Will heads roll at Westpac from coming reports? Possibly not

Westpac’s entanglement with Austrac led to a purge in the boardroom and in management ranks. Picture: David Geraghty

Expectations of a further round of board and executive bloodletting at Westpac after the imminent release of two reports on the Austrac debacle are wide of the mark.

It’s more likely the conclusion will be that cultural factors - and not bad individual actors - are to blame for the bank’s most debilitating crisis since its 1990s near-death experience.

Consequences? There will be many.

Freshman chief executive Peter King and new chairman John McFarlance will turn the place upside down to instil a culture that gives equal weight to financial and non-financial risk.

However, in a couple of years’ time, the re-making of Westpac after its collision with Austrac will broadly mirror Commonwealth Bank’s experience.

Scarring will be evident, but the foundations should be in place for the type of institution envisaged by McFarlane and King.

That means clearer lines of accountability, a greater sense of urgency, zero tolerance for catastrophic own-goals, and a much stronger risk culture.

The reports to be released by Westpac include Promontory Financial Group’s review of the bank’s financial crime program, and consideration by an external, three-person panel of board accountability issues.

They will be out before the end of this month, more likely in the front end of June than the back end.

Westpac’s settlement negotiations with Austrac continue in the background, with a gaping chasm separating the bank’s $900m provision and Austrac’s $1.5bn demand.

Almost 19.5 million of Westpac’s 23 million transgressions relate to international funds transfer instructions (IFTIs), mostly involving two correspondent banks which were sending low-value, recurring payments by foreign government pension funds.

For a decade, Westpac was unaware of a systems failure which meant that the IFTIs from the two banks were not converted into Austrac data, as required by AML legislation.

That all changed in 2017 after Di Challenor joined Westpac as head of global transaction services from JPMorgan.

When Austrac targeted CBA over multiple AML breaches later that year, Challenor ordered a comprehensive review of Westpac’s compliance.

The review identified the IFTI breakdown and Westpac self-reported to Austrac, but that was far from the end of the matter.

In August 2016, Westpac had launched the LitePay product for payments of up to $3000 to a range of countries for only $5 per transfer.

While the product had detection monitoring scenarios in line with Austrac guidance, the typologies were not updated in December to incorporate key indicators for the purchase of child exploitation material involving transfers to the Philippines and Southeast Asia.

The typologies were finally updated in June 2018, with devastating consequences.

Westpac said last month in its defence to Austrac’s statement of claim that it had some monitoring processes in place for 12 customers linked to child exploitation.

However, the program was insufficient, and more robust transaction monitoring would have generated a greater volume of suspicious matter reports to the financial intelligence agency.

Like CBA, Westpac’s entanglement with Austrac led to a purge in the boardroom and in management ranks.

Last week, Lyn Cobley, who headed the institutional division where the AML compliance failures occurred, followed the procession out the door.

There’s some broad similarities between Cobley’s position and Matt Comyn, who was in charge of CBA’s retail bank at the time and oversaw the bank’s rollout of its faulty intelligent deposit machines.

Yes, the stuff-ups occurred on their watch, but pending the outcome of investigations by ASIC there’s been nothing to suggest that they should wear the blame.

Westpac’s governance and culture self-assessment is the best guide so far to where the problems really lie.

In the bank’s own words, it doesn’t do non-financial risk as well financial risk; it cultivates complexity to address commonsense issues; accountability is blurred by matrix reporting, and there’s “excessive concern about the career repercussions for delivering bad news”.

It’s surprising that things don’t go wrong more often.