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July 19, 2021

Important Developments in Anti-Money Laundering in Australia

Regulation changes and an updated AUSTRAC Guide will affect the procedures of reporting entities in Australia

These important developments cover

  • Guidance on identifying and reporting cuckoo smurfing
  • Customer identification by third parties
  • Exceptions to the tipping off prohibitions
  • Rules where customer identification cannot be performed
  • Stricter controls over correspondent banking

Legal Disclaimer: Please be aware that what we are presenting here is an executive summary of these developments. Operational managers need to read the actual Law, Rules, and AUSTRAC Guidance (see footnote) and, where appropriate, seek professional, legal advice.

Cuckoo smurfing

Where a criminal or terrorist organisation in Australia has money that it acquired illegally, it cannot safely spend that money because it has no legitimate explanation for where the money came from. So it will look for a way to make the money seem to have come from a legitimate source.

If somebody overseas attempts to send money to somebody in Australia, a corrupt intermediary might divert that money to the criminal organisation. This international transfer is then evidently a legitimate explanation for where the money came from. The criminal organisation then arranges for an operative (a smurf) to deposit the dirty money into the intended recipient’s account.

In some cases the beneficiary customer is aware of the suspicious activity occurring in their account and wilfully ignores it. There have also been instances where a person overseas has intentionally engaged a corrupt remittance service provider to send funds to their own accounts in Australia to avoid capital controls or tax laws in a foreign jurisdiction.

It’s called cuckoo smurfing after the way a cuckoo deposits its eggs into an innocent bird’s nest for that other bird to raise (not all cuckoos do this, by the way).

AUSTRAC guidance for financial institutions

In June 2021 AUSTRAC together with the Fintel Alliance released the Detect and Report Cuckoo Smurfing Financial Crime Guide warning financial institutions about the dangers of ‘cuckoo smurfing’.

The Guide lists the most likely targets of cuckoo smurfing as:

  • Australian expatriates
  • Australian exporters
  • international students studying in Australia
  • international investors, and
  • migrants wishing to settle in Australia.

The guide also sets out demographic, account, and depositor indicators that ‘cuckoo smurfing’ may be occurring:

  • Demographic indicators include multiple cash deposits at the same location over a short period of time as well as cash deposits at ATMs with low levels of surveillance.
  • Account indicators include the same account receiving deposits from multiple third parties as well as cash deposits appearing inconsistent with the expected transaction history of the account holder.
  • Depositor indicators include an individual making cash deposits into multiple customer accounts as well as depositor details such as names or initials appearing fictitious.

No single indicator will be a definitive way to identify if an account is being used for ‘cuckoo smurfing’. Rather, financial institutions should use a combination of indicators to determine if further monitoring should be conducted and to identify if a suspicious matter report needs to be submitted to AUSTRAC.

Where a financial institution identifies indicators of potential fraudulent activity involving ‘cuckoo smurfing’, it should undertake a comprehensive assessment.

AFP and AUSTRAC guidance for members of the public

The Australian Federal Police and AUSTRAC have released a factsheet for the general public about how to spot, avoid, and be protected from cuckoo smurfing’ including warning signs and how to report suspicious activity.

Customer identification by third parties

A key component of AML/CTF systems is customer identification – known as KYC: know your customer.

The government has introduced reforms to KYC processes that are targeted in part at making it easier for banking customers to switch their banking service providers under the Open Banking/Consumer Data Right regime, and for new providers to facilitate switching.

Safe harbour

A reporting entity may be protected from liability for KYC procedural breaches if it relies on customer identification by a third party where it:

  • enters into a written agreement or arrangement with the third party, where that third party is subject to appropriate AML/CTF regulation and supervision;
  • carries out regular assessments of the arrangement; and
  • has reasonable grounds to believe that the customer due diligence (CDD) requirements of the AML/CTF Rules are being met.

No safe harbour

A reporting entity may choose to rely on KYC carried out by a third party if it believes it is reasonable to do so and is satisfied that the third party carried out the identification according to the Rules.

But in such a case the reporting entity is not protected from liability for breaches.

AUSTRAC guidance

AUSTRAC’s guidance includes two regulatory quick guides relating to CDD arrangements. One deals with ongoing reliance arrangements with third parties and the other with case-by-case reliance arrangements. Among other things, the first guide provides information to assist in assessing CDD arrangements regularly as well as managing risk under a CDD arrangement. The second guide provides an example of using a risk-based approach in relation to case-by-case reliance.

Exceptions to the tipping off prohibitions

To prevent investigations from being compromised, where a reporting entity submits, or needs to submit a Suspicious Matter Report (SMR) to AUSTRAC, it must keep that secret. This is the ‘tipping off’ prohibition.

The law has been made clearer: unless an exception applies, a reporting entity must not disclose (other than to AUSTRAC) that a SMR has been given or is required to be given to AUSTRAC; or any information from which this could reasonably be inferred.

Two new exceptions have been added, allowing disclosure of this information to auditors for the purposes of an audit or review of the reporting entity’s AML/CTF program, and to foreign members of a corporate group or designated business group for the purposes of informing them about the risks involved in dealing with a customer.

For the pre-existing exceptions, consult your AML experts, the AUSTRAC quick guide – below – or see our AML/CTF Compliance Manual

AUSTRAC guidance

The AUSTRAC guidance provides tipping off examples. It includes a regulatory quick guide with a helpful checklist of procedures to avoid tipping off’  

Where KYC cannot be performed

Updated provisions in the AML/CTF Act now explicitly prohibit reporting entities from providing a designated service if customer identification procedures cannot be performed. The AML/CTF Rules now also specify what a reporting entity must do when it has doubts about the veracity or adequacy of previously obtained KYC information.

AUSTRAC guidance

The AUSTRAC guidance reminds reporting entities of their obligation to identify and know their customers before providing a designated service and that a designated service must not be provided to a customer unless an authorised customer identification procedure (ACIP) has been carried out. This obligation applies regardless of whether the context is a one-off transaction or an ongoing business relationship. Related AUSTRAC guidance discusses the exceptions to verifying a customer before provided a designated service as set out in the AML/CTF Act.

Stricter controls over correspondent banking

A correspondent banking relationship is where one financial institution provides banking services to another financial institution where the financial institutions are in different countries (this includes where the second institution is a subsidiary or a related company).

Complicated AML/CTF rules already apply to correspondent banking relations. The new amendments include: (a) a prohibition on reporting entities entering into a correspondent banking relationship with a financial institution that permits its accounts to be used by a shell bank; and (b) requirements that reporting entities conduct due diligence assessments before entering into, and during, all correspondent banking relationships.

 

Footnote: The Legislative and Rule changes – Details

The reforms to the AML/CTF Act 2006, passed by Parliament in December 2020, are set out in the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Act 2020 (Cth). To implement the reforms, the Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2021 (No.1) was made on 15 June 2021. AUSTRAC published a Guidance to the reforms.

 

 

GRC Solutions AML/CTF Resources

Our resources have been updated where appropriate to cover these recent developments.

Australia

AML/CTF Training for finance sector - covering the particular responsibilities of ADIs

Anti-Money Laundering- covering the responsibilities of financial services and other businesses in general

New Zealand

Anti-Money Laundering - New Zealand

USA

Anti-Money Laundering - USA

Singapore

Anti-Money Laundering - Singapore

Malaysia

Anti-Money Laundering - Malaysia

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