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Australia’s scandal-plagued financial industry was set reeling yet again after regulators accused Westpac Banking Corp. of the biggest violation of money-laundering laws in the country’s history. Allegations that some of the transfers went to child pornographers in the Philippines triggered a furor that cost the bank’s chief executive his job and precipitated the chairman’s early departure. An official report in February had lambasted senior banking executives across the industry for tolerating a culture of greed, leading to a litany of misbehavior. Nine months later, the financial crime agency’s court filing sounded a similar note, calling the breaches at Westpac systemic and the result of “indifference by senior management and inadequate oversight by the board.”

1.What ’ shappenedatWest pac? The Australian Transaction Reports and Analysis Centre announced a lawsuit on Nov. 20 accusing it of breaching money-laundering laws more than 23 million times. It alleges that between 2013 and 2019, the bank failed to report more than A$11 billion ($7.5 billion) in payments into and out of Australia, mostly using a bank-to-bank system originally designed to help facilitate pension transfers. The most serious allegations relate to a separate consumer product known as LitePay, which is meant to make it easier for people to send small amounts of money to each other. The agency says Westpac failed to carry out proper due diligence on 12 customers whose accounts showed repeated, small payments to Southeast Asia, even though it knew such transactions were a red flag. In one case, a customer transferred money to a person in the Philippines who was later arrested for child trafficking and exploitation involving live streaming of sex involving minors.

2.Thenwhat ? Chief Executive Officer Brian Hartzer’s resignation was announced within days. (He will be paid out A$2.7 million in salary, but will forfeit all bonuses.) Chairman Lindsay Maxsted said he would retire early, and director Ewen Crouch, who heads the risk committee, said he wouldn’t seek re-election to the board. Proxy adviser Institutional Shareholder Services Inc., which has about 2,000 clients globally, is recommending a vote against the re-election of directors Nerida Caesar and Peter Marriott and against the bank’s pay report at Westpac’s annual general meeting on Dec. 12.

3.How di dwegether e? Unlike some of their peers in the U.S. and Europe, Australia’s four biggest banks, responsible for 80% of the nation’s loans, made it through the global financial crisis relatively unscathed, thanks to an economy propped up by a mining boom and more conservative mortgage lending standards. But

then came a series of scandals in which they were variously accused of giving poor financial advice, failing to honor insurance claims or mistreating small business owners. Some also faced court action over allegedly trying to manipulate benchmark interest rates. Commonwealth Bank of Australia was accused of 53,000 money-laundering infractions, the most until the Westpac case. (Commonwealth Bank’s CEO Ian Narev resigned over that scandal and the bank settled in 2018, agreeing to pay a record A$700 million fine.) Amid public pressure to tackle misconduct, the government in 2017 announced a wide-ranging, yearlong public inquiry known as a Royal Commission.

4.Whatwast heconcl usi on? The inquiry uncovered misdeeds including charging for services that were never provided, forging loan documents, lying to regulators and pushing customers into bad investments to meet bonus targets. The Royal Commission’s final report also described regulators as ineffective and urged them to toughen enforcement and curb the bonus culture that fueled decades of wrongdoing. It recommended the abolition of “money for nothing” commissions on loans and referred 24 cases of alleged bad behavior for possible legal action. However, it stopped short of mandating that “one-stop-shop” financial firms be broken up or that lending rules be tightened, actions that could have threatened bank profits.

5.Sodi dbanksgetofft hehook? Not really. While the industry’s worst fears didn’t materialize in Commissioner Kenneth Hayne’s report, released Feb. 4, banks had already made some sweeping changes. Most have been seeking to sell their financial advice and wealth management units, where many of the problems occurred. Pay and bonuses were overhauled to focus more on customer satisfaction than sales targets. The regulator has curbed some risky (and more lucrative) home lending, while banks have been spending hundreds of millions of dollars upgrading outdated IT systems and forking out hundreds of millions more to compensate ripped-off customers. A few heads have rolled -- most prominently the CEOs and chairmen of National Australia Bank Ltd. and wealth manager AMP Ltd. The government also took advantage of public anger to pass a bank levy in 2017 that will cost the big four lenders and Macquarie Group Ltd. A$6.2 billion ($4.4 billion) over four years.

6.Ar et her egul at or supt ot hej ob? To be determined. Hayne put a lot of the onus of cleaning up the mess on the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority -- the same organizations he lambasted as too timid. He urged ASIC to think first about

prosecution, not negotiation. And the Federal Court will be given expanded jurisdiction over financial crime to make it easier to launch cases. APRA pledged to focus on transforming governance, culture and pay across all financial institutions that it monitors, after a review ordered by the government in the wake of the Royal Commission found it had a culture of conformity.

7.Sowhat ’ st heout l ookf orbanks? While they’re still making multi-billion-dollar profits, the gloss has come of the money printing machine On top of more muscular regulation, they are facing rising costs for compliance and have collectively set aside billions to cover compensation to customers. On top of that, the central bank has cut interest rates to record lows, squeezing margins.

The Westpac scandal: how did it happen? SYDNEY MORNING HERALD

The fallout from Westpac’s 23 million alleged breaches of antimoney-laundering laws has plunged the bank into crisis and rocked the financial sector. The allegations are outlined in a statement of claim that the financial intelligence agency, Austrac, has lodged in the Federal Court. The number of alleged breaches leaves the Commonwealth Bank’s run-in with the regulator in late 2017, where it was fined $700 million for clocking 53,506 breaches related to its uncapped cashdeposit machines, paling into insignificance. Recent headlines were dominated by allegations that some breaches caused the bank to facilitate child abuse in the Philippines – a revelation that drew searing condemnation from Prime Minister Scott Morrison down.

Reporting and customer identification are at the heart of a bank’s compliance obligations.The scandal has claimed the scalps of nowousted chief executive Brian Hartzer and chairman Lindsay Maxsted – and calls continue for more blood at the board level. Meanwhile, Westpac’s annual general meeting is set for December 12: an independent review into accountability at the bank is underway, shareholder class-action lawyers are circling, and the size of the fine imposed by the regulator is yet to be revealed. How could so many transactions escape the bank’s notice? What does the law say that a bank has to keep track of? And what does the scandal mean for other banks?

What does the law say a bank has to monitor? Record-keeping, reporting and customer identification are at the heart of a bank’s compliance obligations. Organised and automatic systems are central to ensuring this is done efectively. If something goes wrong in this process, it quickly gets out of hand, “multiplying out of sight”, says law firm Hunt & Hunt partner Richard Williams. “The fact that with Westpac you’ve got 23 million breaches, that just shows the magnitude of the reporting obligation,” he says. The banks are now the policemen.

As part of a bank’s licence to operate, it must work with financial intelligence agency Austrac to help stop criminals cleaning money or financing terrorism. Austrac was established on the heels of the 1988 Final Transactions Reports Act for banks (and other deposit-taking institutions) to lodge reports on cash transactions over $10,000 or payments deemed suspicious. Advertisement

During this time, Austrac had what Mr Williams describes as an “assistance role” with the banks – providing education and support to make sure they were complying with the law. “And then in 2006, the Anti-Money Laundering [and CounterTerrorism] Act came in and that imposed much broader obligations as to ‘know your customer’,” Mr Williams says. The obligations under this Act have progressively increased over time, to the point, Mr Williams says, “The banks are now the policemen.” Mr Williams, who has more than 25 years’ experience in financial services law, says the regulator’s approach to the job has also changed over time. “What’s happened now is Austrac have moved from an assistance model to more of an enforcement model,” he says. The regulator’s chief executive now has powers to issue fines for a greater range of ofences and reports are required on every international transaction, no matter the size. Making sure a bank is compliant is a costly and thankless task. “If it works, nothing happens,” Mr Williams says. Advertisement

Ousted Westpac CEO Brian Hartzer, pictured here before the scandal broke, in November. CREDIT:LOUIE DOUVIS

How do banks track overseas transactions? In the recent case of Westpac, most of the 23 million breaches came from people making online purchases or receiving a pension from a foreign country. Each time money goes in or out of the country, the bank must lodge what’s called an IFTI report (International Funds Transfer Instruction report) to Austrac. These reports are due within 10 business days and must include six key details about who sent and received the money, as well as transaction dates, identification codes and information about what the payment is for. This information might be used to help Austrac with an investigation into money laundering or terrorism financing down the track. A key standard for international funds transfers between banks is the Society for Worldwide Interbank Financial Telecommunication (SWIFT) system – a messaging network used by banks worldwide to send information about money being sent between countries.

But Austrac says that in various relationships with foreign banks, Westpac considered the SWIFT system costly and slow, and opted for a cheaper and quicker approach. Owing to a technological error that apparently went undetected for years, Westpac did not report 19.5 million IFTIs to Austrac. To further complicate matters, 99 per cent of these transactions came from Citibank, a third party using Westpac to “clear” its money. Advertisement

What role did Citibank play? Citibank was revealed to be "Bank A" from Austrac’s statement of claim, making it one of four correspondent banks that used Westpac to lodge its IFTI reports. Citi was quizzed by Labor MP Andrew Leigh during the House of Representatives standing committee on economics for its role in providing Westpac with information about the payments. “Should you not have been more proactive in providing those full details?” Dr Leigh said. Citi Australia’s chief executive, Marc Luet, replied: “I think clearly the responsibility for reporting on these transactions was not ours.” AUSTRAC is not investigating Citibank for its role. Westpac stopped providing its service to Citibank in mid-2018.

Regardless of where blame lies, which still remains to be determined, the IFTI reports either were not there or failed to meet the regulator’s requirements for complying with the law for almost five years. Westpac says when it realised it had not properly lodged a large number of these reports, it self-reported the compliance breaches to Austrac in August 2018. But Austrac alleges that, despite senior management being aware of "long-standing non-compliance", they failed to make resolving the problem a priority. Former Macquarie employee turned anti-money-laundering compliance expert Anthony Quinn says while IFTI reporting sounds complex, it should be simple. “Regulatory compliance is all about managing data well,” he says. “And generally banks are really bad at this. That’s typically where they fall down.”

The remaining alleged breaches were related to Westpac failing to properly record the origin of international funds transfers, which occurred more than 3.5 million times. Austrac alleges Westpac initially retained some of the required information for these transactions. “However, due to poor oversight of its data retention systems, Westpac did not retain records of this information for seven years as required,” Austrac alleges.

Westpac is alleged to have breached anti-money-laundering laws 23 million times.CREDIT:GETTY IMAGES How do banks detect which of these transactions are suspicious? Banks should also have a centralised system that holds and tracks client information using what are called “typologies” – a list of red flags that can be built into algorithms to automatically alert the bank to suspicious patterns of spending. This would include data collected from IFTI reports. When a red flag is raised, the bank is required to lodge a suspicious payments report to Austrac within 24 hours. But depending on how the data is organised, alerts can either become too broad – flooding the compliance team with notifications – or too narrow, missing important red flags. Austrac says LitePay failed to generate a sufficient number of red flags and this enabled some of the most damning of the breaches. Westpac says it did have typologies built into its low-cost international transaction service LitePay. But Austrac says the bank

did not implement appropriate typologies to monitor child exploitation risks through the LitePay platform in June 2018. LitePay was scrapped four days after Austrac’s bombshell statement of claim was filed in the Federal Court. The agreed statement of facts between Austrac and Westpac is yet to be released. But Austrac says LitePay failed to generate a sufficient number of red flags and this enabled some of the most damning of the breaches – 12 customers, one with a prior conviction for child exploitation ofences, who were able to transfer almost a combined $500,000 overseas. Westpac says it filed “suspicious matter reports” to Austrac for each of the 12 customers. But Austrac says if the typologies were set up efectively, these payments should have raised more red flags.

Westpac is alleged to have breached anti-money-laundering laws 23 million times.CREDIT:GETTY

Who is to blame? That is the million, if not billion, dollar question. Austrac blames an “indiference” of senior management towards compliance. It says the bank was warned about its systemic failures but was either slow to act or did nothing about it. Westpac has launched an independent inquiry to determine who should be held accountable within the bank.

The prudential regulator, APRA, will decide whether to pursue action against Westpac under the federal government's Banking Executive Accountability Regime (BEAR) by the end of this year.

What is the impact? As people manage their money online more and more, banking has become almost exclusively a technology provider. Many banks around the world are grappling with how to update their legacy mainframe systems that are so old there is hardly anyone left who understands their coding language. Compliance is tightly connected to brand. Non-compliant behaviour lands your business on the front page. The cost of keeping up with the times is immense, but we now know the cost of non-compliance can be reputational damage. “Compliance is tightly connected to brand. Non-compliant behaviour lands your business on the front page,” says Minter Ellison lawyer turned chief executive of compliance training organisation Safetrac, Deborah Coram. “Traditionally, compliance has been seen as a 'check-the-box' activity. But nowadays, that’s really not sufficient.” Ms Coram says there needs to be a cultural change where executives are invested in the reasons behind anti-money laundering legislation, not simply ensuring its operations meet the regulator’s requirements. She points to the raft of “regtech” (regulatory technology) businesses eager to jump in to help executives monitor compliance. Other banks will be taking note of Westpac’s failures and antimoney-laundering compliance is likely the topic on the lips of bank executives around the country. “Compliance as a theme for organisations, especially in the financial services sector, has increased exponentially. There is no doubt this is enormous. The burden seems to be growing not lessening,” Ms Coram says.

Westpac chairman Lindsay Maxsted and new CEO Peter King in Sydney on December 3. CREDIT:RENEE NOWYTARGER

What’s at stake at the AGM? The annual general meeting is the time of year where a company’s shareholders and board of directors come together to discuss the company’s performance over the duration of that year. The shareholders get to vote on a number of key issues from reelection of board members to the company’s remuneration report. Proxy advisers write reports informing shareholders on how to vote. Two such firms, ISS and CGI Lewis, have recommended shareholders vote against the re-election of Westpac’s longstanding board member Peter Marriott. Shareholders have been known to vent their fury at AGMs following a banking scandal. ISS is also advising investors to vote against Nerida Ceasar’s reelection and to oppose the bank’s remuneration report, giving it an historic second strike. A company records a strike if more than 25 per cent of shareholders vote against its remuneration report. If a company records strikes two years in a row, shareholders can then vote to spill its board under the "two strikes rule". Other proxy advisers, such as the Australian Council of Superannuation Investors and Ownership Matters, are telling investors to vote in favour of the remuneration report and Mr Marriott.

Shareholders have been known to vent their fury at AGMs following a banking scandal – most notably the NAB’s meeting in 2018 that came at the tail end of the scathing banking royal commission. NAB copped the largest protest vote on executive pay in corporate history that day. Westpac’s executives will be no doubt be holding their breath until the

THE GUARDIAN https://www.theguardian.com/australia-news/2019/dec/17/westpacscandal-apra-launches-full-investigation-into-bank-over-child-exploitation-allegations The prudential regulator has launched a full-scale investigation into Westpac over its money-laundering and child exploitation scandal that could result in bank directors and executives being kicked out of the industry. And the Australian Prudential Regulation Authority told Westpac it must set aside an additional $500m in capital, bringing the total capital penalty imposed on the bank since the middle of the year to $1bn. Apra said it would also review Westpac’s governance of risk, including executive accountability and remuneration.

Furious shareholders front 'incompetent' Westpac executives at AGM Read more

The investigation comes after Australia’s financial intelligence agency, Austrac, launched legal action against Westpac last month alleging the bank breached antimoney-laundering and counter-terrorism finance laws 23m times, including by allowing customers to transfer money to the Philippines in a manner consistent with child exploitation.

Advertisement It is the latest blow for the bank over a scandal which has already lopped the heads of its chief executive and chairman and earned a second “strike” against its remuneration report from furious shareholders.