August 2006 Top Story:
**MLI ARCHIVE***
Industry gives nod to improved draft
Australia’s financial services industry has been presented with the risk-based regime it wanted, but will it be able to handle the responsibility of DIY compliance?
Australia’s financial services industry has warmly welcomed the second exposure draft of the Anti-Money Laundering and Counter-Terrorist Financing legislation released last month by the government.
The Minister for Justice and Customs, Senator Chris Ellison, released the 281-page bill on July 13, which has allowed more industries greater flexibility to tailor compliance programs to both the level of threat posed by customers and the risk relating to particular financial products.
What was roundly applauded as a less prescriptive approach was welcomed by bank, accountancy, superannuation and financial adviser bodies.
The banking peak industry body, the Australian Bankers’ Association, was among the first to welcome the second draft. ABA chief executive David Bell said it appeared to be consistent with the detailed agreements arrived at during the roundtable meetings in July until September last year.
“The banking sector is pleased that the federal government is taking a risk-based approach that has the objective of avoiding unnecessary compliance costs,” he said.
Bell’s only comment concerned the transitional arrangements on the commencement of the new regime. It has been widely reported that many bodies are lobbying for a three-year phase-in of the bill, but most believe industry will be given no more than 18 months to comply with the new laws.
Among the more widely publicised changes in the revised bill is the dropping of the requirement for every customer to be classified as low, medium or high risk and the easing of verification requirements for superannuation products. This has been delayed until customers are paid their benefits, as it is considered a low-risk product.
Financial planners will not have to ask questions to ascertain the identity of customers when they provide advice, although they will when a customer buys a product.
Business groups will also be able to share identification information and subscribe to a group-wide compliance program.
A new test requiring staff to have “reasonable grounds” for
reporting a suspicious transaction has been added so as to deter racial
profiling.
On the enforcement front, Austrac can now enter into “enforceable
undertakings” with companies. Under such agreements, companies
agree to take certain actions or face regulatory penalties.
Non-complying companies may be hit with “remedial directions” which they must follow. Both powers are used by regulators including the Australian Securities and Investments Commission, the Australian Prudential Regulation Authority and the Australian Competition and Consumer Commission.
Some have criticised what has been left out. The first draft demanded that banks, mortgage brokers, insurers, financial planners, lawyers and accountants, casinos and other cash-handling industries run background checks on clients according to a strict identification standard.
The second tranche of the rules would cover real
estate agents, pawnbrokers, general lawyers and other non-financial services
institutions.
But following submissions made by all industries covered in the laws,
Senator Ellison has watered this down to allow companies and casinos
to create their own AML/CTF program, incorporating security measures
already used by the firms.
Katherine Forrest, financial services partner in Melbourne office of Mallesons Stephen Jaques, told Money Laundering Intelligence that the firm was happy with many of the changes, particularly the increased scope of the due diligence offences.
“This means that where a person has made a reasonable effort to do due diligence and a money laundering offence occurs, he or she now has a more general defence than what was the case previously,” she said.
Forrest also mentioned there had been good work done on redefining designated services so that they “sticked together more coherently than in the first draft”, although she said more work could be done on this.
“The definitions in the first draft around providing a loan were also very broad – you could have been caught if you were providing credit for goods and services and that was never intended to be the case.”
Certain kinds of financial transactions where you’re dealing on your own behalf were also no longer “caught” by the rules.
“For example, dealing in derivatives on your own behalf. A listed company hedging on interest rates and currency movements would have been performing a designated service but those kinds of self-dealing things have been carved out,” she said.
Owain Stone, head of fraud investigation and dispute services at Ernst & Young, said there might be issues for independent financial advisers who might have to provide products or introduce people to products from a range of different institutions.
“Now if they are being asked by those institutions to do the identification
process, then they have to work out what happens if bank A wants this,
bank B wants that . . . or broker A and B want something else,” he said.
“There is potential for confusion – the devil may be in the detail.”
Stone said he believed the implementation would be less of a technical problem more of a change management exercise.
“It doesn’t matter if it’s GST, Basle II or Y2K. These are all massive change management exercises and there will certainly be a cost which will have to be borne by the customers or the shareholders.”
Joy Geary, an independent consultant on AML, said the correspondent banking requirements were still pitched too high.
“There are some things that an entity simply cannot find out about another bank,” she said.
Geary said she expected organisations to have trouble doing their risk assessments and determining what risk-based means for them. “This is simplified in the rules, which is a good thing. While this is not a weakness in the new draft, I am not sure people really understand how hard this will be.”
She also mentioned the new requirement to report regularly to Austrac on compliance. “This will require underlying systems and processes to be able to produce these reports,” Geary said.
While also welcoming the risk-based approach, Chris Cass, Deloitte’s forensic partner in Sydney, agreed with Geary that a risk-based regime would become “a real challenge to Australian business”.
“I don’t think the Australian financial community is that mature in terms of dealing with a risk-based approach related AML,” Cass said.
“The industry has come out of 18 years of a prescriptive reporting system and now they’re being left do their own thing.”
“I think a risk-based approach is good but I’m issuing a word of warning to industry – the execution of a risk-based approach is a lot harder than actually saying it.”
Banks and other cash-handling institutions covered by the laws have been granted a reprieve from the toughest rules, demanding institutions ask customers where the money comes from, said Cass.
Cass said the hardest question was who was the source of the account – “If it’s an Australian proprietary company regulated by ASIC they don’t have to comply with that rule,” he said.
“The new draft doesn’t meet FATF recommendation number five – the customer identification rules.”
“In a risk-based approach, the subjective element of your customer due diligence program are live issues – it’s about finding out who controls an entity and where they get their money from.”
Cass also said he was worried about whether Austrac’s regulatory strength in the absence of prescription. He said there may be “a huge variety of effort put in”.
“And to be fair to those that implement the full program and who take risk management seriously, they deserve a level playing field managed by the regulator.
“If Austrac doesn’t uphold the standard, then you can just see the problems happening,” Cass said.
At a conference at Sydney University last month, Austrac director Neil Jensen said the rules would meet the global standards.
“We’re compliant or largely compliant with 25 of the 49 global standards and I believe that we will be at least largely compliant with over 40 of the recommendations in this first tranche,” Jensen said.
“With the second tranche we should be well on
the way to the full 49.”
“Not many countries have put this into effect – and we don’t
have a lot of precedent in terms of seeing how it will work.
“That’s a big issue for me as a director of Austrac – how do we ensure compliance with this risk-based, one size doesn’t fit all program.”
DelMonte Publications Aug 2006
