Fighting financial crime in banking – Australia & New Zealand
There has been a global increase in AML regulations as the fight against financial crime intensifies across global borders. With increased sanctions, new age threats, need for stronger risk detection, monitoring, and risk profiling, compliance teams in banks will need to adopt stronger defence models to combat the rise in financial crime.
Financial Crime and Compliance teams will be aware of the difficulty AML and Customer Due Diligence (CDD) efforts can bring, and the dense web of requirements to follow. With automation technology constantly evolving and laws and regulations shifting to become more robust, teams will need to ensure that they are taking a resilient stance on financial crime. As criminals adopt new methods to infiltrate compliance weaknesses, financial crime and compliance teams in Australia and New Zealand will need to increase the talent and systems to ensure that resilient and robust processes are implemented to avoid hefty fines and reputational damage.
Current financial crime landscape in Australia and New Zealand
According to a recent LexisNexis Risk Solutions Study, it is predicted that Australian Financial Services Firms will spend more than AUD $3.6 billion on Financial Crime Compliance in 2022. In the past 18 to 24 months, Australian financial firms have been exposed to increased financial crimes, with money laundering being ranked as the top risk in compliance operations by 80% of Australian compliance specialists working for financial institutions. The study also revealed that respondents stated that third-party professionals, such as accountants and attorneys, assisted money launderers in repurposing the proceeds of base crimes.
Another area of significance will be the industry’s expectations of the implementation of AML Tranche 2. In Australia, we are seeing increased risk and the need for more compliance, especially from Designated Non-Financial Businesses and Professions (DNFBPs), with similar vulnerabilities to the financial sector.
It is anticipated that the so-called AML/CTF Tranche 2 would be passed sooner than expected, highlighting the need for more stringent AML/CTF processes and systems. This is indicative that Australian regulators are making AML/CFT a priority to meet global standards in combating money laundering and terrorism financing.
In New Zealand, the National Risk Assessment has highlighted drug trafficking, fraud and tax evasion as the three key financial crime concerns that the country must deal with. Lawyers, real estate agents and high value dealers are also considered to be high risk money laundering typologies, closely followed by cash and remittance. Physical cash, cash in bank accounts, homes and automobiles make up most forfeitures and restraints, and as a share of the estimated domestic crime proceeds, they are much greater than estimated global averages[1].
New Zealand is further ahead with regards to its AML/CTF regulatory environment. They took a more moderate approach when introducing AML/CTF obligations on DNFBPs. The approach taken in those jurisdictions was to either provide reporting exemptions based on legal professional privilege or where the information is obtained in circumstances where the relevant communication is privileged. Australian firms should adopt robust Know Your Customer (KYC) and customer due diligence measures to grade customers, companies, and source funds for risk to monitor for the second stage of money laundering, known as layering.
The Australian and New Zealand banking sector poses a serious AML risk – but will technology adoption be key?
Regulators feel that firms’ existing AML systems and controls (including those in relation to which shortcomings have already been identified by the regulators) do not all share the same purpose to mitigate current and new risks, meaning that current AML systems may not be as purposeful as they should be. Increasing AML regulations, evolving criminal threats, and ongoing pandemic effects have ultimately resulted in increased investments in the need for talent and technology.
CDD is one area of compliance that is frequently investigated. Even though the processes are straightforward, many banks and other financial organisations still get it wrong. Many firms look to automation to fill these gaps, but the reality is that technology needs to be overseen by adequately skilled people. In many circumstances, transaction monitoring alarms need to be strengthened, which can only be done with the correct combination of people and technology.
Some of the biggest existing challenges in compliance teams are a combination of data quality, gaps in IT infrastructure, ineffective internal tools, system failures, and outdated technologies. All these areas will crucially require the correct personnel to oversee their review, enhancement and ongoing effective implementation and/or updates in the future.
Fundamentally, people are still just as important as technology. The right people remain a vital key component in your compliance function to ensure that regulatory changes, challenges and priorities are both met and adhered to.
What is needed, now more than ever is a combination of a people plus technology solution. Automation of your current AML processes and systems can only take you so far. They need to be purposeful, and the right people will very much be needed to achieve this. Technology automation can of course help with repetitive and relatively mundane tasks, but people can and must oversee automation, as well as ensure that informed and accurate decisions are being made.
With the top 4 current and future financial crime and compliance trends, it is clear from global regulatory landscapes that the heightened need for additional compliance in banking is imminent and needs to be prioritised. From updated sanctions and UBO lists to de-risking crypto demands, these are the key trends that will have a significant impact on financial crime and compliance departments in banks.
- Greater openness between banks will be required
Large financial institutions and banks have been urged by the Financial Action Task Force (FATF) to freely exchange information to help fight terrorism and money laundering. The issues that the banks are facing are similar. However, the business-centric strategy used to keep information hidden from rivals has left openings and coverage gaps that financial criminals can take advantage of. Banks and Governments can help stop financial criminals from exploiting these flaws by exchanging information.
In the US, prior guidance limited the sharing of SARs by banks with US operations to their international head offices, controlling companies, or affiliates that had already submitted SARs; it did not apply to foreign bank branches or affiliates. FinCEN now anticipates that roughly 100 banks will sign up for the initiative, suggesting the uptake of the pilot has been seen to help combat money laundering and terrorist financing.
An example of how banks aim to use the pilot is through combating the rise of Ransomware – a growing global danger. Due to its borderless nature and the speed at which hostile actors can act, it is essential to share information quickly and build a comprehensive picture of an individual or entity’s activity. The decision by FinCEN is in line with authorities’ efforts to innovate, to assist businesses in managing the risks they confront and the increasingly global nature of financial crime.
Innovative new methods have been implemented by Australian Transaction Reports and Analysis Centre (AUSTRAC), showcasing that this notice is the most recent indication that other organisations are utilizing greater openness as a means of effective and efficient ways to combat certain types of financial crime.
- Key updates to the Australia Beneficial Ownership Transparency (ABOT) and Sanctions
The enhancement of regulations and enforcement surrounding Know Your Customer (KYC) and Ultimate Beneficial Owner (UBO) compliance is one of the most notable security advancements over the previous year. The Anti-Money Laundering (AML) Act, which was passed in 2020, imposes severe fines and penalties on banks which fail to comply. With the rise of digital and online-only banking, FinTech and global transactions, this development is becoming more and more significant.
CDD regulations apply to the basis of KYC and UBO regulations. Through the onboarding procedure when an account is opened, the objective is to identify and verify the legitimacy of account owners. The CDD includes a variety of documents, including proof of address, tax returns, government-issued identification, business registration documentation.
- Trade-based Money Laundering Challenges
The scope of sanctions regime is growing, and they are addressing increasing problems like global corruption, environmental crimes, and abuses of human rights. Criminals who engage in Trade-Based Money Laundering (TBML) use the breadth and complexity of global trade to transfer money between parties and elude law enforcement by physically moving items, such as over and under-shipping of products and services.
Most nations do not evaluate the hazards that environmental crimes pose for money laundering. Gatekeepers, such as financial institutions and other regulated companies, as well as academic and law enforcement specialists should work together with the regulators to monitor and battle TBML in order to address this developing issue.
Through the remainder of 2022 and beyond, we can anticipate that sanctions will keep developing to address new global problems, and more nations will adopt Magnitsky-like legislation that enables Governments to impose economic and travel sanctions against foreign people or organisations that engage in serious human rights, environmental, or corruption violations.
- Cryptocurrency concerns call for a more regulated environment
As predicted by several experts previously, the lack of regulation of crypto has emerged as a major issue at the outset of 2022. The rising financial crime risks related to digital currency and crypto assets have been made abundantly clear over the last few years, as the crypto boom surges globally. The Australian and New Zealand markets are no different in terms of crypto adoption.
The Australian Securities and Investments Commission recently released a report on investor behaviour that found that out of its survey of 1,053 investors, cryptocurrencies were second only to Australian shares in terms of most common asset held, at 73% and 44%. The adoption of crypto based trades is not slowing down.
This year’s announcement of RBA exploring cryptocurrencies through the development of a central bank digital currency showcases the movement to crypto adoption and its possible longevity in the market, but has also highlighted the market changes in terms of regulatory adoption.
The Financial Action Task Force (FATF) and other regulatory organisations are increasingly concerned about financial crimes related to cryptocurrencies because of the explosive growth in cryptocurrency use. According to the Government of Western Australia Department of Mines, Industry Regulation and Safety, AUD $4.1 million dollars were conned out of 71 WA investors so far this year alone. Crypto scams and lack of regulation have led to key movements within the industry to try and regulate crypto exchanges.
In relation to operations using crypto assets, including digital currency, both APRA and AUSTRAC offered risk management recommendations to their regulated organisations.
All APRA-regulated firms received a letter from APRA outlining initial risk management requirements for operations involving crypto assets, a summary of regulatory policy (a “roadmap”) about crypto assets, and related actions that APRA will conduct soon.
This year also saw the release of the AUSTRAC’s Financial Crime Guide for Digital Currency, highlighting the need to stop criminal use of digital currencies, and offers advice about the risks of financial crimes that apply to them.
Expect to see the Australian government and regulators working closely to release new regulations and ensure penalties are followed as the crypto ecosystem comes under closer regulatory scrutiny.
It is clear to see that from the upcoming trends, fighting financial crime will require additional skilled resources, which is why the future of resilient financial crime fighting will rely on the contingent workforce.
With new trends in hiring and retaining key talent, more organisations are turning to the contingent workforce model to help them deliver on critical projects, deal with surges in work, and get back to business as usual. The contingent workforce tackles the significant challenge of rapid and cost-effective staffing without the need for lengthy and time-consuming selection processes, interviews, or onboarding. This is also seen in the utilisation of offshore contingent models to access key talent that would otherwise be difficult to find locally.
Most firms’ permanent recruitment procedures are slow in a fast-paced market. Recruiting good, competent people can take months, which is why there has been such a high demand for skilled compliance contingent professionals in 2022, and this is expected to rise in 2023.
The pandemic created a new era of talent and recruitment with many firms struggling to resume BAU as additional regulatory and risk compliance requirements are placed on their already thin stretched teams. Momenta supplied an entire team interstate. This team was entirely onboarded, trained, and commenced work remotely. The success of this initial process led to the client subsequently requesting an increase in the team size from 15 to 20. Momenta continue to be the Bank’s principal trusted resource vendor, supplying the best possible candidates with a rapid response delivery, whilst also managing the interview, vetting, and HR responsibilities. Read more here.
Utilising the expertise of contingent resourcing can offer many firms breathing space in terms of resolving any issues their AML controls may have. Setting up the right teams to ensure any gaps are identified will be key for firms in 2023 and into the coming years, as regulators place more pressure on financial service participants to strengthen current compliance systems and controls.
Driven by regulatory action from AUSTRAC, a major Australian Bank was required to comprehensively assess and respond to its Financial Crime risk exposure, identify control improvement opportunities, and re-define its Target Operating Model. The bank approached Momenta for assistance in augmenting their existing operations team for Alert Investigations and Politically Exposed Persons (PEPs) reviews, and to perform key KYC and EDD services.
Since Momenta was onboarded, the Bank has significantly broadened the scope of our service delivery across additional bank divisions. Momenta has successfully placed teams of more than 200+ across multiple divisions and programs of work. Momenta remains a principal supplier of resources to the bank across our areas of expertise. Read more here.
