* Australian banks have lagged global compliance benchmarks
* CBA under fire for money laundering breaches
* Customer deposits growing source of funding, competition fierce
* Australian firms less responsive to FATF recommendations
HONG KONG/SYDNEY, Aug 21 (Reuters) - A money laundering probe at Commonwealth Bank of Australia is the latest in a slew of scandals denting the reputation of Australian banks as simple, reliable lenders at the forefront in the battle against financial crime.
Australian banks have lagged their global peers in both their spending and their approach on anti-money laundering and know-your-customer systems as they pursued rapid growth in customer deposits, some banking officials and experts say.
"In the last few years, regulators and banks have been focused on changing the whole bank culture to get all levels of staff taking compliance seriously," said Philippa Allen, CEO of ComplianceAsia, which advices on compliance issues.
"That is not as widespread yet in Australia," she said. "Australian banks have not had the big fines imposed on them like their global peers have."
Know-your-customer (KYC) and anti-money laundering (AML) processes became a key focus globally after HSBC Group and Standard Chartered were hit with hefty fines in 2012.
Major international banks are now spending between $900 million and $1.3 billion a year on financial crime compliance, according to analysis by corporate governance recruitment firm Barclay Simpson.
HSBC spent $1.6 billion on regulatory and compliance programs in the first half of 2017, up 12 percent from a year ago.
In comparison, CBA's spending on risk and compliance fell 7 percent to A$470 million ($371 million) in the year to June, according to the bank's annual report.
CBA said the drop was a result of the "timing and completion of key phases of risk and compliance projects" in the prior year including roll-out of refreshed teller machines.
The bank said it has hired more than 50 compliance professionals since 2015 and is strengthening its customer background check processes while upgrading technology used to monitor accounts and transactions for suspicious activity.
Rival National Australia Bank's spend on compliance and operational risk was nearly unchanged at A$167 million in its first half-year.
LAGGING GLOBAL BENCHMARKS
The Australian Bankers' Association estimates the country's four major banks - CBA, NAB, Australia and New Zealand Banking Group and Westpac Banking Corp and three main regional lenders - have together spent A$1.73 billion in recent years on implementing regulatory changes including foreign account tax compliance act and anti-money laundering rules.
"There is an issue and the issue is the KYC/AML standards in Australia has lagged the global benchmarks for several years," said a senior banker at one of Australia's Big Four lenders.
A Thomson Reuters survey last year found that 62 percent of Australian financial firms had not made changes to meet the 2012 recommendations by the Financial Action Task Force (FATF), a global group of government anti-money-laundering agencies. (http://tmsnrt.rs/2v7TcZ9)
Most Australian firms are also less reactive to regulations: 65 percent said regulatory change would be an influential factor that could lead them to make changes to client due diligence, compared with a global average of 76 percent, the survey found.
"(Australian) banks have clearly been behind the curve when you look at the amount of details required to open a customer account and doing periodic review of those accounts," said the banker, declining to be named due to sensitivity of the issue.
Australian banks including CBA advertise that prospective migrants or those on short-term working holiday visas can open an account prior to arrival.
"It's quick to open and you'll get your bank account details straight away," CBA says on its website.
CBA declined to comment on specific questions relating to opening accounts, but referred to a statement this month which said the bank was strengthening its KYC processes with investments of more than A$85 million.
CBA, Australia's No.2 lender, is facing a potentially record fine over breaches of money-laundering and counter-terrorism financing laws. It blamed a coding error for most of the issues and says it will defend the case brought by regulator AUSTRAC.
Other scandals at Australian banks in recent years have involved interest rate rigging, product mis-selling and poor financial advice, leading to mounting pressure for a wide-ranging government inquiry into the sector.
Australian Securities & Investment Commission Chairman Greg Medcraft said this month there was a "serious cultural problem" in how the Australian banks dealt with regulators. He accused banks of being "far too legalistic" and failing to give enough attention to non-legal risks such as reputational damage.
Such criticisms come against a backdrop of cutthroat competition to lure customer deposits, the biggest source of funding for top banks, to meet the new regulatory requirements to improve their capital buffers.
Australia's "Big Four" banks have boosted domestic deposits to about 60 percent of total funding from 40 percent in 2007.
While still low compared to major lenders elsewhere in Asia, Australia's increasing reliance on deposits has raised pressure on banks to improve their compliance systems, particularly where cash is involved.
"Anytime you're dealing with something untraceable like cash you've really got to be on top of things," said Jeremy Danon, principal at Ariel & Associates, which provides AML training to financial firms.
($1 = 1.2666 Australian dollars) (Editing by Lincoln Feast)