© ABC News / Alistair Kroie
The revelations have already cost the bank one high-profile customer, child protection advocacy group Bravehearts.
"Child sexual assault and exploitation happens in the darkest of corners and Westpac had an opportunity to shine a light on it. Instead they showed an unbelievable and inhumane disinterest," said the group's founder Hetty Johnston.
"There are rules and regulations in place so this doesn't happen but it seems Westpac has opted to ignore them. Every organisation has to take responsibility for protecting our children and if Westpac hasn't been doing that, we simply can't keep banking with them."
In its statement of claim, anti-money laundering watchdog AUSTRAC outlined 12 customer cases where repeated suspicious payments were made to the Philippines in a pattern that should have raised red flags about potential child abuse.
It also said that while LitePay has now taken steps to improve its monitoring, other Westpac services still present opportunities for high-risk transactions to be made to the Philippines and South-East Asia without alerting the bank or regulator.
So how were paedophiles exploiting Westpac's banking services and why was this allowed to continue for so long?
LitePay offered low-cost transfer option
As anyone who has had to send money overseas for legitimate purposes knows, international funds transfers generally cost quite a bit of money.
So Westpac set up a service for its account holders that offered lower cost transfers to Britain, the eurozone, India and the Philippines, with the prospect of money being received within hours.
In this instance, it is transfers to the Philippines that have raised the biggest concerns.
"The Philippines is a country well known to be frequented and visited by travelling child sex offenders and [with the rise of the internet] people can access it online more easily," said child protection advocate Karen Flanagan from Save the Children.
"This knowledge is not new — institutions and banks should know this is a risk in their business and they should have taken steps to mitigate it."Westpac was supposed to have done this for LitePay, particularly after several official reports highlighted the risks as early as 2013.
Yet Westpac had no such system in place on LitePay until August 2016, and that initial system didn't work. No alerts were issued.
In December 2016 AUSTRAC provided banks, including Westpac, with a briefing outlining the typical financial profile of someone engaged in child exploitation that should raise red flags in automated detection systems.
The banks were told to look for people with no obvious family links to the Philippines or South-East Asia, who were sending small sums of money to lots of different people, often over a short period of time.
The banks were told to report such transactions to regulators.
But it was not until June 2018 that Westpac finally implemented a detection system that functioned correctly. It still doesn't have appropriate detection systems in place on other products through which money can be transferred to high-risk areas of South-East Asia.
How the system was exploited
Over the years that Westpac didn't have adequate monitoring in place, AUSTRAC's investigations uncovered at least 12 instances where it appears customers transferred money to pay for exploitation, such as child sex shows and child prostitution.
All 12 exhibited the tell-tale signs of engaging in overseas child exploitation.
There were frequent transfers of relatively small amounts to multiple recipients in the Philippines using LitePay and other Westpac services. In several cases, the customers also travelled to the Philippines, which Westpac should have been aware of due to activity on their accounts.
While not outlined specifically in AUSTRAC's statement of claim, the clear implication is that these payments were made for child exploitation, such as the live streaming of child sex or procurement of children for sex while these people were visiting the Philippines.
In all, these people transferred almost half a million dollars to the Philippines in more than 3,000 separate transactions.
Hetty Johnston outlined the human effect of the failure to detect and report these transactions earlier.
"Over 3,000 transactions translates to over 3,000 occasions where a child endured unimaginable, yet preventable, sexual and physical trauma while seemingly Westpac didn't care enough to undertake their regulatory oversight."What will be the consequences for Westpac?
Aside from the lack of reporting around suspicious transactions that should have raised child abuse red flags, Westpac is also in AUSTRAC's firing line for the non-reporting of around 19.5 million international funds transfers, plus numerous other alleged breaches of the law, taking the total to 23 million.
Given that each breach of the law carries a maximum penalty of $17 million to $21 million, that exposes the bank to a theoretical liability in the range of $400 trillion — equal to about a century of Australia's total current annual economic output.
That obviously isn't practical. So the more likely outcome is a settlement or court-determined penalty based on the precedent of CBA's $700 million AUSTRAC fine in 2018.
However, given that Westpac has committed more than 400 times as many breaches, some of which are extremely serious, it seems quite likely its penalty may break CBA's record fine.
Given the financial and reputational damage to the bank, there is also increasing pressure on its senior management and board to step down as a result of what AUSTRAC described as their "indifference" and "inadequate oversight" that led to the "serious and systemic" breaches of the anti-money laundering laws.
How are these banks identifying that these people don't have family members, relatives or friends in the Philippines? Unless they have some sort of unusual access to more complete online activity and contacts of customers..?