Don’t launder your good name

Australia’s largest listed company, the (now slightly less) venerable CommBank, can be credited with many things; not least bringing Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations – and breaches of said regulations – to the forefront of Australians’ minds. While those in financial services and other affected sectors have long been aware (or at least, should have been aware!) of the regulations, and the various obligations imposed by them, many people would have been living in blissful ignorance. Not any longer!

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) is administered by AUSTRAC and covers a range of sectors that include financial services, gambling, bullion dealers and mortgage brokers. Interestingly Australia’s AML/CTF laws do not extend to real estate – no surprise then that a very recent UBS study found that many foreign-owned apartments were purchased with cash.

The AML/CTF Act was launched to bring Australia into line with international best practice, to identify instances of money laundering and terrorism financing, and ideally, bring the perpetrators to justice.

Most reading this will be familiar with Part B of the AML/CTF regulations – the client due diligence procedures. Every reporting entity (i.e. every business in the relevant sectors that deal with client funds) must know their client and understand each client’s financial activities. Yes, it added an enormous amount of paperwork to a myriad of businesses – banks, brokers, financial advisers, managed account and platform providers…the list goes on.

A reporting entity must have procedures in place to monitor clients and transactions, and lodge reports with AUSTRAC within a specified timeframe – something else our friends at CommBank failed to do.

The financial planning sector

In early 2016 AUSTRAC undertook a risk assessment of the financial planning sector; after all, it’s a sector where ‘know your client’ is well and truly enshrined in law and an established practice; advisers should be in the box seat when it comes to identifying suspicious behaviour by clients, new and established.

AUSTRAC divided the financial planning cycle into its component parts and found that criminal offences could occur at any stage, ranging from the establishment of the adviser-client relationship and requisite data collection, through to eventual withdrawal of investment proceeds. To help financial advisers recognise and report potential criminal activity, AUSTRAC developed a poster that identifies different types of crime and the red flags to watch for.

AUSTRAC’s report suggested that the AML/CTF risk factors are ‘medium’ in the sector, but could be somewhat under-reported. From the approximately 25,000 advisers working for 1,574 planning practices, only 271 suspicious matter reports (SMRs) were made over two years from 1 April 2014 to 31 March 2016. Squeaky clean clients or nefarious goings on escaping detection? The CommBank experience shows that wherever there’s a loophole, there’s someone waiting to exploit it. Not that I am suggesting the existence of such loopholes in relation to financial planning, however, it’s good practice to ensure they don’t exist and report anything suspicious. As well as the well-publicised financial penalties, there are knock on effects that could impact individual businesses, or the sector as a whole. These might include:

  • Financial losses arising from criminal activity
  • Increased PI and other insurance premiums
  • Reputational and brand damage
  • PR and marketing costs associated with repairing reputational and brand damage
  • Loss of clients
  • Increased scrutiny and regulatory action.

The broking sector

A full-service stockbroker has the same AML/CTF obligations as a financial adviser. While an execution only broker, such as OpenMarkets, has a slightly less onerous task, it is still required to verify each and every client’s identity, quite a chore in itself. This includes a requirement to:

  • Verify the identity of applicants/director/trustees and any additional beneficial owners (retail clients only)
  • Verify Trust and Super Fund names and ABNs
  • Collect information as to whether applicants/director/trustees is a Politically Exposed Person (PEP)
  • Collect information as to whether any beneficial owners that are not applicants/director/trustees on an account is a PEP
  • Collect the names of any additional directors on company accounts that are not applicants.

Clients can choose to provide hard copy certified ID (the usual 100-point check) or can consent to an electronic verification check.

Interestingly, verifying someone’s identify simply verifies that they’re a registered human being – it does not verify that the person completing the application is the person they say they are. OpenMarkets is currently reviewing biometric identification technology to make identity fraud much easier to recognise.

The potential outcomes of money laundering and funding of terrorism

Aside from the obvious outcomes of criminals freely laundering the proceeds of crime and terrorists raising funds to commit further atrocities, one of the less expected potential outcomes is the prospect of changes to our currency. There are some suggestions that Australia should follow India’s lead and get rid of larger denomination notes, $50 and $100. The 53,000+ CommBank transactions ably demonstrated that criminals prefer pineapples and granny smiths.

Even before this hit the fan and the headlines, the longevity of the $100 note was in question. Late last year the government announced a taskforce to review the black economy, in which there is an estimated $21 billion of unrecorded and untaxed cash payments – and once again, the green note in rumoured to feature heavily. While some have called for its demise, other proposals include an expiry date on notes (which has added benefits – it may stop the hoarding of $100 notes by pensioners and foreigners) or a high-tech solution such as an embedded tracking device.

There is no doubt that CommBank’s errors (all 53,700 of them) will have significant fall out. If AUSTRAC has its way and has each and every breach treated as individual incidents, the total fine could be greater than the bank’s market cap. While a fine of that magnitude is unlikely, there will be a financial punishment that has already hit the share price and raised the spectre of an investor class action. While Chief Executive Ian Narev lost his bonus and his job, the damage done to CommBank’s reputation is hard to measure and could damage the brand for years to come. That’s just one of many good reasons to ensure you meet your AML/CTF obligations, and do so in a timely manner.

General Advice Warning
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