The prudential regulator has launched a full-scale investigation into Westpac over its money-laundering and child exploitation scandal that could result in bank directors and executives being kicked out of the industry.

And the Australian Prudential Regulation Authority told Westpac it must set aside an additional $500m in capital, bringing the total capital penalty imposed on the bank since the middle of the year to $1bn.

Apra said it would also review Westpac’s governance of risk, including executive accountability and remuneration.

The investigation comes after Australia’s financial intelligence agency, Austrac, launched legal action against Westpac last month alleging the bank breached anti-money-laundering and counter-terrorism finance laws 23m times, including by allowing customers to transfer money to the Philippines in a manner consistent with child exploitation.

It is the latest blow for the bank over a scandal which has already lopped the heads of its chief executive and chairman and earned a second “strike” against its remuneration report from furious shareholders.

Apra said it would cooperate with investigations being conducted by Austrac and the Australian Securities and Investments Commission. Separately, federal police are investigating the payments to the Philippines.

John Lonsdale, the deputy chair of Apra, said Austrac’s lawsuit raised “serious allegations that question the prudential standing of Australia’s second largest bank”.

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



“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.”

Westpac’s chairman, Lindsay Maxsted, who has promised to resign next year as a result of the scandal, said the bank would fully cooperate with the Apra investigation.

“Westpac accepts the gravity of the issues presented by Austrac,” he said in a statement to the stock exchange.

“As previously stated, these shortcomings are unacceptable and we are determined to urgently fix these issues and lift our standards.

“We will provide our full support to Apra through its investigation and review.”

Apra will conduct the investigation using powers that were beefed up after a money-laundering scandal at Australia’s biggest bank, the Commonwealth, in 2017.

The regulator said it would investigate whether Westpac’s governance and risk management framework was adequate, whether its executive pay regime was adequate to manage non-financial risks, whether the bank failed to comply with the banking executive accountability regime, whether it failed to comply with prudential standards and whether it failed to report breaches.

Apra added $500m to the capital requirements of ANZ, Nab and Westpac banks in July due to the “higher operational risk” discovered in self-reviews ordered by the regulator.

The regulator had already hit CBA with an extra $1bn capital requirement after its prudential review discovered problems including complacency and a culture that discouraged criticism.