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- Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) regulations are tightening worldwide
- Regulators in New Zealand are following AUSTRAC’s example and cracking down on non-compliance with reporting rules
- The international Financial Action Task Force (FATF) has provided global recommendations that require previously-exempt businesses ranging from lawyers and real estate agents to insurance companies, to report on AML/CTF activities
- Thousands of additional companies around the world are or will soon be required to report suspicious activities to regulators, putting immense pressure on internal compliance and operations teams
- It’s an opportunity to ditch clunky legacy systems and embrace a smarter and more efficient approach to AML/CTF compliance
A global trend in AML/CTF reporting
Worldwide, increasing financial crime is pushing regulators to take a closer look at whether companies within their jurisdictions are meeting compliance obligations when it comes to reporting potential money laundering and terrorism financing activities.
The penalties for non-compliance can be severe, with high-value fines levied against companies and potential imprisonment for individuals involved, as well as damage to the company’s brand.
This is despite the fact that reporting inaccuracies can very often be put down to technical and coding errors.
The Reserve Bank of New Zealand recently issued one major NZ bank with a warning over its failure to report the correct locations for some 50,000 physical cash transactions — an omission it admitted was due solely to technical inadequacy.
Given increasing scrutiny from regulators, and the high cost of non-compliance, many regulated entities are reviewing their AML/CTF programs to ensure they are fit for purpose, seeking to digitise some of the manual processes that add risk.
Playing catch-up
Even for large organisations like banks, with years of experience in AML/CTF detection and reporting, the challenge is in gaining sufficient oversight over all transactions, determining which of them need to be reported, and compiling adequately detailed reports.
The problem is that so many businesses have evolved their transaction management systems over time, with outdated processing and recording systems that may not communicate with each other, including a reliance on manual processes to compile and submit reports.
The situation has been exacerbated by a lack of specialist technology to help businesses meet the reporting standard for suspicious activities.
Although some transaction monitoring platforms can help identify some of the activity that needs to be reported, there has been a lack of technology to help reporting entities complete the important last mile of actually reporting it to regulators.
John Rayment, CEO of Identitii (ID8) — a financial and regulatory technology specialist — told The Market Herald that most reporting entities were in dire need of a platform that made it easier for them to identify what was and was not reportable to regulators, automated key manual processes to alleviate some of the operational burden, and gave them more visibility and certainty that their reporting was being done correctly every time.
The Anti Money Laundering market — made up of companies like Identitii offering AML solutions — is currently estimated at US$2.5 billion (A$3.7 billion) and is estimated to rise to over US$6 billion by 2028 as the reporting net widens.
Thousands of companies face more stringent reporting requirements
Mr Rayment told The Market Herald that thousands of companies that have never been required to identify or account for suspicious activities will soon be required to report suspicious activities.
When implemented, new Suspicious Matter Reporting (SMR) regulations will require over 100,000 additional Australian businesses — known as Designated Non-Financial Businesses (DNFBs) — to submit relevant reports to the Australian Transaction Reports and Analysis Centre (AUSTRAC).
These will include real estate agents, lawyers and notaries, accountants and auditors, and a raft of other businesses that operate trusts on behalf of customers. Similar regulations have been or are being rolled out around the world, meaning hundreds of thousands of new companies will have new reporting obligations.
The potential for costly errors and omissions is compounded by the fact that a great many of the businesses that will be required to report suspicious activities do not have any experience in such reporting.
Many will not have the requisite depth of clarity on their activities, nor will they have a technology solution in place to help manage and track what needs to be reported, with many electing to use temporary manual solutions that will make it hard to ensure their reporting is accurate.
As specialists in facilitating compliance with new reporting regimes that will be rolled out in various jurisdictions around the world in the coming months and years, Mr Rayment said that the Identitii team was seeing a lot of stress and uncertainty spreading through the regulated community.
“The issue is that a lot of businesses that have not traditionally been required to detect and report on suspicious matters and activities will soon be drawn into the net,” Mr Rayment said.
“And they’re starting behind the eight ball because their technology — or lack thereof — makes it incredibly difficult to meet compliance standards. It’s already happening in New Zealand, and Australia won’t be far behind.”
New Zealand – lessons and challenges
New Zealand was among the first countries to implement Tranche Two rules, the common name for the new regulations that bring DNFBs under more stringent AML/CTF reporting obligations.
“There is much Australia can learn from the New Zealand experience,” Mr Rayment said.
“In the same way, New Zealand companies can learn a lot from Australian organisations who are pushing hard towards digitising reporting to AUSTRAC.
“There are over 5000 reporting entities in New Zealand, and many are facing the same challenges with manual processes and legacy technology systems that their Australian counterparts are dealing with.
“What we’re seeing from customers in Australia is a concerted push to digitise this critical process and reduce the risk of non-compliance. There are similarities in the Australia and New Zealand reporting requirements, which mean NZ companies could benefit easily from technology built to help their Australian counterparts.”
Mr Rayment added that the DNFBs that were now — or will soon be — required to report could benefit from getting ahead of the new rules by putting in place a rigorous and digital AML/CTF process early.
“Many of these entities will have limited or no experience in the required levels of detection and reporting, and they will need to come up to speed quickly. For some, their existing systems will make that difficult, if not impossible.”
It’s crunch time
As the world continues to grapple with the issues of organised crime and terrorism, the need for business operators to be aware of and to participate in the measures that must be taken to eliminate the threats they present will continue to grow.
However, as John Rayment of Identitii told The Market Herald, the changing landscape offers a unique opportunity for regulated entities to look at technology to better automate their obligations.
“It’s time for businesses that have been bolting on solutions and muddling through with outdated systems to make the leap to best practice,” he said.
“That will help them streamline their businesses, reduce costs and meet any additional incoming detection and reporting standards. It’s an investment in a smarter, safer and ultimately more profitable future.”
