Westpac announces record-breaking $1.3b fine

Treasurer Josh Frydenberg has warned the financial services sector that the $1.3 billion fine levied against Westpac shows the government will not tolerate breaches of federal anti-money laundering and counter-terrorism financing laws.

The Age and Sydney Morning Herald on Wednesday night revealed the country's second largest bank came to an agreement with the financial intelligence regulator to pay the largest civil penalty in Australian corporate history after it was accused of breaching anti-money laundering laws and failing to stop child exploitation payments.

"This is a very significant penalty in response to very serious breaches of our anti-money laundering and counter terrorism financing laws," Mr Frydenberg told this masthead. "It sends the strongest possible message to all financial institutions about the importance of these laws and the government's preparedness to enforce them."

Westpac has announced it will pay a $1.3 billion fine, the largest in Australian corporate history.Credit: Wayne Taylor

The agreement between Westpac and the Australian Transaction Reports and Analysis Centre (AUSTRAC), announced Thursday morning, includes the fine as well as Westpac's admission it failed to properly report over 19.6 million international transfers amounting to over $11 billion.

The bank has also admitted it failed to carry out appropriate due diligence on its customers, with 284 clients making transactions indicative of suspicious activity including child exploitation in South East Asian countries.

Westpac chief executive Peter King apologised for the bank's failings.

"We are committed to fixing the issues to ensure that these mistakes do not happen again. This has been my number one priority. We have also closed down relevant products and reported all relevant historical transactions," Mr King said.

The penalty, once approved by the Federal Court, will surpass Commonwealth Bank's $700 million fine in 2018 after AUSTRAC found CBA's uncapped cash-deposit ATMs enabled arms and drugs dealers to launder money.

Under the agreement with AUSTRAC, Westpac also acknowledged it failed to keep records and monitor risks associated with money moving into and out of Australia through its correspondent banking relationships, including those institutions in higher risk jurisdictions.

AUSTRAC chief executive Nicole Rose said Westpac's systemic failure to comply with anti-money laundering laws meant AUSTRAC and law enforcement agencies missed critical intelligence needed to support police investigations.

"Our role is to harden the financial system against serious crime and terrorism financing and this penalty reflects the serious and systemic nature of Westpac’s non-compliance," Ms Rose said.

'More certainty'

AUSTRAC's bombshell case against Westpac was filed in the Federal Court last November, throwing the lender into turmoil. It utimately triggered the departure of chief Brian Hartzer and chair Lindsay Maxsted and led to three shareholder class actions.

Vas Kolesnikoff, executive director of shareholder advisory firm ISS, predicted further heads would roll at the bank. "The legal people, the compliance people are still there. There are movements but I think the next thing is shareholders will expect a bit of turnover at the board level as well."

"These executives are getting paid an extremely large amount of money and big bonuses," he said. "An excuse of 'this is all complicated' doesn’t seem to work anymore."

Mr King was set to retire from Westpac this year but instead took over from Mr Hartzer and was officially appointed chief executive in April. He signalled earlier this year he intended to settle with AUSTRAC and told investors on Thursday morning the agreement was an "important step in the court process".

"We are committed to fixing the issues to ensure that these mistakes do not happen again. This has been my number one priority," said Westpac CEO Peter King.Credit: Louie Douvis

Westpac released the findings of its own investigation into the compliance breaches in June, with two major investigations blaming technology failures, management misjudgments and poor systems for the breaches.

Mr King said Westpac was taking action to address the "areas where we have failed" and was committed to implementing all recommendations put forward in its review.

"We are strengthening our financial crime capability. We acknowledge the important role Westpac must play in protecting the integrity of the financial system."

The bank has recruited around 200 additional staff working in financial crimes detection and created a new group executive position directly responsible for improving financial crime capability.

AUSTRAC's case against Westpac centred on the bank's failure to submit International Funds Transfer Instructions (IFTIs) - forms with six crucial pieces of information about money entering and leaving the country - within the mandated 10-day period. The failures can be largely traced to its use of the now-terminated transfer platform, Litepay, that was cheaper than the industry standard.

Westpac had set aside $900 million to cover the expected penalty in April. It also allocated $160 million to improve its technology and for donations to charities working to eliminate child exploitation.

Mr King was questioned about whether the $900 million provision would be enough at a parliamentary committee hearing on September 11 by Labor MP Andrew Leigh.

"The only thing surprising about the fine is that Westpac was surprised by it," Dr Leigh said on Thursday. "The Commonwealth Bank breach didn't involve child exploitation, it involved significantly fewer breaches and yet they were fined $700 million."

"It's in the interest of Westpac shareholders and the broader community that the bank now gets on top of this," he said.

Mr Kolesnikoff said the fine was a major blow for Westpac shareholders.

"The bank cost shareholders [$1.3] billion - at the end of the day that's what got to be remembered - in what probably didn't need to happen," Mr Kolesnikoff said.

Westpac's share price fell by about 1 per cent by midday on Thursday, compared to a 0.8 per cent fall for the benchmark ASX/200 index.

Morningstar analyst Nathan Zaia said despite the record amount of the fine, it was in line with market expectations.

"It’s huge, it’s the largest fine in history, it’s an eye watering number but it’s already pretty much been expected by the market" he said. "A few hundred mill difference in the scheme of a bank with a market cap of $60 billion that generates billions of profit annually, it doesn’t really have much of an impact with the valuation we put on the bank."

He said investors were hopeful Westpac could now move on. "The bank has made a lot of changes, they’ve spent a lot on compliance. This is the final penance in putting this chapter to bed."

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