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BOQ will carry an extra $50 million in capital until it has addressed the concerns of regulators.Credit:Dan Peled

The bank has entered into separate enforceable undertakings with the financial crimes watchdog,AUSTRAC,and the Australian Prudential Regulation Authority (APRA). It must hold an extra $50 million in capital until it has addressed APRA’s concerns by implementing a remedial action plan.

The regulatory action comes after BOQ repeatedly acknowledged it needs to strengthen its risk management after last year’sabrupt departure of former chief executive George Frazis,who was replaced by former chairman and current chief executive Patrick Allaway.

Principal at fund manager Alphinity,Andrew Martin,said the experience of other banks caught up in regulatory breaches suggested BOQ could face higher costs as it was forced to improve its systems.

“For a company that’s already dealing with its own internal issues,it’s now going to be more distracted and have more potential cost input than it did before,” Martin said.

Angus Gluskie,managing director of White Funds Management,said the higher capital requirement would drag on investor returns,and smaller lenders such as BOQ were also in a worse position than the major banks to upgrade their technology in a cost-effective way.

“The smaller banks are having to invest in technological solutions that can compete against the major banks without their size and financial firepower,” said Gluskie,whose fund holds BOQ shares.

AUSTRAC said it held concerns about the adequacy of BOQ’s systems for complying with anti-money laundering and counterterrorism financing laws,and the enforceable undertaking BOQ signed would require the bank to improve its program around this.

APRA,meanwhile,said it had uncovered weaknesses in the bank’s past approach to risk management and culture,and BOQ had made several breaches of the prudential standards in 2022 and 2023. APRA said the breaches of the prudential standards related to liquidity,outsourcing and business continuity management.

BOQ chairman Warwick Negus said the moves to improve its compliance would complement a technology overhaul at the bank,which would decommission “complex legacy systems” and reduce its reliance on manual processes.

“BOQ remains committed to its multi-year Integrated Risk Program to build a stronger and simpler bank with an uplift in risk culture,frameworks,processes and controls,” Negus said.

APRA chair John Lonsdale said the enforceable undertakings and the capital add-on would give the bank clear incentives to lift its game.

“Although BOQ is financially sound and comfortably above its core capital and liquidity requirements,there are significant gaps in its risk management framework that must be addressed as a priority,particularly in the non-financial risk,anti-money laundering and counter-terrorism financing spaces,” Lonsdale said.

AUSTRAC chief executive Nicole Rose said the two regulators kept each other informed about their investigations into BOQ,and that the bank had co-operated with AUSTRAC over the past six months.

“The actions undertaken by AUSTRAC and APRA in relation to BOQ highlight whole-of-government efforts to maintain the integrity of Australia’s financial systems,” Rose said.

“Businesses which do not have a strong AML/CTF program in place are vulnerable to exploitation by criminals,which is why AUSTRAC has been working with BOQ to harden their processes.”

BOQ shares have fallen 27 per cent in the past year,and on Wednesday the stock lost 5.4 per cent,falling to $5.47.

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