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‘I Didn’t Mean to Break the Law’ Doesn’t Cut It

David Fickling

(Bloomberg Opinion) -- When a bank admits it may have transferred money to the Philippines for customers suspected of sexually exploiting children, you’d better hope it has a good excuse.

That's not the case with Australia’s oldest lender, Westpac Banking Corp. A review the bank commissioned into 23 million breaches alleged by the country’s anti-money laundering agency Austrac concluded Thursday with a slap on the wrist.

“While the compliance failures were serious, the problems were faults of omission,” Chief Executive Officer Peter King said in a statement released with the report. “There was no evidence of intentional wrongdoing.”

That’s not good enough. We set banks far too low a bar if our standard is only that they don't knowingly aid and abet criminal activity. Ensuring that banks don’t unwittingly facilitate such breaches is precisely why they have compliance departments. It’s hardly a defense to admit that Westpac’s internal risk management was so threadbare that it failed to pick up obvious shortcomings over a period of years.

Westpac’s review points to some very zeitgeisty explanations for its failure: that the alleged breaches happened at a time of rapid technological change; that regulators are more focused on financial crime; that the public has higher standards for companies these days; and that corporate boards are now expected to be more interventionist.

Looking at the details of the cases, though, many of the places Westpac fell down would have been familiar to bankers as far back as the Medicis. Managers didn’t know enough about who their customers were, or scrutinize the patterns of their payments to detect suspicious activities. They didn’t look deeply enough into the relationships of their correspondent banks either, exposing themselves to risks one step removed via their banking relationships. And the board failed to interrogate and closely examine these activities.

These aren’t novel mistakes driven by the dizzying speed of life in the 2010s — they’re failures in the compliance culture that should be at the core of operations for anyone in the business of lending money.

Compliance officers have historically been resented within banks, because they’re seen as a cost center whose job is to stop their colleagues from making money. Before the 2008 financial crisis, the risk of a fine from regulators seemed remote, while the reward of revenues from sailing close to the wind was temptingly close. No one wanted internal auditors sticking their noses in and preventing profitable activities or setting up costly reporting protocols. That function is nonetheless crucial if we’re to maintain integrity in our banking system.

For all the report’s talk about sins of omission, weak compliance by Westpac (and its larger peer, Commonwealth Bank of Australia, which paid an A$700 million penalty, or roughly $483.2 million, in 2018 to settle a separate money-laundering case with Austrac) wasn’t an accident.

The way to improve a bank’s compliance capability isn’t a mystery. You simply need to hire and pay more compliance officers and give them more authority throughout the organization, something that banks in most rich countries did after the collapse of Lehman Brothers Holdings Inc. Australia’s lenders kept partying like it was 2007.

Indeed, the increasing sums that Westpac has been spending on compliance in recent years, eating into each profit release, are evidence that the lucrative go-go years weren’t generated by any special genius, other than the choice to turn a blind eye to weak internal regulation.

Take a look at the cost-to-income ratios of Australian banks, a decent measure of how much cash they’re paying out on staff and systems in relation to their revenues. Only in Singapore, Hong Kong, Taiwan, Sweden and Norway do large lenders manage to provide their services at so little internal cost. One way of looking at those figures is to assume that banks in those countries are simply more efficient than elsewhere — but compliance is difficult and expensive, and if you want it done well you may find that your profits aren’t what they once were.Westpac has promised to turn over a new leaf, just as Commonwealth Bank did after settling its Austrac case.

“We completely accept that some important aspects of Westpac’s financial crime risk culture were immature and reactive,” King wrote, “and we failed to build sufficient capacity and experience in some important areas.”

Let’s hope so — but the equity market reaction gives cause for concern. With the S&P/ASX 200 index barely up on the day, Westpac shares jumped as much as 5.4% at the open. If management has truly grasped the nettle on their compliance controls, shareholders are going to have to get used to that spending eroding their profits far into the future.

This column does not necessarily reflect the opinion of the editorial board or Bloomberg LP and its owners.

David Fickling is a Bloomberg Opinion columnist covering commodities, as well as industrial and consumer companies. He has been a reporter for Bloomberg News, Dow Jones, the Wall Street Journal, the Financial Times and the Guardian.

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