AUSTRAC has released a Risk Assessment Report on Australia’s Securities & Derivatives Sector (Risk Assessment). This is the fourth risk assessment of the Financial Services industry undertaken by AUSTRAC, developed in conjunction with partner government agencies such as the AFP and ASIC, and key industry experts, including online traders, stockbroking firms and banks. So why focus on the securities and derivatives sector? Well it’s quite simple really. Australia has the second most active stock market in the Asia-Pacific region. Over 6.7 million Australians own shares and on average there are 929,000 trades per day on the ASX worth $4.7 billion.
The risk assessment initiative which started last year is designed to educate and inform reporting entities on specific designated services to:
- improve and refine AML/CTF risk assessments and internal controls; and
- meet their reporting obligations under the AML/CTF Act, particularly the requirement to submit Suspicious Matter Reports (SMRs) to AUSTRAC.
Previous risk assessments include superannuation, financial planning and store card sectors.
Overall, AUSTRAC’s Risk Assessment revealed that:
- fraud was the largest reported threat to the sector (51 per cent), driven predominately from cyber related fraud, including hacking of customer email and trading accounts;
- money laundering together with insider trading/market manipulation, were equal in being the second largest reported threat;
- tax evasion and terrorism financing were the least reported threats to the sector; and
- the risk of criminal exploitation for the securities and derivatives sector is at the “high end of ‘medium.'”
Entities operating in the securities and derivatives sector are exposed to a wide variety of customer types and therefore related risks associated with misuse of products and services. In particular:
- off market transfers; and
- third-party payments.
The trend toward customers using online services as a medium to open accounts to trade and to quickly move funds, creates another layer of challenges for reporting entities, particularly in relation to cybercrime and money laundering.
With 45 per cent of the ASX market owned by foreign entities, the sector is subject to significant foreign jurisdictional risk. 206 SMRs reported suspicious transactions relating to 49 jurisdictions, with China and Hong Kong accounting for a quarter of these SMRs. Corporate customers in low-tax jurisdictions (such as the British Virgin Islands and Switzerland) created additional vulnerabilities such as tax evasion, fraud, money laundering, insider trading and other offences.
Major risks identified by AUSTRAC
One of the major risks that was identified through fraud were cyber-enabled techniques used so cybercriminals can hack customers’ email and online trading accounts. Some reporting entities perceived cyber-enabled fraud as a serious issue in both volume and the level of sophistication. There were a significant number of fraud-related SMRs that revealed stolen and/or fraudulent identification documents were being used to set up trading accounts to withdraw funds. Even fraudulent credit cards were being used to fund trading and subsequently withdraw trading funds.
Many SMRs indicated the use of well-established methodologies to launder money, including structured cash deposits and unusually large cash deposits. A significant number of SMRs describe the placement of cash into transaction accounts, which were subsequently transferred into trading accounts. The following characteristics were identified where a customer was suspected of money laundering:
- customer’s occupation was recorded as unemployed;
- transaction activity was conducted in a short amount of time (sometimes on the same day);
- transactions were made at different bank branch locations;
- transaction activity is inconsistent with customer profile;
- deposits may be conducted by third parties; and
- source of the funds is unknown.
Insider Trading and Market Manipulation
Online trading platforms were increasingly being used by overseas-based entities, particularly from China, Hong Kong, Canada, Europe and Russia in an attempt to manipulate the Australian financial market. AUSTRAC notes that these attempts are increasing, due to foreign-based individuals’ access to the Australian market. Since 2011, 35 people have been successfully prosecuted for insider trading as a result of ASIC’s investigations.
Tax Evasion and Terrorism Finance
AUSTRAC identified that the present level of reporting of tax evasion and terrorism financing is very low. Tax evasion might not be reported that often, due to customers using off-shore providers to create corporate structures that conceal the beneficial ownership of shares to evade tax. Despite only three SMR reports being submitted by reporting entities relating to possible terrorism financing, AUSTRAC reminds reporting entities not to be complacent about the risk of terrorism financing. Awareness of the risk posed by terrorism financing may result in the increased detection and SMR reporting of terrorism funding.
How CompliSpace can help
The AML/CTF regime is complicated, and is subject to almost constant change. CompliSpace assists its clients to unravel the complexities in this area, providing a full suite of AML/CTF services, ranging from external independent reviews, in-house training, AML/CTF Program design and KYC services.
Our team of compliance professionals and lawyers combine extensive expertise alongside practical technology-enabled solutions to simplify the complexity of the financial services regulatory environment to allow clients to focus on allocating resources toward improving financial performance.
Please contact Brooke Benson to discuss your AML/CTF requirements further.