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Big Four bank Westpac (ASX: WBC) has today released the results of its investigation into AUSTRAC's allegations of money laundering and enabling child exploitation, saying there was no evidence of intentional wrongdoing.
The investigation dates back to November 2019 when AUSTRAC commenced civil legal proceedings against Westpac in relation to alleged contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).
At the time, AUSTRAC alleged Westpac contravened the AML/CTF Act on more than 23 million occasions.
Specifically the watchdog claimed that Westpac failed to:
- Monitor money laundering and terrorism financing risks;
- Report over 19.5 million international funds transfer instructions (IFTIs) to AUSTRAC over nearly five years;
- Pass on information about the source of funds to other banks in the transfer chain;
- Keep records relating to the origin of some of these international funds transfers;
- and carry out due diligence on transactions in the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks.
Today Westpac chairman John McFarlane released the results of an internal investigation into the alleged breaches, with the report finding the breaches did not occur intentionally, rather they were the result of bad judgment.
Westpac says the failure concerning the non-reporting of more than 19.5 million IFTIs occurred due to a "mix of technology and human error dating back to 2009".
Further, Westpac says the failure to adhere to AUSTRAC's guidelines for child exploitation risk occurred due to "deficient financial crime processes, compounded by poor individual judgments".
"While the compliance failures were serious, the problems were faults of omission. There was no evidence of intentional wrongdoing," says recently appointed CEO Peter King.
The bank blames its failures on three primary causes, namely:
- Some areas of AML/CTF risk were no sufficiently understood within Westpac;
- There was unclear end-to-end accountabilities for managing AML/CTF compliance; and
- There was a lack of sufficient AML/CTF expertise and resourcing.
"The Report also noted that, with the benefit of hindsight, and noting the Board's escalating focus in the area, directors could have recognised earlier the systemic nature of some of the financial crime issues Westpac was facing," says Westpac.
"The Panel also noted that reporting to the Board on financial crime matters was at time unintentionally incomplete and inaccurate."
The AUSTRAC lawsuit has so far resulted in a number of consequences for the bank.
First, former CEO Brain Hartzer and former chairman Lindsay Maxstead stood down in the wake of the controversy, six days after the allegations were first brought to light.
The controversy also led to DBRS Morningstar downgrading its long-term ratings trend from stable to negative, and the Australian Prudential Regulation Authority was forced to step in and ensure Westpac lifted its risk capital by $500 million.
The company was hit with two class action lawsuits, one in Australia by Phi Finney McDonald and one in the US by New York-based law firm Rosen Law Firm. The suits seek to recover damages for investors affected by the AUSTRAC investigation and Westpac's alleged failures.
Further, Westpac slashed its earnings by $1.03 billion in 1H20 because of AUSTRAC-related matters including $900 million for a potential penalty and $130 million for a response plan.
Today Westpac CEO Peter King says further appropriate action has been taken internally in the wake of the scandal.
"Consequences that have been applied to individuals include significant remuneration impacts and disciplinary actions. A number of staff have already left the company," says King.
"A range of renumeration consequences were applied to 38 individuals. Consequences applied to prior year awards, including withheld FY19 short term variable reward, totalled approximately $13.2 million. In addition, cancelled FY20 short term variable reward, including for the CEO and Group Executives, is valued at approximately $6.9 million assuming an outcome of 50 per cent of target opportunity.
"Remuneration and disciplinary actions took into consideration decisions already taken and announced, the level of direct managerial responsibility or accountability for the compliance failures, and the level of culpability for failings."
CEO King also acknowledged today that there is a need for cultural change within Westpac.
"We recognise we need to change," says King.
"We completely accept that some important aspects of Westpac's financial crime risk culture were immature and reactive, and we failed to build sufficient capacity and experience in some important areas.
"We have learned from this and are absolutely committed to making amends for this event."
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