Wednesday November 20 last year must have been a day when Westpac boss, Brian Hartzer, first wondered whether he would make it to Christmas at the bank.

As things transpired, he did not survive and now the bank is facing, not just two class actions from its shareholders, but also an investigation by the corporate regulator into its jumbo $2.5 billion capital raising.

That Wednesday, at 9:30am, Westpac had filed a three-paragraph release with the ASX, in good time for the opening of sharemarket trading.

The most important words were “civil proceedings”. There was no hint of anything criminal. Forty minutes earlier, AUSTRAC (the money laundering and terror-finance regulator) had filed a Statement of Claim in the Federal Court in Sydney.

Perhaps the regulators had signalled to Westpac the day before that they were going to launch proceedings. So Westpac moved fast to discharge its continuous disclosure obligations to the ASX, that is, to tell the sharemarket what was going on.

This is the vexing question for both bank shareholders and investigators from the Australian Securities & Investments Commission; if Westpac directors knew that terrible news was coming down the line, why did they not tell their shareholders before – not after – they issued new shares, shares whose price would surely crater on the news, leaving shareholders the poorer.

The AUSTRAC lawsuit could hardly have been a huge surprise for Hartzer and his board.

There, amidst descriptions of “batching”, “nesting”, “payable-through services”, and “funds transfer chains” was something the directors of the bank already knew, or definitely should have known. In the 11 months to September 20, 2019, Westpac had reported to AUSTRAC just over 19 million international transfers of funds into Australia totalling over $11 billion.

Hartzer, then Australia’s most highly regarded of the Big Four bank chiefs, knew the reports were up to five years late. And he would have known that the bank’s failures related to nearly three-quarters of all the money transfers it had received. Admittedly, a gargantuan failure.

What the bank chief might not have known was that the media were not so interested in this incoming money.

The media were about to seize on something far more prurient; pedophiles’ money headed out of Australia to the Philippines, something you don’t read about in the Statement of Claim until you get to the 14 page discussion of child exploitation risks, starting at the foot of page 34.

Shortly after midday on the day of its sharemarket confession, Westpac released an 11-paragraph response to the AUSTRAC Statement of Claim saying that it was “taking very seriously AUSTRAC’s concerns around appropriate customer due diligence on transactions to the Philippines and South East Asia, including reviewing relevant processes” and, as for the rest of the claim:

“The majority of the payments for which the reports were not generated were recurring, low-value payments made by foreign government pension funds to people living in Australia.”

This was deadly serious stuff, stuff which ought to have been disclosed to the market earlier, particularly as Westpac had approached its big shareholders, cap-in-hand, asking for a cool $2 billion.

Winding back the clock

A little over two weeks earlier, just before the numbing 23 million breaches of money-laundering laws had been made public, Westpac had announced plans to raise new capital.

So it was that Monday November 4, 2019, has also turned out to be a critical day in the Westpac calendar.

On that day, the ASX issued a trading halt on Westpac’s shares at 7:45am, at the bank’s request, but had left it to Westpac to say why its stock had been suspended from trading.

Westpac immediately filed its full-year financial results under the banner, Help when it Matters, announcing on Page 1 that the big numbers, revenue and profit, were down.

The 80c a share dividend was there on Page 1 too. But you’d have to know it used to be 94c because there was no mention on Page 1 that the dividend was down too. Or you could wait another five minutes until the Summary of Results came out. CEO Brian Hartzer was upfront: “2019 has been a disappointing year,” he said.

And he also hinted about the AUSTRAC problems: the bank was announcing a $2.5 billion capital raising: “to provide an increased buffer above APRA’s unquestionably strong benchmark” and “creating flexibility for changes in capital rules and for potential litigation or regulatory action.”

There were no frank admission of 23 million breaches of the law, or anything so informative and distasteful.

But there was a little more when the bank’s annual report landed with the ASX. Under the heading Information about Westpac we find a lengthy and relevant discussion of “financial crime”. It concludes: “Any enforcement action against Westpac may include civil penalty proceedings and result in the payment of a significant financial penalty, which Westpac is currently unable to reliably estimate.

“Previous enforcement action by AUSTRAC against other institutions has resulted in a range of outcomes, depending on the nature and severity of the relevant conduct and its consequences.” That note, dealing with “provisions” gives a similar description of the AUSTRAC investigation and concludes by repeating the words about the inability to reliably estimate a financial penalty.

PwC signed the Auditor’s Report describing its procedures for Note 27 saying: “These procedures also included, among others, evaluating the evidence of the quantification of provisions and the assumptions applied and assessing the appropriateness of disclosures.”

What happened next is big

A few minutes later, after uploading its annual report, Westpac announced its capital raising; $2 billion would come from an institutional placement the next day, with $500 million available to smaller shareholders on the register as at November 1, 2019, at a price to be determined in December.

It repeated the short, sharp statement from the summary of results regarding potential litigation almost word for word.

The new issue would see Westpac with 3,489,928,773 shares entitled to the 80c dividend, with all but the foreign shareholders entitled to the full franking credits and most foreigners receiving relief from withholding tax on their dividends.

The $2.5 billion capital raising would just about fund the $2.79 billion dividend, leaving Westpac in a position only slightly worse off than if no dividend had been declared at all. The government would satisfy the benefits attached to the $1 billion in franking credits which were likely to be claimed.

Yes, a key feature of this sharp deal – besides a quick-fire capital raising to pay its dividend – was that Westpac was also tapping taxpayers. Shareholders with no taxable income would get a neat payment of 42.8 per cent of their Westpac dividend, on top of their Westpac dividend that is.

Why did the bank not try to raise the full $2.79 billion from shareholders to pay their dividend? They would need to raise another $700 million if they were going to keep the dividend at 94 cents and find it all through the capital raising. Perhaps they did. It is plausible that – as was the case with Bendigo Bank’s subsequent efforts to use shareholder capital to pay its dividend, that they tried and failed.

The team of investment banks raising money for the deal may well have told Westpac it would have to settle for less capital. In any case, the timing of the deal did not go down well with the bank’s major shareholders who were rather taken by surprise, not happy that they were tipping in fresh capital to pay for their own dividend. Had they been told the bank didn’t have enough money to fund its payout to shareholders internally?

Illicit transfers

Casting back to the “AUSTRAC day” however, the magnitude of the problem on incoming money might have been explicable, nearly all the unreported incoming transfers came from just one bank: “Bank A”.

Although this looked huge; it was actually minuscule if you looked at the total dollar amount that Westpac had failed to report about Bank A. Bank A’s transfers accounted for less than one percent of the dollar value; around $100 million; on average, about $500. Far more thought provoking were the 36,000 incoming transfers from “Bank B” and the 13,000 incoming transfers from Banks “C” and “D” combined. These covered the rest of the incoming $11 billion or around $200,000 each.

Thousands of transfers worth billions of dollars were in breach of the law. Yet Westpac had resorted to a jumbo capital raising just over two weeks before the dramatic revelations went public. ASIC meanwhile, in the aftermath of the Hayne Royal Commission into the banks, is under pressure to prosecute rather than pursue a slap-on-the-wrist settlement known as an Enforceable Undertaking (EU).

As revealed here, the preferred regulatory route to punish banks for their myriad misdemeanours of the past ten years has been the EU, an agreement between the regulators and the banks which can result in the banks being “punished” by making a donation to a charity of their own choosing.

The deal is the regulator agrees not to say the bank has broken the law, or anything nasty like that, and the bank agrees to promise not to do it again – whatever the euphemistic “it” is. So a “penalty” is paid which often finds its way to a financial literacy course, the bank admits no wrongdoing and the regulator claim a victorious enforcement action.

Commissioner Kenneth Hayne frowned on the practice of EUs as being a feeble way to punish the errant banks and compel them to better behaviour. So now we have an investigation by ASIC into the Westpac capital raising. Whether anything will come of this is another matter. For this story, ASIC did confirm that its chairman James Shipton had told a Parliamentary Committee that an investigation was underway but there is no Statement of Claim, no further evidence of action and not even a press release. It is softly softly.