Financial Planners – A Culture of AML/CTF Compliance?

Financial Planners – A Culture of AML/CTF Compliance?

On the 21st December 2016 AUSTRAC published its money laundering and terrorist financing risk assessment on the Australian Financial Planners sector.

The risk assessment provides sector-specific information on ML/TF risks, and can be found at  http://www.austrac.gov.au/sites/default/files/financial-planning-sector-risk-assessment-WEB.pdf

AUSTRAC has assessed the overall money laundering and terrorism financing (ML/TF) risk for the financial planning sector as Medium.

AUSTRAC also assesses the threat of criminal exploitation to Australia’s financial planning sector as Medium.

This rating is based on assessments of the criminal threat environment, the vulnerabilities in the sector, and the consequences associated with the criminal threat.

The risk assessment identifies that financial planners play an important facilitation role for their customers to access financial services, but this can make financial planners susceptible to exploitation for criminal purposes.

AUSTRAC states that, at a sector level, financial planners have only a partial understanding of their anti-money laundering and counter-terrorism financing (AML/CTF) obligations, with many not fulfilling the requirements to have risk-based customer due diligence procedures and to submit SMRs to AUSTRAC.

Almost all entities engaged for the risk assessment saw this lack of understanding as a significant vulnerability which undermines the sector’s resilience to criminal financial activity.

The risk assessment establishes specific characteristics of the financial planning sector that make it vulnerable to financial crimes include:

  • The large customer base and significant amount of money movement being facilitated by financial planners
  • The range and complexity of products and investment strategies being facilitated by financial planners
  • The growing trend towards online delivery of financial planning services.

Financial planners who deal with foreign jurisdictions, accept cash, have customers who are politically exposed persons (PEPs), or make payments to third-party accounts may be exposed to higher levels of risk than those that do not undertake these activities.

Factors that limit the overall vulnerability of the sector include the low level of customer anonymity for personal advice services and the low level of agents acting for customers.

As part of the risk assessment, AUSTRAC analysed in detail all SMRs lodged over a two-year period, where:

  • The SMR had been lodged by a financial planner; or
  • The SMR had been submitted by another financial institution, but a financial planner had identified the suspicious matter or had been involved in the transaction in some way.

Over that period the SMRs relating to financial planners totaled 273 with only 67 financial planners reporting an SMR.

Some examples of these suspicious matters were:

  • A financial planner was approached by a prospective customer, who had accumulated cash savings well over their annual income from running their own business
  • A foreign national used a financial planner to invest a large sum of money – however, this was inconsistent with the customer’s profile and the source of the funds was unclear
  • A financial planner received a phone enquiry from an individual who was seeking advice, and that individual was known to be the subject of a corruption investigation.
  • A bank observed that a financial planner received multiple cash deposits of less than $10,000 made by several different individuals at different bank branches, in an apparent attempt to avoid detection
  • A bank received a request by a financial planner to transfer very large sums of money between numerous bank accounts held by the planner’s customer, in what the bank suspected was an attempt to obscure the source of the funds.

AUSTRAC’s engagement with the financial planning sector for the risk assessment revealed several industry misconceptions about SMR reporting:

  • “The product issuer will report instead.”
  • “I need to have conclusive evidence.”
  • “Reporting will damage the customer relationship.”
  • “Reporting means my business has done something wrong.”

These misconceptions are likely to contribute to the low level of reporting by financial planners.

Suspicious matter reporting to AUSTRAC identified suspected money laundering accounted for a significant portion; while terrorism financing was the subject of only three reports

Conclusion

The risk assessment appears to be a comprehensive and well researched document containing some stark facts about the financial planning industry’s ML/TF risks and the effectiveness of the AML/CTF systems controls deployed within the sector.

Financial planners are well-placed to detect suspicious behaviour by their customers, and play an important role in supporting Australia’s AML/CTF operations.

Greater vigilance and increased reporting of suspicious activity by financial planners will serve to better protect and strengthen the sector.

AUSTRAC’s view is that, despite the challenges, the financial planning sector must ensure that AML/CTF compliance is a greater part of the organisational culture for financial planners.

The financial planners should take note of the information within the risk assessment as a matter of urgency and review their own AML/CTF arrangements considering AUSTRAC’s findings.

Financial planners should consider, based on the AUSTRAC risk assessment, whether they have appropriate controls to mitigate their Ml/TF risk, as required by the AML/CTF Act 2006.