Westpac’s Brian Hartzer vows to stay and fix issues

Brian Hartzer has disputed Austrac’s claims of ‘indifference’ by Westpac’s leadership team over compliance lapses.

An analysts says Westpac can expect a significant penalty Picture: AFP

Westpac chief executive Brian Hartzer has disputed the financial crime regulator’s claims of “indifference” by the bank’s leadership team to compliance lapses and 23 million breaches of anti-money-laundering and counter-terrorism financing laws.

Mr Hartzer, who vowed to stay on as CEO and fix the issues, said while he accepted the allegations in the statement of claim lodged with the Federal Court, he did not agree that Westpac executives were unmoved by the failings.

“There’s one thing that I do take issue with, and that is the suggestion that, at least at a senior executive level or at board level, that we have been indifferent,” he said.

“We have absolutely not been indifferent on this topic and we have made quite a number of changes over time to the leadership in risk, the leadership in financial crime.”

Australia’s anti-money-laundering and counter-terrorism financing regulator Austrac launched legal action against Westpac over alleged breaches of the law including “systemic failures” in reporting of international transactions, including some linked to criminals and child exploitation in Asia.

The court document claims Westpac failed to assess and monitor ongoing money-laundering and terrorism-financing risks for more than $11bn moved into and out of Australia through its banking relationships.

Austrac also said Westpac did not do enough to stop individuals in high-risk countries and jurisdictions — including Iraq, Lebanon, Ukraine and Zimbabwe — from potentially accessing the Australian payment system.

Austrac alleged Westpac failed to adequately resource its anti-money-laundering and counter-terrorism finance function and hit out at its leadership and board.

“These contraventions are the result of systemic failures in its control environment, indifference by senior management and inadequate oversight by the board,” the statement of claim said.

But Mr Hartzer said Westpac had increased its resourcing and was addressing the compliance failings, some of which related to the botched implementation of a new technology system. “It is clear that not enough attention has been paid at a working level to resolving these issues,” he said.

The latest action against Westpac follows a record $700m fine paid by Commonwealth Bank last year to settle a high-profile Austrac case for contravening the law 53,750 times. That action contributed to the downfall of Ian Narev as its CEO.

National Australia Bank has also disclosed a number of breaches of anti-money-laundering and counter-terrorism financing laws.

The financial services sector is also grappling with the fallout from the Hayne royal commission and a customer compensation bill of $10bn.

Some analysts estimate Westpac’s Austrac penalty will at least match CBA’s fine and possibly come in at as much as $1bn. The bank’s shares tumbled 3.3 per cent on Wednesday, wiping more than $3.1bn from its market value.

The statement of claim highlighted that Westpac failed to conduct proper diligence on 12 customers linked to child exploitation risks, some involving “repeated patterns” of frequent low-value transactions. One of those opened Westpac accounts after serving a custodial sentence for child exploitation.

Gary Gill, head of investigations at boutique professional services firm Sapere Forensic, said Westpac could expect a significant penalty and banks should have been on notice given Austrac was ramping up its enforcement in recent years.

“They gave the banks and others a fair amount of time to get their house in order,” he said. “The organised criminals are always going to target banks and others.”

Regal Funds Management portfolio manager Mark Nathan said it was difficult for Westpac to quantify what it expected as a ­penalty.

“There are different ways to look at the fault and severity. In the absence of anything else, CBA’s settlement is a good starting point,” Mr Nathan said.

“The Austrac allegations were strongly worded. Some would ­suggest that management could have escalated the priority and urgency of this earlier, but appreciate the magnitude and breadth of recent compliance enhancements and complexity involved.”

Shaw and Partners analyst Brett Le Mesurier said he suspected a large Westpac legal settlement or penalty, which could top $1bn.

Morgan Stanley analysts said they had forecast a $250m penalty for Westpac in 2020, and noted that every $500m hit equated to a drag of about 11 basis points on the bank’s core capital.

Mr Hartzer would not be drawn into the size of a potential penalty but acknowledged there would be “consequences for Westpac”.

“We absolutely accept that this is an unacceptable state of affairs. Where we find there needs to be personal accountability we will take action,” he said.

Austrac’s statement of claim alleges Westpac had failed to report more than 19.5 million international funds transfer instructions to the regulator over nearly five years for transfers both into and out of Australia.

It labelled Westpac’s technology system that was meant to manage the process as “not fit for purpose”.

Westpac self-reported those breaches in August last year, spurring an investigation by Austrac that uncovered the issues around lax customer due diligence and criminal activity.

“Westpac has failed to carry out appropriate due diligence on 12 of its customers, with a view to identifying, mitigating and managing known child exploitation risks,” the statement of claim said.

“One customer opened a number of Westpac accounts after serving a custodial sentence for child exploitation.”

An Australian Securities & Investments Commission spokesman said: “We will examine any issues arising from these proceedings that may touch on ASIC’s jurisdiction. We will continue to co-operate with our colleagues at other agencies in relation to this matter.”

Last month, Westpac warned of a “significant financial penalty” for anti-money-laundering breaches as it revealed a wider $341m hit to second-half cash earnings due to customer compensation payments.

Austrac said on Wednesday that Westpac had co-operated with its investigation and had started improving its controls.