Westpac's directors and senior managers face potential bans from the banking industry, as the sector's regulator launches an investigation into their handling of alleged money laundering breaches.

Key points: APRA is investigating whether "fundamental deficiencies" in Westpac's risk management led to alleged money laundering breaches

APRA is investigating whether "fundamental deficiencies" in Westpac's risk management led to alleged money laundering breaches The banking regulator will also look at whether the bank and its managers and directors may have breached the Banking Executive Accountability Regime (BEAR)

The banking regulator will also look at whether the bank and its managers and directors may have breached the Banking Executive Accountability Regime (BEAR) Westpac is currently facing a Federal Court action from financial crime agency AUSTRAC over more than 23 million alleged money laundering law breaches

Late last month, the Federal Government's financial crime agency AUSTRAC launched a Federal Court action against Westpac, alleging the bank had breached anti-money laundering laws on more than 23 million occasions.

Now the banking regulator APRA is investigating Westpac to determine whether those failures resulted from "fundamental deficiencies" in its risk management that also may have breached the Banking Act.

APRA's investigation is focussed on Westpac's senior managers and directors, who came under fire from AUSTRAC in its legal statement of claim for "indifference" and "inadequate oversight" respectively.

"AUSTRAC's statement of claim in relation to Westpac contains serious allegations that question the prudential standing of Australia's second-largest bank," APRA's deputy chair John Lonsdale said in a statement.

"While Westpac is financially sound, there are potentially substantial gaps in risk governance that need to be closed."

New BEAR powers to probe bank's governance

This is potentially further bad news for recently departed former Westpac chief executive Brian Hartzer and soon-to-be-departed chairman Lindsay Maxsted, who are likely to be among those managers and directors investigated.

APRA is using new powers under the Banking Executive Accountability Regime (BEAR) in its investigation of the bank's management.

The BEAR came into force for the major banks on July 1, 2018, while many of Westpac's alleged breaches of anti-money laundering laws and failures to respond to those problems occurred before then.

So APRA is also investigating Westpac's directors and managers for potential breaches of the Banking Act.

The penalties for breaches under both of those laws include the potential for directors and executives to be banned from senior positions in financial services.

The bank can potentially be fined if it is found not to have complied with either law at a corporate level.

Specifically, the regulator will be looking at whether the bank's governance and risk management were adequate, whether its remuneration and accountability arrangements were appropriate, whether there were failures to comply with the BEAR and whether it failed to promptly notify APRA of potential breaches.

Westpac to stump up an extra $500m

APRA's investigation will run concurrently with AUSTRAC's lawsuit and a separate investigation by the corporate regulator ASIC into whether the bank breached any obligations under the Corporations Act.

Mr Lonsdale said the wide scope of the investigation meant it could take quite a while.

"Given the nature of the matters raised by AUSTRAC, the number of alleged breaches and the period of time over which they occurred, this will necessarily be an extensive and potentially lengthy investigation," he added.

The ABC understands that it could take a couple of years before the investigation is complete and any action might be taken.

However, the regulator is taking some immediate action against the bank by using its powers to require Westpac to hold an additional $500 million in capital — effectively money set aside to protect the bank and its depositors from losses — which brings to $1 billion the amount of additional capital Westpac has been forced to hold above its regular requirements.

APRA will also conduct an immediate review of the bank's risk governance.

Westpac's outgoing chairman said the bank was already taking action to try and fix its risk-management problems by last month appointing external consultants from Promontory to undertake an accountability and financial crime program review.

"As previously stated, these shortcomings are unacceptable and we are determined to urgently fix these issues and lift our standards," Mr Maxsted said in a statement.

"We will provide our full support to APRA through its investigation and review."