Countdown to catastrophe as Austrac’s Westpac allegations unfolded

A war room was quietly set up at Westpac’s Sydney headquarters in mid-November with a sense a legal blow was close.

Westpac chairman Lindsay Maxsted Picture: AAP

A war room was quietly set up at Westpac’s Sydney headquarters in the middle of November when the bank’s senior executives got the sense a legal blow was close.

But it wasn’t until Tuesday night that the damning confirmation came.

Anti-money laundering and counter-terrorism financing regulator Austrac was about to launch bruising action in the Federal Court. It was like a bomb dropping on Westpac, which was established in 1817 as the Bank of New South Wales.

At the same time across Sydney, business types were gathering to hear a keynote address by Josh Frydenberg.

The Committee for Economic Development of Australia event was well attended as the Treasurer spoke about the health of the Australian economy and the challenges posed by an ageing population. Sitting on one of the tables closest to the stage was the head of Westpac’s institutional bank, Lyn Cobley. Once the speech was over, the main course was served. She darted away from the table several times and appeared distracted.

It seems the shock news may have been delivered to her while Frydenberg was preparing to take questions from the floor.

The Austrac statement of claim landed with a thud on Wednesday morning and the regulator’s chief Nicole Rose was quick off the mark to address the media. The allegations were brutal. Westpac’s earlier disclosures about reporting failures for international funds transfer instructions and then last month the warning of a potential “significant financial penalty”, were overshadowed by much more serious and shocking allegations.

Austrac was alleging Westpac failed to conduct due diligence on 12 customers that were using its systems to transfer low-value payments, and there were clear links to child exploitation in The Philippines and Southeast Asia.

“In October 2014 and November 2014 customer one transferred money to a person located in The Philippines who was later arrested in November 2015 for child trafficking and child exploitation involving live streaming of child sex shows and offering children for sex.”

The shockwaves went out far and wide and it wasn’t long before Prime Minister Scott Morrison was saying he was “absolutely appalled” by the allegations levelled at Westpac.

Westpac boss Brian Hartzer says he only learned of the extent of the criminal activity when the statement of claim became public.

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“I am personally disgusted and appalled by the subject matter of some of these transactions. I deeply regret that this has occurred and, as I said, I will get to the bottom of this personally and fix it,” he told journalists on a brief media call on Wednesday afternoon.

Hartzer spoke of changes already made in the risk and financial crimes units at Westpac and further improvements to technology after its systems had failed to adequately pick up and report transactions.

By that stage, the Australian Prudential Regulation Authority was giving careful consideration to the matter and whether some of the activity may have implications under the Banking Executive Accountability Regime.

APRA last year slapped a $1bn add-on to CBA’s minimum capital requirement while the other major banks got smaller additional capital charges due to failings fleshed out at the Hayne royal commission.

The corporate regulator was also taking an interest in Westpac, assessing disclosures made to the ASX. Requirements were heightened for Westpac, given it had conducted a $2bn institutional capital raising and was tapping retail investors for about $500m.

The sharp share price declines in the stock have already spurred some retail investors to request release, after they had asked for an allocation of stock under a share purchase plan.

At some point attention will turn to Westpac’s auditor PwC.

Australia’s Auditing Standard ASA250 requires auditors to broadly ensure the companies they audit have complied with laws and regulations in generating their income.

Hartzer largely accepted Austrac’s allegations this week, but there was an exception.

He rejected claims of “indifference” by the bank’s leadership team and “inadequate oversight” by the board.

The Lindsay Maxsted-led board was in damage control and a lengthy phone link-up was held on Wednesday night.

The pressure on Westpac intensified on Thursday as retail and institutional investors came out swinging, joining several politicians. That came against the backdrop of a looming Westpac annual general meeting on December 12, and the growing prospect of a second strike against the pay report.

The clock was ticking.

The marathon meeting for the embattled board on Friday spanned tricky topics. But in the end, for better or worse, Maxsted and the board opted for further forensic investigation.

Luckily the investigations will be handled externally, given the issues Westpac has had in identifying and rectifying its own systems and processes since 2013.

A few examples from Austrac’s statement of claim:

● By April 2018, Westpac had identified 120 products and associated systems that required an uplift in transaction monitoring and there were 13 “high risk” products needing immediate review.

● In the institutional bank — where four “high risk” products were highlighted — Austrac said trade finance was yet to have automated monitoring.

● In December 2016, Westpac and rival banks received detailed briefings by Austrac on key payment indicators for the purchase of live streaming exploitation material, particularly around transfers to The Philippines and Southeast Asia.

Westpac was aware a few months later that its systems weren’t being triggered to properly pick up the trends. It wasn’t until mid last year that one product had “appropriate automated detection” for child exploitation involving The Philippines.