In September 2018, the Australian government announced funding for a $5.2 million initiative between the Australian Transaction Reports and Analysis Centre (AUSTRAC) and industry partners to produce “targeted national money laundering/terrorism financing risk assessments for Australia’s largest financial sectors” including two risk assessments for the remittance sector. The first would focus on independent remittance dealers (IRD) and the specific money laundering (ML) and terrorism financing risks (TF) that they face, while the second would focus on risks to “remittance network providers and their affiliates”.
In September 2022, AUSTRAC released the first of those risk assessments which drew from a comprehensive review of 1,100 intelligence reports and suspicious matter reports (SMR), 13% of which related to IRDs that “use their own products, platforms or system to provide remittance services directly to customers”. In the report, AUSTRAC points out that the IRD category refers to very large entities and very small entities: consequently, the risk assessment reflects the variety of ML/TF threats that collectively affect the industry.
AUSTRAC has stated that the risk assessment is not intended to be received as “targeted guidance or recommendations” for IRDs’ anti-money laundering (AML) and counter-financing of terrorism (CFT) compliance efforts. However, the regulator does expect IRDs to review the assessment and use it to:
- Inform their in-house risk assessments
- Improve their risk management systems
- Improve their understanding of the wider risk landscape
With those factors in mind, let’s take a closer look at AUSTRAC’s IRD report, and examine some of its key highlights.
Remittance Providers’ ML/TF Threat Environment
As part of the risk assessment, AUSTRAC assessed the threat environment facing IRDs in Australia, which refers to “the nature and extent of money laundering, terrorism financing, and predicate offences associated with IRDs”. AUSTRAC classified the threat environment as presenting a “medium” risk but broke down its analysis across the different types of threat: money laundering, predicate offences, and terrorism financing.
AUSTRAC assessed the money laundering threat environment to IRDs as presenting a “high” level of risk, with both larger and smaller Australian IRDs facing the same level of threat, including links to “serious and organised crime”.
The risk assessment suggested that the IRD sector was primarily exploited for the purposes of placing and layering illegal funds because of its specialisation in moving money quickly and at low cost over multiple transactions. High risk foreign money laundering jurisdictions for Australian IRDs included the UK, the US, China, and Nigeria, with most key money laundering predicate offences (such as fraud, trafficking, and tax evasion) originating in Australia.
AUSTRAC outlined the following common indicators of IRD money laundering:
- Customers that are unable to explain their source of funds.
- Customers using cash payments or multiple debit cards to fund their remittances.
- Remittances sent through certain jurisdictions that do not match the customer’s profile.
- Cash deposits in amounts just below reporting thresholds.
- Seeming coordination between multiple customers opening new accounts.
- Customers requesting personal details (such as names) to be omitted from transactions.
- Recipients of remittances that have no apparent connection to the sender.
The AUSTRAC risk assessment classified the IRD terrorism financing threat as ‘medium’. The classification reflects the relatively low number of terrorism-financing related alerts submitted by IRDs and represents a decrease from previous assessments, perhaps a result of changing terrorism financing methodologies. Despite the risk classification, AUSTRAC pointed out that IRDs were involved in 20% of all terrorism-financing intelligence reports in the review.
Key indicators of terrorism financing involving IRDs include:
- Use of cash to fund remittances.
- Remittances sent to high risk jurisdictions.
- Enquiries from law enforcement or media organisations.
- Reasons given for remittances including ‘charitable donation’ or ‘family support’.
- Individual or non-profit organisation customers.
A predicate offence refers to a crime which generates illegal funds that must subsequently be laundered. The AUSTRAC report classified the threat to IRDs from predicate offences as “medium” and the regulator pointed out that the risk was predominantly against larger IRDs, reflecting their dominance in the sector.
The risk assessment identified the following key predicate offence threats to IRDs:
- Fraud: IRDs are attractive targets for fraudsters because of their capacity to facilitate money transfers across the world with little prospect of recovery.
- Scams: Criminals perpetrate a range of scams in Australia, including romance scams, false billing scams, and remote access scams, and request that victims send them money using IRD services.
- Child exploitation: IRDs facilitate the rapid movement of funds to jurisdictions that carry a high risk of child exploitation crimes.
- Drug trafficking: IRD services are exploited most commonly for small scale drug trafficking.
- Tax evasion: IRDs are used for personal tax evasion as commonly as they are for corporate tax evasion.
The AUSTRAC risk assessment set out the inherent vulnerabilities of the IRD sector that criminals commonly target.
Customers: The IRD sector serves a diverse customer base, which includes a significant proportion of customers from ethnic communities which are likely to remit money for family support, community funding, and charitable donations. The IRD customer population includes a “moderate number” of higher risk customers, including known criminals, foreign customers, companies and trusts, and politically exposed persons (PEP).
Products and services: The IRD sector’s products and services represent a “high” ML/TF vulnerability as a consequence of their high exposure to cash and the speed with which they move funds between accounts. Similarly, some IRD services enable customers to exchange currencies, making it more difficult to track their origins.
Delivery channels: The risk assessment stated that the decline in face-to-face customer contact, and the shift to online or remote service as a consequence of the COVID-19 pandemic, was an increasingly significant vulnerability of the IRD sector. In particular, the anonymity and speed of online IRD services present opportunities for criminals to launder money successfully. AUSTRAC also identified the use of outsourced third party service providers in foreign countries as a vulnerability because of the added complexity that process adds to the remittance process.
Foreign jurisdictions: The IRD sector’s ongoing exposure to foreign jurisdictions represents an ML/TF vulnerability because of the inherent regulatory complexity of the cross-border movement of funds. Cross-border remittances also increase the likelihood of contact with high risk jurisdictions.
AUSTRAC characterised the consequences of ML/TF in the IRD sector as “major”, and set out the effects of those crimes on the following individuals and groups:
The report suggests that criminal activity may have an increased impact on individual customers, causing both financial and emotional damage. Specific consequences include:
- Personal and financial loss and emotional distress
- Potential legal repercussions for victims
- Increased compliance spends causing price increases for customers
- Loss of services due to de-risking
AUSTRAC suggests that ML/TF threats pose significant “financial, operational, and reputational risks” to the IRD subsector, including:
- Financial losses and increased insurance costs
- Reputational damage and difficulties establishing business relationships
- Stricter regulatory oversight
- Enforcement and legal actions, potentially with civil or criminal penalties
- De-banking and de-risking
The Australian Financial System
The AUSTRAC review points out that ML/TF activities damage Australia’s international reputation and the country’s financial infrastructure. Specific consequences include:
- Difficulties combating crime
- Reduced government revenues
- Increased financial and physical damage from predicate crimes
- Increased financing of illegal activities as a result of undetected money laundering
- Loss of confidence in the Australian IRD sector
National and International Security
The AUSTRAC review suggests that ML/TF in the IRD sector has the potential to impact national and international security interests, with consequences that include:
- Gang related violence
- Increased influence of drug trafficking organisations in foreign countries
- Increased support for Australian foreign terrorists
- Facilitation of terrorism in Australia and overseas
How to Reduce ML/TF Risk in IRDs
AUSTRAC notes that risk mitigation strategies vary significantly between IRDs, which means that some face a greater level of risk than others. While some IRDs have “relatively comprehensive risk mitigation strategies”, others have “unsophisticated approaches” with deficiencies in customer due diligence (CDD), staff training, and understanding of AUSTRAC AML/CFT obligations. The review sets out specific ways that Australian IRDs could enhance their risk mitigation measures, including:
- Regular assessments of customer risk
- Enhancements to CDD and screening processes
- Comprehensive risk assessments for enterprise IRDs
- Regular independent audits of risk management solutions
- Employee training
The review identified enhanced risk assessments, CDD, and customer screening as crucial components of an IRD risk mitigation solution. Implementing those measures effectively as part of a compliance solution means IRDs must collect and analyse vast amounts of customer data, and be able to act quickly when suspicious activity is detected.
Ripjar’s Labyrinth Screening platform was developed to help IRDs and other financial service providers manage their risk mitigation requirements with speed, accuracy and efficiency, and achieve AUSTRAC compliance on an ongoing basis. Labyrinth Screening enables IRDs to screen customer names against thousands of news and adverse media sources, and international watchlists, in over 20 languages, in real time. Our platform is built with cutting-edge machine learning technology to seamlessly blend structured and unstructured data, and provide actionable intelligence.