Australia has passed extensive legislation aimed at tightening the net around those who would otherwise seek to launder money and/or finance terrorism. This law is known as the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the Act) which received Royal Assent on 12 December 2006.
The Act forms part of a legislative package that implements the first tranche of reforms to Australia's Anti-Money Laundering (AML)/Counter-Terrorism Financing (CTF) regulatory regime.
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The reforms undertaken by Australian are a major step towards:
- enabling Australia's financial sector to maintain international business relationships
- preventing and detecting money laundering and terrorism financing by meeting the needs of law enforcement agencies for targeted information about possible criminal activity
- bringing Australia into line with international standards, including standards set by the Financial Action Task Force (FATF).
With the AML/CTF legislation having been in place for 15 months, the Australian Transaction Reports and Analysis Centre (AUSTRAC) has now stepped up its action with the CEO, Neil Jensen warning that "measured but firm" action will be taken against companies that fail to comply. Over the last 15 months, AUSTRAC has not enforced non-compliance penalties ($11 million for companies and up to $2.2 million for individuals) as long as businesses were taking 'reasonable steps' to comply. That leeway period has now expired.
AUSTRAC has confirmed that as at 31 March 2009 (the deadline for compliance report lodgement by reporting entities), only about 51 per cent of expected reports had been lodged. While a challenge is posed on effectiveness and sustainability of the AML/CTF program due to the current economic crisis with organisations reducing staff members, now is the time to act as it is expected that extensions can be sought with the right approach in place.
Financial services are the most popular and vulnerable conduits of money laundering in Australia, ranging from bankers to a one-man-shop brokerage firm and would be targeted by AUSTRAC to ensure compliance.
The Act – Application to financial services
The Act provides that the most relevant financial institution activities for designated services generally include accounts & deposit-taking, cash carrying & payroll services, Currency exchange services, loan services, securities markets/investment services and superannuation and approved deposit funds.
The table below provides a list of financial services considered to be designated services. It is important to note that the list is not exhaustive and that through risk-based processes businesses can identify specific circumstances that may equate to provision of the prescribed designated services. Please refer to the attached decision tree for further guidance on AML/CTF legislation application to your business.
Designated services related to financial services:
Refer to http://www.austrac.gov.au/files/designated_services.pdf for a detailed list.
Obligations for financial service providers
The Act imposes a number of obligations on reporting entities when they provide these designated services. These obligations include:
- adopting and maintaining an anti-money laundering and counter-terrorism financing program (Part 7 of the AML/CTF Act) Part A and Part B
- providing a report on compliance with the obligations under the AML/CTF Act (Part 3 of the AML/CTF Act)
- arrange for an 'independent review' of your AML/CTF program
- arrange for training and awareness of the AML/CTF program
- registering as a provider of a 'registrable designated remittance service' (Part 6 of the AML/CTF Act)
- carrying out applicable customer identification procedures (Part 2 of the AML/CTF Act) & verification
- carrying out of ongoing customer due diligence (Part 2, Division 6 of the AML/CTF Act from 12 December 2008)
- reporting of suspicious matters (Part 3, Division 2 of the AML/CTF Act, from 12 December 2008)
- reporting of threshold transactions involving amounts over a set monetary value (Part 3, Division 3 of the AML/CTF Act, from 12 December 2008)
- reporting of international funds transfer instructions (IFTIs) (Part 3, Division 4 of the AML/CTF Act, from 12 December 2008)
- including information within electronic funds transfer instructions (EFTIs) and obtaining and providing that information when requested by the AUSTRAC Chief Executive Officer (CEO) (Part 5 of the AML/CTF Act, from 12 December 2008)
- record keeping obligations for designated services provided. These include but are not limited to records of customer transactions.
Key issues to look out for
Risk-based approach
The risk-based approach to AML/CTF requires a paradigm shift in thinking, i.e. from reactive to proactive - no longer the slavish adherence to legislation or simply the ticking the box approach.
AML legislation has effectively transferred some of the detective activities of law enforcement into the compliance and supervisory functions. With this comes the inherent presumption that financial services providers are in some unspecified way able to distinguish criminal from legitimate account activity, bearing in mind the fact that money is money and by its very nature is neither clean nor dirty. Indeed, all such reporting entities can reasonably do is point to transactions that, against a given history, might appear unusual – the leap of faith inherent in the approach being that 'unusual 'by definition must equate to 'suspicious'. Add to this the risk that reporting the unusual is driven by a desire to avoid regulatory censure, particularly where business sees such reporting as absolving them of responsibility, leading to a geometric rise in the number of suspicious activity reports.
This poses a big challenge to reporting entities to ensure that they have a sound risk management practise and approach to AML/CTF management.
Risk indicator examples
The following risk indicators are only examples. Through risk-based processes, businesses may identify additional indicators within their systems.
Compliance reporting and late submission
On 31 March 2009, Reporting entities were required to lodge their AML/CTF Compliance Reports for the year ended 31 December 2008 to AUSTRAC.
Entities may be concerned if they missed the deadline and AUSTRAC's general view is that:
- reporting entities are required to comply with the provisions of the AML/CTF Act, AML/CTF rules and regulations from their date of effect or face possible civil penalties for failing to do so
- AUSTRAC urges reporting entities that missed the submission deadline to submit an AML/CTF compliance report immediately
- well-intentioned entities who – at any time – find they are or will be non-compliant, can approach AUSTRAC with a view to negotiating a practical solution.
Independent review
The legislation calls for you to arrange for an 'independent review' of your AML/CTF program. We encourage you to see this review as an opportunity to obtain expert third party comfort that your AML/CTF policies and procedures are being consistently applied on a day-to-day basis in areas such as:
- AML/CTF risk assessment (including risks associated with operations in other jurisdictions)
- KYC policies and procedures (including record keeping arrangements etc.)
- employee due diligence
- ongoing customer due diligence
- suspicious matter reporting.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
