Westpac CEO Brian Hartzer stepped down on Tuesday morning amid allegations that the bank violated money laundering laws.
It's alleged more than 23 million Westpac transactions breached anti-money laundering and counter-terrorism finance laws.
As the scandal grows, it's likely Westpac's pain is only going to worsen.
The Royal Commission wasn't the end of the drama for the big four banks, despite what some might characterise as a toothless government response. For Westpac, in particular, the worst pain might soon be ahead.
Westpac CEO Brian Hartzer resigned on Wednesday morning amid what could be the worst scandal in the bank's history. AUSTRAC, Australia's financial regulator, alleges Westpac contravened crucial anti-money laundering and counterterrorism finance laws on over 23 million occasions.
Here's what's going on.
What are the allegations against Westpac?
On November 20, AUSTRAC announced it would apply for civil penalty orders against Westpac over 23 million violations of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, the primary piece of legislation concerning money laundering in Australia.
According to AUSTRAC, Westpac's oversight of services provided through its banking partners was "deficient", leading to non-compliance with the act.
Essentially, Westpac partners with a number of banks and partners globally, which use Westpac's infrastructure to facilitate international payments and transfers. AUSTRAC alleges Westpac's oversight of transactions within these correspondent relationships was so poor it did not know where many payments originated from. This leaves open significant possibility for abuse.
Even more troublingly, the regulator says Westpac may have facilitated child exploitation in southeast Asia through its lack of oversight of frequent low-value payments through an international payments service named LitePay.
The AFR reports one customer used LitePay to funnel money to a man later arrested on child sex trafficking trafficking charges.
According to AUSTRAC, Westpac knew there were heightened child exploitation risks with frequent low-value payments to certain areas in the Philippines and other parts of southeast Asia. However, the bank did not implement a proper automated detection solution until 2018.
It's this last allegation which is dominating headlines, with Home Affairs Minister Peter Dutton alleging Westpac has "given a free pass to pedophiles" and should face significant consequences.
"It is clear... that the Westpac banking bosses, through their negligence, have given a free pass to pedophiles, and there is a price to pay for that and that price will be paid and we have been very clear about it," Dutton told Parliament on Monday.
What penalty is Westpac facing?
Westpac's CEO Brian Hartzer, who joined the bank in 2015, initially came out with a statement conceding much of what AUSTRAC alleged, and implying he would be at the forefront of dealing with the problems.
“These issues should never have occurred and should have been identified and rectified sooner. It is disappointing that we have not met our own standards as well as regulatory expectations and requirements,” Hartzer said in a statement provided to Business Insider Australia.
“We have implemented a range of additional steps in our processes including enhanced automatic detection systems ... as part of this we are also taking very seriously AUSTRAC’s concerns around appropriate customer due diligence on transactions to the Philippines and southeast Asia.”
But it wasn't to be. Within a day, Hartzer was out. The company's current CFO Peter King will serve as interim CEO until a permanent replacement can be found.
Hartzer's departure likely couldn't come a moment too soon, after The Australian reported the boss told his executives just hours before his resignation the scandal was “not an Enron or Lehman Brothers” and that the average Australian wouldn't consider Westpac's woes a "major issue".
That might have been an overly charitable reading on how Australians would respond to a scandal involving the sexual exploitation of children.
The next chief executive is likely to face significant challenges. No matter which way you slice it, the bank is staring down the barrel of one of the biggest corporate fines in Australian history – likely over $1 billion.
The company's value has also taken a significant hit. Since AUSTRAC's announcement last Wednesday, the share price has plunged 7 percent, or $6 billion.
Not a bad deal for Westpac CEO Brian Hartzer in the end
Despite his ignominious fall from grace, things could be worse for Hartzer.
He's been given 12 months notice, and will be paid just shy of $2.7 million for that period. In case that deal sounds too sweet, Westpac said in a statement Hartzer would not be eligible for any of the financial year bonuses.
Good to know.
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