Westpac in for more pain

The corporate regulator has hit Westpac executives and managers entangled in the financial crimes scandal with compulsory examination orders, meaning the accountability questioning is far from over.

An independent review of the compliance failings at Westpac, commissioned by the bank’s board, uncovered a litany of errors, sins of omission, misleading information communicated to the board, poor skills and resourcing and failed technology implementation. A comedy of errors.

Thursday’s documents had it all, highlighting a bank culture that was immensely lacking and had messy lines of accountability. It showed, though, no clear intent by Westpac executives and managers to do the wrong thing.

While intent is an important plank, the long list of failures that point to a decade of incompetence in areas of anti-money laundering compliance and transaction reporting are just as worrying.

The failures led to 23 million transactions not being reported to Austrac and were linked to financing the activities of pedophiles.

The bigger Westpac management review will be handed to regulators, unredacted, as they assess their next move against the bank. This column understands the corporate regulator has already started forcing in-depth interviews with relevant Westpac staff, by issuing the compulsory examination orders, under section 19 of the Australian Securities & Investments Commission Act.

New Westpac chairman John McFarlane put it aptly when he said joining the bank had been “quite an enlightenment … Westpac is very different to other places I’ve ever been. It’s a very centralised organisation.”

He noted that pinning down accountability was difficult and the financial crime compliance failures were “buried deep in the organisation”.

Some 38 individuals were identified and hit with penalties to their pay, amounting to a combined $20m over 2019 and 2020 as a result of the accountability reviews. McFarlane said some of those individuals remained in the “red zone”.

Some former executives and managers are said to have declined to participate in Westpac’s various reviews.

To its credit the Westpac board accepted all the recommendations and made public the report by an independent panel spearheaded by NBN chairman Ziggy Switkowski. It trawled through about 1400 documents.

A separate Westpac internal management review assessed many more documents, emails and interactions and interviewed executives past and present. King & Wood Mallesons partner Andrew Gray and a team of lawyers helped to steer that process.

ASIC is probing how Westpac dealt with its continuous disclosure obligations, particularly as it raised $2bn in capital just 15 days before the Austrac legal action against the bank was lodged on November 20. The corporate regulator is also assessing potential breaches of the Corporations Act, including obligations to act “effici­ently, honestly and fairly”.

It will be interesting to see what emerges from the regulator’s deep dive into the bowels of Westpac.

One fund manager recalls a November 12 meeting at Credit Suisse’s Sydney office, where investors were told potential regulatory issues with Austrac were just one of four potential headwinds for Westpac’s capital position.

The meeting was headlined by then CEO Brian Hartzer and finance boss Peter King.

As well as the pay consequences, Mr Hartzer fell on his sword over the Austrac saga on November 26, former chairman Lindsay Maxsted brought forward his retirement and board member Ewen Crouch didn’t stand for re-election last year.

King was appointed permanent CEO.

The banking regulator will also examine the reports released by Westpac on Thursday and is considering whether the findings require any supervisory action or will influence its investigation. The Australian Prudential Regulation Authority’s Westpac probe was announced in December.

The accountability reviews showed Westpac received a jolt in 2017, and started more seriously assessing financial crime compliance after the Commonwealth Bank’s failures came to light.

But even though 2017 was cited 32 times in the documents released by Westpac on Thursday, the CBA furore was still not enough for its Sydney-based rival to get a good handle on its own underlying issues and accountability for them.

It wasn’t until August 2018 that Westpac self-reported problems to Austrac, while it took until March 2019 to put in place a sweeping financial crime plan.

That was led by chief risk officer David Stephen — who joined Westpac in October 2018 — and is said to have commissioned a review by EY soon after arriving.

A legal settlement for the Westpac issues remain in a stalemate, though, with the bank setting aside $900m for a penalty and Austrac wanting at least $1.5bn.

The independent review of Westpac’s compliance and financial crimes structures made it clear past management was not capable of getting across its obligations. And while the task for bank boards in the heavy compliance era is difficult, particularly if they are “not getting correct information”, relevant committees still need to ask the tough questions and probe management.

The Westpac panel review found the content of information flows to the board were not adequate even if the flow of information was. “It was sometimes misleading or information was omitted.”

Westpac last year increased the number of board risk committee meetings to five from four, and McFarlane will now mandate a further rise to six meetings for that group and the newly formed financial crime committee.

In relative terms, though, that may be light-on. NAB’s risk committee met 16 times in the year ended September 30, while ANZ’s risk committee met eight times over the same period. Commonwealth Bank had 10 board risk committee meetings in the year ended June 30, 2019.