How a ‘minor’ negligence led to unspeakable crime…
And why AML is so important
UPDATE September 25th, 2020: Since this article was published — Westpac has agreed to pay AUD $1.3 billion, admitting to breaching AML/CTF laws more than 23 million times.
According to the United Nations Children’s Fund, it is estimated approximately 1 million children worldwide enter prostitution every year. Given the hidden nature of the crimes and the difficulties in identifying the victims, it is challenging to obtain accurate statistics regarding the exploitation against children. In this issue we discuss how one of Australia’s largest banks, Westpac, failed to detect payments linked to child exploitation in the Philippines, uncovering one of the biggest money laundering breaches in the world.
What happened at Westpac?
November last year, before the pandemic swept the world and dominated media reports, a scandal of considerable proportions emerged in Australia. The second largest Australian bank, Westpac, was accused by the national financial intelligence unit (AUSTRAC) for breaching anti-money laundering laws a whopping 23 million times, involving AUD $11 billion in transactions.
Fast forward to present day, and Westpac has admitted to the breaches, though blames technological errors. Citing deficient processes and a resource shortage, rather than intentional acts of wrongdoing — the bank was forced to put aside AUD $900 million to address the potential legal penalty. Though, according to experts, Westpac will likely need to pay more for its negligence.
As the bank goes through its lawsuit, some believe that a larger penalty will be imposed by the Federal Court because the social harm caused by Westpac’s compliance failure is impossible to calculate. After all, its failure to adhere to anti-money laundering and counter-terrorism financing laws allowed for widespread criminality to potentially go undetected — a consequence difficult to measure.
The most disturbing of these crimes include the failure to vet payments that may be linked to paedophilia.
What’s the link between sexual child exploitation and Westpac?
In December 2016, AUSTRAC had given an official briefing outlining the typology of an individual engaged in child exploitation. This typology was meant to be used when upgrading the detection systems of all banks, so that they could automatically catch certain patterns of payments and raise the appropriate red flags.
The financial profile for child abusers provided by AUSTRAC included individuals who send small amounts of money to different people in the Philippines or South-East Asia, despite having no obvious family links. Often, these transactions occur over a short period of time.
While these suspect transactions were to be promptly reported to regulators, Westpac delayed its internal upgrades to catch these red flags until June 2018. In effect, the bank allowed suspicious and harmful transactions from child exploiters to go undetected for at least one year and a half after AUSTRAC’s notice.
Of these, at least 12 suspicious customers were identified by AUSTRAC, who engaged in repeated suspicious transactions sending money to the Philippines. One of which was a convicted paedophile, and another who was linked to live sex shows. In total, these individuals made more than 3,000 seperate transactions and transferred nearly half a million dollars to the Philippines.
Why is the Philippines at risk?
The sad reality is that child sexual exploitation is a lucrative industry with payouts for impoverished families. For the abuse, little equipment is needed — just a webcam and the internet.
Unfortunately, the Philippines is considered a child-exploitation hotspot. One of the reasons is the prevalence of the English language, allowing offenders to easily communicate. Since the Philippines is in a similar time zone as Australia, it also makes it optimal for live streaming.
Secondly, the Philippines is huge on remittance payments. According to the World Bank, the Philippines is one of the top remittance receiving countries. This means the “same financial facility that millions of overseas Filipino workers use to easily send money back home” facilitates sex offenders paying for live-streamed abuse. Depending on age of victim, number of victims, and number of viewers, paedophiles pay anywhere from $15 to $500.
What are the financial red flags?
AUSTRAC leads FINTEL Alliance, the world’s first public-private partnership that brings together government, law enforcement, private sector and academic organisations to tackle this issue. Partnering with major banks, remittance service providers, and law enforcement and security agencies from Australia and abroad, the organisation notes some of the following indicators in its report from November 2019:
- Offenders are difficult to profile and often try to be discreet. Though predominantly male, bank accounts involved in these transactions can also belong to females.
- Facilitators are family members or individuals with societal links to the children. Motivated by financial gain, they will not have an obvious (personal or business) link to the offender purchasing the material. Facilitators may be female.
- Financial Institutions/Remittance service providers: Most offenders use different financial institutions and remittance service providers to send payments to avoid detection. Sometimes, their accounts are closed due to suspicious activity where they then change service providers.
- Reasons for payments may be falsely listed as accommodation, education, school, uniform, medical bills, clothing and toys for children.
- Grooming related payments can occur, where offenders offer gifts or money to build a relationship with a facilitator or victim.
- Countries or regions that are high-risk are the Philippines, Thailand and Mexico. These countries are ranked as “the top source countries for the production and distribution of child sexual exploitation material.”
While the paedophilia piece is the most disturbing part of the Westpac scandal, allegations against the bank include other wrongdoings. For example, in June this year recent revelations raised the estimate for Westpac’s failure to file threshold transaction reports (TRR) — cash transactions of $10,000 or more — from 60,000 to 90,000.
While the bank cites technological errors and ‘errors of omission’ rather than intentional wrongdoing, some believe that the bank should’ve been more proactive, especially given that a scandal of similar proportions emerged in 2018 in the Commonwealth Bank of Australia. In this case, The Commonwealth Bank of Australia was forced to pay the biggest corporate fine in Australian history for allowing drug gangs to launder money.
What does this say about corporate culture in Australia’s banking industry? And will this Westpac scandal leave a meaningful imprint in the compliance sector — or will this all just eventually ‘blow over’, resulting in further negligence?
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