Australia-based financial institution Westpac said in its latest earnings report that it has set aside AUS$900 million (U.S. $570 million) for a potential fine with Australian enforcement authorities related to a money laundering scandal and for allegations of facilitating child exploitation in the Philippines and Southeast Asia.
Westpac said Tuesday the actual penalty “may be materially higher or lower than the [$900 million] provision.” It also said it would also take a AUS$130 million (U.S. $82 million) hit to its cash earnings resulting from its compliance response plan “to improve its financial crime program, support industry initiatives to enhance financial crime monitoring and provide additional support and resources to organizations working to eradicate child exploitation.”
In addition to the projected cost implications, the allegations ultimately resulted in the November resignation of Chief Executive Officer Brian Hartzer and the early retirement of Westpac Group Chairman Lindsay Maxsted. On April 2, Westpac announced the appointment of Peter King as its new CEO.
Australia’s financial intelligence unit and its anti-money laundering and counter-terrorism financing (AML/CTF) regulator AUSTRAC first announced its Statement of Claim against Westpac in November 2019 alleging AML/CTF violations. AUSTRAC’s civil proceedings described a host of compliance and risk management failings by Westpac, including violations under Australia’s International Funds Transfer Instructions reporting rules and many other alleged systemic failings concerning correspondent banking, risk assessments, customer due diligence, transaction monitoring, and recordkeeping.
Child exploitation allegations
Perhaps most disturbing are the child exploitation allegations and Westpac’s continued failures to ignore such warnings by AUSTRAC. “In December 2016, AUSTRAC provided reporting entities, including Westpac, with methodology briefs detailing the key indicators for the purchase of live-streaming child exploitation material, involving international funds transfers to the Philippines and South East Asia,” the agency said. The Financial Action Task Force and the Asia/Pacific Group on Money Laundering also published numerous typologies reports, most recently in July 2018 and August 2019.
“Under Westpac policy, the maintenance and development of new detection scenarios is an integral part of the transaction monitoring process,” according to AUSTRAC. “The development of new scenarios and logic is intended to be prioritized according to emerging typologies and advice and feedback from AUSTRAC and law enforcement agencies within Australia. Contrary to the policy, Westpac did not have appropriate and timely regard to AUSTRAC and other guidance on child-exploitation typologies.”
By May 2016, Westpac itself had assessed the heightened child exploitation risks associated with low-value payments to the Philippines through a platform called LitePay, AUSTRAC said. In August 2016, Westpac introduced an automated detection scenario, applying to LitePay, to identify customers sending funds to multiple beneficiaries using the LitePay product. “This scenario did not appropriately monitor for the known risks involved with the child exploitation typology, specifically, the indicia of frequent low-value payments within a short period of time,” AUSTRAC said.
Even though Westpac knew by late February 2017 that this scenario had not triggered, it did not implement “an appropriate automated detection scenario” to monitor the LitePay channel for the known child exploitation typologies involving the Philippines until June 2018, AUSTRAC said.
AUSTRAC also describes a refusal by Westpac to comply with the Society for Worldwide Interbank Financial Telecommunication (SWIFT) network. Globally, most international transfers are sent through SWIFT, which require certain payment information to comply with SWIFT messaging format and SWIFT guidelines, including information about the ordering customer, or payer, and about the beneficiary, or payee. According to AUSTRAC, “Westpac considered that the SWIFT payment network was costly and not an efficient means of sending low-value, large-volume payments for clients of global banks that need to make and receive payments around the world.”
Westpac essentially enabled other financial institutions to covertly move money around the world. “Some banking services, including those facilitated through the non-SWIFT [Australasian Cash Management] arrangements, involved payments that were not fully transparent. In a significant number of cases, Westpac did not know the originator, purpose of payment, beneficiary or jurisdiction of the origin of funds.”
Additionally, AUSTRAC said, “in a number of instances, Westpac did not appropriately assess the jurisdictional risks of the correspondent banking relationship.” Moreover, several correspondent banks disclosed relationships with banks in sanctioned countries or disclosed subsidiaries in sanctioned countries.
When all is said and done, resolution of the matter could surpass the current record AUS$700 million (U.S. $443 million) civil penalty that AUSTRAC levied against Commonwealth Bank of Australia in June 2018. That case concerned systemic failings by CBA’s compliance and risk management department to report 53,750 suspicious transactions made through its “Intelligent Deposit Machines.”