One of Australia’s Big Four banks, Westpac, appeared to have escaped the worst of the damning criticisms of the royal commission into bank misconduct. Its CEO Brian Hartzer, appeared before the commission and emerged relatively unscathed but as Tom Ravlic writes, Hartzer is now out

Compared to its peers, the bank misconduct royal commission in Australia was not too damning for Westpac. Certainly when compared to the battering sustained by Commonwealth Bank and the National Australia Bank.

And it did not take too long after the commission’s final report was released for Westpac CEO Brian Hartzer to begin complaining about the impact of regulation on the business of banking.

This was partly the result of the tightening of lending regulation on the part of the prudential regulator, APRA. But it was also a result of the demand for greater regulatory control of these corporate Gullivers by the ‘Lilliputians’ made up variously of consumers, lobby groups and journalists that have been focused in part on retribution for the conduct that has been revealed in the royal commission and elsewhere.

Hartzer is no longer at the administrative apex of one of Australia’s largest institutions. He was forced out of his CEO’s chair after the latest legal controversy forced his bank into the public eye in a most unexpected manner.

Westpac failed to ensure it reported transactions to the financial transaction monitoring agency, AUSTRAC, that anti-money laundering regulations required it to do. Australian financial journalists were perplexed when the CBA was forced to cough up for a fine of X for several tens of thousands of failures to report.

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The fact that CBA got caught up in the AUSTRAC web fascinated many commentators. And it wound up with that bank’s chief executive officer at the time, Ian Narev, exiting his highly paid post. AUSTRAC and the CBA agreed in June 2018 to an amount of A$700m  to settle the score for the 53,506 transactions that were not reported.

23 million alleged breaches

Few commentators were sufficiently well prepared for the shock to come more than a year later.

Westpac had 23 million transactions that it had failed to report to AUSTRAC. It should be noted that transactions that need to be reported to AUSTRAC are not necessarily transactions that provide evidence of criminal or terrorist conduct. There is, however, the possibility that the transactions reported to AUSTRAC could be identified as being transactions that are linked to known criminals or terrorist group members that use the financial system to shift funds gained from illicit activities to serve other nefarious objectives.

Legal documents lodged by AUSTRAC detailed the regulatory agency’s belief that the bank failed to properly monitor transactions and that Westpac’s systems were poorly resourced. One of Australia’s biggest banks was accused of taking an ‘ad hoc’ approach to dealing with the anti-money laundering compliance.

There were multiple record keeping failures that included but were not limited to Westpac’s failure to provide details of the origin of the funds transferred to it before flick passing them onto another bank to process. This was a failure in the case of 10,521 transactions. The amount involved in that instance was $694 million.

The AUSTRAC activity surrounding Westpac, the NAB and other entities such as AfterPay is not the only regulatory activity that is taking place Down Under in the financial services sector.

Regulators under fire

One of the outcomes of the royal commission chaired by Hayne was the renewed passion from Australia’s corporate regulator to use court action more regularly as its preferred enforcement mechanism.

Regulators across the board came under fire during the royal commission. Hayne condemned the failure of regulators to do anything substantive about the way in which the bankers and other actors in the financial services industry were dealing with their consumers.

It was during a recent parliamentary committee hearing that the ASIC chairman, James Shipton, told politicians that its current enforcement approach is heavily focused on corporate and individual accountability under the law.

“We are prioritising our continuing investigations involving major financial institutions and matters arising from the royal commission. As such, since February 2018 there has been a 24% increase in the total number of ASIC enforcement investigations and a 134% increase in enforcement investigations involving the big six or their officers or subsidiaries,” Shiption said. “We have also progressed a number of matters through the courts.”

Shipton proceeded to rattle off a shopping list of entities that have either been flushed through the legal system with penalties imposed or they were still working their way through the judicial plumbing. The ASIC chairman told the committee that there were entities that decided to admit liability, which cuts down the time spent in front of a court establishing cases against banks.

“[MLC Nominees] and NULIS, which are two entities in the NAB’s wealth management division, admitted to breaches of the law. This is a significant outcome regarding the fees-for-no-service failures. Admissions have also been made by NAB regarding their loan introducer program. Also, we have utilised the courts to clarify important points of law. The appeal decision in the Westpac Securities Administration Ltd and BT Funds financial advice case provides important clarity and certainty to the complex topic of general and personal advice,” Shipton noted.

There are also a string of court cases that the ASIC chairman says were started in recent months in order to follow through on matters that were raised during the banking royal commission.

Comminsure criminal charges

Select AFSL as well as its director are the target of one legal action launched by the regulator. Other actions have also proceeded against Bendigo  and Adelaide Bank and the bank of Queensland related to unfair contract terms.

CBA, the institution plagued with misconduct and poor governance matters throughout the past decade, copped it when criminal charges were laid against Comminsure, an insurance subsidiary, relating to breaches of anti-hawking legislation.

The Commonwealth Bank’s subsidiary pleaded guilty to ringing people without permission to sell insurance products.  The end result? A conviction and a $700,000 fine, which was considerably less than the possible $1.8m fine. Sometimes admitting guilt pays dividends.

“We are also awaiting judgement in our important court action against Dover Financial, AMP Financial Planning and Westpac regarding a former financial planner,” Shipton told the committee.

“On our financial services enforcement work more broadly, we have recently recorded significant criminal outcomes, including imprisonment, relating to particularly egregious matters, including against former financial advisers.”

While the corporate regulator is bringing cases against the banks with a greater degree of enthusiasm than might otherwise have been the case, the ASIC representatives also told the politicians quizzing them that some cases may not meet certain legal criteria in order for the bank to be charged with specific offences committed against consumers.

The NAB introducer scam, which involved a series of referrers findings ways of lying in applications in order to get loans approved to score incentive payments, is one example where deputy chair of ASIC, Daniel Crennan, said that there were complicated factors in loan fraud cases to court. Borrowers are sometimes caught up in telling fibs to the bank in order to secure loan approval.

“The loan fraud cases are characterised by the complicity, in some cases at least, of the borrower in presenting to those that make the credit decisions a false account of their ability to pay,” Crennan said. “That may take place in circumstances where the borrower might have the money but the money is not able to be tested for one reason or another. Perhaps they don’t operate in the ordinary economy, to put it gently.”

Crennan said that a loan fraud of this nature takes place on a basis that is false in the first instance and that there is no role responsible lending rules are able to play here because the decision to lend is based on a misrepresentation of a customers ability to pay.

“Internationally, loan fraud cases are difficult to bring against the individual participants because, often in those circumstances, the beneficiary of the loan—that is, the borrower—is unwilling to cooperate with the authorities, and that is quite well known amongst our peers internationally,” Crennan said.

These court matters are all being heralded as a part of the regulator’s renewed on taking a more aggressive approach to taking banks and other people suspected of breaching law to court.

And now it has even extended its new focus on litigation to auditors in the midst of a fresh debate on audit regulation in Australia.