Westpac CFO Gary Thursby budgets on a big one
Westpac has sent a clear message to AUSTRAC that it will not simply roll over and settle in the landmark anti-money laundering litigation from the Australian financial intelligence agency.
The bank has admitted to an array of transaction reporting failures, but has also indicated many crucial areas where it disputes the regulator's characterisation of its AML systems and controls. In many areas it has described the failures as technical and IT-related, rather than the systemic risk and compliance failures that AUSTRAC has alleged.
The banking and financial intelligence communities have been waiting on tenterhooks for the statement of defence, after a key mediation deadline between the parties lapsed.
The legal subtleties in the bank's response suggest it may try to target some uncertainties in the law around the quality of AML/CTF compliance programs, which were first identified by Justice Nye Perram in the Tabcorp litigation.
The judge said in non-binding commentary that the law technically requires a reporting entity to have an AML/CTF program but does not require it to be effective. Those uncertainties in the law are yet to be addressed, as AUSTRAC has reached settlements in all of its litigation cases prior to trial.
Financial crime experts said there was still a possibility that Westpac would take its chances in court, given the vast difference in the settlement figures that each side is proposing. Westpac has set aside A$900 million for a potential penalty, which is still significantly short of the $1.5-billion-plus settlement that industry figures believe AUSTRAC is seeking.
"This is a very complex area of law and there's been no cases that have actually gone all the way to trial yet. So, in a sense it would be great for the industry if we got some solid legal precedents," said a compliance lawyer, on condition of anonymity.
Grave issues
In a shock to the market, Westpac chose not to make a formal ASX announcement on Friday when it lodged its defence. The announcement was instead made via a media release. This set it at odds with Commonwealth Bank, which released an ASX announcement and a copy of the concise statement of defence to ensure the market was informed.
Westpac is understood to have taken the view that the disclosures in the half-yearly results were sufficient to keep the market informed.
In the statement on Friday, Westpac said it acknowledged the gravity of the issues raised in the AUSTRAC claim and admitted to a "large number" of AML/CTF breaches.
The admissions include late reporting of 19.5 million IFTIs; a range of record-keeping failures; problems with ongoing customer due diligence; and failures with correspondent banking compliance.
The defence has provided some "explanation and clarity" for the court around a number of the major allegations. This includes the nature of the transaction monitoring and correspondent banking risk assessments that Westpac carried out on its Australasian Cash Management (ACM) and LitePay channels, which sit at the centre of AUSTRAC's case.
The bank said its failure to commence report IFTIs in many cases was due to "technological failures and uncertainty" and "isolated programming errors". These arguments suggest the bank will argue that the "course of conduct" rule should apply in sentencing, which would reduce any penalty significantly.
Focus on the bigger picture
In a positive development, Westpac said it is still working with AUSTRAC on a Statement of Agreed Facts and Admissions, despite missing the May 8 court-imposed deadline.
Most importantly, both parties have stressed they are committed to the bigger picture, which is the long-term collaborative public-private partnership to tackle serious and organised financial crime threats within Australia's borders and beyond.
The parties now expect to return to court in mid-to-late June 2020, when AUSTRAC and its lawyers have had time to digest the statement of defence.
Earlier this month the bank revealed it had unearthed another tranche of financial crime compliance breaches, including 17,870 missing threshold transaction reports (TTRs).
Westpac expects the total number of missing TTR reports, which date back "a number of years", could be as high as 60,000 to 90,000.
The latest breaches have raised the stakes significantly in Westpac's negotiations with the Australian financial crime regulator over the case, legal sources said.
Financial crime lawyers said it was possible that AUSTRAC would lodge an amended statement of claim, including the TTR breaches, to keep the pressure on Westpac. This is the same tactic that AUSTRAC and its lawyers deployed in the cases against CBA and Tabcorp as new evidence came to light.
Silks, suits and bravado
Dirk Feinauer, director of Feinauer Lawyers, a boutique firm in Perth, said the parties were likely to continue mediation alongside the court's formal litigation deadlines. He said there was still a strong statistical likelihood that the matter would be resolved, with an agreed settlement proposed to the judge.
"Most mediations are successful. I think about 80 per cent of matters are settled before trial and mediation plays an important role in this. Mediations tend to focus the mind," he said.
The financial crime professionals who are looking forward to full litigation for some legal bloodshed, and some binding precedents, may be disappointed yet.
"Where the law is not clear it is brave to try and create a precedent. The key questions to ask are: Can we afford to litigate? And can we afford not to litigate?" Feinauer said.
"Much like a war, despite the bravado, no one wants to be on the losing side."
Political dimension
The case has attracted top-level political attention, given the systemic importance of the country's second largest bank. Any financial settlement on AUSTRAC's side would first need to be signed off by Treasurer Josh Frydenberg, Attorney General Christian Porter and Home Affairs minister Peter Dutton.
AUSTRAC's case is being led by the Australian Government Solicitor, which also secured an A$45 million settlement in the litigation against Tabcorp and a record $700 million in the most recent case against Commonwealth Bank.
Westpac has lined up an array of legal advisers and barristers, including law firm Allens, and leading silks John Sheahan QC and Dr Ruth Higgins SC. Sheahan acted for Commonwealth Bank of Australia in its major AML court case in 2018. Peter Haig is the Allens partner advising Westpac. Haig's team includes many of the lawyers who joined Allens late last year from Herbert Smith Freehills, which led both of the previous civil litigation defences for CBA and Tabcorp.