The announcement comes after a torrid few years for the Australian banking sector, with some of the country’s biggest financial institutions facing significant penalties for anti-money laundering (AML) violations. 

In 2018, Commonwealth Bank (CBA) agreed to pay $702.5m to settle breaches of the country’s AML/CFT Act, including inadequate monitoring of 778,370 accounts over a period of three years.

In 2020, Westpac paid $1.3bn – the largest fine in Australian corporate history – for “serious and systemic” breaches of AML regulations.

And in June 2021 it was announced that National Australia Bank (NAB) was under investigation for suspected serious and ongoing breaches of AML/CFT laws, including issues related to customer identification procedures and due diligence.

However, cultural changes within major banks have seen them become a “fantastic partner” for financial intelligence, according to AUSTRAC chief executive Nicole Rose.

“Now, for a range of reasons such as the enforcement action, a number of inquiries, and law enforcement prosecutions, people are getting it,” she told the Australian Financial Review.

“The information we get from bank staff now is quality because they are seeing the tangible outcomes of arrests and prosecutions.”

Rose indicated that work by NAB to fix its shortcomings may see it avoid the severe penalties imposed on Westpac and CBA. “Some of these legacy systems are taking a couple of years to fix which we get and are sympathetic to as long as we’re seeing the progress, and they’re sincere about it,” she said. 

Compliance teams should review AUSTRAC’s judgment in the NAB case when it is published to explore in more detail if and why the bank’s penalties are reduced, and what steps the bank has taken to modernize its AML technology infrastructure.  

Renewed focus on crypto

AUSTRAC’s gaze is now pivoting to high-risk sectors including the crypto where, despite being an early adopter of crypto regulations, AUSTRAC admits it has “blind spots”.

Rose has warned crypto users that while almost 400 local digital currency exchanges have registered with AUSTRAC, they have not been endorsed by the regulator as safe for retail investors, and registration alone should not give people a “false sense of security”.

AUSTRAC is working with its foreign counterparts to improve the international oversight of cryptocurrency firms, particularly in relation to the transfer of funds across international borders. 

In 2021, vulnerabilities in Australia’s search engine and cryptocurrency infrastructure were used by British criminals to cheat small investors out of millions of dollars.

AUSTRAC is focusing on the entry and exit points of the digital currency system where fiat currencies are converted into crypto. As such, the regulator’s new emphasis has implications for firms beyond the crypto space – such as banks – who may facilitate the conversion process. Firms involved in facilitating crypto transactions should, for example, ensure they are familiar with – and can screen for – the names of crypto exchange firms, in order to spot relevant transactions. 

Rose said technology businesses entering the market, such as crypto exchanges and buy now, pay later (BNPL) operators often did not understand their AML/CFT obligations, including the importance of thorough Anti-Money LaunderingKnow Your Customer (KYC) (AML) checks. AUSTRAC has issued a host of recent guidance for crypto exchanges, issuing new documentation in August 2020 and October 2020.

Spotlight on cash-intensive businesses

Casinos and other cash-intensive businesses are also likely to face additional scrutiny. There are ongoing investigations into both Crown Resorts and The Star Entertainment Group. From 2015-19, Star’sthe firm’s Sydney casino potentially breached AML/CFT regulations in its handling of customers judged to be high risk and those classed as politically exposed persons. Slot machines in pubs and clubs have also been used for money laundering and AUSTRAC has issued specific guidance on building an AML program in this sector. 

Finally, de-banking remains a serious problem in the Pacific region. In November, AUSTRAC issued new guidance around de-banking, urging the financial sector to take a risk-based, case by case approach to managing AML/CFT challenges, rather than simply closing accounts.

Rose raised concerns that such measures could increase the risk of money laundering, pushing criminals underground where AUSTRAC would have less visibility. “We’re helping banks manage the risk, so it’s not an AML issue they’re trying to avoid,” said Ms. Rose. 

“We’re doing capacity building with the Pacific nations on financial intelligence, so they can recognize the threats and risks, and share information with each other and us.”

Find out more about the state of financial crime in 2022 by pre-registering for this year’s report.

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ROBOCASH Group, launched in 2017, provides financial services in eight countries in Europe and Asia. The company specializes in the field of consumer lending and marketplace funding by offering short-term loans and installment loans. The group has more than 10 million customers and has issued over 8 million loans.

Industry: Lending
Product: AML Screening and Monitoring

The Challenge

ROBOCASH Group, being an international corporate group, is required to comply with the anti-money laundering regulatory requirements of different global regions and countries. ROBOCASH needed to meet all those requirements in a way that was sustainable and made sense for the whole corporate group. The company was, therefore, looking to partner with an AML provider who could provide an easy and quick API integration and specialized AML tools that have global coverage.

The Outcome

ComplyAdvantage has provided ROBOCASH with secure access to complete, timely and up-to-date anti-money laundering data globally. In addition to this, the ability to configure the settings when screening and monitoring customers enabled a reduction in false positives. Thanks to the centralized platform, where all relevant information regarding an alert is consolidated, ROBOCASH’s compliance team has noticed a 50% reduction in time to manage alerts.

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Finiata is a fast-growing company offering an automated and flexible credit solution to small businesses in Europe. The company, which was founded in 2016, is funded by top European investors and is spread across three offices in Berlin, Warsaw, and Ukraine. Their vision is to provide every small business owner with simple tools to easily manage their company’s financial performance and act on the earliest of warning signs.

Industry: Lending
Product: Customer Screening

Using ComplyAdvantage as our AML data provider has enabled automation and significantly reduced manual workload and time spent managing alerts.

— Paulo Andrade, Senior Product Manager, Finiata

The Outcome

The speed and ease of integration allowed Finiata to start managing their risks more quickly and efficiently. The company operates in a space where a high degree of automation is necessary, not only to provide a superior user experience but also to further drive profitability where margins per customer are tight.

Finiata’s compliance team saw their manual workload reduced, which enabled them to focus their time and effort on other aspects of the business that ensure business continuity. In addition, a low rate of false positives means that Finiata can confidently mitigate risk, quickly identify potential fraudsters, and continue providing a seamless experience to their clients.

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Advances in fintech have allowed for the development and widespread uptake of a variety of online financial services, including peer-to-peer lending and crowdfunding, both of which have grown to represent multi-billion dollar markets. Peer-to-peer (P2P) lending (sometimes known as microlending) is the practice of lending money to other individuals or businesses via an online platform that matches lenders with borrowers for a faster and more efficient loan process. Similarly, crowdfunding is a way of raising funds online by bypassing traditional funding sources and instead putting the owners of businesses or projects directly in touch with potential investors who may choose to invest in return for profit or reward if financial goals are met.

Both services rely on the online transfer of funds between entities and individuals and exploit the speed and efficiency of digital technology to deliver their services for customers. However, the widespread use of peer-to-peer lending services and crowdfunding platforms has also attracted the interest of financial criminals seeking to use their AML vulnerabilities to launder money and finance terrorist activities via P2P money laundering.

Given the inherent money laundering risks, P2P lending and crowdfunding firms should ensure that they have an AML/CFT framework in place to deal with the criminal threats they face and should understand the compliance obligations of the jurisdictions in which they operate.

What Are The P2P Money Laundering Risks?

P2P money laundering risks derive primarily from the anonymity associated with online financial services and the lack of regulation in what are still relatively new types of financial service.

In more detail, crowdfunding and P2P money laundering risks involve:

Customer identities: By applying for loans or transferring funds to crowdfunding projects online, criminals may be able to conceal their identities and avoid triggering AML measures. Money launderers may be deceptive in their applications to use the services or arrange for proxies to use the services on their behalf.

Service legitimacy: Criminals may be able to use crowdfunding mechanisms to market securities for a seemingly legitimate company while distributing illegal products to investors on the side. Similarly, peer-to-peer loan platforms could allow money launderers to transfer illegal funds to recipients with minimal regulatory scrutiny.

Cross-border transfers: Both crowdfunding and peer-to-peer lending services often involve the transfer of funds across international borders. In this context, P2P money laundering may be able to exploit differences in regulatory standards, such as identity verification or suspicious activity reporting thresholds. The logistical challenge of tracking illegal funds across jurisdictions may also make it more difficult for financial authorities to carry out money laundering investigations.

Structuring potential: Peer-to-peer lending and crowdfunding mechanisms may be used to engage in “structured” transactions. Practically, this involves moving funds through multiple transactions across multiple platforms. The convenience and speed of crowdfunding and peer-to-peer lending allow criminals to engage in structured transactions more easily and deepen the legitimate appearance of illegal funds.

How to Comply with AML Regulations

Financial service providers must be able to comply with a range of AML/CFT regulations in order to detect P2P money laundering activities and report suspicious activity to the authorities. Under the recommendations of the Financial Action Task Force (FATF), member states must ensure that firms implement a risk-based approach to money laundering by conducting risk assessments of their customers and adjusting their AML/CFT response to match those risks.

Accordingly, anti-money laundering crowdfunding and peer-to-peer lending service providers should ensure that their compliance programs feature:

• Customer due diligence (CDD) measures to accurately verify the identities or beneficial ownership of loan customers or investors.
• Transaction monitoring in order to detect suspicious activity: this many include unusual transactions or transactions with high-risk countries. 
• Screening and monitoring for politically exposed persons (PEP), customers subject to international sanctions and customer involvement in adverse media stories. 

Under FATF recommendations, AML compliance for crowdfunding and peer-to-peer lending services should also involve the appointment of a compliance officer with sufficient authority and expertise to supervise the p2p money laundering prevention program. Similarly, firms should implement a training schedule for compliance employees in order to maintain ongoing compliance performance.

AML red flags: To better spot criminals using peer-to-peer lending or crowdfunding projects to launder money, firms should be vigilant for red-flag behaviors including:

• Loans or transfers above jurisdictional reporting thresholds.
• Loans or transfers involving PEPs, customers on sanctions lists or customers that are the subject of adverse media stories.
• Unusual patterns of loans or crowdfunding investments or transactions involving customers in high-risk jurisdictions.
• False representation or inadequate identity verification of loan recipients.
• Patterns of loan overpayment.
• Use of correspondent banking services with unclear ownership as part of money transfer structures.

P2P Money Laundering Data Solutions

In order to manage compliance obligations for peer-to-peer lending or crowdfunding, firms should seek to integrate a suitable AML software platform. Automated AML technology not only adds speed and efficiency to CDD and transaction data collection and analysis but helps to reduce the potential for human error. AML software solutions have the added advantage of being able to scale with a firm’s compliance needs, promising ongoing compliance in changing regulatory environments.

The post P2P Money Laundering: How to Comply appeared first on ComplyAdvantage.

However, the increased profile and sophistication of the digital lending market reflects an increased level of risk from criminals. The vulnerabilities of digital lending mean that firms must have effective AML lending processes in place to detect and remediate criminal threats appropriately and ensure that they are not exploited as a way to launder money or finance terrorist activities.

With that in mind, when it comes to AML lending, digital lenders must understand the risks they face and how to comply with the relevant AML/CFT regulations within their jurisdiction.

AML Lending Risks

The money laundering risks to digital lending service providers include those conventional risks inherent in the industry but also reflect the more sophisticated methodologies of criminals that exploit online anonymity and regulatory disparity to evade AML/CFT measures. With that in mind, the key AML lending risks include:

Customer identity: Conventional AML measures in banks and other brick-and-mortar lending businesses allow for the verification of customer identities in person via customer due diligence (CDD) checks. In a digital lending context, however, criminals are better able to conceal their identities when using online services or use proxies to apply for loans on their behalf. Online loan applications with insufficient identity verification may be used to thwart CDD checks and allow criminals to evade other CFT/AML lending safeguards.

Beneficial ownership: Customer due diligence is also important to establishing the beneficial ownership of entities that are applying for loans. Money launderers may seek to further exploit the anonymity associated with digital lending by applying for a loan through a firm that they control, concealing their ownership in order to avoid AML identity verification measures and the scrutiny of authorities.

Cross-border loans: Digital loans can facilitate the speedy transfer of money across borders and jurisdictions. With that in mind, digital lenders may find themselves dealing with customers in different jurisdictions with different regulatory standards for monitoring and reporting transactions. Criminals may be able to use the regulatory disparity between jurisdictions to avoid reporting thresholds for suspicious transactions, or they may seek to take advantage of poor communication and information sharing between international authorities. 

Structuring: Digital loan services can take place quickly and in greater frequency than in-person transactions at brick-and-mortar premises. Money launderers may seek to exploit this capability by applying for loans through a variety of digital lenders and carrying out multiple online transactions. Moving money through a variety of digital service providers deepens the appearance of legitimacy and may make it much harder for financial authorities to track the illegal money.

How to Comply with AML Lending Regulations

When it comes to AML, digital lenders must abide by a range of important rules and regulations designed to ensure that they spot suspicious activity and report to the authorities in a timely manner. The Financial Action Task Force (FATF), for example, and its regional bodies require member states to implement its AML recommendations via domestic legislation. In practice, this means that digital lenders and all financial institutions should implement AML lending programs with the following key features:

• Risk-based approach: The FATF requires that firms implement a risk based approach to AML. In practice, digital lenders must put AML/CFT measures in place that reflect their level of risk. Higher-risk customers should be subject to stricter AML measures, while lower-risk customers should be subject to simplified measures. 
• Customer due diligence: Digital lenders should ensure that they perform suitable customer due diligence on their customers in order to accurately verify their identities and establish beneficial ownership. Higher-risk customers should be subject to enhanced due diligence (EDD) measures.
• Transaction monitoring: In order to spot potential money laundering, digital lenders must monitor customer transactions for suspicious activity, which may include suspicious transaction patterns or transactions involving high-risk countries. 
• Screening: Digital lenders must screen and monitor their customers for politically exposed person (PEP) status, against sanctions lists and for involvement in adverse media stories. PEP-status customers should be considered high-risk and subject to EDD. 

In addition to active CDD, monitoring and screening measures, digital lenders should ensure that their AML program includes ongoing training for compliance teams. Additionally, digital lenders should appoint an AML compliance officer with the authority and expertise to oversee their compliance program. 

AML lending red flags: Certain “red flags” may indicate that customers of digital lending platforms are involved in money laundering. These red flags include:

• Transactions above reporting thresholds.
• Suspicious transactions patterns or transactions with high-risk countries.
• Customers making multiple online loan transactions in a manner that indicates structuring.
• Customers attempting to conceal their identity in online loan applications.
• Frequent overpayment of loan repayments.
• Transactions involving sanctioned customers, PEPs or customers that are the subject of adverse media.

AML Software for Digital Lenders

In order to satisfy AML/CFT compliance obligations and continue to provide the level of efficient service that customers expect, digital lenders should implement a suitable AML software platform to handle their regulatory needs. Automating AML via software is a way for digital lenders to manage their data collection and analysis obligations, delivering speed and efficiency during the compliance process and reducing human error. AML software also enables digital lending firms to better deliver ongoing compliance by adapting more quickly to changes in legislation and emergent criminal methodologies.

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Since 2012, the United Nations Convention against Corruption (UNCAC) Article 52 has significantly impacted FIs’ identification and management of PEPs. This article requires enhanced due diligence (EDD) for PEPs, meaning stricter background checks, verification of wealth sources, and close monitoring of transactions for suspicious activity, expanding on previous regulations by including foreign PEPs and domestic officials, their families, and close associates. 

Of course, being a PEP does not equate to being a criminal or suggest a link to abuse of the financial system. However, as PEPs are higher-risk customers, FIs and DNFBPs must be familiar with the PEP red flags and indicators used to detect such abuse. 

What are 7 PEP red flag indicators?

The Financial Action Task Force (FATF) has developed a list of PEP red flags/indicators to assist in detecting misuse of the financial system by PEPs during a customer relationship. 

Often, matching one or two of these indicators indicates a statistically raised risk of doing business with a particular customer, and several indicators need to be met before grave suspicion is warranted. However, in some cases – depending on specific circumstances – matching just one or more of these indicators could lead directly to suspicion of illegal activity, such as money laundering.

The FATF’s recommended red flags, as outlined in recommendations 12 and 22, are as follows:

 1. PEPs attempting to shield their identity

PEPs know their status may facilitate the suspicion of illicit behavior. With that in mind, they may conceal their true identity through various means to avoid detection, protect unearned assets, or evade legal trouble. Under the FATF’s recommendation, some of the key red flags to watch out for include the following:

• The use of corporate vehicles to obscure (i) ownership, (ii) involved industries, or (iii) countries.
• Use of corporate cars without a valid business reason.
• Use of intermediaries that don’t match with everyday business practices
• Use of PEP relatives and close associates (RCAs) as legal owners.

2. Suspicious behavior from PEPs 

When liaising with entities and monitoring activity, firms need to stay vigilant regarding a PEP’s movements and general behavior.  In particular, firms should be aware of any unusual inquiries about their AML/CTF policies, alongside uncommon transfers to accounts in different countries. As a result, the FATF encourages firms to monitor the following: 

• Investigate any inconsistencies between the information provided by entities and publicly available data, such as asset declarations or salaries, as these discrepancies could warrant further investigation.
• Pay close attention to entities conducting business in your jurisdiction without a clear and justifiable reason – a legitimate business purpose should be readily available.
• Carefully scrutinize entities that provide inaccurate or incomplete information, as deliberate misinformation is highly suspicious and requires further investigation.
• Entities who inquire about a firm’s AML/PEP policies, which could signal potential attempts to exploit vulnerabilities.
• Be cautious of entities seeking services they wouldn’t usually require, as this might suggest attempts to hide assets.
• Monitor entities who frequently transfer funds to countries with no apparent connection, as these unrelated financial activities raise concerns about potential illicit sources of income.
• Conduct additional due diligence for entities denied a visa to your country, as entry restrictions might suggest past issues or security concerns.
• Closely monitor entities from countries with restrictions on foreign account ownership, as country-specific limitations on holding accounts can be a risk factor.

3. The PEP’s position or involvement in business 

While the previous section highlighted behavioral red flags, understanding a PEP’s position and power within their organization adds another crucial layer to the risk assessment. As outlined by the FATF, individuals holding roles with greater control, authority, and influence can be inherently more susceptible to involvement in illegal activities. Here’s why: 

• Substantial authority over or access to state assets, funds, policies, and operations.
• Control over regulatory approvals, including awarding licenses and concessions.
• The formal or informal ability to control mechanisms established to prevent and detect money laundering and terrorist financing (ML/TF).
• If they (actively) downplay the importance of their public function or the public function they’re associated with.
• The PEP does not reveal all positions (including ex officio).
• Access to or control or influence over government or corporate accounts.
• Own or control financial institutions or DNFBPs, either privately or ex officio.
• The PEP (partially) owns or controls the financial institution or DNFBP (privately or ex officio) that is a counterpart or a correspondent in a transaction.
• The PEP is a director or beneficial owner of a legal entity that is a client of a financial institution or a DNFBP.

4. High-risk industries and sectors for PEPs 

Alongside the PEP’s position in their organization, connections with high-risk industries can raise their risk level. FIs and DNFBPs should use national guidance and conduct thorough risk assessments per the FATF’s recommendation 1. While high-risk industries will indubitably vary from country to country, the FATF presents the following as examples of higher-risk sectors in its recommendations 12 and 22:

• Arms trade and defense.
• Banking and finance.
• Businesses active in government procurement (i.e., those whose business is selling to government or state agencies).
• Construction and (extensive) infrastructure.
• Development and other types of assistance.
• Human health activities.
• Mining and extraction.
• Privatization.
• Provision of public goods and utilities.

5. Transaction indicators 

Accurate transaction monitoring is essential as a PEP’s transactions and banking history can reveal a complete overview of their income, spending, and saving activity for any period. The purpose of a transaction, as well as the nature of the business relationship behind it, should be scrutinized, along with the examples below:

• Private banking.
• Anonymous transactions (including cash).
• Non-face-to-face business relationships or transactions.
• Payments received from unknown or unassociated third parties.
• Using several separate bank accounts for unknown purposes.
• Consistent use of rounded amounts that can’t be justified.
• An account shows a sudden flurry of activity after a dormant period.

6. Products, services, and delivery channels red flags 

Another key indicator, depending on the nature of the PEP, is their connection to certain industries, products, services, transactions, or delivery channels that can be labeled as high-risk and easy to exploit for money laundering or other illicit purposes. Some of these include:

• Businesses that mainly cater to (high-value) foreign clients.
• Trust and company service providers.
• Correspondent and concentration accounts.
• Dealers in precious metals, precious stones, and other luxurious goods.
• Dealers in luxurious transport vehicles (such as cars, sports cars, ships, helicopters, and planes).
• High-end real estate dealers.

7. Country-specific PEP red flags and indicators

As defined by the FATF in recommendation 19, due diligence is vital if a foreign or domestic PEP is from a higher-risk country. Additionally, the FATF also recommends taking the following geographical considerations into account when entering into a business relationship with a PEP: 

• Foreign or domestic PEPs from countries that have yet to sign or ratify relevant anti-corruption conventions (or otherwise have not or have only insufficiently implemented these conventions), such as the UNCAC and the OECD Anti-Bribery Convention.
• Foreign or domestic PEPs from countries with mono-economies (economic dependency on one or a few export products), especially if their countries have export control or licensing measures.
• Suppose a PEP from a high-risk country has control or influence over decisions that aim to address any shortcomings in the anti-money laundering and combating the financing of terrorism (AML/CFT) system. In that case, it can lead to additional risks.
• Foreign or domestic PEPs from countries that depend on the export of illegal substances, such as narcotics.
• Foreign or domestic PEPs from countries with high levels of organized crime.

Detect red flags with automated solutions 

With so many red flags to be wary of, manually analyzing a PEP’s financial transactions, wealth sources, and business relationships can be time-consuming and prone to human error. 

Fortunately, advanced AML solutions offer sophisticated tools that empower comprehensive EDD for PEPs. These solutions surpass basic EDD by delving deeper into their finances and finding the true nature of wealth and transactions. 

Even after initial due diligence, continuous monitoring remains crucial – dynamic screening tools can provide a safeguard by automatically monitoring transactions and activities for suspicious patterns or red flags that may indicate money laundering or other financial crimes.

Implementing these solutions can offer significant advantages – streamlined data analysis and automated workflows significantly reduce operational burdens, freeing up resources for your team to focus on strategic tasks.

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