Another major bank is facing massive financial penalties for falling foul of Australia’s financial intelligence agency AUSTRAC, which launched legal action against Westpac on Wednesday. AUSTRAC alleges "systemic non-compliance" with the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act and identified an incredible 23 million breaches. Each individual contravention could attract a civil penalty of between $17 million and $21 million, leaving the bank facing fines potentially in the billions of dollars.
A statement of claim filed with the federal court, AUSTRAC said "Westpac contravened the Act on over 23 million occasions. These contraventions are the result of systemic failures in its control environment, indifference by senior management and inadequate oversight by the board.”
These breaches covered transactions worth $11 billion and allegedly included not properly monitoring or not having proper systems in place to detect money laundering, counter-terrorism financing and child exploitation. The anti-money laundering regulator is accusing Westpac of failing to report more than 19.5 million international funds transfer instructions to it over a period of five years, for money moving into and out of Australia as it is required to. Westpac said the majority of the transactions were pension payments from foreign governments to people living in Australia.
Potential Child Exploitation Should Have Been Identified
AUSTRAC also alleged that Westpac's systems were used by 12 individuals to conduct almost 3000 transactions that were indicative of the patterns employed by people suspected to be involved in child exploitation.
AUSTRAC alleges 2944 transactions totalling $480,000 that were indicative of child exploitation payments made by the 12 Westpac customers. According to AUSTRAC, in 2016 senior management within the bank were briefed on the risks of sending payments to child exploitation hotspots via a low-cost international payment service, known as LitePay, but the bank did not introduce a system of detecting suspicious transactions on LitePay until mid-2018. It said "Westpac still has not implemented appropriate automated detection scenarios to monitor for the known child exploitation risks through other channels…as a result, Westpac has failed to detect activity on its customers’ accounts that is indicative of child exploitation.”
CEO Brian Hartzer Responds
Shortly after the claims became public, and facing calls for his head, Westpac CEO Brian Hartzer, said he was “disgusted and appalled” by the allegations, but said he would not resign.
“I was, like everyone I’m sure, utterly horrified at what I read and am absolutely determined to get to the bottom of why on earth this was allowed to persist for a period of time and make sure that we close it off,” he said. “As CEO of Westpac I am very sorry this has happened and we will fix it,” he said. “I will be personally leading our response to all of these issues.”
It appears unlikely Westpac will fight the claims as Hartzer said he accepted the allegations in a statement of claim filed by the regulator “almost overwhelmingly”. He would not however be drawn on the potential amount the bank would be required to pay in settlement of the claims.
Systemic Non-Compliance To Cost Billions?
The inability to correct the problems, even after knowing about then for years could cost the bank, and are possibly the reason some are calling for resignations at the highest level. Westpac own recent annual report confirmed it had been targeted in relation to the bank's "processes, procedures and oversight" of anti-money laundering and counter-terror financing regulations. The regulator noted that Westpac had disclosed the failures in its reporting, had co-operated with investigations and was improving its controls for anti-money laundering compliance.
The cost of Westpac’s failure could run into the billions of dollars, based on the settlement the CBA agreed to when it fell afoul of the law last year. Then, CBA agreed to pay a record $700 million fine to settle their anti-money laundering case brought against it by AUSTRAC. The fine was the biggest civil penalty imposed in Australian history, and was based on CBA failing to properly file more than 53,000 reports to AUSTRAC over cash deposits of more than $10,000 in its ATMs. In contrast, Given Westpac’s contraventions number not merely in the tens of thousands, but 23 million, a massive fine could be the result.
AUSTRAC's statement said that each of the 23 million alleged contraventions attracted a civil penalty of between $17 million and $21 million. Based on these figures, the potential maximum fine could be over $390 Trillion dollars – but given that figure is over 4 times the GDP of the entire world, we can safely assume a fraction of that amount in an agreed settlement is a more likely outcome.
Why Didn't They Fix The Problem?
Whatever fines may be imposed, it will be on top of the $1 billion plus cost Westpac is expected to incur as part of its remediation to compensate thousands of customers who were charged incorrectly for advice and overcharged on loans. Given that Westpac made a profit of $6.8 billion last year alone, you'd think someone in senior management would have been able to make sure they were complying with their obligations under the law. Given the bank new about the issues for years, if a massive fine is the result of this systemic contravention, shareholders would be entitled to ask why on earth did they drag their feet?
Why not throw their ample money and resources at the issues and fix them?
Could it be bad culture, or simple ineptitude? Is AUSTRAC correct when it blames the systemic failures in Westpac's control environment on indifference by senior management and inadequate oversight by the board? No doubt shareholders would like to know.
One has to wonder what repercussions would occur in other industry's or businesses if such a complete failure left a company open to such a significant penalty.