Significant Event Review Panel (SERP)

NAB.032.001.0044

Significant Event Review Panel (SERP)Date Wednesday, 20 January 2016Time 3.00pm - 4.00pmLocation Room 07.010, 700 Bourke StreetTelephone Dial In Meeting place: 1800 016 466 (within Australia)

Meeting ID: 22750801Please note: SERP Secretariat must be advised of all dial ins prior to the meeting

AGENDA

1. Introduction / Quorum Noting Chair 3.00-3.05

Breach Paper

2. Banker and Introducer Lending Fraud Decision 3.05-3.35

The Remaining Agenda Items are for Committee Members Only

Other Business

3. Other Business Discussion Committee 3-35 - 345

4. Next SERP Meeting & Close Noting Secretary 3.45-3.50

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INVITEES

Attendees

SERP VOTING MEMBERSKylie Young Head of Regulatory Affairs (delegate for Jennifer Darbyshire)Narelle T SmithJacqui A ColwellMelissa ReynoldsBrian E Witney

Head of Group Compliance (delegate for Steve Whiteling)Chief Risk Officer Personal BankingExecutive General Manager, RetailGeneral Manager, Management Assurance Personal Banking

INVITEESBarbara M Robertson* Darren G AdamsEdna CoetzeeTanya A McVicar

Head of Product and Regulation Legal(non-voting Member)Head of Risk Enterprise Management (observer)Senior Analyst Risk Disclosures, SERP Secretariat (non-voting Member) Head of PBR Operational Risk and Compliance, acting Head of Risk Retail & Small Business (observer)

Claire J ShawRichard E Wilson*

Head of Forensic Services (observer)Manager, Redstar Credit (observer)

APOLOGIESJennifer DarbyshireSteve C Whiteling

General Manager, Group Regulatory Strategy & Affairs (Chair)Head of Operational Risk & Compliance (Acting)

*By telephone

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NAB.032.001.0046

AGENDA ITEM 1

Introduction / Quorum

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NAB.032.001.0047

AGENDA ITEM 2

Breach Paper: Banker and Introducer Lending Fraud

For Decision

Memorandum

To Significant Event Review Panel

CC Lou Fontinovo (Management Assurance Partner)

Tanya McVicar (Risk Partner)

From Irene Rowlands (Retail GM, NSW South & ACT)

Melissa Reynolds (Executive General Manager, Retail)

Date 5 January 2016

Subject Potential Breach for Determination

Event Title:

Risksmart Reference Number:

Licensee Impacted:

Date breach was identified:

Date event was raised:

Division:

Performance Unit/Business Unit:

Banker and Introducer Lending Fraud

6572713

NAB Ltd

29/10/15

29/10/15

Personal Banking

Retail, NSW South & ACT

Date of verbal update to SERP (if applicable): N/A

Recommendation

To review and determine whether a reportable breach has occurred.

A comprehensive review of this event is underway (covering specific Banker and Introducer investigation, as well as an end to end process review) and is scheduled for completion in January 2016. As part of the review, specific actions for remediation will be identified and developed for implementation.

Background

In October 2015 a fraud investigation was initiated as a result of an alert via the NAB Whistleblower program, including a detailed investigation of suspect loans associated with specific Introducers and Bankers identified in the alert within the Greater Western Sydney Local Area Market. This investigation also included a number of suspect loans associated with a ‘referrer’ (non-introducer) who had established close relationships with Branch staff in the market (Event).

While the review of the Event remains ongoing, the outcomes to date have raised concerns including possible collusion, fraudulent documentation, acceptance of documents directly from Introducers and false allocation of Introducers to customer loan applications.Privileged & Confidential SERP Meeting Pack 20 January 2016.docx of ll

NAB.032.001.0048

Bankers and Introducers (including the above referrer) identified during this review have been, and continue to be, managed accordingly, however the review is continuing with a view to also understand the root cause of this Event and determine any appropriate remediation that may be desirable more broadly.

ASIC was formally notified of this event on 21 December 2015 as instructed by Group Executive, Personal Banking.

How was the Event discovered?

Whistleblower alert in October 2015.

Does the Event indicate a breach or potential breach of regulatory obligations?

Initial findings indicate potential responsible lending obligation breaches. Further determinations to be advised once investigations are completed.

Event Details

Refer ‘Background’ above - pending review completion

Has Legal advice been received?

Yes (verbal only)

Is it a significant breach for the purposes of reporting to ASIC and/or APRA?

On 21 December 2015, ASIC was formally notified of this issue and the investigations/review to date.

Criteria for ASIC reportability (sgi2D(i)(b))

Considerations

Number or frequency of previous similar breaches

Some elements of the conduct underlying Event have previously been identified in the course of BAU activity in relation to specific Bankers and/or Introducers. However, the conduct previously observed have not occurred on this scale, or been the result of a whistleblower alert.

As an example, two unrelated cases regarding Introducers were discovered by Fraud Investigations during this period, in NSW and SA, which involve similar conduct in nature to this Event (e.g. involving falsified documents).

Impact of the breach or likely breach on the ability to provide financial services

There is no impact on the ability for NAB to provide financial services as a result of this Event.

Indication that arrangements to ensure compliance may be

inadequate

While reviews of the Introducer channel are ongoing (some of which were separately commissioned prior to this event), early insights (pending validation and assessment) indicate areas for potential improvement, including:

• Introducer onboarding• Ongoing Introducer due diligence• Central lending verification process• Management Information Reporting

Note, some of these areas are broader in nature than simply thisEvent or the Introducer Program more generally.

Actual or potential financial loss to clients or the licensee

Pending review completion, noting payment of approximately $630k in unauthorised commissions, plus potential serviceability concerns of

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NAB.032.001.0049

up to approximately $50m in relation to the identified loans.

Concern for ongoing serviceability relates to the use of loan proceeds (surplus cash out) and lump sum deposits that appear unrelated to applicants' ongoing salary.

Total lending across the 4 (four) Introducers is approximately $l39m with presently outstanding loans of $l0lm, with another approximately $8ook of personal loans. Total commissions paid to these Introducers to date is $630k, including $488k in relation to l (one) Introducer.

Has the Panel previously considered a similar Event?

No

Does the Event require reporting?

Despite there being no requirement for positive reporting under the National Consumer Credit Protection Act 2009, ASIC was formally notified of this Event on 21 December 2015 and the investigations/review to date.

Investigations are continuing as to whether a reportable breach has occurred and if so, the significance of such breach.

To whom is the Event reportable?

See above.

How did Risk and Compliance systems operate in respect of the breach?

Initial and draft findings of internal reviews are provided as follows:• Prior to 14/12/2015 there was no mandated strategy regarding preferred Introducer category

and industry.• Limited training was available and provided to frontline bankers regarding Introducers.• Limited governance and oversight of the National Referral Partner (Aggregator) Affiliate on

boarding process.• Lack of or limited ongoing due diligence of Introducers against risk databases (e.g. CARE, ASIC

ban lists).• CRM platform operational complexity (e.g. manual processes) has reduced management’s ability

to pro-actively monitor the risk and performance of Introducers.• Inadequate MIS/CRM to support manage the Channel's activities.• Termination process does not appear to be fully defined and documented (e.g. documentation

to ensure terminations have been completed correctly and immature Governance Forum processes as this Forum is only 6 (six) months old.)

The findings and remedial activities stated above relate more broadly to the Introducer Program and not just specific to this Event. Pending completion of the review further root causes and remediation requirements may be identified. The review is due for completion end January 2016.

Remediation Activity and Consequence Management

To date investigations have focused on potential Banker and Introducer fraud, as well as potential control breakdowns in areas such as the NAB Introducer Program (on boarding, origination and application process) and central verification procedures for both personal loans and home loans.Next steps and further investigations planned include:• Fraud investigations into Bankers, including correspondence with Introducers and other Bankers.• Interviews continue to be conducted with Bankers identified and are well advanced.• Investigations to identify whether any control breakdowns are systemic and implications for

customers are ongoing.• KPMG have been engaged to support this investigation at both strategic and resource levels.Privileged & Confidential SERP Meeting Pack 20 January 2016.docx of ll

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Consequences applied to date have included the dismissal of 5 (five) Retail Bankers, 6 (six) Retail Banker conduct outcomes (4 Amber Non-Reversible & 2 Amber) and the termination of 2 (two) Introducer relationships. In addition to this a Micro and Small Business Banker has been dismissed as a result of their relationship and dealings with the “referrer”.

In addition, Internal Audit is conducting an audit of the NAB Introducer Program as part of its FYl6 Audit Plan, as well as an end to end Introducer Program diagnostic being undertaken by Business Improvement, which was commissioned by Retail Channel & Segments prior to this event.

Prior to this event also, a number of activities have been undertaken by the Introducer Program to strengthen the overall governance, including the establishment of the Introducer Governance Forum and National Referral Aggregator Forum, as well as the Introducer Targeted Industry strategy.

Attachments

t:

NAB letter to ASIC - PB Fraud Investigatio


Contains confidential information

National Australia Bank LimitedABN 12 004 044 937 800 Bourke StMelbourne, Vic 3008________Telephone:^^^^^^^^^Fax:

NationalAustraliaBank

21 December, 2015

Michael Sadaat

Senior Executive Leader

Deposit Takers, Credit and Insurance

Australian Securities ands Investment Commission

Level 24,120 Collins Street

MELBOURNE VIC 3001

Email:

Dear Michael,

National Australia Bank Limited: Notification of Banker Investigations - Western Sydney

The purpose of this letter is to provide the background and details of an investigation NAB is conducting into bankers in Western Sydney. We have also included an outline of actions in progress and would foresee the opportunity to provide an update on these in the New Year.

Background

In late October 2015 an internal fraud investigation was initiated as a result of an alert via the NAB Whistleblower program. The alert generated a review and detailed investigation of suspect transactions by bankers identified in the alert within the Greater Western Sydney Local Area Market in NSW.

Investigation findings to date

The investigations to date have identified banker fraud as well as potential control breakdowns in the NAB Introducer Program origination and application process, and income verification procedures for both personal loans and home loans. On 29tn October an initial working group was convened and continues to meet bi-weekly to assess new evidence, discuss the outcomes of banker interviews and determine the application of appropriate consequence management. Consequences applied to date have included the dismissal of 5 (five) bankers and the termination of 2 (two) introducer relationships.

Next steps and further investigations planned

the investigation into this matter within the Greater Western Sydney LAM is now continuing in 2 streams:• Fraud investigation into individual bankers, correspondence with introducers and other bankers.

Interviews continue to be conducted with bankers identified for review.• On 23rd November a Working Group was established combining NAB Forensic Investigations, Risk

and Personal Banking representatives to investigative if any of the control breakdowns are systemic and any implications for customers.

• On 14'! December KPMG (Forensic Services) were engaged to support this investigation at both a strategic and resource level.

National Australia Bank Limited ABN 12 004 044 937 AFSL and Australian Credit Licence 230686 Page 1 of 2

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| Contains confidential informationL__________________________________________________________________________________________________________________________

• NAB Internal Audit have also advised they are conducting an audit of the NAB Introducer Program controls.

• The event will be assessed under NAB's Significant Event Review Panel (SERP) process.

These further investigations will also enable NAB to establish whether any customers have been impacted as a result of this event and will update ASIC further should we have any findings of customer detriment.

Should ASIC want to discuss this matter further, please do not hesitate to contact Kylie Young (Head of Group Regulatory Affairs - Conduct) o

Yours sincerely

Gavin SlaterGroup Executive Personal Banking National Australia Bank Limited

National Australia Bank Limited Page 2 of 2


NAB.032.001.0053

AGENDA ITEM 3

Other Business

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AGENDA ITEM 4

Next SERP Meeting & Close

The next Committee meeting is scheduled for Wednesday, 27 January 2016 at 3.00pm.

Submissions are due no later than Friday, 22 January 2016 at 9.00am due to the public holiday on 26 January 2016.

A schedule of SERP meetings and submission timelines (to June 2016) can be located on the SERP workspace site.

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Significant Event Review Panel (SERP)

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