In brief - There is an increased regulatory focus on the mutual banking sector and management of its risk and compliance with anti-money laundering and counter-terrorism financing obligations
Recent news articles have highlighted the risk that some mutual ADIs are not complying fully with AML/CTF obligations. It is unclear whether this is due to logistical issues, budgetary restraints, or a general assumption that anti-money laundering obligations reside with the big banks.
This represents a critical risk to mutual ADIs.
Australia's AML/CTF (anti-money laundering/counter terrorism financing) regime rests upon a number of key foundations:
- money is checked at the border by AML/CTF reporting entities (the territorial border, the entry point of funds into Australian ADIs from overseas, or the cash/EFT border between a customer and a bank within Australia)
- the regulation of activities rather than institutions, and
- reporting requirements
Once money has crossed the border into the Australian system (and converted from cash into EFT), it is deemed to be clean until it leaves, that is, it changes from EFT to cash (and it must be re-checked on readmission to the Australian system).
The regulator AUSTRAC has recently warned that the $100 billion mutual banking sector faces a “medium risk” of being used by terrorism financiers to launder money1, and that the sector's vulnerability to money laundering and terrorism financing is “high”2.
We anticipate that there will be increased regulatory scrutiny of AML compliance in the mutual banking sector going forward.
Set out below is a checklist of eleven critical governance checks for mutual banks to consider in assessing compliance with the AML/CTF legislation.
1. Activities that make a body an AML/CTF reporting entity
Section 6 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 sets out an exhaustive list of designated services that make a body a reporting entity. They include:
- provision of accounts
- accepting money on deposit
- making loans in the course of carrying on a loans business
- supplying goods by way of lease under a finance lease not to a consumer and in the course of carrying on a finance leasing business
- provision of a cheque book facility in the capacity of an account provider for an account
- bills of exchange, promissory notes or letters of credit by an ADI, Bank, Building Society or Credit Union
- debit cards where the account provider is an ADI, Bank, Building Society or Credit Union
- issuing stored value cards where the whole or part of the money can be withdrawn in cash and the amount is more than $1,000
- issuing stored value cards where no part can be withdrawn in cash but the amount of stored value is more than $5,000
- issuing and redeeming travellers cheques
- issuing money orders for more than $1,000
- giving effect to remittance arrangements as a non-financier
- issuing or selling securities in the course of carrying on a business of issuing or selling securities and derivatives
- issuing life insurance policies and making payments under them
The rules also apply to e-currency/cryptocurrency exchange providers, bullion dealers and providers of gambling services.
2. Reporting entities
A reporting entity must carry out procedures to verify a customer's identity before providing a designated service to the customer.
A reporting entity must also carry out ongoing customer due diligence.
3. Suspicious matter reporting
A reporting entity must give reports to AUSTRAC about suspicious matters.
- where the reporting entity suspects on reasonable grounds that a "customer" is not the person the customer claims to be
- information the reporting entity has in respect of breach of taxation or other laws, including the proceeds of crime legislation
- where the reporting entity suspects on reasonable grounds that the provision of the service is preparatory to the commission of a financial terrorism offense or a money laundering offense
The report must be given within three business days in respect of the non-terrorism obligations, and with 24 hours in respect of the terrorism obligations.
4. Threshold transactions
A report must also be given by a reporting entity if there is a threshold transaction. Threshold transactions involve the transfer of physical currency or e-currency of $10,000 or more.
Parcelling transactions (eg, attempting to pay cash of $9,999 or four lots of $2,500 into an account) can be a suspicious matter and therefore reportable.
Such a report must be made within 10 business days.
5. International funds transfers
These must be reported within 10 business days.
6. Reporting Entities Roll
Providers of designated services must be entered on the Reporting Entities Roll, maintained by AUSTRAC.
7. Electronic Funds Transfers
Electronic funds transfer instructions must include certain information about the original of the transferred money.
8. AML/CTF Programs
The reporting entity must have and comply with an AML/CTF program.
That program is divided into Part A (General) and Part B (Customer Identification).
Part A of the program is designed to identify, mitigate and manage the risk a reporting entity may reasonably face that the provision by that entity of designated services in Australia might involve (inadvertently or otherwise) money laundering or terrorism financing.
Part B deals with know your customer (KYC) procedures.
9. Correspondent banking with shell banks prohibited
A financial institution must not enter into a correspondent banking relationship with a shell bank or another financial institution that has a correspondent banking relationship with a shell bank.
10. Counter-terrorism measures
The regulations may prohibit or regulate the entering into of transactions with residents of prescribed foreign countries. At the moment, those are North Korea and Iran.
11. Record keeping and reporting requirements
There are various obligations in respect of record keeping and reporting to AUSTRAC.
Except as provided under the legislation, an AUSTRAC official must not disclose the information or documents obtained under the AML/CTF Act.
A reporting entity must not disclose that it has reported or is required to report information to AUSTRAC or formed a suspicion about a transaction or matter.
A reporting entity commits a criminal offence if it tips off a customer or other person as to the above.
AUSTRAC publishes a helpful starter guide on AML /CTF obligations here.
1 AUSTRAC report, page 4 https://www.austrac.gov.au/business/how-comply-guidance-and-resources/guidance-resources/risk-assessment-mutual-banking-sector
2 Refer Criminals target mutuals as big banks close money-laundering loopholes, Mark Rodden, The Australian, 30 October 2019
This is commentary published by Colin Biggers & Paisley for general information purposes only. This should not be relied on as specific advice. You should seek your own legal and other advice for any question, or for any specific situation or proposal, before making any final decision. The content also is subject to change. A person listed may not be admitted as a lawyer in all States and Territories. © Colin Biggers & Paisley, Australia 2023.