AML Scandals Seem to Inevitably Spawn Investor Lawsuits

As we recently blogged, Westpac, Australia’s second-largest retail bank, has been embroiled in a scandal arising from approximately 23 million alleged breaches of Australia’s anti-money laundering/countering terrorist financing (“AML/CTF”) laws and regulations involving nearly $12 billion in transactions. The scandal broke on November 20, 2019 when the Federal Court of Australia filed a Statement of Claim (“SOC”) detailing how Westpac allegedly failed to monitor transactions involving its correspondent banks that, in turn, facilitated child exploitation abroad.

In this post, we discus the Westpac scandal, its massive consequences and the details of follow-on private securities litigation, including in U.S. courts. As we further discuss, the same legal threats continue to bedevil Dankse Bank, the center of the world’s largest AML scandal.

The Allegations

The Westpac scandal centers on its relationship with various foreign correspondent banks and transactions they processed between 2013 and 2019 through three components of its business.

First, pursuant to Australasian Cash Management (“ACM”) arrangements, correspondent banks in Asia would use Westpac’s infrastructure to process payments for their overseas customers through the Australian payments system. Westpac processed billions of dollars in transactions through ACM arrangements during this time frame.

Second, Westpac offered a low-cost international payment service known as LitePay to its customers and certain correspondent banks. This payment platform facilitates low-value international transfers out of Australia.

Third, Westpac offered its correspondent banks “Off-system BSB” arrangements that allowed the correspondent banks to open accounts with Westpac through which its offshore and domestic customers could operate virtual accounts. Each of the three business arrangements presented high AML/CTF risk due to the limited visibility they afforded Westpac into the ultimate sources of the money flowing through their systems.

The Federal Court of Australia found that in facilitating the above transactions, Westpac committed approximately 23 million discreet violations of the applicable AML/CTF laws and regulations. Those alleged violations included its failure to:

• Appropriately assess and monitor the ongoing ML/TF (money laundering/terrorist financing) risks associated with correspondent banking relationships and with the movement of money into and out of Australia;
• Carry out appropriate due diligence on customers sending money to the Philippines and South East Asia for known child exploitation risks;
• Report millions of international funds transfer instructions (“IFTIs”) to AUSTRAC, which is Australia’s financial intelligence unit and AML/CTF regulator;
• Pass on information about the source of funds to other banks in the transfer chain; and
• Keep records relating to the origin of these international funds transfers.

Fleshing out these alleged failures, the SOC alleges that Westpac failed to report to AUSTRAC approximately 20 million IFTIs totaling approximately $12 billion between November 2013 and February 2019. For over 3.5 million IFTIs, Westpac allegedly failed to retain records of the origin of funds. Moreover, Westpac failed to properly assess the AML/CTF risk of its correspondent banks in nearly 100 cases. That is, Westpac failed to assess the nature of the correspondent bank’s relationships, including its customer base and the types of transactions it carried out. Furthermore, it generally failed to adequately ensure its correspondent banks maintained their own sufficient AML/CFT controls.

The Securities Suits

News of the scandal rocked Westpac and its consequences immediately began to follow, including the ouster of its Chief Executive and the Australian Prudential Regulation Authority (“APRA”) instruction to set aside nearly $1 billion in reserve for potential regulatory penalties. The direct fallout from Westpac’s AML/CTF violations will continue as regulators and enforcement agencies pursue and complete their investigations and Westpac’s own internal investigation proceeds.

No less threatening to the bank, however, are the collateral consequences that are beginning to (predictably) emerge in the form of private litigation against the bank. As we have blogged before concerning other large multi-national AML scandals, a scandal of this magnitude has a significant impact on the market value of the entity itself and its derivative securities. Like other foreign (to the U.S.) companies, Westpac trades American Depositary Receipts (“ADRs”) in the United States on the New York Stock Exchange. ADRs provide American investors a vehicle for investing in foreign companies. Typically, a U.S. bank will issue ADRs that represent specific numbers of shares in a foreign company’s stock. The value of a company’s ADR is tied directly to – and generally parallels – the value of its domestic shares.

In Westpac’s case, immediately upon release of the SOC, its stock price dropped 2%. By November 24, 2019 – 4 days after the filing of the SOC – its price had dropped 18%. By mid-December, its market value had dropped nearly $6 billion. And investors were swift to act with the first round of securities fraud suits filed against Westpac in the first few weeks of 2020.

For instance, in Byrne v. Westpac Banking Corp., et al., Case No. 3:20-cv-00171 (D. Or.), John Byrne filed a class action complaint (the “Complaint”) under the federal securities laws on behalf of purchasers of Westpac ADRs between November 11, 2015 and November 19, 2019. The Complaint names as defendants Westpac and its principal executives and asserts a claim for securities fraud under Section 10(b) and Rule 10b-5 against all defendants and a claim for control person liability against Westpac’s former executives under Section 20(a) of the Exchange Act.

The Complaint sets forth a theory familiar to those who have followed previous money laundering scandals that yielded securities fraud actions. The Complaint sets forth how from 2015 through 2019, Westpac made certain disclosures concerning its AML/CTF compliance that turned out to be “false and misleading.” For instance, in its 2015 Annual Report on Form 20-F, Westpac stated that in Australia, it maintains “a Group-wide program to manage its obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 [and w]e continue to actively engage with the regulator, AUSTRAC, on our activities.” Westpac made an identical disclosure in its 2016 Form 20-F filing and a substantively similar disclosure in its 2017 Form 20-F filing.

In its 2018 Form 20-F, Westpac described the then-recently enhanced requirements of Australia’s AML/CTF laws and its efforts to continue ensuring its compliance with those regulations. However, it further disclosed that it had:

recently self-reported to AUSTRAC a failure to report a large number of International Funds Transfer Instructions (IFTIs) in relation to one WIB product. These IFTIs relate to batch instructions received from 2009 until recently from a small number of correspondent banks for payments made predominantly to beneficiaries in Australia in Australian dollars. Through the product, Westpac facilitates payments on behalf of clients of certain of its correspondent banks. The majority of the payments are low value and made by Government pension funds and corporates. The Group is investigating and working with AUSTRAC to remediate the failure to report IFTIs. Further details regarding the consequences of the failure to comply with financial crime obligations are set out in the Risk Factors section of this report.

Subsequently, in a May 2019 conference call with investors, Brian Hartzer (“Hartzer”), Westpac’s former Chief Executive Officer (“CEO”), “downplayed the Company’s interaction with AUSTRAC, stating, in pertinent part: ‘We also have a few regulatory and compliance issues to work through. These include things like the responsible lending and general advice cases and an issue we’re working through with AUSTRQAC on a failure in WB to report certain domestic payments that we made on behalf of a small number of international correspondent banks.’”

Later, Westpac filed is 2019 From 20-F Report expanding on its 2018 disclosure and describing how:

AUSTRAC has issued a number of detailed statutory notices over the last year regarding information relating to the Group’s processes, procedures and oversight. These notices relate to a range of matters including these IFTI reporting failures and associated potential failing related to record keeping and obligations to obtain and pas on certain data in funds transfer instructions, as well as correspondent banking due diligence, risk assessment and transaction monitoring.

It continued: “Any enforcement action against Westpac may include civil penalty proceedings and result in the payment of a significant financial penalty, which Westpac is currently unable to reliably estimate.”

According to the Complaint, these statements were “materially false and/or misleading because they misrepresented and failed to disclose the following adverse facts pertaining to the Company’s business, operations and prospects, which were known to Defendants or recklessly disregarded by them:

(1) contrary to Australian law, the Company failed to report over 19.5 million international funds transfers instructions to AUSTRAC;

(2) the Company did not appropriately monitor and assess the ongoing money laundering and terrorism financing risks associated with movement of money into and out of Australia;

(3) the Company did not pass on requisite information about the source of funds to other banks in the transfer chain;

(4) despite being aware of the heightened risks, the Company did not carry out appropriate due diligence on transactions in South East Asia and the Philippines that had known financial indicators relating to child exploitation risks;

(5) the Company’s AML/CTF Program was inadequate to identify, mitigate and manage money laundering and terrorism financing risks; and

(6) as a result, Defendant’s statements about its business, operations, and prospects, were materially false and misleading and/or lacked a reasonable basis at all relevant times.

The Plaintiffs further claim that “Westpac ADRs fell $1.25 per share over the next three trading days or over 7.13% to close at $16.67 per ADR on November 22, 2019, damaging investors.” Their theory of liability is that this stock drop evidences that Westpac’s stock price had been artificially inflated by the misrepresentations detailed above, the truth of which they relied upon in purchasing Westpac securities.

The Litigation Moving Forward

It is likely that this suit is merely the first of many Westpac will face over the developing scandal. However, it can look to other similar recent litigation for a roadmap to follow and, potentially, a way out. As we blogged before, Danske Bank is facing multiple securities fraud suits from holders of ADRs claiming damage from the occurrence of its own substantial money laundering scandal. After several rounds of pleading, the plaintiffs in Plumbers & Steamfitters Local 773 Pension Fund, et al. v. Dansk Bank, et al., Case No. 1:19-cv-00235 (S.D.N.Y.) have settled on an operative complaint – their third amended complaint (the “TOC”).

On September 13, 2019, Danske moved to dismiss the TOC, arguing the investors’ claims fail to state a viable cause of action under Rule 10b-5 and “seeks nothing more than to transform deficiencies in Danske Bank’s anti-money laundering controls into allegations of fraud.” As in the Westpac case, the theory of the Danske plaintiffs is that the bank defrauded investors by misrepresenting is AML/CTF compliance and failing to disclose facts known to it concerning substantial AML/CTF violations out of its Estonian branch. Admittedly over-simplifying the Danske motion to dismiss, Danske essentially argues that generalized statements about compliance with applicable regulations are insufficiently specific to constitute “material misstatements or omissions” under the Private Securities Litigation Reform Act (“PSLRA”). Nor can the plaintiffs adequately allege the scienter required under the PSLRA existed at the time the alleged misrepresentations and omissions were made because those statements merely reflected the facts known and/or believed as they developed through the course of investigation and additional investigations.

Opposing dismissal, the Danske plaintiffs argue that the facts of the money laundering scandal were known to and disregarded by senior management who prioritized maintaining the bank’s inflated valuations.

Argument has not been scheduled on the Dankse motion yet, so resolution of the bank’s challenges to the investors’ claims is still months away. But, the ultimate decision there is likely to provide the Westpac parties real and substantial guidance as to the path their suit will take.