12 December 2008: Australia’s AML/CTF regime commences - are you ready?

12 December 2008 is a key deadline for another key provision of the Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Act 2006 – a transaction monitoring program, including suspicious matter reporting to AUSTRAC and an ongoing customer due diligence program, including enhanced customer due diligence.

It has been almost a year since the first 12 December deadline, where a number of key provisions in implementing AML/CTF legislation and AML/CTF Rules came into effect. These included the requirements for reporting entities to implement an AML/CTF program with board sign-off; a customer identification and verification program to identify and verify all new customers post 12 December 2007 using a risk-based approach; and record keeping requirements.

In this alert, Deloitte takes a look at some of the key AML/CTF challenges faced by industry over the past 12 months and some of the key challenges that lie ahead.  

Understanding the deadlines – legal or regulatory risks?

Throughout the year and looking ahead, we believe there has been some confusion by industry about the 15 month grace period. AUSTRAC has emphasised that the 15 months grace period is where AUSTRAC will not take civil action against an organisation for non-compliance as long as the organisation is taking reasonable steps to implement the new requirements. AUSTRAC has also emphasised the fact that retrospective customer identification and verification must take place if a reporting entity implements the new requirements at a later date than 12 December 2007.

This logic, to prevent a competitive disadvantage to those who implemented by the set deadline, equally applies to the new 12 December 2008 deadline. Reporting entities will have to demonstrate to AUSTRAC how they monitored their customers post 12 December 2008 up until the time they have an appropriate transaction monitoring program in place.        

Deloitte encourages its clients to take all necessary steps to manage its money laundering and terrorism financing risks at the earliest opportunity. The reason for Australian’s AML/CTF reforms is to ensure that Australian organisations take steps to meet globally agreed standards and manage both the incident risk as well the regulatory obligation. Deloitte’s overseas experience highlights the need to consider and manage all legal risks around new AML/CTF laws and not simply observing regulatory timetables.

Keeping up with AUSTRAC – educator or enforcer?  

In the past 12 months, AUSTRAC has been active in participating in industry working groups, responding to ongoing technical issues and providing feedback to industry on the results of the submitted compliance reports, its on-site inspections and desk-top reviews. At a number of recent industry forums, AUSTRAC has identified a number of common inadequacies, being:

• off-the-shelf AML/CTF Programs, where there is a lack of customisation with regard to an entity’s risk assessment (if undertaken) and a lack of reference to/or integration to underlying operating procedures
• risk assessments where the focus is ‘one dimensional.’ That is, a focus on customer or product only, but the assessments fail to address the composite risks. Also, where products or customers were blanketed as ‘low risk’, there was a failure to provide any explanation or justification to support the assessment
• independent reviews where the review is not independent (e.g. persons involved with the design and implementation of the AML/CTF Program being used in the review) and/or being conducted by persons who do not have the requisite AML/CTF experience or skills.

Deloitte encourages its clients to take advantage of AUSTRAC’s current educatory focus in getting their AML/CTF programs and processes up and running. Based on overseas experience, systemic or reporting entity weaknesses in the Australian marketplace may quickly change AUSTRAC’s focus to that of an enforcer where regulatory fines and forced inspections soon follow. In any event, we remind reporting entities that the full AML/CTF legal provisions commence 12 December 2008 and this is the date upon which third parties could consider bringing civil action for any resultant loss arising from failures to meet AML/CTF legal obligations. This is a common and constant risk in overseas jurisdictions.  

Transaction monitoring – what is critical?

Transaction monitoring is a key provision for the next 12 December deadline. AUSTRAC believes the following is critical in implementing a transaction monitoring program:

• a system need not be automated and given the circumstances, a manual system may be more effective
• staff training is critical, whatever system (manual or automated) is deployed, to the effectiveness of the system
• managing outputs from a transaction monitoring system in terms of suspicious matter reporting is key and will be a focus area of AUSTRAC in 2009.  

Deloitte encourages its clients to implement and embed transaction monitoring programs at the earliest opportunity .   Based on overseas experience, this is one of the most difficult areas to consistently get right of the new AML/CTF provisions. Entities should be starting with what their business requirements and risk objectives are before they launch into a solution. As pointed out by AUSTRAC, training is a key component of getting it right from the outset.    

And last but not least – what about sanctions?

Both Australian and foreign Governments are increasingly turning their attention to sanctions. A week rarely passes by without a significant change in a foreign regime highlighting the increasingly important role that sanctions play in the foreign policy of Governments. Only last week, the US authorities issued a new notice to prohibit Iranian “U-Turns” (a U-Turn transfer is a transaction involving the transfer of funds from a foreign bank that pass through a US financial institution and are then transferred out to a second foreign bank). As a result of this new notice, U-turn transfers for any Iranian bank are no longer allowed.

Although Australia has had counter-terrorism financing laws since 2002, this remains an area where many reporting entities lack significant awareness or process to manage the obligations, particularly for those transacting overseas. We believe this is an area that will receive significantly more regulatory and Governmental attention and we encourage our clients to seek advice on what can be a complex legal and operational issue.   

How can Deloitte help?

Deloitte has expertise and experience designing and implementing solutions to meet legal and regulatory obligations concerning financial crime (including AML/CTF, sanctions, fraud and corruption). 

We would welcome the opportunity to share the benefit of this knowledge with you. To contact an expert in AML issues directly, please  click here, or for a general enquiry about other Deloitte services, please see the link below.

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