Australia’s banking sector is at medium to high ML/TF risks

A national risk assessment on major banks and other domestic banks operating in Australia indicated that they are at medium and high risks for money laundering and terrorist financing (ML/TF) activities. Tranche 2 anti-money laundering (AML) reforms are likely to soon come into force in Australia and it could help the country with its reputation as a trusted financial centre, especially after several high-profile money laundering court cases.

Australia’s banking sector sits at the centre of its financial services industry. It is hoped that the reforms will help fight the evolving threat of organised financial crime, which is estimated to cost Australia up to $60 billion a year. According to the Australian government, “Significant regulatory gaps and vulnerabilities have made Australia an increasingly attractive destination for laundering illicit funds.”

AML Tranche 2 has already been introduced by countries like the UK, Canada, and New Zealand and firms in Australia are preparing for these changes. Australia is one of only three jurisdictions that are not aligned with the Financial Action Task Force (FATF)  recommendations on international AML standards. Once the Tranche 2 reforms are implemented, they will be and this will mean changes for a range of businesses as they must comply with the regulations to avoid penalties.

Australian banking sector’s risk assessments

AUSTRAC, the government’s financial intelligence agency, analysed four ML/TF risk assessments to help the country’s banking sector identify, understand and disrupt serious financial crime. 

These assessments examined four sectors:

• its four major banks 
• other domestic banks 
• foreign subsidiary banks 
• foreign bank branches 

While the ML/TF rating for foreign subsidiary banks and foreign bank branches is medium risk, it is high risk for major banks and other domestic banks operating in Australia. 

The assessment noted that most suspected ML/TF activity involves retail banking products and services, particularly those that facilitate cash transactions or rapid transfer of funds domestically or internationally. Significantly, it was pointed out that these products and services are exploited at all stages of the money laundering cycle, and are exposed to terrorism financing activity and a range of predicate offences such as drug trafficking, fraud and tax evasion.

The fact that the ML/TF risk associated with Australia’s major banks is high is significant in that major banks, combined, hold approximately three quarters of the banking sector’s total assets, process the majority of Australia’s international transactions and offer thousands of products and services to a significantly larger and more diverse range of customers than other banking subsectors. 

Major banks are exposed to money laundering at all stages and are more exposed to terrorism financing than other banking or financial sectors because of their very large customer base, significant number of high-risk customers, high exposure to cash, extensive product offerings and exposure to foreign jurisdiction risk. 

The ML/TF risk for other domestic banks is also high. These banks are also exposed to a range of money laundering methodologies and suspected terrorism financing because of their large customer base, high exposure to cash, increasing use of remote service delivery channels and similar exposure to foreign jurisdiction risk. They also have a vulnerability because they get some of the higher-risk customers from the major banks, such as members of organised crime groups and people linked to terrorism. 

The ML/TF risks for foreign subsidiary banks is medium. But there are threats in this subsector, such as frauds and scams, which can be exacerbated by the use of online delivery channels. They do have a high exposure to cash, a heavy reliance on remote delivery channels and a high exposure to foreign jurisdiction risk and, of course, they have exposure to the higher risk customers that left the major banks.

Similarly, the ML/TF risks for foreign bank branches is medium. This subsector faces different threats because of its limited retail banking footprint and it mostly services corporate and institutional customers. The primary threats here are frauds and scams committed against their customers and corporate tax evasion. Their vulnerability stems mostly from their use of correspondent banking and agent bank arrangements, customers engaged in international trade, and private and investment banking products and services that help disguise the true source and destination of funds. 

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