By Byron Kaye and Paulina Duran
SYDNEY (Reuters) – Regulators on Wednesday accused Australia’s Westpac Banking Corp
The oversight failure at Australia’s second-largest bank led to deep systemic non-compliance with anti-money laundering laws, financial crime watchdog AUSTRAC said in a civil court filing.
The regulator is pursuing fines of up to A$21 million ($14 million) for every transaction Westpac failed to monitor adequately or report on time.
The lawsuit dwarfs a case AUSTRAC brought against larger Commonwealth Bank of Australia
“These contraventions are the result of systemic failures in its control environment, indifference by senior management and inadequate oversight by the Board,” AUSTRAC said in the court filing.
Westpac said it had self-reported the breaches to AUSTRAC and had since shut down the service at the center of the complaint which let customers and affiliate overseas banks process payments from Australia.
“These issues should never have occurred and should have been identified and rectified sooner,” Westpac CEO Brian Hartzer said in the statement.
“It is disappointing that we have not met our own standards as well as regulatory expectations and requirements.”
The lawsuit sent Westpac shares down as much as 3% by midsession, outpacing a broader share market decline of 1.3%, as investors began counting the financial and reputational cost of the lawsuit.
CHILD EXPLOITATION RISKS
“Whatever penalty they get … will be premised on the idea of causing them pain, that’s what a civil penalty is,” said Brian Johnson, a banking analyst at Jefferies Australia.
Most alarming were details on the failure to address risks of child exploitation, Johnson added.
The AUSTRAC filing said Westpac knew since 2013 about “heightened child exploitation risks associated with people who made frequent low value payments to the Philippines and South East Asia” but did not set up an automated detection system until 2018.
Even since then, Australia’s oldest bank had not implemented automated detection systems to monitor for the known child exploitation risks through other channels, which meant it “has failed to detect activity on its customers’ accounts that is indicative of child exploitation”, AUSTRAC said.
The Sydney-based bank had failed to conduct due diligence on 12 customers who had made frequent low-value transactions over several years which suggested involvement in child exploitation, it said.
One customer who had served a prison sentence for child exploitation set up several Westpac accounts. Westpac detected suspicious activity in one account but failed to review the other accounts and “this customer continued to send frequent low value payments to the Philippines through channels that were not being monitored appropriately”, AUSTRAC said.
Westpac meanwhile maintained relationships with offshore banks without assessing their business relationships, products, customers or payments, even when those banks disclosed relationships with “high risk or sanctioned countries including Iraq, Lebanon, Ukraine, Zimbabwe, and Democratic Republic of Congo”.
“The risk posed to Westpac was that these high risk or sanctioned countries may have been able to access the Australian payment system,” AUSTRAC said.
AUSTRAC declined to comment when asked by Reuters if it was conducting similar investigations on the other two of Australia’s so-called Big Four banks, National Australia Bank
Fourth-ranked ANZ declined to comment while NAB was not immediately available for comment.
The Reserve Bank of New Zealand, which carries out a similar function to AUSTRAC in New Zealand, said it was in close contact with the Australian agency with regards to Westpac. Westpac is one of New Zealand’s biggest lenders.
“Obviously it’s appalling and distressing,” Australian Prime Minister Scott Morrison told reporters in Brisbane, when asked about the Westpac lawsuit.
“It is a fairly damning indictment about some of the processes and procedures they’ve had in place.”
(Reporting by Byron Kaye and Paulina Duran in Sydney, and Nikhil Nainan in Bengaluru. Editing by Lincoln Feast.)