On 20 November The Australian Transaction Reports and Analysis Centre (AUSTRAC) commenced civil proceedings against Westpac alleging the lender contravened its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (Act).

AUSTRAC is seeking declarations of contravention and pecuniary penalties pursuant to s175(1) of the Act.

[Note: The Concise Statement, Statement of Claim and Originating Application are available on the AUSTRAC website.] 

AUSTRAC's allegations

In broad terms, AUSTRAC alleges that Westpac did not:

1. appropriately assess and monitor the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships and with the movement of money into/out of Australia
2. carry out appropriate due diligence on customers sending money to the Philippines and South East Asia for known child exploitation risks
3. report (approx) 19.5 million International Funds Transfer Instructions (IFTIs) to AUSTRAC 
4. pass on information about the source of funds to other banks in the transfer chain
5. keep records relating to the origin of some of these international funds transfers

AUSTRAC alleges that Westpac contravened the Act on 23 million occasions. 

In a statement, AUSTRAC said that 'Westpac’s oversight of the banking and designated services provided through its correspondent banking relationships was deficient. Westpac’s oversight of its AML/CTF Program, intended to identify, mitigate and manage the money laundering and terrorism financing risks of its designated services, was also deficient. These failures in oversight resulted in serious and systemic non-compliance with the AML/CTF Act'.

AUSTRAC CEO Nicole Rose said that AUSTRAC 'have been, and will continue to work with Westpac during these proceedings to strengthen their AML/CTF processes and frameworks. Westpac disclosed issues with its IFTI reporting, has cooperated with AUSTRAC’s investigation and has commenced the process of uplifting its AML/CTF controls'.

Westpac's response

Since the 20 November when AUSTRAC announced it had commenced civil penalty proceedings, Westpac has released a number of statements providing updates on the lender's response. These include, a detailed response plan, responding to the allegations in AUSTRAC's statement of claim, and an announcement of leadership changes. A summary of Westpac's statements is below.  

Timeline and response

20 November: Westpac released an initial statement acknowledging the commencement of civil proceedings by AUSTRAC and noting that the lender had previously disclosed (including in its Full Year 2019 reporting) that it had self-reported: a) a failure to report a large number of international funds transfer instructions (IFTIs) to AUSTRAC; and b) that AUSTRAC was also investigating a number of other areas relating to Westpac’s processes, procedures and oversight.

20 November: Westpac released a second statement responding to AUSTRAC's statement of claim in which the lender acknowledged that 'these are very serious and important issues' and confirming its commitment to 'assisting AUSTRAC and law enforcement agencies to stop financial crime'. Westpac CEO Brian Hartzer went on to say that the 'issues should never have occurred and should have been identified and rectified sooner. It is disappointing that we have not met our own standards as well as regulatory expectations and requirements'. The statement also outlines the steps Westpac is making/has made to 'improve and bolster the management of financial crime risks including strengthening our policies, data feeding systems, processes and controls'. 

22 November: Westpac issued a statement on behalf of the board, 'unreservedly' apologising, expressing the board's commitment to addressing the issues and to working with AUSTRAC. Westpac Chair Lindsay Maxsted said 'the notion that any child has been hurt as a result of any failings by Westpac is deeply distressing and we are truly sorry. The Board unreservedly apologises. Our Board, CEO, and management team are fully committed to fixing these issues and we are taking all steps necessary to urgently close any remaining gaps and fix our policies and procedures so that this can never happen again.' The statement goes on to outline the actions already implemented/being implemented by the lender including: reviewing and taking action on all of the individual customers mentioned by AUSTRAC; 'establishing a multi-layered review' of current processes/systems; committing to appoint independent experts to conduct a review of accountability as well as oversee the actions arising from the review; and commencing discussions with relevant community groups about any further steps the lender can take to 'fight child exploitation'. The statement adds that the board will continue to provide updates on the steps being taken.  

24 November: On 24 November, Westpac Chair Lindsay Maxsted and CEO Brian Hartzer released a three point response plan — the plan is broken into 1) immediate fixes; 2) lifting standards; and 3) protecting people with actions and timelines under each — to address the issues raised by AUSTRAC.

Actions under the response plan

1. Immediate fixes: Westpac outlines seven actions (five of which have already been completed) to ensure 'issues cannot happen again'.  They are: 1) closing the Westpac Australasian Cash Management product; 2) remediating and analysing all unreported IFTIs to AUSTRAC; 3) closing the LitePay international funds transfer system (the platform that facilitated low value international payments); 4) updating child exploitation filters into screening for the SWIFT payment channel to additional jurisdictions; 5) undertaking a further review of all child exploitation transactions types for the Phillippines over the past 12 months; 6) re-reviewing taking appropriate action (where appropriate) against the 12 customers (previously reported by Westpac to AUSTRAC); and 7) adding 200 resources to the existing 750 people in the financial crime resourcing team by 2020.

2. Lifting standards: The plan states that Westpac is reviewing all financial crime systems and processes 'to pursue best-in-class global standards'.  The plan outlines five actions to lift standards including the introduction of priority screening. This means that where Westpac flags transactions that suggests potential child exploitation in high risk locations, the transactions are prioritised for action and reported to AUSTRAC within 24 hours (which is faster than the standards require).

Other actions include: 1) the establishment of a board financial crime subcommittee chaired by a non-executive director to oversee the implementation of the enhanced financial crime program; 2) commissioning an external expert to independently review Westpac's program including a review of accountability; 3) improving cross industry data sharing (including seeking partnerships with industry, technology, telecommunication and government partners) and; 4) elevating the financial crime function to report directly to the Chief Risk Officer.

3. Protecting people: Finally the plan outlines a number of actions and investments aimed at reducing the human impact of financial crime. Actions include: 1) convening an expert advisory roundtable to develop a program of actions to support the prevention of online child exploitation and the provision of $10m per year for three years to implement the recommendations; 2) providing $6m over six years to SaferKidsPH; and $18m in funding over 3 years to the International Justice Mission to address online sexual exploitation of the children in the Philippines.

The plan also 'explain[s] some of AUSTRAC's allegations' and actions Westpac has taken to 'improve financial crime management' including (among others) 'dealing with and fixing individual issues' (eg IFTI non-reporting issues) and investing in the consolidation of different financial crime systems into a single group wide technology system.

Short term incentives may be withheld/reduced pending the outcome of the accountability review:  In a statement accompanying the plan, Westpac Chair Lindsay Maxsted said the 'board understands the need for action and accountability' and that in consequence, the Board had determined 'that either all or part of the grant of the 2019 Short Term Variable Reward will be withheld for the full Executive team and several members of the general management team subject to the assessment of accountability.  We recognise the seriousness of these events and that is why we will appoint an external expert to provide independent oversight of the process. We will make the recommendations public.'

26 November: On 26 November, Westpac announced a number of leadership changes.  

• Group CEO Brian Hartzer will step down as CEO effective Monday 2 December.  Peter King (current Westpac CFO) will replace Mr Hartzer as acting CEO while a permanent replacement is found.  Current Chief Operating Officer, Gary Thursby will act as CFO.  
• Chair Lindsay Maxsted will bring forward his retirement as Chair to the first half of 2020.
• Long-standing Director, Ewen Crouch will not seek re-election at the upcoming Westpac AGM on 12 December.

Remuneration arrangements: The statement also outlines exit arrangements for outgoing CEO Brian Hartzer as follows.

• Mr Hartzer has been given 12 months’ notice and will be paid his fixed remuneration of $2.686m over this period
• Both Mr Hartzer’s unvested deferred Short-Term Variable Reward and unvested Long-Term Variable Reward will be forfeited
• In addition to forgoing his FY19 Short-Term Variable Reward, Mr Hartzer will also not be eligible for Short-Term Variable Reward in FY20 or FY2
• Westpac will not proceed to seek shareholder approval for the FY20 Long-Term Variable Reward outlined in the 2019 Notice of Meeting at the upcoming AGM

Incoming acting CEO Peter King will be remunerated as follows: Incoming acting CEO Peter King will receive annual total fixed remuneration of $2,100,000; annual Short Term Variable Reward at target of $2,100,000; and annual Long Term Incentive of $2,800,000 (face value), with any shares that are issued in respect of this award being purchased on market. 

Response from regulators and investors

• The Treasurer has said APRA is looking into the issues: In an interview, Treasurer Josh Frydenberg said that the Australian Prudential Regulation Authority is considering action against Westpac executives, potentially under the Banking Executive Accountability Regime (BEAR), as well as the potential imposition of financial penalties. 'APRA has the ability under the Banking Executive Accountability Regime to disqualify boards and to disqualify executives where there is a failure to appropriately enforce and uphold the duties under the legislation. Now, that legislation came in to force in 2018, it’s not retrospective and some of those alleged breaches date back to 2013 but the anti-money laundering laws are a prescribed activity under APRA and I know that APRA is looking at it' Mr Frydenberg said.  Asked whether APRA can 'do more than just disqualify the executives' Mr Frydenberg said that APRA can apply to the court for fines of up to $500m. Mr Frydenberg went on to comment that the issue has further eroded trust in major financial institutions. 'There is a lack of trust and confidence among the public after the royal commission with some of our leading financial institutions. And now this…These issues develop a momentum of their own. They’ve (Westpac) got an AGM on December 12. And no doubt there will be some very hard discussions between now and then'. Subsequently, Mr Frydenberg welcomed the announcement by Westpac of the leadership changes at the lender on behalf of the government. 'As I said over the weekend, these issues develop a momentum of their own but there needed to be accountability' Mr Frydenberg said.
• ASIC is also reportedly investigating: According to media reports, the Australian Securities and Investments Commission (ASIC) has confirmed it is also investigating. The Guardian quotes an unnamed ASIC spokesperson as saying 'ASIC can confirm that it commenced an investigation on Thursday, 21 November 2019, concerning possible breaches of legislation it administers arising from AUSTRAC’s actions in relation to Westpac'.
• Reserve Bank of New Zealand: In a statement, the Reserve Bank of New Zealand said it 'looking closely' at the Australian investigation.  RBNZ is 'working closely with regulatory counterparts' following AUSTRAC' announcement, the statement reads. 'We have a regular onsite programme with New Zealand banks to ensure compliance with New Zealand’s AML/CFT requirements, and will be looking closely at the Australian findings and if they have relevance for Westpac NZ'.  

Investor response

[Note: The Westpac AGM will be held on 12 December. At the 2018 AGM, Westpac incurred a 'first strike'. Four directors will stand for re-election at the meeting (as director Ewen Crouch will not stand for reelection)] 

• Australian Shareholders' Association: In a short statement, the Australian Shareholders’ Association (ASA) said it 'is horrified by Westpac's disclosure of Austrac reporting breaches and implication of these failures'. The statement adds that  'ASA wants to know the board's response as a matter of urgency, and we will determine our actions when we have information. We will be meeting with Westpac Chair, Lindsay Maxsted, next week and will discover more'. 
• The Australian Council of Superannuation Investors (ACSI) issued a statement welcoming the leadership changes at Westpac. ACSI CEO Louise Davidson said 'The actions taken today reflect the seriousness of the incidents and the failure of the bank to meet community expectations. ACSI will continue to engage with Westpac on a range of issues to determine whether further action is needed'. Ms Davidson went on to say 'It is still unclear how these significant issues came to occur, and why a fulsome investigation was not initiated earlier. Investors want to see Westpac’s culture and governance strengthened to avoid a repeat of these issues. We believe that this crisis warrants further board renewal in the new year to support rebuilding public trust.  We will be continuing to engage closely with Westpac to monitor its progress on remediation and improvement'.