AUSTRAC releases results from survey of financial planners and advisers

In June 2011, AUSTRAC conducted a survey of financial planners and advisers. The purpose of the survey was to obtain information on advisers’ understanding and implementation of their obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). The survey was conducted online and was voluntary and anonymous.

The report of the results of the survey, Financial services intermediaries,^[1] was released on 5 April 2012. The survey was designed for businesses that provided only what are called “item 54 services”. A total of 147 survey respondents fell into this category and the report covers only these respondents. The respondents were from all states and territories except the Australian Capital Territory, although most were from Victoria (32 percent), New South Wales (27 percent) and Western Australia (21 percent). Respondents were asked how many individuals were authorised to provide financial services under their Australian financial services licence (AFSL):

• 67 businesses had two to five persons who were authorised to provide financial services;
• 31 businesses had only one authorised person;
• 18 businesses had six to 10 authorised persons and there were another 18 businesses that had 11–30 such persons;
• five businesses had 3 1–100 authorised persons; and
• seven businesses had more than 100 authorised persons.

Section 6 of the AML/CTF Act contains tables which list products and services that are “designated services”. For example, making a loan, where the loan is made in the course of carrying on a loans business constitutes the provision of a designated service. The providers of designated services have responsibilities under the Act. Item 54 of Table 1 states that if a person, in their capacity as a holder of an AFSL, makes arrangements for a person to receive a designated service, then by making such an arrangement, that person is also providing a designated service. Holders of an AFSL who provide only item 54 services have reduced obligations under the AML/CTF Act, compared to persons who provide other designated services. For example, item 54 providers are only required to have and maintain Part B of an AML/CTF program, and are only required to submit suspicious matter reports (SMRs) to AUSTRAC.

The report states that the survey results reflect the views of survey respondents about their compliance with the AML/CTF Act and AML/CTF Rules. Although AUSTRAC does not express a view in the report about the level of compliance with the Act and Rules by item 54 providers, AUSTRAC does make comments on the survey results.

This article briefly summarises some of the main findings of the survey.

Customer identification (know your customer) policies

Item 54 providers are required to have in place a Part B AML/CTF program which sets out their customer identification (KYC) policies and procedures.

Very few survey respondents relied solely on a product provider’s customer identification procedures when identifying customers. Most respondents applied either their own customer identification procedures only, or applied their procedures and a product provider’s procedures when identifying customers. In the report, AUSTRAC comments that it is their expectation that item 54 providers should not rely solely on a product provider’s KYC procedures, and it is encouraging that the majority of respondents are not doing so.

Respondents were asked to select, from four possible responses, the KYC issues that were covered by their AML/CTF program or other policies, procedures and supporting documentation. A large majority of respondents said their AML/CTF program or other documentation covered three of the four issues:

• how to make and retain customer identification records;
• the circumstances in which additional customer identification information should be collected and or verified; and
• how discrepancies in customer identification should be handled.

In relation to the fourth issue, only 38 percent of respondents said their AML/CTF program or other documentation covered how to identify agents of customers. AUSTRAC commented that item 54 providers are required to have procedures in place to identify agents of customers.

Ninety-five percent of respondents reported they had conducted at least one review of their AML/CTF program. This result indicates that the size of the business was not a factor determining whether or not a review had been conducted. In AUSTRAC’s view, it is good practice for item 54 providers to carry out regular reviews of their AML/CTF programs.

Money laundering/terrorism financing risk

Only two respondents said they had high risk customers, 96 percent said they did not allow customers to deposit funds into their bank account (apart from payment for professional services) and 99 percent said their employees/authorised representatives would never accept cash on their premises directly from a customer (apart from payment for professional services). These responses indicate that these businesses were conducting their business in ways that reduced their money laundering or terrorism financing risk.

Ninety percent of respondents reported that their AML/CTF program or other documentation contained an ML/TF risk assessment, but only slightly more than half said they had in place a method to determine the ML/TF risk rating to apply to their customers. In response to this, AUSTRAC said it expected that all item 54 providers should have in place a method or procedure to determine the ML/TF risk rating to apply to its customers.

Suspicious matters

Under section 41 of the AML/CTF Act, item 54 providers are required to submit SMRs to AUSTRAC. ^[2]

The survey included a list of potentially suspicious matters and respondents were asked to indicate whether or not their employees or authorised representatives would identify each of those matters. The percentage of respondents who believed their staff would identify particular matters as suspicious ranged from 96 percent of respondents for “doubts about the identity of a customer” to 54 percent for “a customer enquires about investing in a high-risk country”. AUSTRAC commented that it expects that entities should be able to identify all of the listed potentially suspicious matters where they are relevant to their business.

Respondents were asked whether their employees or authorised representatives had identified any potentially suspicious matters over the 11 month period from July 2010. Nearly all respondents (94 percent) said none had been detected.

Only eight respondents said that they had identified potentially suspicious matters. This does seem to be quite a low figure, and perhaps it prompted AUSTRAC to state that item 54 providers should ensure they have the organisational capacity to detect and report suspicious matters to AUSTRAC.

Almost three-quarters of respondents said they had written procedures in place to ensure that potentially suspicious matters would be identified. AUSTRAC commented that it is good practice for businesses to have written procedures in place to handle SMRs and it is encouraging that the majority of respondents indicated that they have such procedures.

Staff training and monitoring

Eighty-four percent of respondents said they trained their employees or authorised representatives to ensure that potentially suspicious matters would be identified.

Respondents were asked how they ensured that their employees or authorised representatives were complying with the provider’s AML/CTF program. Eighty-seven percent of respondents reported that they used standard operating procedures. In addition, more than half conducted audits and or relied on regular communication with employees or authorised representatives. Seventy-two percent of respondents used two or more methods to ensure that their employees or authorised representatives were complying with the respondent’s AML/CTF program.

There was a correlation between the size of the business and whether or not the business conducted audits. The greater the number of individuals that were authorised to provide financial services, the greater the likelihood that the business would conduct audits of records. All respondents with 31 or more authorised representatives said they conducted audits.

AUSTRAC commented that item 54 providers should have adequate control mechanisms in place to ensure that their employees or authorised representatives are complying with the provider’s AML/CTF program.

Conclusion

Obviously, a survey such as this does have some limitations. The results are self-reported: that is, there is no check that a respondent’s responses are accurate responses to the survey questions. Responses may be inaccurate for a variety of reasons (for example, a respondent may have misunderstood a question). Also, respondents are self-selected. Since participation in the survey was voluntary, it may be possible that those who chose to participate were businesses that were more concerned with compliance with the AML/CTF Act than those that chose not participate.

Nevertheless, the survey’s findings do suggest that item 54 providers appear to take their responsibilities under the AML/CTF Act seriously, and there is generally a good level of compliance by respondents with the Act.

This article was first published in the Australian Banking and Finance Law Bulletin, May/June 2012

^[1]The report is available at Austrac.gov.au^{Back to article}

^[2] A list of ML/TF indicators specific to item 54 providers can be found in Annexure A of AUSTRAC Information Circular No 71 Observations on compliance by reporting entities that provide only item 54 designated services available at Austrac.gov.au ^{Back to article}