The public excoriation and personal humiliation of Australia’s big bankers have surely arrived at yet another new low.
Westpac’s multiple offences – from the top down – are laid bare in devastatingly blunt language by Australia’s anti money-laundering regulator in its application for penalties.
Austrac’s chilling statement of claim in the Federal Court says: “These contraventions are the result of systemic failures in its control environment, indifference by senior management and inadequate oversight by the board.”
According to the regulator, that translated into Westpac failing to properly resource anti money-laundering and counterterrorism financing activities, failing to invest in appropriate IT systems and to remediate known compliance issues in a timely manner. It blames an “ad hoc approach to risk management of these issues”.
A normally combative Westpac and its chief executive Brian Hartzer certainly aren’t quibbling with AUSTRAC’s condemnation.
Hartzer admits the bank got it terribly wrong. He must realise the unknown but massive settlement with the regulator will be the least of it in terms of the bank’s reputation – and his own.
The market was immediately swirling with rumours his time was up. Hartzer’s response, when asked, was rather the reverse and that he would be staying to lead the solution.
“My commitment is to do what I can do – get to the bottom of this and make sure we fix it so it never happens again,” he told a press conference. “We absolutely accept this is an unacceptable state of affairs.”
In terms of any personal accountability, he stressed many of those involved in the initial technology snafu and then dealing with it dating back years had previously left the bank.
Yet perhaps the most striking thing out of yet another extraordinary episode in corporate self -harm is the business’s continued inability to respond to a problem long after it is suspected to exist. Right through to almost the present day.
In the wake of the Hayne royal commission, this is an all too familiar story in banking culture.
And just as the individual stories of unfair treatment resonated with the community during the royal commission hearings, this claim will reverberate even more loudly in public consciousness because it touches on something so vile. Child exploitation and sexual abuse.
It won’t matter this concerns just a minuscule proportion – 12 customers, in particular, are cited – of the headline figure of 23 million breaches of the act relating to money coming in and out of Australia.
The vast majority relate to a system set up around a decade ago to process international funds transfers as quickly and cheaply as possible. Around 80 per cent of these transactions involve government pension payments and 20 per cent business payments. To make the processing of the money easier and quicker, Westpac also entered into “Australasian cash management” arrangements with overseas correspondent banks.
Instead of all transactions being automatically reported to Austrac within 10 days as required, it took five years and counting from 2013 for the bank to realise millions of them had not been reported. When dealing with a few of the correspondent banks, the Westpac technology just wasn’t working.
Some of these missing transactions were still being reported last month. Nor did Westpac know or pass on information about the source of some of these funds to other banks or keep records relating to the origin of some others.
$11b in suspect transactions
Over the course of several years, that added up to more than $11 billion worth of transactions.
But it’s the fact that Westpac didn’t treat as an absolute priority the need to fix separate systemic risks of child exploitation in transfer payments that will be considered even more damning.
So from 2013, AUSTRAC and the bank’s own risk assessments meant Westpac was actually aware of heightened child exploitation risks associated with frequent low-value payments to the Philippines and south-east Asia.
In June 2016, senior management was specifically briefed on the risks in “LitePay”, a low-cost international payment service. Automated solutions are available to “red-flag” suspicious patterns of frequent low value transactions, extending to filters and closer monitoring.
It still took Westpac another two years to implement an appropriate automatic detection system for LitePay and it has still has not done so for similar risks via other channels.
The AUSTRAC statement says: “Westpac has failed to carry out appropriate due diligence on 12 of its customers with a view to identifying, mitigating and managing known child exploitation risks.” The inference is clear there are likely to be many more but no one really knows.
Former CBA chief executive Ian Narev can perhaps be excused a moment of schadenfreude about the firestorm engulfing Westpac. In 2017, CBA was stung by AUSTRAC’s decision to take it to court over 53,000 breaches of money-laundering laws, accelerating Narev’s exit, further tarnishing his tenure and eventually leading to a $700 million fine for the bank.
But this concerned the failure to address the risks of financial criminality rather than sexual criminality. It also involved thousands of breaches rather than more than 20 million.
Westpac was informed of the timing of the regulator’s court application on Wednesday evening and is keen to emphasise it self-reported the breaches and is working co-operatively with Austrac.
Not that this provides any comfort in the court of public or political opinion. Scott Morrison described the offences as “appalling and distressing” just ahead of speaking at the annual Business Council of Australia dinner in Sydney on Wednesday.
The immediate future of Westpac’s CEO and its chair Lindsay Maxsted was always going to be an inevitable topic of table discussion among their peers . It makes a change from the endless talk over the appropriate level of executive bonuses.