Australia’s mutual banking sector: assessing the money laundering risks

AUSTRAC defines mutuals as “approved deposit-taking institutions (ADIs) that are owned by their customers, such as mutual banks, building societies and credit unions”. Mutuals typically service a particular community, industry, trade or profession, and return profits to their customers rather than distributing them to shareholders.

The mutual banking sector is rapidly consolidating with a 50% decrease in entities from 2008-2018, whilst the value of the sector itself has almost doubled.

In a recent report, AUSTRAC explores the money laundering and terrorism financing (ML/TF) risks faced by the sector.

 

Assessing the risks

AUSTRAC assesses the overall ML/TF risk associated with the mutual banking sector to be medium.

This rating is based on assessments of the criminal threat environment, the vulnerabilities in the sector, and the consequences associated with the criminal threat, each of which have been independently assessed.

 

Criminal threat environment

The criminal threat environment refers to the nature and extent of ML/TF and predicate offences that are associated with the mutual banking sector.

AUSTRAC assesses the mutual sector faces a medium level of criminal threat, based on suspicious matter reports (SMRs) submitted by the sector and analysis of intelligence and information from AUSTRAC, partner agencies (including the AFP, ACIC and ATO) and industry.

AUSTRAC analysed 2000 SMRs submitted by the sector, of which:

  • 67% indicated potential money laundering attempts – e.g. large and frequent cash transactions and transactions involving unknown third parties. However, AUSTRAC considers many of these reports may represent legitimate (albeit unusual) transactional activity.
  • 23% indicated fraud against individuals – e.g. scams, identity fraud and theft from customers’ accounts.
  • 13% indicated tax evasion.
  • 5% indicated welfare fraud.
  • Less than 0.5% indicated terrorism financing – there is some evidence that entities who pose a high risk of terrorism financing may be turning to mutuals after a period of transacting with other banks.

Note: many SMRs showed more than one suspected offence type. For example, stolen identity information was used to open accounts that may then have been used to launder proceeds of crime.

 

Vulnerabilities

AUSTRAC assesses the mutual banking sector is subject to a high level of ML/TF vulnerability, making it susceptible to criminal exploitation.

AUSTRAC’s assessment of vulnerabilities falls into the following categories:

  • Customers: the sector has a sizeable and diverse customer base, and many SMRs reported concerns about customers’ source of funds and wealth. Some high-risk customer types include businesses (based on the type of business activity they are engaged in), politically exposed persons and other public officials who may represent a foreign bribery risk.
  • Products and services: this inherent risk largely relates to the nature of banking products in general such as transactions with high risk jurisdictions or unknown third parties, and limited oversight over third-party service providers.
  • Delivery channels: e.g. the sector utilises online banking, banking apps and the New Payments Platform (NPP) – an open access infrastructure for fast payments in Australia. Outsourcing of customer-facing services is also common in the mutual sector, which creates ML/TF vulnerabilities.
  • Exposure to foreign jurisdictions: facilitating transactions with foreign jurisdictions creates risk of serious and organised crime groups moving criminal proceeds to and from Australia or funding terrorism, and adds complexity to transactions which may be used to obscure beneficial ownership.
  • Implementation of risk mitigation strategies: Mutuals need to have strong AML/CTF systems in place that are tailored to their individual requirements and reviewed to ensure that they remain adequate over time. This includes risk assessment, suspicious matter reporting, transaction monitoring programs and the potential outsourcing of compliance functions to third parties. AUSTRAC assesses that mutuals’ risk mitigation systems and controls could be strengthened.

 

Consequences

AUSTRAC assesses the consequences of ML/TF activity in the mutual banking sector to be moderate.

Consequences for mutuals can include:

  • Loss of revenue from fraud
  • Increased regulatory oversight and potential legal actions
  • Increased costs associated with combating criminal attacks
  • Reputational damage

Consequences for customers can include:

  • Financial losses
  • Emotional distress
  • Lower member returns

Consequences for the Australian community can include:

  • Increased criminal activity
  • Providing a safe haven for criminals due to undetected criminal activity
  • Reduced government revenue from tax evasion and heightened expenditure from welfare fraud, impacting on the delivery of critical government services.

 

Conclusion

Australia’s mutual banking sector is vulnerable to criminal exploitation in the form of money laundering, fraud, tax evasion and terrorism financing.

It is critical for entities operating in this sector to understand and adequately respond to the inherent ML/TF risks in order to protect themselves, their customers and the Australian community against criminal offences targeting Australia’s financial system.

Mutuals need to refine their risk assessments, risk mitigation strategies and compliance controls consistent with the nature, size and complexity of the individual organisation, rather than implementing ‘off the shelf’ solutions.

Nyman Gibson Miralis provides expert advice and representation in complex cases involving cross-border financial crime and money laundering.

Contact us if you require assistance.