This article is more than 10 months old

This article is more than 10 months old

Westpac’s failure to obey anti-money laundering and counter-terror finance laws allowed a customer to make payments to a person in the Philippines who was later arrested for child sex trafficking and livestreaming child sexual abuse, the financial intelligence agency alleges.

The allegation is just one of more than 23 million breaches of the law – involving more than $11bn in transactions – the bank is accused of in a federal court lawsuit filed by Austrac on Wednesday.

During a hastily called teleconference with reporters on Wednesday afternoon the Westpac boss, Brian Hartzer, said he was “disgusted and appalled” by the allegations, but said he would not resign.

Westpac accused of more than 23m breaches of anti-money laundering laws Read more

“As CEO of Westpac I am very sorry this has happened and we will fix it,” he said.

“I will be personally leading our response to all of these issues.”

In a sign Westpac will not fight Austrac in court, he said he accepted the allegations in a statement of claim filed by the regulator “almost overwhelmingly”.

He refused to estimate how much the bank will have to pay to settle the lawsuit, but based on previous cases it is likely to run into the billions of dollars.

Documents filed by Austrac with the court paint a picture of a bank that for years has failed to take money laundering and terror finance risks seriously, despite executives flagging concerns since at least 2016.

In its most serious allegations, Austrac accuses Westpac of failing to monitor a dozen customers who made frequent transactions that were “consistent with child exploitation typologies”.

These typologies involve “customers with no apparent family ties to the Philippines/south-east Asia, frequently remitting small sums of money to multiple beneficiaries in the Philippines/south-east Asia within short timeframes,” Austrac said in its statement of claim.

Austrac alleges that more than 3,000 payments totalling almost $500,000 went undetected by Westpac for years, even though six of the customers repeatedly travelled to the Phillipines or other destinations in south-east Asia.

Payments that should have been detected were being made as recently as two months ago, it said.

The regulator said “Customer 1”, who paid money to the person later arrested for child trafficking and exploitation, transferred $136,000 to the Philippines between November 2013 and July this year, when Westpac finally detected the payments.

It said Customer 1’s bank account also showed he travelled to the Philippines in 2014 and 2016.

“In October 2014 and November 2014 Customer 1 transferred money to a person located in the Philippines who was later arrested in November 2015 for child trafficking and child exploitation involving live streaming of child sex shows and offering children for sex,” Austrac said in the statement of claim.

“Had Westpac been appropriately monitoring for frequent low value transactions consistent with child exploitation typologies in 2014, these transactions would have come to its attention.”

Austrac does not name the recipients in its court documents, but the November 2015 date approximately coincides with Philippines authorities busting two child exploitation rings, one run by the Australian child rapist Peter Scully, and another run by Filipino women Lyan Tandeg and Shellina Nisperos.

Hartzer declined to answer when asked if any of the money went to Scully or his associates.

“We don’t have visibility about whether or not particular crimes have happened, that’s a matter for the regulator,” he said.

“I can’t comment on any individuals as part of that.”

Austrac alleges that in 2017 another customer, “Customer 3”, transferred money to a suspected “child exploitation facilitator” in the Philippines.

The bank also failed to conduct “enhanced due diligence” in relation to “Customer 12”, who “had a prior conviction for child exploitation offences”, the regulator said.

Hartzer said he learned of the specific allegations against the customers when he read Austrac’s court documents on Wednesday morning.

“I was, like everyone I’m sure, utterly horrified at what I read and am absolutely determined to get to the bottom of why on earth this was allowed to persist for a period of time and make sure that we close it off,” he said.

Many of the transactions took place through a system called LitePay. Austrac said Westpac had been aware of the child exploitation risks relating to LitePay since 2013 but did not fix them until June 2018.

This was even though by May 2016 “Westpac itself had assessed the heightened child exploitation risks associated with low value payments to the Philippines through LitePay and other channels”.

Westpac introduced an automated system supposed to identify suspect payments in August 2016, but by the end of February 2017 the bank knew it had failed to trigger, Austrac said.

It said Westpac didn’t set up an appropriate monitoring system for LitePay until June last year and today still lacks detection methods for other payment channels.

Hartzer said Austrac discovered the payments as part of an investigation the regulator launched after Westpac reported itself for other AML-CTF breaches last year.

Austrac also accuses Westpac of failing to properly assess the risk in dealing with correspondent banks with which it did business.

Some of these banks in turn had “nested relationships with other correspondent banks including in sanctioned or high-risk jurisdictions” including the Democratic Republic of the Congo, Iraq, Lebanon, Libya, Ukraine and Zimbabwe, Austrac said.

Austrac also said that between November 2013 and September 2018, Westpac failed to give it reports within the 10 days required by law about almost three-quarters of the incoming fund transfers it received from overseas banks – some 19.5m transactions totalling more than $11bn.

In addition, the bank failed to file timely reports about more than 12,000 outbound transactions, including more than 2,300 sent through LitePay where “Westpac has never given Austrac a report of each of these instructions”, Austrac said.

Westpac faces a theoretical maximum fine of between $391tn and $483tn, but it is unlikely to be ordered to pay anywhere near that amount.

Last year rival big four bank CBA agreed to pay Austrac $700m to settle a similar action against it in which the regulator alleged more than 53,000 breaches of AML-CTF laws. Given the larger scale of the infringements, the payment Westpac could be facing is likely to be much higher.

“There are a number of established principles by which the court will decide the penalty, and we will wait and see how that plays out,” Hartzer said.

He denied there was a culture of indifference to AML-CTF risks among senior management.

“I agree and accept the findings of the statement of claim almost overwhelmingly – clearly we’ve got to accept that and deal with it,” he said.

Westpac cuts dividend for the first time in a decade as profit falls 15% Read more

“There’s one thing I do take issue with and that is the suggestion that at least at a senior executive level or a board level that we have been indifferent.

“We’ve absolutely not been indifferent on this topic and we have made quite a number of changes over time to the leadership in risk and the leadership in financial crime.”

The Austrac lawsuit is the biggest challenge yet for a bank already mired in controversy and part of a financial sector that has endured years of scandal that reached a climax at last year’s royal commission.

Earlier this month it was forced to cut its dividend to shareholders for the first time since the global financial crisis after profit fell 15%, driven down by $1bn in remediation costs to compensate customers ripped off by its financial planners and overcharged on loans.

It is also at the centre of a political stoush over responsible lending standards after the corporate regulator provoked outrage from government backbenchers by deciding to appeal a court ruling dubbed the “wagyu and shiraz” decision.

Sharemarket trade on Wednesday showed investors did not recognise the Austrac lawsuit as an existential threat, with the company’s stock falling about 3.3% to close the day at $25.67.

• This story was amended at 11.40am on 21 November 2019 to conform with Guardian Australia’s terminology around child sexual abuse