Westpac’s Peter King draws line in the sand over size of Austrac penalty

New Westpac CEO Peter King. Picture: Nikki Short

Westpac’s new chief Peter King and his board have disclosed their magic number to Austrac on a penalty for financial crimes misdeeds, as they prepare to fight it out on disputed points.

The newly minted CEO is carefully balancing the bank’s capital at a time of great economic uncertainty and an expectation of ballooning loan losses.

But he and Westpac have now shown their hand around the negotiations, at an estimated $900m figure which would still eclipse the prior record Austrac penalty, paid by Commonwealth Bank two years ago at $700m.

Just two weeks after ruling off its first half, Westpac, on advice from its legal army of Allens, Gilbert + Tobin and King & Wood Mallesons, has given investors insight into the regulatory damage. That comes after close assessment the nature of the legal breaches, the relative size of the company and other financial crime penalty precedents.

There is still a sizeable gap, though, between where Westpac stands versus Austrac, which is apparently pushing for a penalty of more than $1.5bn. That is greater than the top end of analyst estimates at about $1.25bn.

One can only deduce that among the facts being disputed by Westpac are Austrac’s claims that management were indifferent to the compliance shortcomings and that there was “inadequate oversight” by the board. Those statements blindsided the bank at the time as the regulator came out swinging.

In November, Westpac’s board said of those allegations: “Based on its current understanding, the board does not believe that there has been any indifference by any member of the executive team, including the CEO, but accepts that Westpac has fallen short of its own and regulatory expectations and that a detailed review is required to investigate.”

Westpac and King are prepared to litigate on the points of difference, if they can’t be resolved. Following the early departure of Lindsay Maxsted, the board is now led by seasoned banker and former ANZ chief executive John McFarlane.

From a personal perspective, King would no doubt want this matter dealt with expeditiously so that he can get on with navigating the COVID-19 crisis and better positioning the bank for the period that follows.

Westpac and Austrac are required to file a statement of agreed facts with the court by May 8, and a defence on remaining matters a week later.

For battle-hardened Westpac investors who are now facing the prospect of a materially reduced or no first-half dividend, at least the bank has provided some level of clarity around its penalty estimate. The Morrison government will also be keen for a penalty resolution ahead of the pandemic-delayed federal budget announcement in October.

Westpac isn’t alone in finding itself on the wrong side of financial crimes laws.

Globally, anti-money laundering failures and hence penalties have marred many banks. There were some 58 anti-money laundering penalties issued last year totalling $US8.14bn ($12.7bn), analysis by regulatory technology firm Encompass Corporation found. That was a record number of fines and the second highest annual dollar penalty tally on record behind 2014 at $US10.9bn.