AUSTRAC has applied to the Federal Court for civil penalty orders against Westpac for deficient oversight of its anti-money laundering and terrorism financing obligations.

Key points: AUSTRAC alleges Westpac breached anti-money laundering laws on more than 23 million occasions

AUSTRAC alleges Westpac breached anti-money laundering laws on more than 23 million occasions The bank recently warned investors it was in discussions with AUSTRAC and it could face a "significant financial penalty"

The bank recently warned investors it was in discussions with AUSTRAC and it could face a "significant financial penalty" AUSTRAC said some of the breaches relate to transfers to the Philippines and SE Asia, raising child exploitation risks

The bank is alleged to have breached the Anti-Money Laundering and Counter-Terrorism Financing (AML-CTF) Act on more than 23 million occasions, including the failure to adequately monitor the accounts of a convicted child sex offender who was regularly sending money to the Philippines.

Westpac more generally failed to "carry out appropriate due diligence on customers sending money to the Philippines and South East Asia for known child exploitation risks," AUSTRAC alleged.

The anti-money laundering regulator is accusing Westpac of failing to report more than 19.5 million international funds transfer instructions to it over a period of five years, for money moving into and out of Australia.

Related to these transfers, AUSTRAC alleges Westpac "allowed correspondent banks to access its banking environment and the Australian Payments System without conducting appropriate due diligence".

Some of these partner banks do business in high-risk countries — such as Iraq, Lebanon, Ukraine, Zimbabwe and Democratic Republic of Congo — potentially allowing criminals, terrorists and sanctioned individuals or governments to transfer money into or out of Australia.

In a very brief statement before the media at Parliament House, AUSTRAC's chief executive officer Nicole Rose described Westpac's behaviour as "serious and systemic non-compliance".

"Serious and systemic non-compliance leaves our financial system open to being exploited by criminals."

AUSTRAC's conscise statement of claim outlines the magnitude of the theoretical maximum fine Westpac could face.

"Westpac has contravened the act on over 23 million occasions, each contravention attracting a civil penalty between $17 million and $21 million," the regulator noted.

Assuming 23 million contraventions at the lower end of those maximum penalties, that amounts to a potential maximum fine of $391 trillion.

As highlighted in the Commonwealth Bank money laundering case, the actual penalty paid is likely to be much smaller — CBA was facing a theoretical maximum penalty of close to $1 trillion, but ended up settling with AUSTRAC for $700 million in penalties for 53,700 breaches.

Westpac's leaders slammed for 'indifference' to problems

AUSTRAC's statement of claim was even more damning of the bank and its management than its media statements.

"These contraventions are the result of systemic failures in its control environment, indifference by senior management and inadequate oversight by the board," it alleged.

"They stemmed from Westpac's failure to properly resource the AML-CTF function, to invest in appropriate IT systems and automated solutions and to remediate known compliance issues in a timely manner.

"They have occurred because Westpac adopted an ad hoc approach to ML/TF [money laundering/terrorism financing] risk management and compliance."

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The regulator said billions of dollars had passed through these arrangements with "correspondent banks" overseas over the past six years alone, noting that "with a significant number of payments processed under these arrangements, Westpac did not and does not know where the funds originate".

AUSTRAC's lawyers said Westpac's failure to have appropriate anti-money laundering programs in place made the total number of breaches "unquantifiable".

"Westpac contravenes section 81 of the act on each occasion it provides a designated service where it does not have a compliant Part A Program in place," they noted.

"These contraventions are too voluminous to quantify and are ongoing."

Westpac transfers exploited by paedophiles

AUSTRAC's concise statement of claim alleged the bank's anti-money laundering monitoring failures allowed paedophiles, including one with an existing conviction, to transfer money that probably resulted in child exploitation.

"Westpac still has not implemented appropriate automated detection scenarios to monitor for the known child exploitation risks through other channels," the regulator argued.

"As a result, Westpac has failed to detect activity on its customers' accounts that is indicative of child exploitation."

Sorry, this audio has expired Westpac faces fines over anti-money laundering breaches

The regulator cited 12 individual customers who had repeated patterns of frequent, low-value transactions through their accounts that were indicative of child exploitation risks, but were not reported to AUSTRAC.

"Some of the undetected transactions involved payments to alleged or suspected child exploitation facilitators," AUSTRAC submitted to the court.

"One customer opened a number of Westpac accounts after serving a custodial sentence for child exploitation offences.

"Westpac promptly identified activity on one account that was indicative of child exploitation, but failed to promptly review activity on other accounts.

"This customer continued to send frequent, low-value payments to the Philippines through channels that were not being monitored appropriately."

In all, AUSTRAC alleged that the 12 customers had between them made thousands of transactions to the Philippines before Westpac finally identified their activities as typical of child exploitation activities.

One of these customers had made payments in 2014 to someone in the Philippines who was later arrested for live streaming child sex shows and offering children for sex.

In all of these cases, AUSTRAC argued that these activities could have been identified earlier had Westpac been properly monitoring the accounts and international transfers.

In several cases, the customers travelled to the Philippines in the period between the transactions commencing and Westpac finally identifying the suspicious activity.

Westpac 'has cooperated with AUSTRAC's investigation'

Westpac revealed the AUSTRAC investigation in its recent annual report, confirming it had been targeted in relation to the bank's "processes, procedures and oversight" of anti-money laundering and counter-terror financing regulations.

The bank confirmed in that report it had received a number of notices from AUSTRAC relating to reporting failures, due diligence, risk assessment and transaction monitoring.

AUSTRAC said the bank had been working with it to address these reporting problems.

"Westpac disclosed issues with its IFTI reporting, has cooperated with AUSTRAC's investigation and has commenced the process of uplifting its AML-CTF controls," Ms Rose added in a statement.

Westpac's annual report had warned an enforcement action by AUSTRAC could result in civil proceedings and the payment of "a significant financial penalty", which Westpac is "currently unable to reliably estimate".

The bank this morning confirmed it had received a legal statement of claim from AUSTRAC.

"Westpac has previously disclosed (including in its full-year 2019 reporting) that it had self-reported a failure to report a large number of international funds transfer instructions (IFTIs) to AUSTRAC and that AUSTRAC was also investigating a number of other areas relating to Westpac's processes, procedures and oversight," it responded in a statement.

Westpac said it had now closed the product that was responsible for many of the breaches and that the majority were recurring, low-value payments made by foreign-government pension funds to people living in Australia.

However, the bank's chief executive, Brian Hartzer, said Westpac was still culpable for allowing these problems to arise and continue for so long.

"These issues should never have occurred and should have been identified and rectified sooner," he said in a statement.

"It is disappointing that we have not met our own standards as well as regulatory expectations and requirements.

"Like many banks around the world, we have been heavily investing in a program of work to improve and bolster the management of financial crime risks, including strengthening our policies, data-feeding systems, processes and controls."

CBA's money-laundering scandal, first revealed by the ABC in August 2017, expedited the scheduled retirement of chief executive Ian Narev and added to pressure that led to the banking royal commission.