AUGUST 6 2004

The Financial Action Task Force (FATF) an international inter-governmental body set up to combat money laundering and terrorist financing is extending its recommendations to the government to deal with money laundering. The government is proposing to reform Australia’s Financial Services Sector with these recommendations, which will expand and enhance:

• Customer due diligence requirements for financial institutions;
• Measures for dealing with the higher money laundering risks associated with correspondent banking relationships and politically exposed persons;
• Transparency through measures to improve information on the beneficial ownership of legal entities such as companies and legal arrangements such as trusts; and
• The role for particular industry sectors through the extension of anti-money laundering obligations to non-financial businesses and professions (including accountants, trust and company service providers, and lawyers).

These reforms bring about major changes to the reporting and due diligence obligations of Australian financial institutions and will significantly affect the banking and finance industry. While a risk-based approach will be adopted to achieve greater flexibility within industry standards, amendments to the Financial Transaction Reports Act impose stricter reporting and due diligence obligations on financial service providers.

The Financial Transaction Reports Act 1988 came about in response to royal commissions, which exposed links between money laundering, tax evasion, fraud, and organised crime. However, the government feels compelled to accept these recommendations so it can deal with the expansion of electronic banking, financial services available outside the traditional banking sector and the pressures of external countries such as USA after 11 September 2001.

The government will allow business to style policies and procedures to combat potential money laundering risks and will give industry bodies a greater role in developing and maintaining effective programs.

Obligations to Report, Due Diligence & Record Keeping

Every business that provides services and sell products to retail customers must implement comprehensive reporting systems designed to detect suspicious activity more effectively. Businesses that handle the flow of funds through the financial system must consider how monitoring and tracking obligations will affect their information handling and regulatory reporting. Record-keeping obligations need regular review to ensure that information is available within three days of a request by an anti-money laundering regulator or nominated agency.

Currently, customer due diligence is limited to obtaining and verifying a customer's identity, date of birth and residence when opening an account. The cash dealer must then maintain records of identification and account information. However, once a customer's details have been verified, there is no further obligation to monitor the accuracy or validity of those details. One of the recommendations is for ongoing scrutiny of customer identification data, financial activity, and account behaviour, which will involve monitoring customer activity as well as updating customer information records.

Financial sector businesses must exercise higher level of customer due diligence and have adequate operational and risk management mechanisms in place in certain situations which include business relationships involving politically exposed persons and business relationships or transactions with countries that do not adequately apply the FATF standards.

Measures will be introduced to ensure that Australian financial institutions undertake satisfactory customer due diligence on relationships with foreign counterparts. To meet the new international standard, financial institutions must not only satisfy themselves that they are sufficiently diligent with their customer bank, but that their customer bank is performing effective due diligence on its own customers.

The new FATF standards will require the collection and retention of additional customer due diligence information relevant to ongoing due diligence measures, which may include:

• Account files;
• Transaction information;
• Business correspondence;
• The purpose of and reason for opening the account or establishing the business relationship;
• The anticipated level and nature of the activity to be undertaken;
• The relationships between account signatories and underlying beneficial owners; and
• The expected source and origin of the funds to be used in the relationship, details of occupation/employment (for personal accounts), and sources of wealth or income and customer net worth (particularly for private banking relationships).

NEED MORE INFORMATION

Behan Legal advises and assists on these important issues. For an appointment, call 03 9646 0344.