Politics

Federal politics

Don’t bank on it
Time will tell if the Westpac scandal delivers the reset our corporate culture needs

Photograph by Scott Lewis, Flickr

Yesterday morning, Australians awoke to the news that Westpac’s CEO, Brian Hartzer, had stepped aside over millions of alleged breaches of federal anti–money laundering and counter-terrorism financing laws following a meeting between the company’s board and its major investors … and that, rather bewilderingly, the board had installed the company’s chief financial officer, Peter King, in his place.

Both Hartzer and Westpac’s chairperson, former KPMG chief executive Lindsay Maxsted, have been under sustained pressure to resign since AUSTRAC – the Australian Transaction Reports and Analysis Centre, the federal government’s “financial intelligence” agency and its regulator of laws against money laundering and the financing of major criminal activity – lodged a statement of claim in the Federal Court last Wednesday. Hartzer, who initially declared he would stay to fix the mess, could (and probably should) be merely the first of many heads to roll. Maxsted has also announced he’ll bring his retirement forward.

But the board’s decision to replace Hartzer with King, even temporarily, suggests the directors are still failing to see the bigger picture. This is strange, because the bank’s investors and shareholders would presumably be mostly concerned about the risks to which Westpac’s executive and senior management have exposed the company – in particular, its liability for potentially billions of dollars in penalties. As chief financial officer since 2014, King might have even more knowledge of, and direct responsibility for, the bank’s procedures for complying with the Anti-Money Laundering and Counter-Terrorism Financing Act than Hartzer.

At this stage, Hartzer’s “resignation” (he’ll still pocket $2.69 million over the next year, which is the notice period under his contract) looks like the PR stunt of a corporate board scurrying to sandbag the flood. Westpac’s share price had dropped by more than a dollar since AUSTRAC filed, though it’s already begun to recover.

But events may yet overtake Westpac’s desire to minimise the problem. Other agencies, including ASIC, have begun their own investigations, and Labor wants the company to appear before a parliamentary committee. The Coalition, ever the big banks’ friend, is hosing down that prospect, but then it never wanted the royal commission either.

 


So, what exactly does AUSTRAC allege Westpac has done wrong? The Anti-Money Laundering and Counter-Terrorism Financing Act dates from 2006, and is one of dozens of pieces of anti-terror legislation passed by the federal parliament since 2001. It imposes strict obligations on banks and other financial institutions to verify customers’ identities and to report certain transactions and “suspicious matters” to AUSTRAC. The idea is that this information places AUSTRAC in a much better position to identify potential money laundering and terrorist-financing operations.

AUSTRAC alleges that Westpac has breached the Act more than 23 million times since 2013. That points to systemic failures (for instance, by “failing to invest in appropriate IT systems and automated solutions”) rather than failures of individual employees – for which Westpac’s entire executive must bear responsibility.

According to AUSTRAC, Westpac has known since 2013 of the risks that certain “frequent low value payments” to the Philippines and South-East Asian countries are associated with child exploitation. In June 2016, Westpac’s senior management was specifically briefed about the ways in which its LitePay platform – a low-cost international payment service – enhanced these child-exploitation risks. But, says AUSTRAC, Westpac didn’t implement an automatic detection procedure for its LitePay transactions until June 2018 – and it still hasn’t done so for payments through other channels. There can be no excuse for this, from a corporate governance perspective.

AUSTRAC alleges that one Westpac customer, for instance, in 2014 sent money to a recipient in the Philippines who was later (in 2015) arrested for live-streaming the sexual exploitation of children; that same customer’s bank records show that they visited the Philippines themselves in both 2014 and 2016. This is information held by Westpac in its transaction records, and must be reported to AUSTRAC by law. None of it proves that this customer was also engaged in the sexual exploitation of children, but intelligence and police agencies would no doubt argue that this information should trigger further investigation. Privacy advocates might sound a note of caution about this kind of surveillance, which seems to assume guilt by association, but the law is clear – and Westpac’s systems didn’t detect the 625 transactions on this customer’s account that (according to AUSTRAC) were “in repeated patterns consistent with child exploitation typologies” until June 2019.

The Hayne royal commission into banking industry misconduct did not specifically investigate the banks’ records in relation to money laundering and the financing of major crimes, though it did find extensive failures of corporate governance and regulation – failures that suggested a culture of systematically ignoring legal obligations. Assuming the Westpac allegations are true, the bank clearly didn’t have systems in place to meet its obligations under the 2006 legislation, and may not have those systems in place even now. Westpac’s response to the AUSTRAC allegations indicates that the cultural problems identified through the Hayne commission appear to endure. The Australian Financial Review reports [$] that Westpac’s anti–money laundering reporting officer was demoted after she warned the company of the liability it faced.

In its statement of claim, AUSTRAC declares Westpac’s breaches to be the result of “systemic failures”, “indifference by senior management” and “inadequate oversight by the Board”. Of course, we’ve been here before. Treasurer Josh Frydenberg has already indicated that Westpac’s directors could be disqualified from occupying board positions in the future by the Australian Prudential Regulation Authority (the banking regulator).

Since AUSTRAC lodged its complaint, Labor has made mileage out of the Coalition’s reluctance to move against the banks. The Coalition notoriously rejected calls to set up a royal commission 26 times, and has allowed business to continue essentially as usual since the commission reported in February. Meanwhile, as Labor points out, Scott Morrison’s government continues to bash the unions. And the harm that’s been caused by all banks’ executives – as demonstrated so sensationally at the Hayne commission – surely dwarves whatever some unions might have done.

This is not the first time that a bank has fallen foul of the Anti-Money Laundering and Counter-Terrorism Financing Act. In June 2018, the Commonwealth Bank settled an AUSTRAC claim for $700 million after it breached the Act a mere 53,000 times. These breaches attract civil, not criminal, penalties under the legislation (which is why Westpac and CBA were sued rather than charged), though the civil penalty for each breach can be as much as $21 million – meaning Westpac, in theory, faces a total maximum “fine” of more than $391 trillion. It won’t come to that, of course. Like CBA, Westpac will argue that any penalties the Federal Court awards should be at least partly rolled together. But applying the CBA settlement’s maths to the allegations against Westpac would see Westpac fined $300 billion – in other words, about 40 years of profits. That would presumably sink the bank, so it’s unlikely to happen either. Westpac, after all, is too big to fail.

There are two main interest groups concerned about these revelations. One is Westpac’s shareholders and investors, who have a right to be livid at the liabilities this executive team has created for the company. The other is those government agencies who rely on banks to meet their reporting obligations so as to detect and prevent major crime. The responses of both groups – and of the Morrison government – over the next little while will indicate the extent to which they’re committed to reforming corporate culture.

Because corporate culture is ultimately the main problem. The worst that is likely to happen to Hartzer, Maxsted and the rest of Westpac’s executive will be that they lose their current roles, though the managers will receive generous golden handshakes. This is despite the fact that this executive team has exposed its company entirely unnecessarily to potentially the biggest corporate penalty in Australian history.

Corporate leaders justify their obscenely large salaries and bonuses on the basis that they’re ultimately responsible for their companies’ failures. But they’re rarely held responsible. Will AUSTRAC’s action against Westpac be the game changer? Will it encourage the Federal Court to impose a penalty so great that it actually hurts? So large that other boards decide against risking their own companies’ finances and reputations by re-appointing members of this failed executive in the future? So massive that corporate boards across Australia are scared into taking some real investigative interest in what is happening on their watch? Time will tell.

Russell Marks

Russell Marks is a lawyer and an honorary research associate at La Trobe University. He is the author of Crime and Punishment: Offenders and Victims in a Broken Justice System (Black Inc., 2015). 

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