Both the Australian Securities and Investments commission (Asic), which has responsibility for corporate conduct and the Australian Prudential Regulatory Authority (Apra), which oversees the governance and financial health of deposit taking institutions, have stepped in.
“Asic can confirm that it commenced an investigation on Thursday, 21 November 2019, concerning possible breaches of legislation it administers arising from Austrac’s actions in relation to Westpac,” a spokesperson said.
The investigation is likely to consider whether Westpac directors have breached their duties as directors, whether there have been breaches of the continuous disclosure rules, which require public companies to inform the market of all matters that could affect the share price, and whether there are any other corporate conduct matters that contravene legislation.
Aside from the question of whether the directors performed their duties as stewards of the company on behalf of the shareholders, there will be other questions as well.
Offer documents disclosed the Austrac investigation as a key risk, but did not say the matter involved 23m possible breaches.
Asic is also responsible for issuing financial services licences, which Westpac and other banks hold. Those licences carry a requirement to act honestly and fairly and this too is set to be investigated by Asic.
Meanwhile, the law firm Phi Finney McDonald is investigating a class action against Westpac on behalf of shareholders who acquired shares before 19 November 2019.
It will allege the bank breached its continuous disclosure obligations.
“Austrac’s allegations against Westpac are deeply troubling,” said Tim Finney, Phi Finney McDonald director.
“Modern institutional investors take corporate governance issues extremely seriously. The suggestion that a major bank could be so lax with its anti-money laundering systems that it potentially facilitated child abuse and exploitation is about as serious as it gets.”
The Apra investigation is likely to focus on governance issues and whether the actions of Westpac transgressed the Banking Executive Accountability Regime (Bear).
The Bear, which establishes heightened standards of accountability among authorised deposit-taking institutions such as the major banks, came into force in July 2018 as a response to the revelations in the banking royal commission.
It spells out the responsibilities of directors and executives of financial institutions and is the main way the government hoped to restore some faith in the battered sector. It also includes enhanced prudential reporting and controls, which could hit Westpac’s bottom line.
While the bulk of breaches are alleged to have occurred before the Bear came into effect, Austrac claims some continued as recently as Wednesday, when it filed its lawsuit.
“Apra confirms it is looking into governance issues at Westpac following the Austrac action,” a spokesman said.
“Apra is considering whether the alleged breaches (and any potential penalties) have implications under Bear, or raise other prudential concerns that require a response from Apra.
“However, as the treasurer noted, the Bear is not retrospective, and therefore its potential application may hinge on the timing of the alleged offences,” it said.
But sources said Apra could potentially take action under other pre-existing powers.
In July, Apra made Westpac add an extra $500m to its prudential capital buffer for identified weaknesses in Westpac’s governance and non-financial risk management, following a self-assessment by the three other banks in the wake of the CBA revelations of breaches of the money-laundering laws.
“Apra is currently monitoring a major remediation program the bank is carrying out to address identified weaknesses,” the regulator’s spokesman said.
On Sunday Westpac’s chairman, Lindsay Maxsted, broke his silence on the crisis gripping the bank, issuing an update on the bank’s response to the Austrac investigations.
Among the actions he flagged were an immediate closure of LitePay, which was allegedly used by paedophile networks to send payments to the Philippines, without raising any red flags, and doubling the number of staff working in financial crime to 750 people. Maxsted said it would add $80m to the bank’s costs in 2020.
But contrary to reports that executive bonuses had been scrapped, the release said that 2019 short-term variable bonuses had been “withheld” for the full executive team, “subject to the assessment of accountability”.
Meanwhile, Westpac’s executives and the board have scheduled crisis meetings with institutional investors, which include many of the largest superannuation funds.
The Australian Council of Superannuation Investors, which represents $2.2 trillion invested in Australian companies, is one of the bodies which will be seeking answers before it makes recommendations to its member companies on actions they can take.
Chief executive Louise Davidson said the failure of the board alleged by Austrac was “incredibly concerning”, especially in light of the long time period over which these issues occurred.
“We expect the board and CEO of Westpac to clearly explain how the issues identified by Austrac occurred and where accountability will fall. Investors take these matters seriously and will be engaging with the board ahead of the AGM.”
Westpac’s AGM is due to be held on 12 December.
Moody’s issued a report saying: “The allegations are credit-negative because of the damage to the bank’s reputation and the adverse financial impact from potential fines and costs related to remedial actions. “
While Moody’s said it was too early to estimate the value of any potential penalties, it noted that Commonwealth Bank has been fined $700 million by Austrac in relation to its breaches.
The ratings agency concluded that a similar sized fine would be manageable for the smaller Westpac, given the $6.8 billion profit the bank reported for the fiscal year ending 30 June (fiscal 2019).
This post first appeared on The Guardian.