In 2009, the Australian Institute of Criminology (AIC) conducted a survey of 4,346 Australian businesses with anti-money laundering and counter-terrorism financing (AML/CTF) obligations under Australian legislation. The aims of the survey were to determine:
- perceptions of the risks of money laundering and financing of terrorism faced by these businesses;
- processes used by businesses in the compliance areas of customer identification and transaction monitoring;
- estimated costs for businesses to comply with the regime; and
- businesses’ perceptions of the necessity and effectiveness of the regime and of the effectiveness of their compliance with it.
Businesses were contacted by letter and telephone by staff from a social research company, the Social Research Centre, engaged by the AIC to carry out the survey. Contact details were provided by the Australian Transaction Reports and Analysis Centre (AUSTRAC) after permission in writing was obtained from AUSTRAC’s Chief Executive Officer, subject to the AIC and the survey consultant agreeing to comply with strict protocols regarding security of information and confidentiality. The research was also approved by the AIC’s Human Research Ethics Committee and the Statistical Clearing House of the Australian Bureau of Statistics.
Data were collected over a period of approximately 10 weeks between 31 July 2009 and 11 October 2009. Of the 10,670 addresses originally provided by AUSTRAC, 8,976 were included in the initial questionnaire mailing (a number were removed because they fell outside the sampling criteria), with 8,690 being confirmed as usable selections. A total of 4,346 survey responses were received, which was 50 percent of those selected (see Challice & Eliseo 2012 for further details). This provided a large sample of businesses from all sectors that were subject to AML/CTF regulation in Australia in 2009. The majority of respondents were small or micro businesses, as was the case with their level of representation in the regulated sector as a whole.
The participating businesses were from the gambling, banking, managed funds and superannuation, securities and derivatives, foreign exchange, alternative remittance, financial services and cash delivery sectors, and other businesses providing regulated services such as bullion dealers. Almost half of respondents came from the gambling industry (55.3%), while businesses from the financial services sector (23.5%) formed the second largest group. Only eight percent of respondents came from the banking sector. This may have influenced the results where analyses were conducted across the entire sample. Small and micro businesses comprised the majority of the sample, which may also have influenced the results in the study.
In addition to conducting the business survey, 10 individuals from businesses who completed the questionnaire agreed to participate in face-to-face interviews. These individuals worked in pubs and clubs, a credit union, a cash delivery business, a mortgage lender, a private equity firm and a currency exchange service. In addition, a representative from an Australian Government agency was interviewed. These interviews were conducted anonymously and no individuals or businesses were named or identifiable. The aim of the interviews was to ascertain additional information on some issues that the questionnaire was unable to canvass in detail. Interviews with such a small number of individuals cannot be considered to be representative of the entire regulated sector but nonetheless, the qualitative data that were obtained provided some important, albeit subjective, insights into the operation of the AML/CTF regime in Australia.
The information presented in this report was collected during a period that coincided with the early implementation stages of Australia’s AML/CTF regime. This period represented a phase during which the regulated sector was still adapting to the requirements and the effects of the legislation and as a result, some respondents might not have had a comprehensive understanding of how the legislative requirements affected their business operations. In addition, AUSTRAC has undertaken significant outreach activities with the regulated population since the data were collected.
Although the current study was the first of its kind in Australia, the research was subject to a number of limitations. These are explained more fully in the separately published methodology report (Challice & Eliseo 2012). Some of the principal limitations are as follows.
It was apparent that some inconsistencies were present in how businesses from the same industry sector identified their primary sources of revenue in the self-reported demographic information.
In addition, and despite intensive pre-testing of the survey instrument and review by AUSTRAC and other stakeholders, as well as the use of a comprehensive glossary, the language used in the questionnaire to describe some aspects of the AML/CTF regime in Australia proved inaccessible to some survey respondents. This may have been more of an issue for some of the newly included business sectors. Some interviewees reported being motivated to participate in a follow-up interview in order to obtain feedback on difficulties they experienced in trying to respond to the survey. Depending on the extent of participants’ difficulty in understanding some of the key terms employed, the results may not have captured the views of businesses recently included in the regime to an appropriate extent. Analysis of responses from participants who elected not to complete the survey suggested that non-corporate businesses, such as pubs and clubs, Australia Post outlets and retailers were over-represented in this group. More than 70 percent of those who elected to not complete the survey agreed that the regime was too onerous (Challice & Eliseo 2012).
Almost half of respondents consisted of businesses in the gambling industry. Businesses from the financial services sectors, such as banks, were under-represented. This might have influenced the results in situations where analysis was conducted across the entire sample. Small and micro businesses comprised the majority of the sample, which may also have influenced the results obtained in the study. At the time of writing, there was no publicly available information on the distribution of business size within the regulated sector, to determine whether the number of smaller businesses that responded were representative of the entire regulated sector.
Perceptions of the risks of money laundering and terrorism financing
Although there have been estimates that ‘up to $10b a year in the proceeds of crime are available for laundering in and through Australia’ (ACC 2011: 46), more than 97 percent of respondents considered that their business had a low risk of involvement in money laundering in the 2008–09 financial year. More than 95 percent of respondents across all business sectors believed that the level of risk of money laundering faced by their businesses in 2008–09 would remain the same or decrease in the ensuing two year period to 30 June 2011. Only nine businesses from the sample of more than 4,000 considered that money laundering posed a high risk to their business at the time.
Almost all of the businesses surveyed also considered that risk of terrorism financing was low in 2008–09. Again, more than 95 percent of respondents anticipated that the risk of their business becoming implicated in terrorism financing would remain the same or decrease in the two year period to 30 June 2011. Only two businesses considered that the risk of terrorism financing to their business was high.
The money laundering and terrorism financing (ML/TF) risks that participants speculated may affect their business in the two year period to 30 June 2011 were more likely to relate to the core internal activities of the business than to some external threat. Businesses in certain sectors also believed that some of their customers were more likely than others to pose a risk of money laundering and financing of terrorism. For example, those in the financial services sector were more likely than those in other business sectors to consider that politically exposed persons (PEPs) and foreign companies posed greater money laundering risks than other types of customers. Individuals (both Australian and overseas residents) were the customer type most frequently nominated as posing higher risks of both money laundering and financing of terrorism than corporate customers.
Survey participants were asked about three aspects of their AML/CTF activities—the procedures used to identify customers (so-called ‘know-your-customer’ (KYC) procedures), the extent to which they undertook ongoing customer due diligence and the extent to which they undertook pre-employment screening processes. It was found that 85 percent of businesses conducted ongoing customer due diligence procedures, with 80 percent complying with KYC requirements and 75 percent conducting pre-employment screening.
There was no significant difference in terms of rates of compliance with customer due diligence requirements between businesses that took the view that they faced few risks of money laundering or financing of terrorism and those who believed that they were at higher levels of risk. Similarly, there was no significant relationship between compliance with the three anti-money laundering measures outlined above and the perceived effectiveness of the regime generally.
A significant relationship was found between the business sector of participants and their likelihood of complying with KYC, ongoing due diligence and pre-employment screening processes. Businesses from the financial services sector were significantly more likely than other businesses to perform ongoing due diligence and KYC procedures. Businesses from these sectors, such as banks, as well as those offering cash delivery services were more likely than other sectors to conduct pre-employment screening.
Anti-money laundering/counter-terrorism financing software
A number of software applications have been developed to assist businesses to comply with AML/CTF obligations. Some of these facilitate customer identification by enabling names to be matched with lists of internationally proscribed persons and organisations, while others enable transactions to be tracked and monitored for reporting purposes. The present survey asked respondents to indicate which types of software they used, if any, and to state whether or not the software they used was effective in meeting legislative obligations. Since 2009, a number of businesses may have begun using software for compliance purposes.
Less than one-quarter of businesses indicated that they used software for AML/CTF compliance purposes. Those in the gambling sector were the least likely to use AML/CTF software. The majority of businesses considered that procedures undertaken by staff and internal audit were effective in monitoring transactions, while only a few businesses agreed that software was an effective means of monitoring transactions for AML/CTF purposes.
Reporting suspicious matters
Australian reporting entities are required to submit various financial transaction reports to AUSTRAC. Reporting entities are required to lodge suspicious matter reports (SMRs) upon forming a suspicion that a customer may be dealing with the proceeds of crime or involved an offence or tax evasion. SMRs are discretionary reports and in Australia, may be triggered at any stage of a transaction.
Survey respondents were asked to indicate the circumstances in which the non-reporting of suspicious transactions to AUSTRAC may be justifiable. The largest proportion of businesses considered under-reporting of suspicious matters to be unjustifiable, while most businesses considered that over-reporting of suspicious matters could be justifiable. More than 70 percent of businesses agreed over-reporting was justifiable where they were unsure of what a transaction involved. Almost 60 percent agreed that over-reporting was justifiable in order to avoid penalties for non-compliance.
Participants’ views on under-reporting and over-reporting suspicious matters were associated with business sector. Businesses in the banking sector were the least likely to consider over-reporting justifiable in certain circumstances. Financial services sector businesses, such as banks, and securities and derivatives firms, were more likely to consider under-reporting justifiable in certain circumstances than other types of businesses.
The participants’ business sector was also associated with the likelihood of identifying a suspicious matter in the year to 30 June 2009. Banks, despite holding more restrictive views on the justifiability of over-reporting than other business types, were most likely to have identified a transaction suspected of being linked to money laundering in the year to 30 June 2009. Participants outside the banking sector were more inclined than not to report a suspicious matter, while those in the banking sector were the most likely to actually encounter and identify a suspicious matter. None of the surveyed businesses reported matters involved with the financing of terrorism.
Participants were also asked to estimate the approximate cost of complying with the AML/CTF regime over the 12 month period ending 30 June 2009. Owing to the fact that the period 2008–09 was one during which some businesses were starting to implement their AML/CTF systems, costs incurred during this period may have been quite high. The median expenditure on AML/CTF compliance was $1,000, with 57 percent of businesses reporting an AML/CTF expenditure of $1,000 or less for the year. The range of compliance expenses across the entire sample was from zero costs to $60m for the year in question. Managed funds and superannuation businesses had the highest median compliance costs of $6,000 in the 2008–09 financial year, while businesses from the foreign exchange sector and those classified as ‘other’ reported median costs of below $500.
Two-thirds of businesses believed that their costs would remain the same as in the 2008–09 year for the two years to 30 June 2011. Staff training and professional development, staff salaries, record keeping, monitoring and reporting accounted for the majority of compliance costs for Australian businesses.
The survey also sought to determine if businesses’ expenditure on compliance in 2008–09 was associated with their views on the extent to which they considered compliance with the regime to be too onerous. It was found that businesses with higher costs were not more likely than other businesses to view compliance with the regime as being too onerous for the risks involved. The likelihood of participants viewing compliance with the regime as being too onerous, however, did not directly increase with the level of expenditure. Businesses that spent $1,000 or less in 2008–09 were more likely to give neutral responses to the question of whether the regime was too onerous for the risks involved than those that had higher expenditure.
Attitudes towards the AML/CTF regime
The largest proportion (45.5%) of respondents neither agreed nor disagreed that the system was too onerous with respect to money laundering risks. The proportion of respondents who agreed with the statement (30%) was slightly higher than the proportion who did not (25.7%). These findings indicate there was no strong feeling either way about the onerous nature of the regime. The businesses that considered the burden of compliance too onerous for the risks involved were the ones that also considered the regime to be less than effective in minimising the risks of ML/TF.
Some businesses anticipated that compliance with the AML/CTF regime would be an onerous process when it was introduced in 2006, but later found that compliance was relatively simple or found that AML/CTF enhanced existing compliance programs or other risk management processes, therefore not requiring fundamental changes to procedures already in place.
Overall, two-thirds of Australian businesses considered the regime to be effective in deterring offenders, minimising risk of financial crime, minimising risks of money laundering, minimising risks of terrorism financing, maintaining the integrity of the financial system and promoting good governance practices. Respondents viewed the regime as being neither effective nor ineffective in facilitating proceeds of crime recoveries and minimising the risk of reputational damage.
Overall, it appeared that the Australian businesses regulated under the AML/CTF regime in 2009 who responded to the current survey believed that the risk of money laundering was low and that the risk of financing of terrorism was even lower. Overall, the perception of respondents was that the benefits of the regime appeared to justify the compliance burden that many businesses experienced. Respondents felt that there was a continuing need to improve the levels of education about the risk of money laundering and financing of terrorism in order to ensure that all levels of business in Australia appreciated the aims of the regime and how their compliance activities may assist in preventing and deterring serious financial crime.
Businesses without previous exposure to AML/CTF compliance were more likely to report difficulties with the system and to consider the regime as being overly onerous compared with the risks involved. Some of those businesses indicated they were experiencing difficulty with conducting risk assessments, implementing risk-appropriate measures and complying fully with the regulatory obligations.
Educational materials and training activities tailored to businesses without previous exposure to AML/CTF or other forms of financial regulation, or without other extensive compliance activities, were identified as potentially improving compliance and effective implementation of legislative requirements. Initiatives aimed at these sectors would be likely to improve businesses’ capacity to conduct a risk assessment, which is the central component of the risk-based AML/CTF system. It might be inferred from the recommendations of respondents for better dissemination of education and training materials that the information made available to the regulated sector at the time of the survey did not assist some reporting entities in understanding and complying with the AML/CTF regime. In the period since the survey was conducted, AUSTRAC has developed a more extensive range of education, training and guidance materials, including industry-specific guidelines, risk management tools to assist small and medium-sized business to identify, assess and treat risks and annual typology reports describing known methods by which specific sectors have been used for ML/TF purposes. In addition, the private sector has developed new training courses for those involved in AML/CTF compliance work. For example, the Diploma of Applied Anti-Money Laundering and Counter-Terrorism Management is a new workplace-focused qualification, developed jointly by the Australian Financial Markets Association and the International Compliance Association. More recent surveys being undertaken by AUSTRAC as part of its 2010–11 supervision strategy should reveal whether longer exposure to the AML/CTF regime has delivered greater understanding of ML/TF risks and enhanced capacity to comply with regulatory obligations.
The findings presented in this report need to be viewed as part of a wider context, as business perceptions represent only one pieceof the broader ML/TF picture. Due to the complexity and clandestine nature of ML/TF, most if not all businesses will only see a part of the environment. A significant amount of ML/TF and illicit financial activity can only be detected when government agencies examine larger holdings of transaction reporting and other information to which businesses rarely have access.
AUSTRAC and other government agencies provide guidance and information on ML/TF risks, including real life cases and methods that have been detected. But this information is, by necessity, limited. Intelligence and operational sensitivities restrict the amount of information and detail authorities can provide to businesses on actual cases or the full extent of the known ML/TF risk. Government authorities also acknowledge that they too do not possess comprehensive visibility of the entire ML/TF risk environment. For these reasons, business perceptions of ML/TF risk presented in this report need to be seen as only one view of the ML/TF environment in Australia.