Westpac Chiefs Race to Save Their Jobs as Scandal Engulfs Bank

(Bloomberg) -- As the fallout widens from Australia’s worst-ever alleged breach of money-laundering laws, Westpac Banking Corp. Chairman Lindsay Maxsted has a little over two weeks to win over shareholders and avoid the ignominy of his entire board being ousted.

More than A$7.5 billion ($5.1 billion) has been wiped off Westpac’s market capitalization since the financial crimes agency slapped the lender with a civil lawsuit on Nov. 20 alleging it breached money-laundering laws 23 million times, including failing to detect payments to child pornographers in the Philippines.

A chorus of government ministers are demanding accountability, and Westpac now faces separate probes by the banking and securities regulators that could result in hefty fines.

With a critical annual general meeting looming on Dec. 12, Maxsted and other bank representatives will meet with institutional investors over the coming days to explain how they are tackling the crisis. The fate of Chief Executive Officer Brian Hartzer, 52, could ultimately rest on how those meetings play out.

“The scale of it is just so enormous,” said Warren Staples, a senior business lecturer at RMIT University in Melbourne, who specializes in ethics and governance. “I’d be surprised if the rest of the board would be prepared for it to blow up at the AGM,” he said, predicting Hartzer would be ousted before then to vent the build up of pressure.

The suit against Westpac alleges that between 2013 and 2019, the bank failed to report more than A$11 billion in payments into and out of Australia, mostly using a bank-to-bank system originally designed to help facilitate pensions transfers.

The Australian Transaction Reports and Analysis Centre says Westpac didn’t keep proper records or have sufficient knowledge of where the money was flowing. The breaches were systemic and the result of “indifference by senior management and inadequate oversight by the board,” Austrac says.

The most serious allegations relate to a separate consumer product known as LitePay. The agency says Westpac failed to carry out proper due diligence on 12 customers whose accounts showed repeated low-value payments to countries in Southeast Asia including the Philippines, even though it knew such transactions were a red flag for possible child exploitation. In one case, a customer transferred money to a person in the Philippines who was later arrested for child trafficking and exploitation involving the live streaming of child sex.

It’s the lack of oversight of customer payments linked to child trafficking and child pornography that’s triggered a furor. Prime Minister Scott Morrison last week insisted the board should consider Hartzer’s future, while Treasurer Josh Frydenberg at the weekend said he’d spoken to both the chairman and CEO and “made very clear” the seriousness of the allegations.

Westpac shares fell 1.3% Monday, taking their decline since the scandal broke to 8%.

The bank is in damage control mode.

It issued an unreserved apology on Friday and appointed an independent panel of experts to review its compliance with money-laundering laws. On Sunday, Maxsted released an action plan to “urgently fix” issues exposed by the lawsuit and said it will withhold all or part of executive short-term bonuses as it looks into who’s to blame.

Action Plan

The bank will close LitePay, add another 200 people next year to its 750-strong team tackling financial crime, invest in cross-border data sharing and spend A$18 million to tackle online sexual abuse of children in the Philippines.

The question now is whether that’s enough to win the confidence of investors.

Shareholders typically vent their frustration at AGMs by voting against the remuneration report, and the bank suffered a large vote against executive pay last year as a government-appointed inquiry exposed widespread misconduct across the banking industry. Another such vote on Dec. 12 -- known as a second strike -- could trigger a motion to vote out the entire board.

The chairman may have his work cut out winning support.

The Australian Shareholders’ Association last week said it was “horrified” by the reporting breaches and would decide its response after meeting Maxsted.

The Australian Council of Superannuation Investors, whose members manage more than A$2.2 trillion in assets, is due to meet Westpac representatives this week. A spokesman said ACSI hadn’t yet decided whether Hartzer or indeed the chairman himself should hold onto their jobs.

Looming Fines

Westpac is also meeting with shareholder advisory firms Ownership Matters and Institutional Shareholder Services Inc., whose guidance to institutional money managers on how to cast their votes is often pivotal.

Besides the hit to its reputation, Westpac faces the prospect of multi-million dollar fines.

Commonwealth Bank of Australia was fined A$700 million last year for more than 53,000 breaches of money-laundering rules -- and Attorney-General Christian Porter suggested last week that any Westpac settlement could be higher saying the allegations were “off the charts.”

The Australian Prudential Regulation Authority, which is also looking into the case, can apply to court for a fine of up to A$500 million, according to Frydenberg. It also has the power to disqualify boards and executives.

The Australian Securities and Investments Commission said Monday it has started its own investigation.

Hugh Dive, the chief investment officer at Atlas Funds Management Ltd., said Hartzer wouldn’t need to fall on his sword if he was unaware of the breaches.

“If he didn’t know anything about it, should he be shot?” said Dive, whose Sydney-based fund owns Westpac stock. “My view is that probably he doesn’t have to go, he doesn’t need to fall on his sword if it’s clear that he didn’t know anything about it.”

--With assistance from Sybilla Gross, Harry Brumpton and Jackie Edwards.

To contact the reporters on this story: Emily Cadman in Sydney at ecadman2@bloomberg.net;Angus Whitley in Sydney at awhitley1@bloomberg.net

To contact the editors responsible for this story: Edward Johnson at ejohnson28@bloomberg.net, Peter Vercoe

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