These sordid allegations this week unleashed a torrent of criticism and intense pressure on the nation’s second-largest financial institution and sparked predictions Hartzer could become the third big four bank CEO scalp in just over two years.
Prime Minister Scott Morrison on Friday sustained the public pressure, saying he wanted to see accountability from the board.
“I would like to see at this board meeting and the many board meetings that will follow a confident plan to address, firstly, the clear weaknesses they’ve had in their systems that have allowed this to take place, which they’ve identified,” Morrison said.
“And secondly, there has to be some understanding of the accountability for when these things happen.”
Shareholders also felt the impact, with $6 billion wiped off the bank’s market capitalisation since the lawsuit was filed.
Further raising the stakes, Maxsted will in three weeks face shareholders at an annual general meeting, where the bank is desperately trying to avoid another backlash on executive pay, as occurred last year.
Beyond the turmoil at Westpac, the scandal has implications for the wider banking sector, which is still reeling after a year of shock revelations at the Hayne royal commission. With profits already being squeezed by a weak economy, it is a blunt reminder that the industry will not be getting any respite from high compliance costs and regulators intent on publicly pulling the industry into line.
In a case that has echoes of the AUSTRAC lawsuit against Commonwealth Bank in 2017, the regulator this week alleged “systemic non-compliance” with the Anti-Money Laundering and Counter-Terrorism Financing Act.
It says all up $11 billion was transferred in ways or to locations – like terrorism hotspots and sanctioned countries including North Korea, Syria, Iran and Iraq – that ought to have been reported to the watchdog, or raised the bank’s suspicions.
Westpac says the vast bulk of the 23 million breaches relate to pension payments from foreign governments to Australian residents.
But it is the allegations that 12 customers made almost 3000 transactions that were indicative of risks for child exploitation payments that has cut through in a public psyche now so used to banking scandals.
One customer alone, Customer 1, sent $132,000 in hundreds of smaller payments to people in the Philippines including a person who was arrested in 2015 for running a live streaming child sex show. Another customer, Customer 12, made transactions after Westpac learned he had been convicted of child exploitation previously.
There has to be some understanding of the accountability for when these things happen.
Prime Minister Scott Morrison
The Australian Federal Police confirmed this week it had received a referral from AUSTRAC regarding the 12 customers who made the payments and then made frequent trips to the Philippines. Police sources say no charges or arrests have been made as a result of the very recent referral by the regulator.
Child exploitation in the Philippines and other parts of south-east Asia is known to be rife.
In 2018 alone, 44 children were rescued from child exploitation premises in the Philippines as a result of collaboration between the AFP and the Philippines National Police, the Department of Home Affairs said.
Given police are generally crawling all over these transactions, offenders need to use multiple frequent payments to hide their tracks. Westpac’s low-fee product to send money overseas – LitePay – became an attractive option for these types of transactions.
But AUSTRAC alleges Westpac ought to have picked up on the transactions because they fit a known type used by paedophiles.
According to the regulator, a red flag customer who is at risk of exploiting children is someone with no apparent family ties to the Philippines or south-east Asia frequently remitting small sums of money to multiple people there within short time-frames.
AUSTRAC says that by May 2016 the bank had assessed a “heightened child exploitation risk” linked to payments to the Philippines through the LitePay product.
In August that year Westpac put in some controls to help it identify the customers sending funds to multiple beneficiaries, but the system did not pick up the child exploitation payments. A further tweak still failed to pick up the payments.
AUSTRAC also alleges that the transactions continued after Westpac became aware on June 3 , 2019 that ‘customer 12’, who has a prior conviction for a child exploitation offence, was moving money to the Philippines in a manner indicative of child exploitation. Between June 10 and August 19, the customer sent thousands of dollars to the Philippines.
“At no time has Westpac implemented an appropriate detection scenario to monitor for the known child exploitation typologies involving frequent low-value payments to the Philippines and south-east Asia via non-LifePay channels.
Andrew Grant, a senior business lecturer at the University of Sydney, says Westpac had clearly fallen short in regards to its adherence to anti-money laundering and counter-terrorism financing laws. Grant says he would not be surprised if Westpac’s “blase” attitude to AUSTRAC’s demands was mirrored in other banks.
“We have to decide, would we be happy for our money to arrive overseas a little later if we are being assured that the funds were checked for drug importation or child exploitation or so on?” he says.
Given the shocking nature of the allegations, the lawsuit almost immediately raised questions about the future of Westpac’s American-born chief executive Brian Hartzer, who has been CEO since 2015.
Under Hartzer, Westpac has had a reputation for being more likely to defend itself against regulatory lawsuits and it also escaped the royal commission with fewer blemishes than its biggest rival, CBA.
This week, however, Hartzer said he accepted the case against the bank “almost overwhelmingly” as he apologised and said he was “disgusted and appalled” at the allegations involving potential child exploitation.
He said the first he learnt of its failures regarding customer “due diligence” was a month ago.
“With respect to the specific customer matters that are in the detailed statement of claim, the first time I saw them was this morning, and I was, like everyone I’m sure on this call, utterly horrified at what I read,” Hartzer told journalists.
“I’m absolutely determined to get to the bottom of why on earth this was allowed to persist for a period of time and to make sure that we close it off.”
Some in the financial markets, however, believe his position is untenable.
They point to the precedent of former Commonwealth Bank chief executive Ian Narev, whose departure from the bank was announced a little over a week after a bombshell AUSTRAC lawsuit. Former National Australia Bank chief executive Andrew Thorburn also resigned, alongside chairman Ken Henry, within days of harsh criticism of them from royal commissioner Kenneth Hayne.
Making matters worse for Hartzer, AUSTRAC alleges an underlying cause of the breaches was “indifference” among senior management – a claim that Hartzer strongly denies.
Even so, directors are under pressure to show there has been accountability, especially with the bank’s annual general meeting on December 12, where irate shareholders will be demanding action.
Upping the stakes, directors and Maxsted are also desperate to avoid a repeat of last year’s backlash, when a whopping 66 per cent of votes were cast against its remuneration report.
Whatever happens to the leadership, shareholders will almost certainly wear a hefty financial toll, on top of this month’s dividend cut, and a $2.5 billion capital raising.
Estimates of the fine vary widely, and it will ultimately be set by the Federal Court. But analysts say it’s likely to be somewhere near the $700 million record penalty paid by CBA.
That comes at a time when profits are already under pressure, with Harzter this month describing the backdrop of falling interest rates and weak loan growth as “very challenging”.
Analysts worry that on top of the fine, AUSTRAC’s lawsuit will further squeeze the bottom line by requiring extra spending on compliance.
Moreover, money laundering is not a problem that is unique to Westpac.
NAB’s new chairman Phil Chronican this month told investors the bank had reported some new breaches to AUSTRAC, in addition to “issues” that it first disclosed two years ago.
Macquarie analyst Victor German says he thinks it is ” improbable that peers would avoid AUSTRAC issues”.
AUSTRAC chief executive Nicole Rose has been urging banks to fess up to any breaches, because ultimately, the regulator relies on tens of thousands of bank staff to be its eyes and ears in detecting suspicious activity. “If they can be looking at money laundering for us, that’s an incredible resource,” Rose told The Sydney Morning Herald and The Age in August.
But Rose also said in the same interview that there was “more to be done” to make sure Australia was not a soft target for money launderers.
Inevitably, this will mean more spending by banks on monitoring flows of money, with a view to detecting crooks.
Todd Harland, a former AUSTRAC manager who is now chief executive of anti-money laundering consultancy AML Solutions Australia, says there has been an underinvestment by banks in the staff and technology needed to comply with laws on anti-money laundering.
In his opinion, Westpac would not be the only bank with gaps in its “transaction monitoring,” which can apply to detecting other organised crimes such as drug smuggling, as well as child exploitation.
He says the challenge for big banks is that they had different systems behind their various products, which could be the result of past acquisitions. The systems do not get integrated, which means banks may be collecting different information about a customer’s behaviour, depending on whether the customer is using a deposit account, their credit card or mortgage.
“You need to be able to look across the financial profile across all of those different products,” he says.
“There’s some genuine operational challenges to it. The counterpoint is they’ve had a decade, and there’s no escaping that.”
with Charlotte Grieve
Clancy Yeates is a business reporter.
Sarah Danckert is a business reporter.