Recent AML / CTF developments
Challenges faced by reporting entities
A number of recent changes to Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) legislation have left reporting entities1 (REs) faced with new challenges in maintaining the currency of their AML/CTF programs.
In this article, we highlight a number of developments in an increasingly fluid regulatory and financial crime risk environment, and outline possible solutions to minimise impacts on an RE’s AML/CTF operational framework.
The AUSTRAC supervisory levy
The AUSTRAC supervisory levy was introduced in 2011 to recover the cost of AUSTRAC’s supervisory activities. The annual levy is determined each year by Ministerial Determination and cannot exceed the costs of AUSTRAC’s supervisory activities. It comprises three components:
- A base component that all REs are required to pay. In 2011-2012, this was set at $300
- A large entity component levied on designated business groups with earnings2 greater than $100 million.3 The levy for these entities is variable, starting in 2011-12 at $20,000 and growing to $2.3 million for groups with annual profit over $6 billion
- A transaction reporting component made up of a volume element (i.e. per report lodged with AUSTRAC) and a value element (i.e. percentage of the value of underlying transactions reported
AUSTRAC undertook a census of REs in February 2012 and has now issued invoices for the 2011-12 financial year. Invoices for 2012-13 are expected from late October 2012, with an ongoing annual census date of 1 July from 2012-13.
Changes to Chapter 8 & 9 of AML/CTF Rules: Part A of AML/CTF programs and regulatory reporting obligations
As of 1 February 2012, all REs are required to ensure that Part A of their AML/CTF program includes all applicable reporting obligations as follows:
- Suspicious matter reporting (SMR)
- Threshold transaction reporting (TTR)
- International funds transfer instruction reporting (IFTI)
- Compliance reporting.
Part A of AML/CTF programs must also now include all processes and controls deployed to ensure that these reporting obligations are met. Although the reporting obligations themselves have not changed, the new Rule requires a record of the systems and controls to ensure the obligations are met, rather than simply a record of the circumstances in which a report would be lodged and the information which a report must contain.
Although a seemingly small change to the AML/CTF Rules, this has a number of potential impacts on REs, including:
- Amendment of Part A of AML/CTF programs to include specific reporting obligation processes and controls that the RE has implemented
- Subjecting these processes and controls to Board approval and ongoing oversight
- Potential further employee training in relation to these processes and controls
- An annual independent review to test the design and operational effectiveness of these processes and controls.
Prescribed countries: Sanctions on Iran
As of 1 March 2012, Iran has been designated a prescribed foreign country for the purposes of the countermeasures provisions of the AML/CTF Act, adding to the economic and trade sanctions already in place against Iran.
REs have additional obligations in regard to customers connected with prescribed foreign countries:
- REs are required to conduct enhanced customer due diligence (ECDD) prior to providing a designated service in which any party is an individual physically located in, or a corporation incorporated in Iran. AUSTRAC expects that REs identify these parties and apply ECDD, even if the underlying transaction(s) are being sent through third party countries4 . AUSTRAC also expects that any transactions involving Iranian entities will be classified as ‘high-risk’ for the purposes of their transaction monitoring system
- REs are prohibited from providing certain designated services, namely those in connection with electronic funds transfer instructions, remittance arrangements and bills of exchange and promissory notes, valued at or above $20,000, where one party to the transaction is an individual physically present in, or a corporation incorporated in Iran. In some circumstances, the Department of Foreign Affairs and Trade may grant exemptions, either for specific transactions or specific individuals, however AUSTRAC expects REs to be particularly vigilant in identifying suspicious matters in regard to customers structuring transactions to avoid the prohibition.5
It is important to note that not only is it an offence to provide a designated service in relation to a prohibited transaction – carrying a penalty of $5,500 for individuals and $27,500 for corporations – but the Autonomous Sanctions Act 2011 also empowers the Minister for Foreign Affairs to declare these offences ‘sanctions laws’, which carry much higher penalties, including imprisonment.
Solutions to AML/CTF challenges
REs must be prepared to deal with regulatory change, especially in such a fluid AML/CTF environment. Given the rapid rate of change in Australia’s AML/CTF regime, it may be the case that periodic review of an RE’s AML/CTF program is no longer sufficient to support an effective program and compliance with the Act. Instead, regulatory changes must be responded to and incorporated into programs as soon as they are passed.
In our experience, regulatory change management – including program design enhancement and training to assure operational execution against design – must be planned. Such planning helps to ensure timely change management across the organisation, which in turn supports the operation and effectiveness of risk management.
Without planning, organisations risk their AML/CTF programs being misaligned with regulatory requirements, potentially leading to non-compliance which has often resulted in costly remedial action being imposed by the regulator. Domestic and international experience demonstrates that the cost of remediating AML/CTF programs under regulatory duress often significantly exceeds the original investment in the program.
Joanna Twartz | Analyst, Forensic
1. Reporting entities are any person or entity who provides a designated service as defined by Table 1 of Section 6 of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (AML/CTF Act).
2. Earnings in this instance are broadly defined as:
• If the entity is an ADI, registered financial corporation, or a member of a ground in which any member is an ADI or registered financial corporation: profit before tax, depreciation and amortisation (PBTDA); or
• In any other case: total earnings before interest, tax, depreciation and amortisation (EBITDA).
3. Australian Transaction Reports and Analysis Centre Cost Recovery Impact Statement (January 20120), pages 9-10.
4. AUSTRAC Guidance Note 12/02: Countermeasures applied to Iran, paragraph 5.3.
5. AUSTRAC Guidance Note 12/02: Countermeasures applied to Iran, paragraph 5.5.