The sheer awfulness of the revelation Westpac appears to have facilitated the Filipino child-sex industry certainly grabbed the headlines in the coverage of AUSTRAC's extraordinarily damaging statement of claim dropped in the Federal Court.

And rightly so.

Westpac had been warned years before and did nothing. Its social licence to operate as Australia's second-biggest bank seemingly treated a bit like an unwanted ATM receipt — screwed up, tossed away and forgotten.

The Prime Minister and Attorney-General were aghast. So were 25 million Australians.

While horrifying in its own right, it masks the bottom line that Westpac remains utterly clueless about the suspect $11 billion of largely cross-border funds transfers the financial intelligence agency has tallied up.

The details of the suspected paedophile payments are found towards the back of AUSTRAC's 48-page statement of claim.

There are several instances cited, generally in the order of tens of thousands of dollars, not millions, or even hundreds of millions for that matter.

In another context, and putting aside the incalculable human toll of the activity, the focus seemed to be on speedboats carrying out small wads of dirty money, ignoring the massive vessels, loaded with containers of concealed loot, steaming out of Australia's tax jurisdiction.

"That's what this case is all about — it's the facilitation of massive, high-level, cross-border tax evasion," says Nathan Lynch, Thomson Reuters' Asia-Pacific bureau chief, financial crime and risk.

"Westpac established a cloak of invisibility for cross-border payments — tax authorities, financial regulators and agencies couldn't see anything.

"It's this aspect of the case that makes it such a landmark case for AUSTRAC to take on — and a case that will send shockwaves around the globe," Mr Lynch said.

Did Westpac pull a SWIFTy?

To understand why this was unlikely to be just sloppiness on an industrial scale you have to dig into the arcane world of data reporting of fund transfers between financial institutions.

The global standard is the Society for Worldwide Interbank Financial Telecommunication (SWIFT) messaging standard for so-called cover payments: the MT202 COV.

The SWIFT platform was established in 2009 as part of a global crackdown on money laundering, and is used in most of the world's high-value cross border payments.

Identitii chief executive Nick Armstrong. ( Supplied: Identiti )

In simple terms, it is designed to ensure that information about the sender and beneficiary of a transaction travels with the money at all times.

According to AUSTRAC's statement of claim, however, Westpac decided that this global standard was too expensive and too cumbersome.

"Westpac considered that the SWIFT payment network was costly and not an efficient means of sending low-value, large-volume payments for clients of global banks that need to make and receive payments around the world," was AUSTRAC's damning assessment.

To get around the "inconvenience" of SWIFT, Westpac set up two of its own products: LitePay for small transfers of up to $3,000 — the favoured platform of those sending money to Filipino sex traffickers — and the heavy-duty Australasian Cash Management (ACM) platform, capable of facilitating payments of up to $100 million.

Under the SWIFT rules, all of these payments need to be accompanied by sender and recipient data, regardless of the size. Without this data the global anti-money laundering and counter-terrorism financing (AML/CTF) framework is boxing in a blindfold.

"Regardless of how much money comes in and out, it still has to be reported," said Nick Armstrong, chief executive of the ASX-listed regtech company Identitii.

Mr Armstrong, who has a background in providing technological solutions to just the sort of problem Westpac is mired in now, says the AUSTRAC case is likely to be a landmark prosecution and watched closely around the world.

"Even if a bank is using internal rails, it still has to report, as the transaction crosses country boundaries."

Nesting for bad eggs

As AUSTRAC pointed out, Westpac provided "nesting arrangements" for other banks and financial institutions to shift money around the world without anyone knowing what was really happening, and who was shifting money to whom.

"Some banking services, including those facilitated through non-SWIFT ACM arrangements, involved payments that were not fully transparent," AUSTRAC said.

"In a significant number of cases, Westpac did not record the originator, purpose of payment, beneficiary or jurisdiction of the origin of funds."

AUSTRAC clearly has its suspicions about the big players availing themselves of Westpac "cloak of invisibility". ( Thinkstock: Photodisc )

The nesting arrangements meant banks and corporate customers with links to sanctioned, or high-risk countries — including Democratic Republic of the Congo, Iraq, Libya and Zimbabwe — could set up shop under the cover of Westpac's 200-year reputation for financial sobriety.

However, the non-SWIFT ACM was anything but vanilla banking.

"Westpac had limited or no visibility over the sources of funds … there were no caps or limits on the volume and/or value of cross-border transactions through these arrangements," AUSTRAC alleges.

Data lost

So, who was shovelling around these millions? We may never know, as the kindest thing you can say about Westpac's record keeping is, it was next to useless.

"$11 billion may have been moved through these channels, but Westpac can't show the regulator where it all went. Even after a multi-year remediation project, there is still missing information," Thomson Reuters' Mr Lynch said.

Thomson Reuters financial crime and regulation expert Nathan Lynch. ( Supplied: Thomson Reuters )

"The bank doesn't have the data that agencies like the Australian Taxation Office require to play their role in policing multinational tax evasion."

AUSTRAC clearly has its suspicions about the big players availing themselves of Westpac "cloak of invisibility".

"At all times until February 2019, one correspondent bank maintained two accounts with Westpac, in its own name, each was used to facilitate payments for two large multinationals and their related companies. Each multinational accessed the accounts through the banking logon provided by the correspondent bank."

Mr Lynch says this would have been an invaluable service for the "usual suspects" with their "double Irish Dutch sandwich" exotic tax shifting advice.

"It wasn't about saving micro-cents in the dollar on SWIFT fees. The reality is the structure was an opaque system to get around regulators and the tax office.

"It also meant the bank could save money on its risk and compliance obligations, which is one of the key criticisms from AUSTRAC," he said.

Given global banks all get similar advice, Mr Lynch suspects there may be a flurry of self-reporting about to hit financial intelligence agencies like AUSTRAC.

AUSTRAC's nifty IFTI rules

The whole scam may have not been uncovered had it not been for some foresighted regulation drawn up by AUSTRAC three decades ago, and supported by the Hawke government.

Mr Lynch says the tripwire for banks trying to dodge SWIFT requirements may be Australia's International Funds Transfer Instructions (IFTI) reporting rules. These unique rules require banks to provide reports on every inbound and outbound international funds transfer instruction (or wire transfers) from financial institutions and other remitters.

Australia was the first country to introduce these wire reporting rules in 1991. They have since been adopted by a small cohort of countries, including Canada and Indonesia.

Mr Lynch says these rules are what has given AUSTRAC jurisdiction in this case. He said the vast number of cross-border transfers that major banks handle can give rise to an enormous number of failures — in Westpac's case more than 19.5 million alleged IFTI breaches.

In turn, AUSTRAC's litigation is likely to assist other global regulators, like the powerful US Office of Foreign Asset Control (OFAC), to assess whether banks have been deliberately avoiding the cost and reporting obligations associated with SWIFT.

"The IFTI rules will be the tripwire in these complex, multinational arrangements. They are what has allowed AUSTRAC to shine a light internationally on these types of structures," Mr Lynch said.

OFAC has recent form on banks dodging SWIFT obligations.

Earlier this year it forced a $US611 million ($900 million) settlement on three UniCredit Group subsidiary banks in Europe for dealing with nations subject to various US sanctions.

The case involved some of the same nations believed to have links to accounts nested in Westpac's ACM offering. It also centred on the banks' cunning efforts to circumvent the SWIFT MT202 COV reporting requirement.

Europe's UniCredit banking group was fined $900 million by US regulators for trying to subvert international money transfer rules. ( Reuters: Stefano Rellandini )

What is the cost?

Identitii's Nick Armstrong said using alternative payment rails, such as Westpac's ACM, is not uncommon in banking. There has been a lot of investment in this area, but it needs to be done in a way that still complies with AML/CTF reporting obligations.

"Banks have been spending money on their core systems relating to moving money around, they also need additional infrastructure to collect data … to invest in infrastructure layers that don't sit in the core system," he said.

Mr Armstrong points out while SWIFT's 300-character limit to describe the nature of a transaction may not seem a lot of information, it is substantially more robust than the 10-to-15 characters some non-SWIFT platforms allow. In other words, barely 5 per cent of a tweet.

Westpac spent about $40 million on anti-money laundering compliance costs back in 2008 to get ready for the new global standards.

In hindsight, that seems woefully inadequate given what may be heading down the track from AUSTRAC.

There is a bit of a game in the media guessing how much Westpac will have to pay in penalties; whether it will top CBA's record $700 million fine (likely), or be counted in trillions (unlikely).

Nonetheless, here's another stab at it.

If the bulk of the $11 billion is related to avoiding tax — and who knows, certainly Westpac doesn't — and the corporate tax rate is 30 per cent, reimbursing the Australian taxpayer $3 billion doesn't seem unreasonable.

It would still leave Westpac with a handy $3 billion-to-$4 billion annual profit, more than enough money to plough back into upgrading and strengthening its systems for detecting financial crime.