As a gateway to significant financial transactions, financial advisers play a critical role in identifying potential money laundering or terrorist financing activities. Make sure you understand your role in managing potential risks for your clients and your firm.
During an online briefing to advisers in November 2021, Minter Ellison Partner Richard Batten shared the implications of Australia’s Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulatory regimes for financial advisers, which are enforced by the Australian Transaction Reports and Analysis Centre (AUSTRAC).
Batten leads Minter Ellison’s financial services regulation practice, and has expertise in the regulation and distribution of wealth management and insurance services and products.
“AUSTRAC sees financial planning as a medium-risk sector, and has identified its gateway role as crucial,” he said. “Your role is to collect the required information, and through your deep engagement with clients you are in a better position than anyone to identify if something odd is taking place.”
According to AUSTRAC data, financial advisers are more likely to submit suspicious matter reports (SMRs) relating to money laundering, but other activities should also be monitored – including tax evasion or the use of false documents.1
“AUSTRAC has indicated they don’t think enough suspicious matter reporting is happening among financial planners – and that may be because they don’t fully understand their obligation, or perhaps some sensitivity around protecting clients,” observed Batten.
Understanding your AML and CTF obligations
Financial advisers can play a critical role in stopping the cycle of money laundering, which involves the placement of ‘dirty’ or illegally obtained money into the financial system, then layering it through transfers, loans, and false invoice payments so it effectively becomes integrated as ‘clean’. This money could be used to purchase luxury assets, or make commercial investments.
“As an adviser, if you are arranging a managed fund or other form of investment for a client, or helping them buy or sell securities, you are a reporting entity within the AML/CTF regime,” explained Batten. “That means you need to assess the risk: if you are seeing a high value transaction, think about where that money is coming from.”
Terrorism financing tends to be linear rather than cyclical, and the money involved may be coming from illicit activities, or legitimate sources – such as a charitable donation or business revenue.
Know your client
Knowing your customer, or KYC, is a critical step. This involves collecting and verifying identity and other related information, based on the appropriate risk for that product or customer type. There may be Enhanced Customer Due Diligence (ECDD) requirements for higher risk clients – such as a politically exposed person, as well as Ongoing Customer Due Diligence (OCDD) requirements. You may need to share that identification and/or verification information with AUSTRAC or the product issuer at any time, so sound record keeping is an important part of the compliance and enforcement process.
Although the ways we work and transact are now increasingly online, it is still vital to ensure you are seeing a true copy of documentation.
“Dealing in a virtual world may make some things easier, but it also adds more risk. That’s why a lot of product issuers are seeking ‘wet ink’ certifications; they want to know you’ve actually seen the document as part of their risk mitigation,” Batten said.
Acting on suspicions
Financial advisers are AUSTRAC’s eyes and ears on the ground, but you need to tread carefully when it comes to SMRs.
The AML/CTF regime is about identifying people and reporting suspicions, and as Batten explained, “that simply means putting a report into AUSTRAC. You need to be careful to avoid ‘tipping off’ – alerting your client that you think something is suspicious – as that can be an offence.”