Westpac to Raise Capital Buffer in Wake of AUSTRAC Crisis

  • Dec 18, 2019 AEDT
  • Team Kalkine
Westpac to Raise Capital Buffer in Wake of AUSTRAC Crisis

APRA Statement Released

In a statement dated 17 December 2019, the Australian Prudential Regulation Authority (APRA) noted that it commenced investigations against Westpac in connection with possible breaches of the Banking Act 1959.

The regulator intends to emphasise on the conduct that led to matters brought forward by AUSTRAC. Also, it would be reviewing the procedures that were adopted by Westpac as part of its rectification and remediation measures.

The investigation aims to identify whether the management and senior members of the bank had contravened the provisions under the Banking Act including the Banking Executive Accountability Regime (BEAR) and APRA’s prudential standards.

Following large-scale allegations by AUSTRAC in relation to the AML/CTF norms against the bank, the regulator aims to ensure that major shortcomings in the bank’s risk management framework are identified and addressed.

Moreover, it would look for the essence behind such disaster while people responsible for these outcomes would be held accountable as appropriate.

As a result, the regulator has also decided to impose an increase of $500 million in capital requirement for the bank to imply the increasing operational risk profile of Westpac. Now, the bank is required to hold $1 billion in relation to the operational risk capital add-ons.

In addition to this, the regular has initiated an extensive review program that would scrutinise the bank’s risk governance. And, this extensive review program would include the review of the measures taken by Westpac to improve its risk governance in the recent years.

John Lonsdale, APRA’s Deputy Chair, stated that the allegation interpreted by AUSTRAC had been asking serious questions in relation to prudential standing of the country’s second largest banking company.

Mr Lonsdale further stated that the bank is financially sound; however, the substantial gaps in risk governance are required to be closed. The scale of allegations made by the AML/CTF regulator also suggests that the investigation is likely to take time.

This investigation is built on the precedent set by 2017’s CBA Prudential Inquiry, which led to an expansion and strengthening of legal powers of the regulator. This investigation would be conducted concurrently with an investigation by the ASIC, and the legal proceedings by AUSTRAC.

Westpac Banking Corporation (ASX: WBC)

Meanwhile, Westpac acknowledged the announcement made by APRA while committing to cooperate in all aspects of the review and investigation. The bank reported that the regulator has required Westpac to hold an additional capital of $500 million.

Also, the bank appointed Promontory to undertake a comprehensive review program, which is presently underway. This program is in addition to the measures taken by the bank under its response plan.

The new operational risk capital requirement would be implemented by increasing risk-weighted assets, and it would become effective, starting from 31 December 2019. As a result, WBC anticipates that the Level 2, CET1 capital ratio would be reduced by nearly 16 basis points, based on the balance sheet dated 30 September 2019.

Westpac’s Response Plan

Late November 2019, the bank had released a comprehensive three-point response plan to address the AUSTRAC allegations.

Immediate Fixes

  • Closed the Cash Management Product, which was the platform at the core of the bank’s inadequacy to identify and report on international fund transfer instructions (IFTIs) to AUSTRAC.
  • The bank reported all the unreported IFTIs to the regulator and appointed independent specialists for a detailed review of such transactions.
  • Close the platform that was used to send small value international transfers.
  • The bank also acted on the customers that were highlighted in the statement by AUSTRAC.
  • The bank increased its financial crime headcount to double over the past three years, and it expects to increase the number by 200 in 2020.

Lifting Standards

  • The bank implemented screening that picks riskier transactions suggesting child exploitation, and these transactions are reported to AUSTRAC within the next 24-hour period.
  • The financial crime function is now reported under the management of Chief Risk Officer, who would accelerate the ongoing AML/CTF program.
  • It also intends to invest over $ 25 million to improve cross-border and cross-industry data sharing and analysis. This will support the regulators and authorities to tackle financial crimes. It seeks to establish a relationship with industry, technology, telecommunication and government partners.

Protecting People

  • WBC would match the International Justice Mission’s (IJM) present level of funding and invest around $ 18 million over three years to mitigate Online Sexual Exploitation of Children (OSEC) in the Philippines.
  • It would make the same level of funding as made by the Australian Government for the SaferKidsPH partnership with other leading institutions. This would see an investment of $ 6 million over six years to raise awareness.
  • The bank intends to consult industry experts about developing a program of actions directed to support the prevention of online child exploitation, and it would provide funding of up to $ 10 million each year for three years to implement the recommendations.

On 18 December 2019 (AEDT 01:48 PM), the WBC stock was trading at $ 24.620, down by 0.081% from the previous close.


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