AUSTRAC Seeks Civil Penalties Against Westpac for 23 Million+ AML/CTF Violations

On November 20, the Australian Transaction Reports and Analysis Centre (AUSTRAC) announced that it had applied to the Federal Court of Australia for civil penalty orders against a leading Australian financial institution, Westpac Banking Corporation (Westpac).  AUSTRAC stated that the requested civil penalty orders “relate to systemic non-compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).”

AUSTRAC alleged that Westpac “contravened the AML/CTF Act on over 23 million occasions,” and had two major deficiencies on its AML/CTF program: (1) “Westpac’s oversight of the banking and designated services provided through its correspondent banking relationships”; and (2) “Westpac’s oversight of its AML/CTF Program, intended to identify, mitigate and manage the money laundering and terrorism financing risks of its designated services.”  These failures in oversight, in AUSTRAC’s view, “resulted in serious and systemic non-compliance with the AML/CTF Act.”

In particular, AUSTRAC alleged five major categories of failures by Westpac:

  1. Failure to appropriately assess and monitor “the ongoing money laundering and terrorism financing risks associated with the movement of money into and out of Australia through correspondent banking relationships.” In this regard, AUSTRAC asserted that Westpac “has allowed correspondent banks to access its banking environment and the Australian Payments System without conducting appropriate due diligence on those correspondent banks and without appropriate risk assessments and controls on the products and channels offered as part of that relationship.”
  2. Failure to report more than 19.5 million International Funds Transfer Instructions (IFTIs) to AUSTRAC over nearly five years, for transfers both into and out of Australia. AUSTRAC described IFTIs as “a key source of information from the financial services sector that provides vital information into AUSTRAC’s financial intelligence to protect Australia’s financial system and the community from harm.”  According to AUSTRAC, the late incoming IFTIs received from four correspondent banks “alone represent over 72% of all incoming IFTIs received by Westpac in the period November 2013 to September 2018 and amounts to over $11 billion dollars.”
  3. Failure to “pass on information about the source of funds to other banks in the transfer chain.” This failure, in AUSTRAC’s view, “deprived the other banks of information they needed to understand the source of funds to manage their own AML/CTF risks.”
  4. Failure to “keep records relating to the origin of some of these international funds transfers.”
  5. Failure to “carry out appropriate customer due diligence on transactions to the Philippines and South East Asia that have known financial indicators relating to potential child exploitation risks.” AUSTRAC specifically charged that Westpac “failed to introduce appropriate detection scenarios to detect known child exploitation typologies, consistent with AUSTRAC guidance and their own risk assessments.”

The concise statement that AUSTRAC filed with the Federal Court in this case did not specify the total amount of civil penalties that AUSTRAC is seeking.  It did state, however, that Westpac had contravened the AML/CTF Act on more than 23 million occasions, with each contravention “attracting a civil penalty between [AUD]$17 million and $21 million.”

N.B.:  AUSTRAC’s application is only the first step in the civil-penalty process for AML/CTF Act violations.  The Federal Court is responsible for deciding on the relief that AUSTRAC has requested, including declaratory relief, money penalties, and costs.

In a statement, Westpac Chief Executive Brian Hartzer conceded that the allegations were “serious and important.”  “These issues should never have occurred and should have been identified and rectified sooner,” Hartzer said, adding, “It is disappointing that we have not met our own standards as well as regulatory expectations and requirements.”

Ultimately, if Westpac continues to admit to its culpability to these program failures and cooperates with AUSTRAC, Westpac can only hope that it will reach a resolution with AUSTRAC no larger than Commonwealth Bank of Australia (CBA) did last year with AUSTRAC.  In June 2018, CBA reached an AUD$700 million resolution with AUSTRAC for “serious breaches of anti-money laundering and counter-terrorism financing (AML/CTF) laws.”

In the meantime, Hartzer and the Westpac board of directors are contending with an upsurge of community outrage that media reports of the AUSTRAC action have prompted.  The most significant factor that apparently prompted widespread public hostility is AUSTRAC’s allegation that Westpac “ought to have detected 12 customers who made almost 3000 transactions to the Philippines – including a person convicted of child exploitation and another doing deals with a person later arrested for running live child sex shows as having transfer patterns indicative of child exploitation.”  Even Australian Prime Minister Brian Morrison weighed in on the controversy, insisting that the bank have “a confident plan” to address ”the clear weaknesses they’ve had in their systems that have allowed this to take place,” and “some understanding of the accountability for when these things happen.”

For these reasons, other Australian banks should have their compliance teams peruse the AUSTRAC filings with care, and use AUSTRAC’s allegations as points of comparison with the state of their own AML/CTF programs.  Australian banks are still grappling with the effects of the Royal Commission report on banking sector misconduct that was released earlier this year.  They should need no further prodding to take the initiative in identifying and remediating any significant flaws in their AML/CTF programs.

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