Australia’s financial institutions and others have just three months to get their anti-money laundering (AML) programs up to scratch but trouble is already brewing over the second phase of reform. Stuart Fagg reports
There appears to be some confusion in Canberraover how much money is laundered in Australiaannually. According to an estimate on the Attorney-General’s website, it’s $11.5 billion, although that figure is not attributed to any report, research or other credible source. The Australian Institute of Criminology, meanwhile, puts the figure at $4.5 billion per year, a number arrived at through responses from 21 overseas financial intelligence units, 14 Australian law enforcement agencies and 4 criminologists.
Regardless of the actual amount of money laundered here, there’s no doubt that it’s a problem that needs tackling. However, with just under three months to go before around 40,000 Australian banks, credit unions, casinos, bullion dealers and others begin compliance with new customer identification procedures, there are major concerns over the readiness of some.
“I think the larger organisations – the big banks and others – are generally not in a wide state of panic,” said Gary Gill, a partner at KPMG Forensic. “They are pretty much under control because they’ve been at this for some time now. It’s when you go down to some of the tier two organisations – the super funds, credit unions – that you see less progress. You know we still get asked from time to time, ‘are we actually covered by this legislation?’.”
Chris Cass, AML partner at Deloitte, added that organisations that are new to AML have a tough task and may be facing dilemmas on how to get started.
“Those that haven’t been subject to it before, you know are asking ‘where do we start, do we start from the board issuing directions or do we get one person who’s done this before or can comply with through the legal counsel?’,” he said. “There’s a whole variety of ‘how do we get started?’ type dilemmas and I don’t mean that in a derogatory sense. They genuinely do want to get started but they’re not sure whether it’s sort of a top–down-driven approach or whether they need somebody to drive up through the organisation about what needs to happen.”
Those facing the 12 December deadline for compliance will need to be able to demonstrate that they know exactly who they are really dealing with through identification procedures that go further than the 100-point check and that their staff are trained to recognise suspicious activities and transactions. While the new money laundering regulator – AUSTRAC – has provided for a 15-month non-prosecution period for organisations failing to satisfy the customer identification requirements, only those that can show progress towards compliance will be spared prosecution.
The AML reforms also represent something of a new direction for compliance initiatives being among the first major pieces of corporate reform to espouse a ‘risk-based’ approach to compliance. The UK, for example, has recently shifted its AML regulatory focus to a risk-based approach after several years of struggling with a more prescriptive system and a number of countries in Asia are watching developments here with interest.
“There is a lot of interest in what happens here,”said Gill. “I mean we’ve gone for a risk-based approach from day one, whereas in the UK [the risk-based approach] kind of evolved over three to five years.”
However, despite lobbying hard for the risk-based approach, many are struggling with the concept. “I think it’s fair to say that most organisations, even the larger ones are struggling with the risk-based approach,”Gill said. “Everybody was pretty unanimous in saying we want a risk-based approach – we don’t want prescription – but the difficulty is how do you actually apply it and what is high risk? What is high risk for one organisation may be medium or low risk for another. And then I suppose the other side of it is, is the regulator then also has to understand not only the industry but the actual organisation and to be able to assess whether their view of risk is appropriate or not.”
Cass added that the AML programs and the approach to AML compliance have been tainted in some organisations by their experiences of Financial Services Reform (FSR).
“For any regulatory initiative, there’s a whole raft of different ways of looking at it,” he said. “Some just say ‘it’s business as usual, let’s get on; we’re not waiting for any regulatory honeymoon, we’re just going to get on and do this; we know it’s coming’. There are others that feel that AML might mirror FSR – where there’s a lot of change at the last minute. And to the leaders driving this it could be challenging if you go too early.”
While at this stage its thought that the major spending on AML is yet to begin in earnest, there have been concerns that some organisations are looking to implement AML ‘on the cheap’, particularly following the massive investments made in FSR and Basel II implementation. However, there may be a big reputational price to be paid by those caught by AUSTRAC.
“I think Australian business knows the cost of everything but not the value of reputation,” said one AML expert who asked not to be named. “If we can’t all take a lesson out of AWB and the reputation or damage to Australia as ‘Australia Inc.’– quite apart from the sackings and the board and the class actions – what is it going to take in Australia to move the risk management culture onto a more mature level?”
There are also concerns over how little customers currently know about the coming changes to how they will be identified by their banks and others. While it is not expected that every single customer will need to visit their institution and be re-identified, that depends largely on how the risk-based approach is structured.
However, the Federal Government is expected to spend some $13 million on an advertising campaign to inform the public.
So while progress on the first tranche of the reforms has been relatively slow, consultation is underway on how the second tranche will look. While the initial stages cover banks, credit unions, casinos, bullion dealers, the second phase is set to bring real estate agents, dealers in precious metals and dealers in precious stones and a range of non-financial transactions provided by accountants and lawyers into the AML mix. Particular focus is expected to be placed on the real estate industry, which, according to recent Australian Institute of Criminology research, presents one of the biggest risks of money laundering and is the most likely destination for laundered funds in Australia.
According to the AIC, some $651 million of laundered money is invested in real estate every year.
The Real Estate Institute of Australia is concerned, saying it was locked out of consultation on the legislation by the Attorney-General’s department on the basis that real estate agents would not be affected, The REIA expected new legislation to be passed covering the second tranche and is now worried it will be saddled with an “onerous” compliance regime.
National law firm Deacons, meanwhile, also has concerned over the government’s approach to the second phase. It believes the reforms go further than the international rules they are purportedly based on, drawn up by the France-based Financial Action Task Force (FATF). Indeed the long-stated aim of the reforms has been to bring Australia in line with the FATF guidelines. “We consider that the width of the draft designated services extends categories of businesses and professions beyond the scope of the designated non-financial businesses and professions referred to in the FATF recommendations,”wrote Deacons partner Alison Deitz in the firm’s submission to the government.
Minter Ellison, also expressed concern saying there are currently no details of the extent of obligations to be placed on partners at law firms, therefore it cannot properly judge the impact of the second tranche proposals.