Hundreds more customers drawn into Westpac child exploitation scandal

Austrac may amend its damning Federal Court action against Westpac to include matters relating to potential child exploitation by as many as 272 customers.

Westpac Bank has uncovered potential child exploitation activity by hundreds more customers. Picture: AAP

Westpac confronts the possibility financial crimes regulator Austrac will amend its damning Federal Court action against the bank, which would see it include additional matters relating to potential child exploitation by as many as 272 customers.

In another blow to Westpac, the bank made clear on Friday it was dealing with further issues beyond those covered in an explosive case against the bank started by Austrac last year.

In an ASX statement, Westpac noted it had self-reported a spate of additional issues to Austrac following the start of Federal Court action in November by the regulator. The initial case alleged 23 million breaches of the law, the bulk of which the bank has admitted.

Most of the 23 million alleged breaches of the law related to Westpac not reporting international payment instructions, and a small number were linked to facilitating payments by 12 customers that were likely to have been used to fund child exploitation material in Asia.

The case led Westpac to undertake a more detailed assessment of its past reporting to Austrac.

The bank conducted a "lookback" of files in December, using the latest typology screening for potential criminal activity, which saw it disclose more suspicious matter reports to Austrac "in relation to potential child exploitation".

"Westpac has now been informed by Austrac that it is further investigating these matters and has notified Westpac it may amend its statement of claim to include allegations arising from these investigations," Westpac said in the statement.

"Austrac has requested further information from Westpac on these matters, including in relation to the TTR (threshold transaction report) issues and 272 customers, many of which were the subject of SMRs (suspicious matter reports) previously filed as part of the lookback. Further updates on this matter will be provided as required."

Additional threshold transaction reports – that were not submitted to Austrac – were disclosed in Westpac's half-year results. The accounts showed Westpac was late in reporting 17,870 threshold transaction reports and as many as 90,000 that were not reported to the regulator at all.

When asked about the bank’s statement on Friday an Austrac spokeswoman said: “As the Westpac matter is before the Federal Court, it would not be appropriate for Austrac to comment”.

The regulator classifies a “threshold transaction” as the transfer of funds of $10,000 or more. Austrac specifies that entities must report these transfers in a threshold transaction report within 10 business days.

Westpac has already set aside $900m for a financial crimes penalty despite the regulator pushing for about $1.5bn. It’s understood, given the stalemate on a financial settlement, Westpac’s legal team had anticipated Austrac may extend the initial legal statement of claim to ramp up its push for a bigger penalty.

The additional potential monitoring issues Westpac has identified throw into question the current case and penalty negotiations.

“It will take longer than hoped to get clarity on the ultimate penalty. No doubt, Westpac will be doing everything they can to draw a line under this episode and move forward,” said Regal Funds Management portfolio manager Mark Nathan.

“We can’t be certain that the ultimate penalty wont be larger, however, it would be hard to argue that the provisions taken don’t already constitute a substantial fine and deterrent.”

Westpac’s shares fell 3.3 per cent to $17.89 on Friday, outpacing the declines in its three main competitors. There was a broad sell-off in bank stocks on Friday that saw the shares of the major players fall from between 1.6 per cent for Commonwealth Bank to 2.8 per cent for ANZ.

The regulatory scandal at Westpac prompted the departure of former chief executive Brian Hartzer last year, and brought forward the retirement of former chairman Lindsay Maxsted. Peter King, formerly the bank’s chief financial officer, took the reins as permanent Westpac CEO earlier this year.

A Federal Court case management hearing is scheduled for June 17. Westpac filed its defence to the court action in May, which Austrac replied to last week. 

The separate filings show the parties continue to disagree on several legal points, including the composition of Westpac’s anti-money laundering and counter-terrorism finance monitoring systems.

Compliance shortcomings

Several accountability reviews undertaken by the bank and an independent panel this month found Westpac’s failings in its financial crimes unit were a result of poor resourcing and failed technology implementation. While misleading information was being communicated to the board, intentional wrongdoing was not uncovered.

Westpac is seeking to fix its compliance shortcomings at the same time as dealing with a potential spike in loan losses from the COVID-19 turmoil.

Moody’s Investors Service highlighted further risks to all Australian banks on Friday, stemming from an April slump in residential mortgage lending and a decline in house prices.

“The combination of reduced housing activity and lower house values highlight the potential for a weaker residential property market, which will add pressure to the banks' asset quality, a credit negative,” the Moody’s report said.

“The performance of housing loans is a key driver of Australian bank asset quality, given that mortgages account for about two thirds of banking system loans. And whilst losses on residential mortgages have historically been exceptionally low, such loans present a key risk given high levels of indebtedness amongst households.”