Banks at high risk from crime, AUSTRAC warns

The regulator has published risk assessments on money laundering and terrorism financing (ML/TF) across the banking sector, after engaging with industry and other regulatory and law enforcement agencies.

The overall ML/TF risk ratings for the banking sector have ranged from medium for foreign subsidiary banks and foreign bank branches, to high for the big four and other domestic banks.

Most of the suspected ML/TF activity involved retail banking products and services, especially those that facilitate cash transactions or rapid transfer of funds domestically or internationally.

Looking at the major banks, which hold around three-quarters of the banking sector’s total assets and process the majority of Australia’s international transactions, AUSTRAC reported they are vastly exposed due to their large customer base, extensive product offerings and high exposure to cash.

The big four served around 47 million customers during the 2018-19 reporting period and overlooked $1.4 trillion in housing loans, covering 78 per cent of the mortgage market.

Further, the big four facilitated $3.5 trillion in international funds transfers during the reporting period – more than all other AUSTRAC reporting entities combined.

The assessment is partly based on a sample of 8,000 suspicious matter reports (SMRs) filed by the big four banks from April 2018 to March 2019, out of a total of 174,507 reports.

The SMRs related mostly to transaction accounts (85 per cent), but around 5 per cent were linked to loan accounts, while 8 per cent related to chequebooks, 6 per cent to bank cheques and 2 per cent to credit cards.

Money laundering was deemed the primary threat facing the major banks, followed by tax evasion, drug trafficking, fraud and scams.

Around half of the SMR sample related to money laundering, while two-thirds of money laundering-related intelligence reports from agencies involved the exploitation of at least one major bank.

The big four are reportedly exploited at “all stages of the money laundering process” and across all transactions, whether international, domestic, incoming or outgoing.

The purchase of high-value assets was one common methodology for money laundering, with the big four’s dominance of the home loan space leaving them more exposed to laundering through real estate than any other financial subsector.

High suspected misuse of home loans

AUSTRAC assigned home loans and credit cards a high vulnerability perception rating, while business and personal loans had a medium level. There was a high rating for known or suspected criminal misuse of home loans.

“…Real estate remains an attractive destination for criminal proceeds,” AUSTRAC’s assessment on the big four noted.

“Serious and organised crime groups can use real estate as an investment or as a lifestyle benefit to integrate the proceeds of crime into the legitimate economy. The sale and purchase of real estate presents particular appeal to money launderers looking to conceal large sums of money in few transactions or who use corporate vehicles and trusts to disguise beneficial ownership.”

AUSTRAC’s partner agencies had reported cases where illicit funds had been used to repay a loan or to purchase an asset outright, as well as cases where real estate agents, mortgage brokers and luxury car dealers helped entities to launder criminal proceeds.

The report also referred to a number of cases of fraud enabled by mortgage brokers. Loan application fraud was the second-most commonly reported fraud from the banks, following identity fraud.

The non-major banks meanwhile faced displaced higher-risk customers from the big four and a number of the smaller entities were found to have less sophisticated and less-resourced AML/CTF programs.

AUSTRAC examined 12 of the non-major banks, with a collective 5 million customers and $203 billion in housing loans (12 per cent of mortgages across all banks).

The primary threats facing the non-major banks were fraud, money laundering, scam and tax evasion, although the subsector was also exposed to terrorism financing and other criminal activity.

Across the non-major banks’ sample of 2,698 SMRs, loan accounts and loan applications were identified in 7 and 8 per cent of the reports respectively.

They commonly included applying for loans with falsified payslips or staged wages, apply for loans with false identity documents and immediate cash withdrawals or transfers, and paying off home and vehicle loans with structured cash payments to integrate illicit funds into the financial system.

However, home loans were given a medium vulnerability perception rating at the non-major banks, with a medium level of detected exploitation, unlike the big four counterparts.

AUSTRAC chief executive Nicole Rose commented that it is vital the banking sector uses the risk assessments to help them to protect their businesses, customers and the Australian community from criminal threats.

“We are navigating a rapidly changing financial system and advances in technologies and platforms. That is why government, law enforcement and the finance sector must continue to work together to protect Australia’s financial system and Australians from serious and organised crime,” Ms Rose said.

The financial services sector has had the second-highest number of data breaches of any Australian industry between January to July and is increasingly experiencing malicious attacks, according to the Office of the Australian Information Commissioner (OAIC).

Around 58 per cent of data breaches in the financial sector were considered malicious or criminal related.

Further, loan application and identity fraud were deemed the greatest ML/TF risk to non-bank lenders earlier this year, with AUSTRAC noting the sector’s reliance on third-party players.

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