To senior people at Westpac the AUSTRAC charges seemed like a minor technical glitch. Instead they’d been handed a grenade which exploded in their faces. The media portrayal has been of greedy bankers who would engage in anything to make a profit. This SMH editorial begins:
- After the royal commission into the financial sector last year, many pundits said that trust in banks could not go any lower. Westpac has proven them wrong.
Less than a year after Kenneth Hayne delivered his report about rip-offs and illegal sales tactics by Australia’s most profitable financial institutions, Australia’s second largest bank has been pinged for breaches of money laundering and anti-terrorism laws, including facilitating payments to paedophiles in the Philippines.
The actual is a little more prosaic, as the editorial goes on to tell:
- Westpac’s latest failures raise different issues to the Hayne inquiry. This is not a case of bank managers ordering their staff to act unconscionably or flawed incentive payments. Westpac’s crimes here are arguably more those of omission than commission. It failed to implement and check the IT systems required to properly detect and report suspicious transactions. (Emphasis added)
In simple terms, Westpac was offering an international payments system for small amounts. By law all payments, whether suspicious or not, should be reported to the AUSTRAC system. So the 23 million transactions in the frame were simply transactions not reported. Westpac says the majority were pension payments from foreign governments to their citizens who were living in Australia. A second large category was purchases made by Australians of music and real goods from a new breed of international online suppliers. A third category was remittance payments from people from developing countries working here and sending money home to help rellies etc. All this has now stopped because Westpac has shut the facility down.
Each and every one of the 23 million unreported transactions attract a civil penalty of between $17 million and $21 million, we are told. The activity or artefact being paid for has no relevance as such.
So, what has AUSTRAC got in terms of unsavoury behaviour? The SMH article Westpac accused of 23 million breaches by money laundering watchdog says:
- AUSTRAC alleges that Westpac’s systems were used by 12 individuals to conduct almost 3000 transactions that were indicative of the patterns employed by people suspected to be involved in child exploitation. Included in this cohort was a customer with a prior conviction for child exploitation offences. One of the 12 Westpac customers allegedly made transfers totalling $132,000 including to a person in the Philippines who “was later arrested in November 2015 for child trafficking and child exploitation involving live streaming of child sex shows and offering children for sex”.
Other customers allegedly transferred large sums in manners which were allegedly indicative of child exploitation – including $75,000 for one customer, $62,000 for another.
All up, AUSTRAC alleges 2944 transactions totalling $480,000 that were indicative of child exploitation payments made by the 12 Westpac customers.
The problematic offences appear to be a pay-for-view exercise to watch unspeakable things happening to children in the Philippines, filmed and made available to the world. It is unlikely that the payments were made directly to the miscreants offering the service, but were masked in some way to look innocent.
I think that is all AUSTRAC has got specifically, and clearly it goes back to before 2015, indeed as far back as 2013. Of course it is a fair bet that some of the other 22,997,056 transactions were unsavoury. And it’s a fair bet that the unsavoury activity will continue, with payment effected by other means. Apart from banks, apparently there are now 15,000 entities out there set up to service this international payments market. My guess is that many are non-compliant and AUSTRAC simply does not have the resources to round them up.
At this point I’ll say that I’ve read and heard endless accounts from so-called experts, most of whom take a narrow and incomplete view, and include information which conflicts with other accounts or simply do not make sense. No-one, it seems, has the full facts on this case, and I’m not sure that a legal charge is the best way of finding out. The case will likely be settled out of court. Westpac are commissioning their own ‘independent’ inquiry by an external expert.
Westpac has no chance of winning the case, because they have already self-reported their non-compliance. The full penalty is by my calculator $460 trillion (million million), but one AFR writer said over $40 trillion. So whether it’s a mere 20 times Australia’s GDP or 200 times does not much matter. Both are ludicrous. Given that the Commonwealth Bank was pinged $700 million for 53,506 actual cases of people stuffing banknotes into ATMs, word is that the penalty will be a bit over a billion as against Westpac’s profit of $6.85 billion. Unless the authorities decide they want to kill the bank.
Back on the reporting, there has been an endless queue of experts, some of whom clearly have no idea of the detailed facts of the case, and many have little or no idea of what is involved in running a large organisation. The latter is especially true of the press and legal people, but also seems to apply to people who are seriously regarded as experts in corporate responsibility.
So I too cannot be confident I have the correct story. I’ll give you some of the sources I found better than most, and then outline what I think happened in general terms and where the problems lie. The answers affect our reputation and competence as a trading nation in the modern world.
Beyond the two SMH articles linked above the pick of those freely available were Nathan Lynch’s blog post Swerving SWIFT: the story behind Westpac’s money-laundering calamity and Phillip Adams’ interview with Louis de Koker, Professor of law at La Trobe Law School.
ABC RN’s The Money program on Westpac featured interviews with Nathan Lynch, Manager, Regulatory Intelligence, Asia-Pacific, Thomson Reuters, John Chivas, advisor for the United Nations Office on Drugs and Crime (UNODC) Global Programme Against Money Laundering (GPML), and Ian Verrender, ABC Business Editor.
Julian Bajkowski’s article Westpac busted 23m times over epic money tracking system failure at itnews is a must-read for the information technology dimension.
Following are some of the dozens of articles in the AFR:
- Christopher Joye The price of banks becoming crime fighters
- Aaron Patrick Westpac removed compliance officer who reported breach
- Aaron Patrick Westpac execs driven by ‘status, money, power’
- Aaron Patrick Westpac papers reveal trail of failure
- Pamela Williams What did Hartzer know and when?
- Patrick Durkin The action women who felled a bank boss
Back in 2010 legislation was passed which made banks transform themselves into active crime intelligence gathering agents. Now it seems that the expectation is for them to decide what is legal activity, what is not, and to take action to shut the miscreants down. I’m not sure this is a proper role for the banks. Mastercard and Visa decided they weould no longer allow donations to Wikileaks at one stage. After three years of legislation they found that denying payments to Wikileaks was not their decision to make..
From the outset Westpac used technology in 2010 that failed to report the transactions to two correspondent banks, one of which accounted for 99% of the transactions Westpac failed to report. Westpac never tried to hide anything and self-reported these transactions. However, the charge sheet says that Westpac failed to retain records of some 3.5 million transaction records from this time. It seems the software destroyed them.
However, for some reason Westpac failed to fix the problem.
Back in the day, AUSTRAC was a tame regulator who worked with the bank to correct problems of this kind. While you were talking to AUSTRAC, you had nothing to fear about the penalties.
AUSTRAC prefers banks to use SWIFT software for reporting. Working out of Belgium SWIFT (Society for Worldwide Interbank Financial Telecommunication) handles about half of the $200 billion worth of transactions each day. However, some banks find other software solutions which are thought to be cheaper.
Westpac’s problems go back to the Gail Kelly era, who retired in February 2015, handing over to Brian Hartzer. In August 2016 Westpac introduced the LitePay software package for small transactions, using ‘Australasian Cash Management’ (ACM) for larger payments. The latter, according to AUSTRAC, is also highly problematic, allowing large sums to enter the country unawares in money laundering. In fact problems with ACM appear to be what the AUSTRAC charge is mainly about, as paedophilia payments only come up towards the end. However, less attention has been paid to the main financial problem because of the gut-churning nature of the child exploitation cases.
On LitePay, a Westpac officer noticed in February 2017 that AUSTRAC notifications were not happening. However, no action was taken. There is a story that a junior officer merely filled out a Suspicious Matter Report form and filed it.
Meanwhile AUSTRAC had changed from its softly, softly approach:
- after the appointment of former CEO Paul Jevtovic in 2014, a former AFP commissioner who was behind the regulator’s landmark cases against Tabcorp and CBA – another bank that claimed it was caught completely off guard by AUSTRAC’s changed approach.
“I will be merciless for those who recklessly or through indifference don’t meet their obligations,” Jevtovic told the Financial Review in his first major interview.
The Tabcorp case broke in February 2017, the CBA in August 2017.
Then in December 2017 Jevtovic finished up and Nicole Rose took over:
- who colleagues say worked most closely with and modelled herself most on NSW’s former top cop Andrew Scipione, has completed a major overhaul of the once sleepy regulator that has become an enforcement agency to be reckoned with.
Insiders say the “dirty money” regulator has transformed from bureaucrats, accountants and lawyers attached to the Attorney-General’s Department to police and enforcement agents linked to Peter Dutton’s Home Affairs.
Yet from December 2016 to June 2018 Board chair Lindsay Marxted says that no information at all drifted up to general managers, group executives, or the board about the transaction reporting issue. This is hard to believe, but if true indicates major dysfunctions in management.
CEO Brian Hartzer claims that he first found out about the bank’s possible involvement in child exploitation on the day AUSTRAC lodged its statement of claim, whereupon he closed the specific accounts within days. Yet AUSTRAC’s statement of claim says:
“In June 2016, senior management within Westpac was specifically briefed on these (child exploitation) risks with respect to the LitePay channel.”
There was a flurry of activity in Westpac when the Commonwealth Bank story broke in August 2017 but by December 2018 Westpac revealed in its annual report that it was in discussions with AUSTRAC after self-reporting its failure to report a large number of transactions in its institutional bank.
Here’s one timeline, which is far from complete:
I’ll just highlight this:
- Early the next year, in February 2019, the board admits its efforts have been held back by a lack of focus, lack of accountability and tribal divisions within the bank (which the bank confessed to in its self-assessment). They hurry to endorse Mr Stephen’s Financial Crime Strategic plan.
Meanwhile the known issues in its Incident Management System, JUNO, kept rising, from 43 in late 2017 to 116 in June 2019. That is in spite of Westpac changing its crime payments detection framework seven times.
Westpac was not knowingly presiding over stomach-churning practices, prioritising profit at any cost. It was trying and failing to fix a systemic reporting fault. Over the last three years it has doubled the number of people working in the financial crime division to 750, with an extra 200 to now come on board next year. It is said that CBA has 1500. I have no idea what these people do to fill their day, but I’ve collected titles mentioned in various stories:
- Chief risk officer
- Chief compliance officer
- General Manager, Global Transaction Services
- global head of financial crime
- General manager, Operational Risk
- Head of financial crime compliance
- group money laundering reporting officer
In the middle of all that swill is the story of Amanda Wood, who joined Westpac in May 2017 from Commonwealth Bank, where she was head of financial crime compliance. Prior to that she had worked as general manager of compliance at AUSTRAC for seven years and seven months. Prior to that she had been a Treasury official and ministerial adviser in the Howard Coalition government. Well-regarded in the industry, she was:
- joint chairman of the Fintel Alliance Experts Group, an AUSTRAC committee of private companies, intelligence and law enforcement agencies that share information and expertise.
Over the past year the alliance has contributed to the arrest of nine of Australia’s most wanted criminals and increased detection of suspected child sexual exploitation by 580 per cent, AUSTRAC chief executive Nicole Rose said three weeks ago.
For over 10 months she was Westpac’s money-laundering reporting officer, had led the bank’s response to the AUSTRAC investigation, working with managers from the global transaction services business to understand what happened and provide explanations to AUSTRAC in person and in writing.
In May 2019 AUSTRAC met with the Board in what was effectively the final warning to impress Westpac that if they didn’t clean up their act the result was not going to be pretty.
A decision to replace Wood had been made prior to the meeting. She was not invited, and 30 minutes later was told that she would no longer continue in her job because they wanted a money-laundering reporting officer who had more international experience. So, managing a group of 50, she would now be heading a group of 10 still working on policy and communication with regulators. She was replaced by T. Scott Saunders, formerly head of compliance at Macquarie Group, who would be given the title ‘global head of financial crime’.
Wood took a redundancy package, set up a consultancy, and has now said she is more than happy to talk about her Westpac experience. In brief she is saying that Hartcher never understood the importance of universal record reporting, saw Westpac’s problems as a technical glitch which would be fixed in due course, and was more concerned about his status and how things looked rather than actually getting the problem sorted.
So when the sh*t hit the fan he said “This isn’t Enron” and, like Steve Smith and David Warner of cricket ball-tampering fame, thought the whole thing would be yesterday’s news within a week.
Hartcher and Marxted were actually told they had to go by a woman no-one imagined had that power. She was head of the Australian Council of Superannuation Investors (ASCI), Louise Davidson. She met with Marxsted at her Lonsdale Street offices in Melbourne on the Monday after the story broke, making it clear the proposed Westpac response wasn’t going to cut it. If superannuation funds started selling everyone would head for the exits and the bank would cease to exist.
ACSI collectively represent industry super funds, now worth $700 billion, on environmental, social and governance issues. Davidson, the AFR tells us, has impeccable personal integrity. She:
- has also realigned the ACSI organisation which in the wake of the GFC primarily focused on CEO and executive pay. Davidson has made gender diversity, climate change and human rights her hallmark.
In this case she has drawn a line Westpac must observe if it is to retain its social licence. Davidson effectively represent shareholders who are investors in industry super funds.
I think Westpac needs advice on organisational design and rather basic management practice. However, in conducting its own investigation it has in fact seen the issue as technology-based by appointing Promontory, a wholly-owned subsidiary of IBM to find out what went wrong.
Eyebrows have been raised because in the 1990s Westpac outsourced its IT functions to IBM.
Ironically, it could be the way to go. I’m guessing here, but when organisations outsource a major function they often lose the exopertise to make appropriate decisions in that sphere. It seems inconceivable that Westpac could not find a software solution that would fulfil their reporting obligations – for 10 years.
As it happens an IT startup called Identitii developed a program that could sit on top of legacy software and effect the required report of each transaction. Identitii developed the product through a trial with Macquarie Bank, Standard Chartered, JPMorgan, Rabobank, Barclays and Westpac. AFR’s Tony Boyd understands the trial was essentially a great success, but when they approached Marxted in July 2017 and again in September 2018 nothing happened. I’d suggest this is what what you get when (a) there is no-one of status with IT knowledge to talk to, and/or (b) you mistakenly think the chairman of the board is actually involved in running the bank.
The Identitii software would have cost about $20 million, which may have seemed a lot at the time, but now estimates suggest the bank will have to spend several hundred millions to extract itself from the mess. Hindsight is wonderful.
The first issue for me is about the handling of the information on the paedophiles. AUSTRAC identified the accounts and made judgement about what was going on. I’m asking whether the first move should be to notify the police, and then let them decide with the bank when the accounts should be closed. The police need to assess when they have specific information on which to base charges. AUSTRAC had 23 million examples of Westpac not performing its legal reporting obligations. Each was as bad as the other as far as the law was concerned.
Secondly, I wonder about the appropriateness of fining the bank $17 to $20 million for each breach. One group only will pay the fines – the shareholders. Westpac’s dividends have been flat since 2015-16. Before all this happened dividends were forecast to reduce by 20 per cent over the next three years.
Contrary to what you will have heard from politicians who should know better, when the Reserve Bank reduces interest rates, the banks’ net interest differential narrows. That is what bank analysts tell shareholders. What banks do is split the pain between the borrowers and the shareholders. Westpac will now pay more for its money because lending to Westpac involves increased risk. The increase is reckoned to be 10 to 15 basis points. Not a lot, but again the shareholders and borrowers are likely to pay.
My default position has been that the officers within the bank responsible should be charged, even jailed for criminal acts or criminal negligence. Nathan Lynch in ABC RN’s The Money program linked above said the current laws could be applied to bring penalties against individual actors within corporations, but the practice had been not to do so. This would be done by the police or other regulators rather than AUSTRAC. Indeed all regulators, such as Australian Prudential Regulation Authority (APRA), Ausatralian Securities and Investments Commission (ASIC) and the Australian Centre for Corporate Responsibility (ACCR) are now taking an interest. Unluckily for Westpac, the bank has only just undertaken a capital raising, which requires full disclosure of potential risks. There may be scope for a class action on behalf of investors who took up share offers which are now worth significantly less than they paid.
For all its laws and regulators, Australia has a lousy reputation for anti-crime financial governance. We rank well below countries we like to compare ourselves with, ranking with Madagascar and Haiti, whatever that means. Stephen Letts article Westpac’s cloak of invisibility has not just bankrolled paedophiles, but appears to support a massive tax dodge too suggests we are well set up to facilitate tax evasion.
There is no doubt the the AUSTRAC case will cost Westpac business. There is talk of large government contracts worth hundreds of millions moving to other banks when they are up for renewal.
As it happened, just two days after the AUSTRAC scandal broke the finance industry held its annual B&T Awards night. Westpac did well, carrying off three gongs, including “best marketer of the year”. It was all very awkward on the night, because the awards had been decided earlier before the AUSTRAC intervention became public.
On the night there was palpable awkwardness and no speeches from Westpac award winners. The best advice appears to be that Westpac would be wasting its money advertising in the next while. The suggestion is that they have a chat with Volkswagen, who apologised copiously after the 2015 scandal, put their heads down and gradually rebuilt trust. Four years later they have regained their position as a top brand.
So far Westpac has not apologised.
However, Australia needs to build trust in its financial system. The Greens are pushing for legislation (AFR article, probably pay-walled) to provide mandatory reporting of suspicious activity by real estate agents, accountants and lawyers, where the sums of dirty money being moved dwarf the Westpac paedophilia payments. Apparently such legislation was drafted out of the Hayne royal commission, but has been stalled because of lobbying about the need to retain client confidentiality.
Like climate change, corporate lobbying looks like putting us at the bottom of the class.