The Westpac scandal highlights the problems Australian institutions have with detecting and reporting dodgy transactions
Westpac’s money laundering and child exploitation crisis has rocked the bank and thrown harsh light on the behaviour of the rest of the financial services sector.
It’s also raised questions about why Australia lags in enforcing rules about monitoring potentially dodgy transactions.
According to allegations by Austrac, Australia’s financial intelligence agency, Westpac broke the law more than 23 million times in transactions worth more than $11bn.
Most of those transactions relate to its failure to file reports about international funds transfers, but Austrac’s most shocking allegations relate to thousands of transactions with the Philippines that fit a pattern consistent with child exploitation that the bank did not detect or block.
The allegations – and a looming fine likely to run into the billions – have enraged Westpac’s investors, who last week forced the resignation of its chairman, Lindsay Maxsted, its chief executive, Brian Hartzer, and the head of its board’s risk committee, Ewen Crouch.
But they have also provoked concerns about the ability of the big banks to comply with the law, drawing a warning from ratings agency S&P that compliance across the industry is weak and likely to be a drag on profits for the next two years.
Meanwhile Austrac appears to be working its way through the big four banks.
It has already dragged two of them, Westpac and the Commonwealth Bank, into court for allegedly breaching the law and a third, NAB, says it is under investigation.
This week the last of the quartet, ANZ, said that as far as it knew it was not under investigation but said it has been reviewing its compliance with the laws since June.
Poor culture and weak laws
“Misconduct in our financial industry is a result of a significant deterioration in culture precipitated – for in excess of a decade – by a relentless drive for record profits, year after year,” says Andy Schlumow, a regulatory consultant and law lecturer at the University of Wollongong.
“Investments in infrastructure have not been made – like IT platforms capable of complying with a bank’s anti-money-laundering and counter-terrorism financing obligations; obligations laid down in legislation, and integral to their licence conditions.”
At a higher level still, despite a review process that has been under way for more than a decade, the Australian government has stalled the process of bringing the nation’s laws up to international standards through changes that include adding lawyers and real estate agents to the list of people required to report suspicious transactions to Austrac.
There is no sign the Morrison government will take action any time soon, even though it has promised international authorities it will bring Australian regulations up to scratch.
The gargantuan home affairs ministry, headed by the former Queensland cop Peter Dutton, has responsibility for anti-money-laundering and counter-terrorism finance. But despite Dutton’s tough talk against Westpac – earlier this week he slammed the bank for giving “a free pass to paedophiles” – he would not commit the government to introducing legislation that would bring Australia up to international standards.
“The Morrison government is committed to continually improving Australia’s anti-money-laundering and counter-terrorism financing laws and working with industry to ensure that Australia’s financial system is hardened against criminals and terrorists without placing undue burden on industry,” a spokeswoman said.
“Any potential future reforms will be reviewed in a careful and considered way.”
The push for more data
Anti-money-laundering and counter-terrorism finance laws seldom troubled newspaper front pages until 2017 and the CBA case, with its allegations of ATMs stuffed with cash reaped from drug and gun-running.
The laws require banks and other financial institutions to make a steady flow of reports to Austrac about international payments, suspicious transfers and large sums of cash changing hands.
They are also supposed to detect and stop transfers likely to be associated with criminal activity. The alleged failure that has Westpac in trouble is that at least a dozen customers made transfers to the Philippines that were consistent with child exploitation for years, without the bank doing anything about it.
Austrac analyses the mountains of data it collects and shares it with other law enforcement agencies, including police and the Taxation Office.
“We get valuable insights from the information provided to us by Austrac, which we use in our compliance activities, particularly in identifying and chasing down offshore tax evasion,” the ATO’s second commissioner, Jeremy Hirschhorn, told the Guardian.
“The higher the quality and completeness of that data the better from our perspective.”
Since 2007, moves have been under way to increase this flow of data by making other businesses that regularly deal with large amounts of money on behalf of their clients, including estate agents and lawyers, contribute reports to Austrac.
The push, known as “phase 2”, stalled during the global financial crisis, but by December 2013 the Abbott government put it back on the agenda as part of a regular review of Australia’s anti-money-laundering and counter-terrorism finance legislation.
However, that review was put on ice while Australia was evaluated at the hands of the financial action taskforce, a multinational group that sets international standards for money-laundering laws and works out of the Organisation for Economic Cooperation and Development’s headquarters in Paris.
When it arrived in April 2014 the taskforce’s evaluation was stinging, calling out Australia for failing to focus on money laundering and for not having yet brought “real estate agents and lawyers, which the authorities assessed as high risk for money laundering and terrorist financing” into the reporting scheme.
The criticism shocked Austrac into adopting a more aggressive approach, reflected in its recent assaults on the banking sector and its recent investigation into buy-now pay-later fintech Afterpay.
“Recent changes at Austrac have seen considerable improvement,” a payments consultant, Grant Halverson, said.
“The majority of recent work however is on self-reported issues by banks – not investigation and detection.”
He said other examples of low detection rates included whistleblower reports of bags full of cash being exchanged for chips at Crown Casino, as well as the activities of the accused Christchurch mass murderer in the lead-up to the massacre.
While Austrac took action, the government responded to the taskforce’s critique with yet another round of consultation in 2016, looking at options to regulate real estate agents, lawyers and other high-risk groups that fall into what in anti-money-laundering and counter-terrorism finance jargon are known as “designated non-financial businesses and professions”.
Lawyers resist tougher compliance regime
A major source of resistance has been lawyers, who have consistently said the requirement to report suspicious transactions conflicts with their duty of confidence towards their clients.
In a submission to the review, the Law Council of Australia also questioned whether the Financial Action Task Force regime made any difference at all to the level of money laundering and complained that compliance would cost the profession more than $2bn annually.
A Law Council spokesman said the organisation still held the views expressed in the submission.
A decade of inaction meant that by the middle of next year Australia was once again due for a bruising encounter with the Financial Action Task Force over its failure to bring in phase 2.
But the Financial Action Task Force has granted Australia a reprieve by freezing all evaluations until a strategic review of the organisation is finished.
“In October, the [Financial Action Task Force] decided to temporarily pause the start of all scheduled follow-up assessments – this is not an Australia specific decision,” an Financial Action Task Force spokesman said.
But Australia still faces a looming international showdown in three months, at the task force’s next meeting in February.
“As a member of the [Financial Action Task Force], Australia has committed to fully and effectively implement all of the [Financial Action Task Force] recommendations, including those that concern ‘designated non-financial businesses and professions’,” the spokesman said.