November 26, 2019 Andrew Tarpey

MONEY LAUNDERING SCANDALS CONTINUE TO PLAGUE AUSTRALIAN BANKS

BY ANDREW TARPEY

Westpac, Australia’s second largest bank, recently became embroiled in yet another anti-money laundering (AML) scandal to rock the banking sector in Australia, a sector that in November alone has seen two of the largest banks in the country face embarrassing headlines about noncompliance and has generated concerns about systemic problems in the boardrooms of Australian banks. The Westpac scandal was so severe and troubling that even Australian prime minister Scott Morrison weighed in, calling the AML breaches “appalling and distressing” and going so far to suggest an overhaul of leadership may be necessary. “It’s not for the government to say who should be in those jobs or not, but they should be taking this very seriously, reflecting on it very deeply, and taking the appropriate decisions for the protection of people’s interests in Australia,” said the prime minister.

AUSTRAC, the banking industry regulator who oversees matters of money laundering and other financial crimes, launched legal action against Westpac due to “serious and systemic non-compliance” with the 2006 Anti-Money Laundering and Counter-Terrorism Financing Act. AUSTRAC alleges that Westpac violated the 2006 law a staggering 23 million times between 2013 and 2019. The report claims that Westpac failed to conduct appropriate due diligence checks on correspondent banks (smaller banks in various jurisdictions for whom Westpac processes transactions), didn’t report to AUSTRAC the details of millions of international funds transfers, and didn’t conduct appropriate due diligence on many of its customers. Most troubling of all, Westpac didn’t have appropriate transaction monitoring controls in place to detect suspicious small dollar payments to the Philippines and southeast Asia, payments which are highly indicative of online child exploitation. AUSTRAC alleges that 12 individuals used Westpac accounts to conduct nearly 3,000 such payments. One of these individuals, who had previously been jailed for child exploitation offenses, opened several accounts with Westpac and proceeded to use one to make low value payments to the Philippines which authorities said was consistent with child exploitation purposes. The payments went undetected as suspicious by Westpac.

Westpac is not alone in its failure to comply with AML laws; there have been several high-profile compliance breaches of late among Australian banks. Just a week before the Westpac story broke, National Australia Bank, which is the fourth largest bank in Australia, revealed in its annual report that it may have been involved in breaches of the country’s anti-money laundering regulations and self-reported information and documentation on the matter to AUSTRAC for investigation. The annual report admitted that the bank struggled with “ineffective implementation or remediation of compliance issues” which could result in “significant monetary penalties”. While at this stage the outcome and total cost to the bank are uncertain, the serious nature of the violations as described by NAB in their annual report is likely to produce a stiff penalty.

The Westpac and NAB scandals follow what was the largest fine for noncompliance in Australian corporate history: a $700 million penalty slapped on Commonwealth Bank of Australia in 2018 for failure to report suspicious transactions, failure to properly monitor transactions and performing inadequate Know Your Customer checks. However, the scale of the Westpac breaches dwarfs those of Commonwealth Bank; Australian Attorney-General Christian Porter has said that the Westpac matter is “off the charts” compared to Commonwealth Bank, and implied that Westpac can expect a much heftier fine than the penalty issued to Commonwealth Bank.

With such brazen flouting of the law and regulations by Australia’s largest banks, the question must be asked as to why this is occurring, and why on such a large scale. Certainly banking scandals due to noncompliance aren’t unique to Australia; we need only look at HSBC (United Kingdom), Deutsche Bank (Germany), and Wells Fargo (United States), among many others, to see that this is a global problem. Taking a high level view of the matter, it’s best to first establish one basic principle: banks and other financial institutions exist to make money and generate profits. For a long time, the government took a (mostly) hands off stance when it came to anti-money laundering enforcement. Sure, there were regulations on the books that banks had to follow, and egregious violations would face large fines and perhaps other penalties, but regulators have really taken a much harder line on enforcement since the turn of the century. Perhaps CEOs and others at the top rungs of financial institutions, having worked their way up the banking ladder in the 1980s and 1990s, are still stuck in the mindset of those times, focusing on the commercial, money-making aspects of banking operations and paying little heed to compliance requirements. After all, the compliance divisions of banks don’t make the bank money. They can, however, cost the bank in a large way; just ask Commonwealth Bank. Westpac is about to find out that lesson the hard way as well.

Andrew Tarpey

Andrew Tarpey is Southpac's Compliance Officer. He is responsible for ensuring AML and financial best practice is followed throughout the business.
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