Westpac’s chairman, Lindsay Maxsted, has rejected the idea more heads need to be lopped from the bank’s board after he along with the chief executive, Brian Hartzer, and a senior non-executive director announced their resignations in the wake of its money laundering and child exploitation scandal.
The bank’s crisis – which was triggered last Wednesday when Australia’s financial intelligence agency, Austrac, launched a blockbuster lawsuit against it – has also reignited controversy over executive pay in the financial services sector after Westpac told the market Hartzer will receive a payout of almost $2.7m.
It also provoked a warning from ratings agency S&P that compliance scandals were likely to drag down the profits of the big four banks for the next two years and has derailed a pushback, led by Hartzer, against increased regulation of the sector after last year’s royal commission.
Whether investors were told enough about the brewing Austrac lawsuit when they tipped $2.5bn into the bank’s coffers in a 4 November capital raising also came under fresh scrutiny on Tuesday, with Maxsted admitting the regulator told Westpac child exploitation payments were a focus of its regulation in an email on 20 September.
The bank faces a raft of other investigations into the scandal from the Australian federal police, the Australian Securities and Investments Commission and the Australian Prudential Regulation Authority.
Chairman: ‘I was horrified’
Westpac reported itself to Austrac last year over its failure to properly implement anti-money laundering and counter-terror finance laws relating to international fund transfers.
In its federal court lawsuit, Austrac alleges Westpac broke the law 23 million times in transactions involving about $11bn.
But it is a far smaller number of payments to the Philippines that has ignited public disgust and drawn condemnation from politicians. The payments, which were discovered by Austrac during its investigation, are allegedly consistent with child exploitation including live streaming of abuse and the sale of children for sex.
“As soon as I read the statement of claim, like so many people here and outside of this organisation, I was horrified by what was in it,” Maxsted told reporters and bank analysts during a hastily arranged teleconference on Tuesday morning.
“It was not what I expected,” he said, adding that details laid out by Austrac of transactions made by 12 customers were “shocking”.
“So I understood absolutely right from the start how grave the situation was.”
Investors wanted stern action
On Sunday Westpac announced a response that included appointing an external expert to investigate its failings, but Maxsted said investors, who the company met on Monday, made it clear they required sterner action.
Hartzer, who was not on the call, will finish on Monday. While the company searches for a permanent replacement, the top job will be filled by the chief financial officer, Peter King – who was planning to “retire” next year at the age of 49 amid speculation he had fallen out with Hartzer.
Maxsted, who has been on the board since 2008 and chairman since 2011, says he will retire before the middle of next year.
The director Ewen Crouch, who heads the board’s risk committee, will not stand for re-election at the Westpac annual shareholder meeting on 12 December.
Louise Davidson, the chief executive of the Australian Council of Superannuation Investors (Acsi), which gives advice to super funds that control $2.2tn in assets, welcomed the departures but said Westpac needed to consider whether it needed to do more to refresh its board.
“Given all that’s occurred, what are the skills and experience that the board needs and how are they going to make sure they have them?” she said.
She said Acsi had yet to advise its member funds on how to vote at the AGM and would keep talking to Westpac about its plans to investigate how the breaches occurred and make sure they do not happen again.
“We think it’s really important now that they have an opportunity to get on with that work,” she said.
“For the organisation, it will be important to understand what went wrong in the first place, to make sure it doesn’t happen again.”
Maxsted said further turnover of the board would be “very dangerous”.
He said the board and management wanted to demonstrate accountability.
“But we don’t want to go too far so that it’s very disruptive to the business,” he said.
Greens call for CEO salary caps
Hartzer’s $2.68m payout triggered a pledge by the Greens to put forward legislation limiting the pay of banking executives, similar to failed amendments it proposed to the new Banking Executive Accountability Regime that would have capped remuneration at 10 times annual average full-time wages.
“I suggest Westpac CEO Brian Hartzer donate his $2.7 million payout to a charity like Save the Children who have been working tirelessly on the issue of child protection,” the Greens treasury spokesman, Peter Whish-Wilson, told the Guardian.
“CEO resignations aren’t enough. It’s time for tougher measures like jail sentences for any white collar crime and for bank executives to have their ridiculous salaries capped by parliaments and by extension the Australian people. This worked in Israel to stop the rot.”
A bank spokesman said the payout to Hartzer represented his “contractual entitlements”.
Questions asked about capital raising
Westpac shares rose 1.72% on Tuesday on the back of the boardroom clearout, ending a four-day run of losses.
However, the depressed share price means investors who participated in the 4 November capital raising now face taking a loss, instead of the easy profit they would have reaped under normal circumstances.
The leading bank analyst Brett Le Mesurier, of Shaw and Partners, said investors would be asking why the capital raising wasn’t put off until after Austrac filed its court documents on Wednesday, given that the bank already had adequate capital to meet regulatory requirements.
“Why didn’t they wait?” he asked.
“What was the urgency?
“They must have had some indication that Austrac wasn’t that far away [from filing the lawsuit] because they said they were in enforcement phase around the time of the annual report.”
Maxsted said the bank was “absolutely” confident it had met its disclosure requirements in relation to the capital raising.
He denied that the bank ignored the risk posed by anti-money laundering laws but admitted that in the past it “didn’t have enough focus on operational risk and compliance matters”.
“So we’ve really turned the dial up,” he said.
“If you go and think about the [Austrac] statement of claim, much of the material in that statement of claim is because we actually did that.
“So we increased our capabilities, increased our resources, had greater accountabilities, and as a result of that, unfortunately, we found issues.”
Westpac then reported the issues to Austrac, he said.
“The exception to that is that we didn’t see that we had an issue in relation to the LitePay system.”
He said that Westpac first learned that Austrac was investigating LitePay on 20 September, in a “fifth or six notice” issued by the regulator compelling the bank to produce documents.
Austrac followed up with an email on 15 November specifically talking about LitePay and payments into the Philippines.
“That was the first time it was mentioned that there were 12 customers and particular concerns related to them,” Maxsted said.
