After scathing parliamentary AML inquiry, Austrac takes aim at quality, quantity of suspicious matter reports in quest to bolster fincrime effectiveness

The Skinny:

  • On the heels of a parliamentary inquiry into the country’s compliance defenses, Australia’s financial intelligence unit is tackling what many consider the beating electronic heart of the fight against financial crime: the depth, accuracy and timeliness of reports tied to suspicious activity. 
  • The Australian Transaction Reports and Analysis Centre (Austrac) is engaging in a “System Transformation Program (STP)” that is designed to update and upgrade how the country’s financial sector files suspicious matter reports (SMRs), a potentially powerful first step to counter a regional negative narrative.
  • When it is finished, sharper and cleaner information, and more horsepower for data analytics, could also help the universe of Australian SMR filings become a catalyst to underpin more frequent and relevant sector guidance and divine and design a more approachable and functional dashboard to view past filings – and even update them.
  • The focus on prior, current and future SMRs, though an overall positive for Australia, could also put some banks in the spotlight as the accuracy, adequacy and depth of filed reports could come under greater scrutiny – along with the rigor of underlying risk ranking, investigation and filing procedures. 

By Brian Monroe
bmonroe@acfcs.org
August 31, 2021

On the heels of a parliamentary inquiry into the country’s compliance defenses, Australia’s financial intelligence unit is tackling what many consider the beating electronic heart of the fight against financial crime: the depth, accuracy and timeliness of reports tied to suspicious activity.

The Australian Transaction Reports and Analysis Centre (Austrac) is engaging in a “System Transformation Program (STP)” that is designed to update and upgrade how the country’s financial sector files suspicious matter reports (SMRs), a potentially powerful first step to counter a regional negative narrative.

The reports – also called suspicious transaction reports (STRs) or suspicious activity reports (SARs) in some jurisdictions – are typically filed by banks and reviewed by law enforcement agencies, in all a foundational prong of global anti-money laundering (AML) efforts.

To read the full Austrac report, click here.

When it is finished, sharper and cleaner information, and more horsepower for data analytics, could also help the universe of Australian SMR filings become a catalyst to underpin more frequent and relevant sector guidance and divine and design a more approachable and functional dashboard to view past filings – and even update them.

The update is welcome news for the country’s fight against financial crime, but addresses only some of the perennial gaps in the region.

“Australia has dragged its feet for too long on implementing global standards and even now cannot find legislative time to enact commitments it made as a country years ago,” said John Cusack, Chair of the Global Coalition to Fight Financial Crime and Editor of the Financial Crime News.

“Every country faces unique challenges but largely the most effective response is the same,” said Cusack, who has also been Co-chair of the influential, Wolfsberg Group and is a former top fincrime compliance officer at several large, U.K.-based international banks.

So what would be the best strategy forward for Australia?

“Identify the real threat, prioritize it and work collaboratively across the public and private sectors allocating scarce resources to achieve positive outcomes,” he said. “Australia like many of its peers hasn’t yet achieved this clarity of purpose or focus.”

On the FCN site, Cusack just published a comprehensive, 60-page country financial crime and compliance risk assessment of Australia, available here for members. He also released a two-page summary of the longer report, available here.

The FCN report highlighted that Australia most recently passed AML reforms in December, a “step that’s been a long time coming” with changes recommended following a statutory review of the country’s primary AML/CTF legislation in 2014.

The update, which came into force in June 2021, addressed FATF criticisms including that designated non-financial businesses and professions (DNFBPs) were not included in the AML regime, a failing that “is still not remedied and may come in a future” update.

The latest improvements make it “explicit that reporting entities must not provide a service until after they perform the proper” depth of customer diligence, even if this part is outsourced to third parties.

Additionally, the new law “strengthens due diligence requirements for entering into correspondent banking relationships and bans FIs from entering into a relationship with an institution that permits shell banks to use their accounts,” according to the FCN report.  

As Austrac strengthens system to file SMRs, banks could find themselves in hot seat

The focus on prior, current and future SMRs, though an overall positive for Australia, could also put some banks in the spotlight as the accuracy, adequacy and depth of filed reports could come under greater scrutiny – along with the rigor of underlying risk ranking, investigation and filing procedures.

As Austrac gains a better ability to review filings on specific gaps or illicit trends – and from specific institutions – some entities subject to AML obligations could be found wanting, particularly under the harsh spotlight of Australia’s just announced parliamentary inquiry.

The country’s senate approved a formal parliamentary inquiry to calibrate the “adequacy and efficacy of Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime,” a far more adversarial review than recent updates to internal regulations and external criticisms by global watchdog groups.

Some of the areas of focus include Austrac’s overall responsiveness to potential problems, proactivity and reactivity to find AML gaps, ability to arm law enforcement with data and gauge the harm of sectors not covered with compliance rules, like lawyers and other gatekeepers.

To read ACFCS coverage of Austrac’s parliamentary inquiry, click here.

As a result, the regulator is under immense pressure to prove that a surge in penalties over the last two years eclipsing $2 billion is a sign Australia is on the right track, with momentum toward compliance effectiveness, rather than a perception of regulation by enforcement because failings were missed by Austrac examiners and languished, festering for years. 

The goal of Austrac: not just a better experience filing, but more, better fincrime filings

Under such a political microscope, it’s no surprise Austrac chose first to focus on a broad and desperately needed update to its SMR filing regime.

Some of the proposed changes, based on interviews with more than 70 public and private entities, operations and thought leaders, include a malleable, resilient SMR filing system that can improve the results of current subject entities and more easily ensconce future industries.

Austrac has stated in public statements and media reports that the system transformation program will take roughly four years and should be a marked improvement over the current system, where individual SMRs have some 50 questions and hundreds of sub-fields.

The final effort should also result in more SMRs filed, with a surprisingly small overall figure of 265,000 filings by institutions subject to AML rules last year.

The goal of the initiative is to “deliver a modern, engaging and user-friendly portal, with improved reporting capability and self-service options to help you meet your regulatory obligations,” according to Austrac.

After engaging stakeholders in the fincrime compliance space, creators and users of the SMRs, Austrac identified four overarching “pain points” that have been perennial issues hindering the goal of effectiveness:

  • 44 percent: An overall clunky design and process for creating and filing SMRs.
  • 32 percent: A lackluster user experience and user interface navigation.
  • 28 percent: Lack of adequate guidance and support. 
  • 24 percent: The need for greater automation and introduction of an application programming interface (API).
  • What users really want: The ability to access your previously submitted transaction reports. 

Upgrade in countercrime filing system must please interior users, exterior evaluators

Austrac, like many other major financial centers in the midst of upgrading AML laws and updating hardware and software to take advantage of cutting-edge technologies – including artificial intelligence, robotic process automation, machine learning and the like – is going through growing pains as it expands compliance requirements to more industries.

Beyond prickly politicians internally, Austrac also faces pressure to improve overall country countercrime results to pass muster with global watchdog body, the Paris-based Financial Action Task Force (FATF), which grades jurisdictions on parity with international recommendations.

After rescheduling and delaying some country mutual evaluations for more than a year due to the COVID-19 pandemic that ravaged the world over the past year and a half, FATF has tentative plans to restart the reviews.

Australia, while conspicuously absent on FATF’s formal assessment calendar, is due for a visit, with its last formal assessment published all the way back in 2015 and a shorter follow-up in 2018.

For Austrac, making significant progress on the SMR system upgrade could only strengthen its standing with FATF.

Some of the proposed changes in the SMR filing system addressing current challenges include:

  • Future flexibility: Review the design of the SMR report structure to ensure it can be used by all current and emerging industries and scenarios. Australia is currently trying to extend AML duties to more non-bank financial institutions and gatekeepers – entities with wildly different risk profiles and structures.
  • Multi-industry simplicity: Improve the user interface and navigation of Austrac Online, to ensure it is tailored to what you need regardless of industry. With multiple sectors using the same interface, it has to have a wide array of options to make it just as easy for a bank to file as a securities broker dealer, just as simple for a money remitter as a law or accounting firm.
  • Feeding feedback, guiding guidance: Provide improved industry specific guidance Austrac Online on your obligations and improve feedback on how the information you provide information is used by Austrac. This is a huge focal point now globally for many countries, chiefly coming in the form of more public-private partnerships. With this upgrade, the FIU can better analyze filings for broad criminal trends in specific industries, but also coach entities to improve weaknesses in categories of filings. Filers could also get a rare pat on the back for a job well done.
  • Automation nation: Automate more functions of Austrac Online including the introduction of APIs for easier access to automated and faster reporting options. In recent years in the AML compliance space, there has been a renaissance of regulation technology, or regtech, firms specifically tinkering with technology to better wield and harness big data. They have pushed the boundaries of possibility with AI, machine learning and other tech tactics to better follow the money of criminals, in the real and virtual worlds, but also better arm bank AML teams and help them find large, interlinked criminal groups moving illicit funds through their institutions.
  • Easily find, update filings: A dashboard to view and correct any submitted transaction reports. This has been a long sought-after functionality as, typically, banks have to file and re-file SMRs and updates to prior filings, constantly keeping track of multiple encroaching deadlines to not incur the wrath of examiners. Such a system allowing quick and easy updates to prior filings could bolster filing efficiency while not cluttering up the database.

With Austrac improving filing on the technology side, banks must not forget this must also be paired with sharpening human knowledge, training and decision-making with an eye toward being seen as a true ally of law enforcement, Cusack said – not just as a response due to fear of fines from examiners.

“Banks are raising their responses not least due to high fines for weaknesses,” he said, adding that updating systems and human training assessments will take a few more years before these weaknesses are adequately addressed.

“What is most important is that Australia makes the most of a onetime AML/CTF upgrade across the private sector to see a step change in positive outcomes in fighting financial crime,” Cusack said.

“This requires more than fixing what didn’t work to creating capability that makes and connects to public sector capability that makes a difference.”

Hefty AML penalties haven’t swayed politicians in opposition

Even as Austrac makes these critical SMR system improvements, it still must sway polarized politicians – at the top of the list, Labor Senator Deborah O’Neill and Labor MP Daniel Mulino – that have heaped criticism on the regulator and are the chief architects of the parliamentary inquiry.

Their logic is that they only reason fincrime compliance failures were able to linger for so long at several beleaguered banks, leading to the hefty fines, is because Austrac – and other banking regulators – didn’t find the problems in the first place.  

Since 2018, Austrac has levied penalties worth some $2 billion against Westpac and the Commonwealth Bank for “systemic breaches” of AML rules.

Last year, the regulator penalized Westpac, the country’s second largest bank, $1.3 billion for millions of AML failings involving billions of dollars, the most serious of which tied to exploiting children.

To read ACFCS coverage of the penalty, click here.

In August 2017 Austrac applied for a civil penalty order under the AML/CTF Act against the Commonwealth Bank of Australia (CBA). In June 2018, the Federal Court ordered CBA to pay a penalty of A$700 million.

To read ACFCS coverage of the penalty click here.

Prior to that, in 2015, Austrac applied for a civil penalty order under AML regulations against Tab Ltd, Tabcorp Holdings Ltd and Tabcorp Wagering (Vic) Pty Ltd (‘Tabcorp’). In early 2017, the Federal Court ordered Tabcorp to pay a penalty of A$45 million.

Even so, the full parliamentary inquiry will review Austrac’s overall responsiveness to potential problems – not just high-profile, splashy enforcement actions. 

The conclusions from the inquiry will inform the incoming “second tranche” of reforms to the Australia’s AML-CTF Act, the biggest update since 2006, that are slated to capture lawyers, accountants and real estate agents – colloquially dubbed “gatekeepers” – with AML duties, along with answer why such efforts have lagged.  

Overall Aussie efforts down under will be measured against global leaders

What new laws are on the books and how they are implemented will also be compared to fincrime compliance updates happening in ally countries.

In the United States, for instance, the U.S. Treasury’s Financial Crimes Enforcement Network (FinCEN) just released a formal list of its national AML/CFT priorities, a collection of historic foils like organized criminal groups and other rising risks, like record ransomware attacks and crypto-fueled paydays.

The widely-watched and highly anticipated AML priorities are the first concrete update to implement the U.S. Anti-Money Laundering Act (AML Act) – the most significant upgrade to the country’s fincrime framework since the 2001 U.S.A. Patriot Act.

The AMLA is an expansive package of updates to break open beneficial ownership bastions, bolster public-private information sharing, usher in a new era of innovation and focus on effectiveness – with the threat of higher penalties for violations, and serial scofflaws.

To read ACFCS coverage of the AML Act, which Congress enacted into law in January after overriding a presidential veto, click here.  

The shift to place more emphasis on results follows efforts by FATF to move away from simply grading technical compliance, laws on the books, and focus on effectiveness, such as assets forfeited, number of convictions and length of prison terms and large, complex cases crushed.

At the same time, as the U.S. – and Australia – shift their fincrime fighting regimes to focus on effectiveness, one international group has finally detailed what that could and should actually mean in terms of concrete metrics.

In short, the Wolfsberg Group in a recent release detailed metrics of effectiveness including:

  • Are you compliant with local AML laws, cognizant of global standards?
  • Are you producing highly useful information to law enforcement, guided by national AML priorities?
  • Do you have a reasonable compliance program that reviews internal and external threats, gaps and vulnerabilities and adjusts based on rising or receding risks and law enforcement input?
To read the full statement by Wolfsberg Group, an influential alliance of more than a dozen of the world’s largest banks, including Citi, JPMorgan, Barclays, Credit Suisse and others, click here.

Even as pressure mounts, past fincrime failings laid bare: a powerful positive shines through

As Austrac defends itself from criticism by irascible lawmakers from within and looming exterior, biting reviews on AML progress from without, the FCN report did, however, note some key positive momentum in a tangible metric of effectiveness: asset forfeiture.

The Criminal Assets Confiscation Taskforce (CACT) was established in 2011 and in its short history has restrained nearly $1 billion AUD, with more than AUD $250 million seized in the 2019-2020 financial year, according to the FCN Australia country risk assessment report by Cusack. 

“Average restraint figures have increased by 90% from an average of A$60.8 million per annum in the four years from 2011 to 2015, to an average of approximately A$115.6 million per annum over the period of the 2014/15 to 2017/18 financial years.”

But more must be done, said Neil Jeans, a financial crime compliance and risk consultant in Melbourne, in a social media posting.

“Unfortunately, we seem to be a complete lack the political will at a federal level to meet Australia’s international commitments and address the failings which were highlighted” in the 2015 FATF 4th Round mutual evaluation report (MER), some of which were also highlighted as far back as 2005, he said.

“Australia, in my view, dodged a bullet when changes to the follow-up evaluation process and the COVID delayed the FATF follow up review, but I sense Australia’s luck is running out unless action is taken in the next couple of years.”