(Bloomberg Opinion) -- After a 14-month inquiry that resulted in the departures of two chief executive officers and two chairmen, you might think Australia’s financial services industry would have cleaned up its act. The anti-money-laundering agency just provided 23 million reasons why you’d be wrong.
Austrac applied Wednesday for civil penalties against Westpac Banking Corp., the country’s second-biggest lender, for allegedly contravening laws on money-laundering and terrorism financing 23 million times. Most concerning was the agency’s claim that Westpac failed to do due diligence on 12 customers whose transaction activity was “indicative of child exploitation risks.”
“Some of the undetected transactions involved payments to alleged or suspected child exploitation facilitators,” Austrac wrote in a summarized statement of claim. “One customer opened a number of Westpac accounts after serving a custodial sentence for child exploitation offences.”
Such a pattern of alleged lapses is extraordinary. It’s more than two years since Westpac’s larger rival, Commonwealth Bank of Australia, faced a similar money-laundering case from Austrac, and the entire banking sector was in the dock for the duration of the Hayne Royal Commission, the government inquiry into the finance industry that finally wrapped up in February.
Westpac came out of that inquiry with only a qualified pass. The tardiness in shedding its wealth business drew criticism, due to the potential for conflicts of interest. While Chief Executive Officer Brian Hartzer didn’t come in for the stinging censure that led to the departure of National Australia Bank Ltd.’s chairman and chief executive, Commissioner Kenneth Hayne was notably skeptical about whether he’d really turned over a new leaf.
The long boom in the Australian economy has led executives to ignore what retail banking is meant to be about. Every bank wants to make life easy and friction-free for customers, but it’s precisely the friction embodied in know-your-customer and anti-money-laundering regulations that stops banks becoming conduits for illicit cash.
Commonwealth Bank’s problems with Austrac stemmed from the introduction of deposit-taking ATMs that were wide open to abuse by money-launderers. In Westpac’s case, its LitePay international payment service appears to have played a similar role. Senior management were briefed on risks from payments to the Philippines and Southeast Asia over LitePay in June 2016, according to Austrac, but only got around to implementing an automated system to spot transactions connected with child exploitation two years later. To this day, some non-LitePay payment channels still lack such automated detection systems, according to Austrac.
Identifying and preventing the funding of child exploitation should be among the most basic tasks of major banks. As anyone who’s been unable to withdraw cash at an overseas ATM knows, automated screening is capable of picking up abnormal activity in the smallest amounts. It’s astonishing that, at a time when the behavior of Australia’s banking sector was under unprecedented scrutiny, Westpac should have failed to implement controls on transactions with high-risk correspondent banks and do proper child exploitation due diligence on its own customers.
Westpac is already suffering. Earlier this month it announced a A$2.5 billion ($1.7 billion) capital raising and cut its dividend after its key profit measure fell 15%. Despite a surprising pickup in house prices in recent months, the buy-to-let investors who have driven the market for years are showing little demand for new mortgage credit, crimping the bank’s most important business. Its price-to-book ratio isn’t quite as low as it was a year ago when the Hayne inquiry was approaching its climax, but it’s closing in on those levels.
Former Commonwealth Bank Chief Executive Ian Narev announced his departure less than two weeks after news of that bank’s Austrac scandal broke in 2017, and his successor Matt Comyn has spent most of the past two years in an extended and radical cleanup. To remain in the top job at Westpac, Hartzer will have to persuade shareholders and directors that a similar change of heart is finally under way.
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David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.
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