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Reserve Bank indicates Australia’s recession is over


The Reserve Bank of Australia says its “best guess” is Australia’s economy will grow in the September quarter, ending the recession.

At senate estimates on Tuesday, RBA deputy governor Guy Debelle said Victoria’s 12-week lockdown would not hinder the nation’s recovery from its first economic recession in over three decades.

“Our best guess is it looks like the September quarter for the country recorded positive growth rather than slightly negative,” Dr Debelle said.

“As best as we can tell, the growth elsewhere in the country was more than the drag from Victoria, and possibly the drag from Victoria was a little less than what we guessed back in August.”

The RBA is expecting gross domestic product (GDP) for the September quarter will track positive, following its steep fall in the previous quarter by 7 per cent.

A technical recession is two consecutive quarters of negative GDP growth.

Dr Debelle said government spending would need to continue until unemployment levels were “comfortably” below 6 per cent, noting a premature tapering of economic aid would hinder recovery efforts.

The RBA is expected to reveal at its board meeting next Tuesday if it will further cut interest rates to alleviate pressures facing the economy.

A number of economists believe the central bank will slash the cash rate to 0.1 per cent and implement further quantitative easing measures to help lift the economy.

When questioned by Labor senator Katy Gallagher on the pandemic’s negative impact on wage growth, Dr Debelle said getting people back into the labour market should be more of a priority than if wages were expected to rise in the near future.

“The main objective is to get people back into employment,” Dr Debelle said.

The central bank said regions such as Far North Queensland, which are heavily reliant on overseas tourism, will likely struggle while international borders remain closed.

Dr Debelle said services sectors such as entertainment would continue to be affected by the pandemic, while construction and industrial sectors were experiencing increased demand.

The RBA is expected to release new economic forecasts next Friday in its quarterly statement on monetary policy.



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CBA chief says no bank wants to facilitate ‘heinous crimes’


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CBA has committed to boosting staff training for spotting money laundering and terrorism financing, yet the bank’s most recent annual report lists failure to comply with AML laws among its top three compliance risk exposures.

“There’s an enormous amount of effort that’s going into making sure we comply with this critically important AML and CTF laws,” Mr Comyn said. “From our perspective, it’s been a very substantial investment over many years now responding to some of our identified shortcomings.”

The comments come as Westpac settled the largest fine in corporate history after AUSTRAC found it had breached anti-money laundering laws 23 million times by failing to properly report suspicious payments linked to its correspondent bank partners, some used to pay for live child sex shows in the Philippines.

The scandal cost Westpac chief Brian Hartzer and chair Lindsay Maxsted their jobs and has triggered two major shareholder class actions.

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“Of course no financial institution wants to find itself … facilitating any of those heinous crimes,” Mr Comyn said.

The approach taken by major banks towards anti-money laundering compliance has been thrust into the spotlight after an investigation by The Age, Sydney Morning Herald, New York Times and 60 Minutes found Westpac had maintained a correspondent bank relationship with Puerto Rican-based Euro Pacific until 2018.

Westpac overlooked a number of red flags to partner with the offshore bank, including the bank’s location in a known tax haven and a president with a history of misconduct.

Euro Pacific is now at the centre of the largest multi-national investigation into tax evasion and money laundering and is regarded as the highest threat to Australia’s national security by the Australian Criminal Intelligence Commission.

Australian Tax Office deputy commissioner Will Day said it was more important than ever to stamp out tax evasion and financial crime.

“We never lose sight of the fact that tax crime is not victimless,” Mr Day said. “Tax criminals take away from that revenue that supports those really important functions. I guess that’s important at any time, but even more so during a pandemic.”

CBA’s annual report said social distancing restrictions had made it harder to comply with customer verification obligations under the AML-CTF Act and special relief, including video calls, had been provided by AUSTRAC.

“There is currently a higher risk of financial crime because of increased opportunities through the number of financial support packages available, combined with an increase in the number of vulnerable people and businesses,” CBA’s annual report said.

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Single customer’s action that led bank to $1.3bn fine


On a June day last year, a Westpac customer walked into his local branch.

He was just one of many who would have popped in to talk about mortgages, deposit the day’s takings or maybe ask about opening a new account.

But to the eagle-eyed teller, something didn’t seem right about the person now referred to as “Customer 12”. Alarm bells were ringing.

Despite all of Westpac’s sophisticated computer systems and its legions of head office staff, it was this teller in a local branch, who was rattled by a single customer’s suspicious behaviour, that led to the discovery of a $11 billion child exploitation network facilitated by the bank.

Even when Westpac uncovered that Customer 12 had a conviction for child exploitation offences and was making transactions that had all the hallmarks of international abuse, he was able to continue to make worrying payments from his account for months.

On Thursday, Westpac was fined $1.3 billion by financial crimes regulator Austrac for failing to stop transactions that funded child sex trafficking.

The country’s second largest bank agreed to pay the largest civil fine in Australian history, after admitting to 23 million breaches of financial crime laws relating to international transfers and transactions that funded terrorism and human trafficking to the tune of $11 billion for years.

CUSTOMER 12

In the statement of agreed facts it was revealed one Westpac customer had funded $40,000 relating to child exploitation syndicates in the Philippines from 2014 to 2018.

Most of the breaches concerned multiple low value money transfers that the bank paid less attention too. And they were done via Westpac payments systems which required minimal information to be provided by the sender.

In total, 262 paedophiles are thought to have used Westpac accounts to facilitate paedophilia.

But none of the appalling behaviour might have come to light were it not for Customer 12’s trip to his local Westpac bank branch on June 4, 2019.

He had banked with Westpac since 2001 and had been conducting what later investigations deemed to be suspicious transactions since 2016.

“A manual alert was raised by a Westpac staff member who identified potentially suspicious activity through face-to-face interactions with Customer 12,” the facts stated.

“The potentially suspicious activity concerned payments Customer 12 has made to the Philippines.

“As a result of this manual alert being raised, further investigations identified that Customer 12 had a conviction for child exploitation offences.”

It would take a further week for the bank to inform Austrac

RELATED: Westpac slugged with $1.3 billion fine over Austrac scandal

WESTPAC SLAMMED

Then Westpac’s processes slowed down. It would take more than a month, until July 13, before Westpac decided to “exit the customer”, or close down his bank accounts.

He was sent a letter informing him of that decision on July 17. But the accounts were not actually closed until August 19, two and a half months following the first red flags noted by the teller.

For all that time, Customer 12 was able to transact on the account without any heightened restrictions in place, despite the child exploitation conviction, until it was finally closed down.

“During the period 10 June 2019 to 19 August 2019, Customer 12 made nine, low value transfers through one account which was consistent with (child exploitation).”

The report said that had Westpac paid more attention to Customer 12’s transactions when he first rang alarm bells it might have been more wary of allowing those transfers to take place.

During the Austrac investigation it came to light that 262 other customers had engaged in financial activity that raised concerns of paedophilia.

Yet Westpac’s systems, that were designed to highlight suspicious activity, sometimes failed to do so for years.

In one case, a customer had been sending low value transfers to countries with a history of child sex crimes for more than five years before Westpac alerted AUSTRAC.

One of the 262 customers only had his account closed in July this year.

“Westpac failed to identify activity potentially indicative of child exploitation risks by failing to implement appropriate transaction monitoring detection scenarios,” Austrac said in a statement.

RELATED: Coronavirus forces record number of ATMs, bank branches to close

The bank had originally admitted to about 19 million of the financial crime violations after an internal compliance probe, instead of the 23 million alleged by Austrac.

The breaches were made to four overseas banks, with the processing errors related to a Westpac end-to-end technology system that did not properly record payment information.

Transfer issues also related to the installation of the LitePay payments product within the bank that facilitated overseas money transactions of up to $3000.

Austrac and the Attorney-General’s office have previously warned frequent low value payments to the Philippines could be at risk of being related to child exploitation rings.

The regulator had looked to extract $1.5bn from Westpac, with the bank aiming for a $900 million penalty. Eventually the fine came in at $1.3bn.

Westpac chief executive Peter King apologised for its failings in the bank’s systems.

“We are committed to fixing the issues to ensure that these mistakes do not happen again,” he said.

“This has been my number one priority. We have also closed down relevant products and reported all relevant historical transactions.”

After the revelations by Austrac, Westpac’s then chief executive Brian Hartzer and chairman Lindsay Maxsted were forced to depart the bank.

Westpac’s fine dwarfs the $700 million penalty that Commonwealth Bank was forced to pay in 2018, after Austrac revealed uncapped deposits on ATMs had allowed arms and drug dealers to launder money into bank accounts.

Mr King said the bank was strengthening its abilities to identify suspicious behaviour, recruiting 200 financial crime employees.

“Westpac has made substantial investments to strengthen its systems, processes and

controls to detect and report suspicious transactions,” he said.

“We are determined to continually lift our financial crime standards, comply with our

obligations and uphold our customer, community, and regulatory expectations.”



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Macquarie Group, Commonwealth Bank face fresh money laundering scrutiny after ICIJ data leak


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The three banks at the centre of the “FinCEN Files” leak: Bank of New York Mellon (BNY), Barclays and Standard Charted, all filed the reports with anti-money laundering authorities in the US as part of their reporting requirements.

Banks around the world are required to report suspicious transactions to anti-money laundering regulators to stamp out dirty money dealings, including the funding of terrorism and organised crime activities, such as drug dealing and tax evasion.

It is not clear whether the Australian banks reported the transactions to the local money laundering regulator AUSTRAC. Anti-money laundering laws dictate that any payment over $10,000 must be reported to authorities as potentially suspicious as well as transactions that are indicative of potential crimes, such as an account making several smaller payments to avoid the $10,000 detection threshold.

CBA settled a massive civil case brought by AUSTRAC over the bank’s failure to report suspicious transactions for $700 million in 2018. It is not clear whether the transactions included in the ICIJ report formed part of the financial intelligence agency’s case.

Macquarie has faced no court action from AUSTRAC and a senior executive with the bank, Greg Ward, said in 2019 that it had no outstanding matters with the local money-laundering regulator.

The CBA payments detail the global reach of Australia’s largest bank. BNY flagged seven payments totalling $US90,000 to CBA account holders from the Primorye Bank, located in the far eastern Russian city of Vladivostok, near the border with North Korea.

BNY also flagged eight payments totalling $US77,800 to CBA accounts from the Kazakhstan Bank CenterCredit. The New York bank also flagged a $US41,180 payment that a CBA account holder received from Latvian bank BlueOrange (named in the data under its former trading name Baltikums Bank). Payments from Deustche Bank’s Czech arm to CBA totalling over $US40 million were also flagged by BNY.

The cache also shows a large number of potentially structured transactions sent from Barclay’s Hong Kong arm to CBA in 2016 and from UK bank NatWest’s arm in the tax haven of Gibraltar.

BNY flagged 94 possibly suspicious transactions involving Macquarie in 2016. This included a report on nine transactions flowing from Macquarie to Citibank’s Singapore office totalling $US55.8 million and another seven transactions to the same bank totalling $US48 million.

BNY also flagged 76 payments totalling $US17.9 million from Macquarie to Barclays in Britain and two payments from National Australia Bank to a Macquarie account holder totalling more than $US1.5 million. BNY also flagged four transactions totalling nearly $US500,000 flowing from CBA to current AUSTRAC target Westpac.

A spokesman for CBA said the bank worked closely with law enforcement bodies and due to regulations it could not share the information about any particular customer.

“We are committed to ensuring that we take appropriate steps to identify, mitigate and manage the money laundering and terrorism financing risk that we face in conducting our business.”

“We recognise that we play a critical role in protecting our customers and the community from the risks associated with money laundering and terrorism financing.”

A spokeswoman for Macquarie said: “While it is unlawful to comment on the specifics of suspicious activity reporting, as a global financial institution, Macquarie is committed to helping prevent the use of the financial system to facilitate illegal activity and has invested in systems and people to detect, prevent and report any activity of a suspicious nature, working closely with government agencies around the world.

“This includes comprehensive self-reporting of transactions to relevant regulators. Macquarie is also a founding member of the Fintel Alliance, the public-private partnership sponsored by AUSTRAC bringing together intelligence and enforcement agencies and industry in the fight against financial crime.”

A spokeswoman for AUSTRAC said it is aware of reporting by ICIJ but did not comment on operational matters or provide specific information regarding suspicious matter reports.

“Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act), reporting entities are required by law to identify, mitigate and manage the risk of their business, products or services being exploited by criminals, and report to AUSTRAC.”

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correction

An earlier version of this article presented the figures included in the ICIJ report in Australian dollars. It has now been corrected to show the figures in US dollars.

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Central bank meetings to dominate the week ahead for markets


There were some novel developments in global markets last week. Fears of a hard-Brexit have rattled markets once again, after doubts were stoked about the UK and EU’s withdrawal agreement.

Tensions spiked between the UK and EU once again, after the UK Government flagged its intention to table a bill in parliament that would adjust the terms in the agreement relating to the contentious Irish border.

The Pound nosedived as a result, falling 3.6 per cent over the course of the week, as the market positioned for another potential cliff-hanger as the UK and EU attempt to finalise a trade-agreement before the end of the Brexit transition period in December.

The week ahead will offer more event-risk than last in global markets.

Central bank related news will dominate, with the Bank of Japan, Bank of England and US Federal Reserve meeting, and the RBA releasing the minutes from its meeting a fortnight ago.

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Little new information is expected in the RBA’s minutes. However, some clarification of the RBA’s comments out of its last meeting that “it continues to consider how further monetary measures could support the recovery” will be sought, as the market searches for hints of further stimulus from the central bank.

Of course, the meeting of the US Federal Reserve will be the biggest event for the week.

No change in policy is expected from the Fed. But there will be interest in what the Fed says about its new inflation-targeting regime. In particular, by what means the central bank, after years of failing to stoke price-growth, intends to stoke inflation, and how it will do so without allowing a potentially destabilise rise in risk-free rates.

At a time when the leaders of the US stock market, which have benefited profoundly from the US Fed’s accommodativeness, are experiencing a patch of heightened volatility, the return to an up-trend in the US equities rests heavily on the continued support of the central bank.

Locally, the event of interest will be the latest batch of employment figures on Thursday which are expected to reveal a stalling Australian labour market.

Economists are tipping the jobs market shed 40,000 jobs last month, with the unemployment rate forecast to tick higher to 7.7 per cent.

Listen to the Short Squeeze, our weekly markets podcast produced in conjunction with IG here. Episodes last for about 10 minutes and are also available through Spotify and Google Podcasts.

This column was produced in commercial partnership between The Sydney Morning Herald, The Age and IG. Information is of a general nature only.

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ANZ Bank prepares for ‘second wave’ of distress in 2021


While there were currently low numbers of companies being wound up, or individuals facing financial strife, he said this was because government support and banks’ temporary loan deferrals had bought time.

Mr Elliott said one concession was that interest rates were very low, which meant it was less costly for the bank and borrowers to defer their loans temporarily. “We can afford to buy time. We can afford to be a bit more sensitive than we might not otherwise be,” he said.

ANZ group executive for Australian retail and commercial banking Mark Hand said the bank was planning on the assumption that more businesses would need to assess their viability after the Christmas trading period.

“We expect our small business [clients] to come in a second wave, effectively, where we need to have those in-depth conversations next year,” Mr Hand said.

With the bank forecasting house price falls of up to 15 per cent, Mr Hand was asked if this meant ANZ would limit loan-to-valuation ratios (LVRs) in Melbourne.

Mr Hand responded that the 15 per cent fall forecast was a “worst case scenario” but it would impose LVR limits on some post-codes, and there were parts of the country where it would not lend more than 80 per cent of a property’s sale price. He said for some luxury properties it would limit LVRs on new loans to 70 per cent.

After the Victorian state government on Sunday extended its lockdown of Melbourne by two weeks, Jefferies banking analyst Brian Johnson said this was another setback for the economy. Mr Johnson predicted a “fairly” hefty rise in the banks’ bad debt provisions, and said deferring loans in the long-term would slow down growth.

“It’s a horrible position to be in. Deferring a home loan might ease the initial pain, but it slows down future growth, and perhaps you end up having an economy that looks a bit like a zombie,” Mr Johnson said.

Meanwhile, Bell Potter analyst TS Lim said the last thing banks wanted to do was foreclose, but added that markets were expecting substantially higher bad debt provisions from the Australian banks. “I think probably the worst has been priced in. All the analysts have a lot of bad debts coming through from now until next year,” Mr Lim said.



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Commonwealth Bank boss expects 10 per cent drop


The coronavirus pandemic has not hit the property market as hard as first thought, according to head of the Commonwealth Bank.

CBA chief executive Matt Comyn had tipped three months ago house prices could drop by 30 per cent in a “worst-case scenario”.

But the boss of Australia’s biggest bank has now revised that figure to at least 10 per cent, saying the property market had been more resilient than expected.

He said prices had drifted only slightly lower and described the bank’s original prediction as “just a scenario that we need to be prepared for”.

“I think a reduction … in the order of 10 to 12 per cent is still a reasonable assumption,” Mr Comyn told journalists Wednesday as the bank delivered a full-year cash profit of $7.3 billion.

“We do have an expectation that in some areas, particularly in inner-city areas, there has been downward pressure on rental yields, so we think that that’s going to weigh on house prices.

“We would say overall, and looking at the numbers in the last few months, the housing market has been more robust than perhaps we would have anticipated from March.”

RELATED: Commonwealth Bank’s cash profit slides as loan deferrals rise

In May Wesptac forecast a 20 per cent fall. All four of the nation’s big banks were predicting double-digit falls with rising unemployment amid the pandemic.

CBA has also published modelling that shows unemployment rising to 9 per cent by the end of this year, before falling to 7.5 per cent by the end of 2021.

Mr Comyn said more government support would be needed to stimulate the economy.

“There’s going to need to be some policies and investments at both the federal and state level to support greater jobs creation so we can bring that unemployment rate down,” he said.

Earlier the bank revealed the extent of the damage caused by the pandemic, with its cash profits sinking by 11.3 per cent.

COVID-19 hardship measures have caused a blowout in deferred loan repayments of more than a billion dollars, impacting its cash position for the year ending June 30.

“Overall, we’re lucky that we came into this period in a very strong position so the bank’s been able to operate very effectively during that time, but of course we have been impacted,” Mr Comyn said.

The bank warned dampened credit growth and low interest rates would place pressure on its revenue income for the current financial year.



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House prices set to tumble at least 10 per cent, according to Commonwealth Bank economists


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However, he said a fall in house prices of 10 to 12 per cent, from peak to trough, was more realistic, as falling rents put pressure on house prices in inner-city areas.

“I think a reduction … in the order of 10 to 12 per cent is still a reasonable assumption,” Mr Comyn told journalists.

“We do have an expectation that in some areas, particularly in inner-city areas, there has been downward pressure on rental yields, so we think that that’s going to weigh on house prices.”

Even so, Mr Comyn said property had so far proven to be more resilient than the bank had expected initially, with prices in Sydney and Melbourne last month still higher than a year earlier, despite recent falls.

“We would say overall, and looking at the numbers in the last few months, the housing market has been more robust than perhaps we would have anticipated from March,” Mr Comyn said.

The comments came as CBA also published modelling showing unemployment rising to 9 per cent by the end of this year, before falling to 7.5 per cent by the end of 2021.

This is slightly less gloomy than the Reserve Bank’s latest forecasts, and Mr Comyn said while Australia was “relatively well-positioned” more government support would be needed to drive unemployment down.

He said that with public borrowing costs at record lows, it would be appropriate for the government to spur investment that could create jobs.



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Bad debts, dividends in focus as COVID-19 dominates bank profits


Banks pencilled in almost $5 billion in COVID-related bad debt charges in their previous results in April and May, and whether lenders will take additional provisions this month is up for debate. While the economy has avoided the worst-case scenarios, the outlook remains highly uncertain.

Investment director at Investors Mutual, Anton Tagliaferro, said he was “pretty cautious” towards the banks, predicting lenders would need to take more provisions for bad loans at some point. “I guess the big question is the bad debt provisions. How do the banks handle all these lockdowns and shutdowns?” Mr Tagliaferro said.

Loans to larger corporations should be in relatively good shape, he said, thanks in part to the wave of capital raisings by ASX-listed companies, which has allowed firms to strengthen their balance sheets and avoid further financial stress.

“The positive side is on the corporate book,” Mr Tagliaferro said. “The big risk is the small and medium businesses and residential mortgages.”

Principal at fund manager Alphinity, Andrew Martin, said he did not think banks faced pressure to take higher provisions now than they took several months ago, though the bigger concern remained bad debts next year. “I don’t think we are going to be surprised by significantly higher provisions than what people expect,” Mr Martin said.

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The extent of CBA’s final dividend and the dividend decisions of other banks will be key points of interest.

Mr Martin said: “I think boards in general will remain conservative [on dividends], at least until they know more.”

Mr Tagliaferro said it was debatable whether banks would pay dividends, after recent regulatory guidance that was “a bit vague”. “The dividends, if they pay them, probably won’t be much or they will have to be covered by dividend reinvestment plans,” Mr Tagliaferro said.

As a result of the uncertainty, analysts are unusually divided in their forecasts for CBA’s dividend. Jefferies analyst Brian Johnson has forecast CBA will pay a “miserly” 20¢ final dividend, JP Morgan’s Andrew Triggs has forecast 85¢ a share, and UBS analyst Jonathan Mott is forecasting 95¢.

Mr Mott said it would be prudent and in line with market expectations for ANZ and Westpac to not pay a dividend for the first half after both lenders deferred a decision on the payment several months ago.

‘The big risk is the small and medium businesses and residential mortgages.’

Anton Tagliaferro, Investors Mutual

Banks’ profit margins have also been affected by the pandemic after being flooded with deposits from households and businesses in recent months, driving down the cost of deposits.

Mr Mott said lower deposit costs and most banks’ not passing on the March official interest rate cut to borrowers could benefit banks’ net interest margins, which compare the cost of funding with what banks charge for loans.

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Venture capital firms bank on a sustained shift to the cloud


“If you look at SafetyCulture, Culture Amp, and Canva is probably the best example of it, they are all built on the cloud,” he said. “A lot of these companies are seeing (the shift to the cloud) accelerate as a result of the coronavirus pandemic.”

Meanwhile, Airtree Ventures partner James Cameron pointed to the growth of online cloud computing training provider A Cloud Guru, which reached $116 million in revenue this year, as a good example of how tech startups can make the most of the rush to the cloud.

A Cloud Guru teaches people how to use cloud platforms like Amazon Web Services, Microsoft Azure and Google Cloud Platform and has taught two million users since launch in 2015.

“It really has been the right time and right place (for the business) to enjoy that explosive growth,” Mr Cameron said.

“They are sitting at this mega trend and of the tailwinds they have got behind them one is online education and the second is the shift into digital reskilling, then there’s also the shift in the general software development world to the cloud.”

A Cloud Guru co-founder and chief executive Sam Kroonenburg said remote working has been a key catalyst for the shift to the cloud.

A Cloud Guru co-founder and chief executive Sam Kroonenburg.

A Cloud Guru co-founder and chief executive Sam Kroonenburg. Credit:Eamon Gallagher

“I think the world has a mandate to move to the cloud and this is a major shift that is happening across the world globally,” he said. “Companies are wanting to move away from managing their own infrastructure, they want to have the flexibility to send their workforce home and COVID-19 is just accelerating that trend.”

Mr Kroonenburg said he expected this shift to continue even after the pandemic is over.

“It is a long term systemic change,” he said.

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Paul Bassat, co-founder of Square Peg, said migration to the cloud was one of the key themes the venture capital firm was focused on, pointing to its investments in Israeli data centre infrastructure startup Excelero and cloud storage infrastructure startup Lightfix.

“We are essentially seeing pretty much all businesses are going to move to the cloud, we are 20 to 30 per cent into that journey so there’s still a long way to go here,” he said.



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