Victorian government threatens to pull business from Westpac

Under-fire lender Westpac could lose banking contract worth hundreds of millions from Victoria’s Andrews government.

The Victorian government has threatened to pull its banking business from Westpac. Picture: David Geraghty for The Australian

The state of Victoria is threatening Westpac over access to more than $60 billion worth of annual transactions in a contract valued at more than $150 million, as it prepares to investigate “reprehensible” allegations the bank facilitated a child exploitation market in the Philippines.

It could mark the end of a longstanding relationship with the government for Westpac, which has held the contract to provide banking services for the Victorian government for almost 20 years, after it was extended by Daniel Andrews’ Labor government for a further two years in 2017.

Victorian assistant treasurer Robin Scott told The Australian he will launch a review of Westpac’s compliance with state and federal laws following the impending Federal Court case against the bank that was launched last week by the anti-money laundering regulator Austrac.

Mr Scott is also demanding an explanation from Westpac chief executive Brian Hartzer as to why the state government shouldn’t ban the country’s second largest bank from a competitive tender for its banking cash and banking services, which is scheduled for next year.

The $60 billion Victorian Treasury banking services contract, which counts as Westpac’s second biggest customer, will be finalised next September.

All suppliers to the state government must adhere to a supplier code of conduct which requires full compliance with all laws, rules and regulations where they do business, while government tenders are assessed with “strict probity requirements” alongside other governance concerns.

“The allegations made against Westpac are reprehensible and I will be writing to the CEO for an explanation,” Mr Scott said.

“Following consideration by the courts, we will be reviewing whether there has been a breach of their supplier obligations,” he said.

The money-laundering scandal has already wiped more than $8bn off the bank’s market capitalisation and analysts say its share price will remain under pressure in the absence of a leadership change, putting Mr Hartzer and the rest of the board on a collision course with investors.

Global ratings agency Moody’s on Monday warned the governance implosion could trigger a cut to the bank’s credit rating given the uncertainty around potential fines, estimated at more than $1 billion, and other costs associated with shoring up its compliance systems and legal fees.

Austrac started action in the Federal Court last week over 23 million alleged breaches of the law, including fund transfers that facilitated money laundering and child exploitation.

The allegations included not properly monitoring international fund transfers and shocking claims the bank failed to properly assess 12 customers with links to child pornography and sexual exploitation in The Philippines and Southeast Asia.

Losing the Victorian contract would represent a serious blow for the bank as it struggles to cope with rising regulatory costs amid a struggling economy.

Victoria’s general government sector makes close to $60bn in payments each year, including more than $23bn billion in payments to employees. Ahead of the Victorian election last year, then-opposition leader Mathew Guy threatened to give the Westpac contract to local Bendigo Bank.

Westpac recently signed a new three-year contract with NSW Treasury to provide banking services to the state government, in a contract that included splitting transaction services to ANZ and Citigroup. The government retains the right to extend the contract for a further three years.

The volume of transactions with NSW Treasury is the biggest in Australia, at more than 13 million payroll payments and more than 1 million credit card payments.

News of a further probe into the troubled bank came after the Australian Securities & Investments Commission on Monday confirmed it was investigating Westpac over “possible breaches of legislation”, including disclosure obligations and directors’ duties relating to the Austrac lawsuit. The Australian Prudential Regulation Authority also announced it is chasing the country’s second largest bank over governance issues and whether senior management breached the new executive accountability regime.

Law firm Phi Finney McDonald also said it was investigating the bank, as it mulls whether to file a shareholder class action lawsuit.

“The suggestion that a major bank could be so lax with its anti-money laundering systems that it potentially facilitated child abuse and exploitation is about as serious as it gets,” said Phi Finney McDonald director Tim Finney.

Westpac chairman Lindsay Maxsted on the weekend said the bank was “determined to urgently fix (the) issues” associated with the alleged failure and announced executive bonuses would be partially scrapped.

These new commitments – which include closing the LitePay foreign exchange service at the heart of the allegations, lifting standards through priority screening, and investing in initiatives to reduce the human impact of financial crime – will incur an extra $80 million pre-tax expense this financial year.

“We accept that we have fallen short of both our own and regulators’ standards and are determined to get all the facts and assess accountability,” Mr Maxsted said in a statement.

Westpac shares fell a further 1.3 per cent on Monday to $24.44.

Some investment groups have urged Westpac shareholders angered by the bank’s failure to properly monitor payments potentially linked to the streaming of child exploitation to reject its remuneration report for a second consecutive year.

The bank is scheduled to hold its annual general meeting in Sydney on December 12.