Westpac has agreed to pay the largest fine in australian corporate history to settle a case linked to money laundering, in which it emerged the bank may have facilitated child exploitation by paedophiles.

Australias second-largest lender by market capitalisation said on thursday it had reached a deal with regulators to pay a civil penalty worth a$1.3bn ($920m) to settle a legal action over its failure to properly report millions of transactions.

Westpac admitted that it had not carried out customer due diligence in relation to suspicious transactions with ties to possible child exploitation, according to a statement by austrac, the financial crimes regulator.

The settlement, which is still subject to court approval, follows last years resignation of chief executive brian hartzer, the early retirement of chairman lindsay maxsted and the departure of ewen crouch, who chaired westpacs risk committee, due to the scandal.

We are committed to fixing the issues to ensure that these mistakes do not happen again. this has been my number one priority, said peter king, westpacs chief executive. we have closed down relevant products and reported all relevant historical transactions.

Austrac said that westpac had failed to report international transactions worth more than a$11bn between 2013 and 2019 in a timely fashion, as required by law. westpac breached money-laundering and anti-terrorist financing laws on 19.5m international transfers and failed to pass on information related to the origin and source of some of these payments, the regulator said.

Austrac alleged some were linked to child exploitation in the philippines, according to court documents.

Elizabeth sheedy, a risk management expert at macquarie university, said the reputational damage suffered by westpac had hit home across australias banking sector, already reeling from a recent public inquiry into industry wrongdoing.

This scandal highlighted that banks risk management systems were not up to scratch and im hopeful that we are starting to see reform. its not just the fine but the reputation damage and public shaming, she said. westpac lost three board members from this scandal and executives know they are accountable and their remuneration will be hit by such scandals.

Australian regulators have targeted money laundering more aggressively in recent years as part of a crackdown on terrorist financing and drug crimes. commonwealth bank of australia, the nations biggest bank by market capitalisation, was fined a$700m in 2018 over breaches of reporting rules on suspicious deposits and transfers. at the time the penalty was the biggest in australian corporate history.

Nicole rose, austracs chief executive, said the settlement with westpac sent a strong message to banks that the regulator would take action to ensure the financial system is not exploited by criminals.

Our role is to harden the financial system against serious crime and terrorism financing, and this penalty reflects the serious and systemic nature of westpacs non-compliance, said ms rose.

Shares in westpac fell just over 2 per cent shortly after the australian stock exchange opened on thursday.