Judge tells banks to ‘lift their game’ as court sanctions Westpac $1.3bn Austrac fine

Westpac’s ‘serious and systemic’ compliance failures exposed Australians to heightened risks from criminal behaviour, court says.

Austrac’s barrister Wendy Harris said the regulator was continuing to engage with Westpac and was satisfied the bank was making progress to improve and remediate its systems.

Westpac exposed the Australian community and financial system to heightened risks from criminal behaviour, and the bank’s “serious and systemic” compliance failures warranted a $1.3bn penalty, the Federal Court has found.

In a judgment on Wednesday, Federal Court Judge Jonathan Beach approved the record $1.3bn agreed penalty between Westpac and financial crimes regulator Austrac.

But he called on the nation’s banks to lift their game on combating money laundering and terrorism financing, and said Westpac’s failure to meet its obligations required an “effective deterrent” against future flouting of the law.

“In my view it is an appropriate penalty,” he said.

“First, the Australian banking industry processes many billions of transactions each year and financial institutions are an important line of defence in protecting the community and the financial system from the risks associated with money laundering and terrorism financing... non compliance with the Act exposes the financial system and the community to very serious money laundering and terrorism financing risks.”

Justice Beach labelled the more than 23 million contraventions of the law by Westpac “serious and systemic”, and highlighted they occurred over a period of six years. He also lambasted Westpac’s risk management systems.

“Clearly, this system failed to properly identify, mitigate and manage the money laundering and terrorism financing risks,” he said. “Further Westpac’s transaction monitoring program was seriously deficient, that had ramifications for monitoring international payment flows concerning billions of dollars that had higher money laundering risks including risks associated with child exploitation and tax offences.”

The Federal Court needed to approve the $1.3bn penalty that Westpac and Austrac agreed to as part of a statement of agreed facts the parties made last month.

Justice Beach sought assurances from Austrac that Westpac was fixing its systems and processes, and said the integrity of Australia’s financial system relied on its banks having “first class” monitoring and compliance systems to meet legal obligations.

He called out Westpac’s prior lax approach to dealing with riskier offshore-based banks.

“More significantly these deficiencies increased the exposure of the Australian payment system to such risks. Contamination from the suspect practices of foreign correspondent banks and their customers must be avoided.”

On the $1.3bn penalty Justice Beach said: “If contraventions of the Act are not seen to attract appropriate penalties the effectiveness of the risk management premise which underpins the Act would be significantly undermined, as also would confidence generally in the financial system.”

“Even when a contravention is not deliberate, in my view the requirements of general deterrence necessitate the imposition of a substantial penalty so that it is known that even minor or inconsequential breaches of the Act have very serious consequences.”

Justice Beach also highlighted Westpac’s failure to conduct “appropriate ongoing customer due diligence” for 262 customers whose account activity was consistent with the funding of child exploitation material.

“It would seem that the failure was systemic and occurred over a number of years,” he said.

Justice Beach questioned two parts within the $1.3bn penalty, including a $300m component relating to Westpac’s failure to properly engage with and conduct due diligence on offshore banks it dealt with.

“If that ($300m) was the only penalty to be imposed I may have adjusted it, however, given the overall consideration of proportionality and totality I will leave this figure where it is,” he said.

The other area of concern was a $400m component of the $1.3bn settlement for deficiencies in Westpac’s systems, which Justice Beach had considered increasing. But he said “given the other significant components” of the penalty, including for late reporting of international payment instructions and lax customer due diligence, he resolved to sign off on the $400m.

He did note Westpac had co-operated with Austrac, made a substantial investment to improve its systems and displayed “considerable contrition” for its contraventions.

Prior to the Justice Beach signing off on the penalty, Austrac’s barrister Wendy Harris said the regulator was continuing to engage with Westpac and was satisfied the bank was making progress to improve and remediate its systems.

Westpac’s barrister John Sheahan said the agreed penalty reflected the “overall seriousness” of the bank’s failings, which were not deliberate.

“Of course it’s (the agreed penalty) not completely scientific and you couldn’t expect that,” he added.

The $1.3bn penalty agreed to by Westpac is the largest ever for Austrac, surpassing the prior record paid by CBA.

Reference was made to the $700m penalty paid by Commonwealth Bank to Austrac in 2018, and Ms Harris highlighted the larger quantum of Westpac’s penalty was a function of a higher number of contraventions of the law.

“It’s a large penalty, but it is an appropriate penalty,” she said. “An institution will be somewhere in a chain but it’s important that each link of the chain is as strong as the last.”