April 30, 2018 / 11:07 PM / in 21 days

UPDATE 2-Australia's CBA ordered to boost capital until governance failings fixed

* APRA-commissioned report of CBA governance and culture scathing

* CBA says will implement report’s recommendations

* Report comes amid judicial inquiry into financial sector

* Australian treasurer expects more CBA executives will go (Updates throughout with more detail, govt response)

By Paulina Duran and Tom Westbrook

SYDNEY, May 1 (Reuters) - Australia’s banking regulator slugged Commonwealth Bank of Australia with an extra A$1 billion ($753 million) capital requirement on Tuesday as it released a scathing report into how the lender allowed money laundering to flourish.

Australia’s largest bank had a “widespread sense of complacency” and was reactive in dealing with risk, the Australian Prudential Regulatory Authority (APRA) said in the report into the culture that led to the money laundering allegations.

The findings pile pressure on the board of Commonwealth Bank following the resignation of chief executive Ian Narev in January, and add to the ignominy heaped on Australia’s top financial firms in recent weeks by an ongoing judicial inquiry into banking sector wrongdoing.

“Executives are gone, board members are gone. More will go,” Australian Treasurer Scott Morrison told reporters in Canberra when asked about the APRA report’s implications for the bank.

The report put all of Australia’s banks on notice that their governance standards would face similar scrutiny in light of the failings at Commonwealth Bank, amid moves to stiffen penalties for corporate wrongdoing and beef up oversight.

It comes a day after Australia’s largest-listed wealth manager, AMP Ltd, announced the resignations of its chairwoman and legal counsel and slashed directors’ fees in response to revelations of misconduct at the independent judicial inquiry.

The year-long inquiry, known as a Royal Commission, started hearings in February and has already exposed widespread wrongdoing including fraud by financial planners, deception of regulators and charging customers fees without providing a service.

APRA commissioned the independent report into Commonwealth Bank last year, after the bank was sued by Australia’s financial intelligence agency for alleged breaches of money laundering laws that allowed criminals and terror financiers to launder millions of dollars through its accounts.

It said the highly profitable bank’s “continued financial success dulled the senses of the institution” and exposed it to non-financial risks, particularly in the areas of compliance and conduct.

“These risks were neither clearly understood nor owned, the frameworks for managing them were cumbersome and incomplete, and senior leadership was slow to recognise, and address, emerging threats to CBA’s reputation,” it said.

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The report’s 35 recommendations included more closely linking executives’ pay to “exacting accountability standards”, boosting risk management and compliance functions, and changes in culture to guarantee best practices in risk identification.

It warned other lenders that they would be held to similar standards.

“APRA supervisors will also be using the report to aid their supervision activities, and will expect institutions to be able to demonstrate how they have considered the issues,” it said.

CBA said it would implement all the recommendations and had already begun making changes at a board level to rebuild customer trust.

Matt Comyn, who replaced Narev as CEO, said he had asked the board not to give him a short-term bonus this year as he sets about rebuilding the reputation of the 106-year-old bank.

“For me this is only one small step in demonstrating that accountability and the steps that are going to be required are going to be different this time round,” he said in an interview released by the bank on Tuesday.

Omkar Joshi, portfolio manager at Regal Funds Management, said the additional capital requirement was insignificant for a bank with an A$800 billion balance sheet.

“Reputationally, I think there’s already been enough issues for them that it doesn’t make it worse,” he said.

Australia’s Big Four banks - Commonwealth Bank, Westpac , National Australia Bank and Australia and New Zealand Banking Group - are facing greater regulation and potential penalties in the wake of the governance scandals.

“I think our sector has had a golden period for 20 plus years and we don’t think that’s going to continue, it is going to be harder,” ANZ Chief Executive Shayne Elliott said on Tuesday. ($1 = 1.3264 Australian dollars) (Reporting by Paulina Duran and Tom Westbrook; writing by Jane Wardell; editing by Stephen Coates)

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