Australia’s first risk assessments by Austrac of money laundering and terrorism financing within the financial planning industry and the superannuation industry has found a “medium” level risk across each sector.

Austrac believes that the sectors are under-reporting suspicious matters due to misconceptions.

Financial planning risk assessment

Australia’s financial planning industry raised $4.6 billion in revenue in 2016 and is accessed by one in five Australians.

Austrac’s review found the financial planning sector is exposed to, and attracts, a moderate level of exploitation by criminal entities, with minor consequences as a result of the criminal activity.

Of the suspicious matters reports (SMRs) submitted to AUSTRAC related to the financial planning sector over a two-year period, around one-fifth related to suspected money laundering, often involving high-value transactions. Few incidents of terrorism financing have been reported in the sector.

The most frequently reported offence in the sector was cyber-enabled fraud, which accounted for half of all SMRs. This threat has been growing in scale and sophistication, with financial planners being targeted as they act as a gateway between customers and financial institutions.

Other fraud-related offences included scams, the use of false documents, as well as suspected cases of fraud conducted by financial planners. There were also a small number of SMRs regarding customer tax evasion and welfare fraud.

AUSTRAC analysed the SMRs to determine who the suspicious party was in each case. In 19 per cent of SMRs, the suspicious party was the customer of a financial planner.

26 per cent of the SMRs in the sample dataset related to cases in which a financial planner was suspected of being involved in an offence. These were generally reported by banks and product issuers, and may reflect more advanced reporting practices by these institutions.

The remaining 55 per cent of SMRs related to offences in which a third party was the suspicious party. This includes parties that were unknown to the customer or financial planner (for example, cyber-criminals), or entities with a connection to a customer (for example, investment scammers).

Over two years, AUSTRAC received 273 SMRs related to the financial planning sector, which is very low considering around 20 per cent of adult Australians seek financial advice from about 25,000 financial planners across the country.

Common misconceptions about suspicious matter reporting: financial planners

According to Austrac financial planners have the following misconceptions about SMR’s:

1.“The product issuer will report instead.” Some financial planners seemed to consider it the financial institution or product issuer’s obligation to report SMRs. However, financial planners are also required to report SMRs to AUSTRAC, and may have information about a customer that the financial institution does not.

2.“I need to have conclusive evidence.” An SMR must be submitted when a reporting entity forms a suspicion on reasonable grounds, regardless of whether there is conclusive evidence that any illegal activity has occurred. Information provided by financial planners in an SMR could assist with investigations by authorities.

3.“Reporting will damage the customer relationship.” Some financial planners believed that reporting SMRs about their customers may damage the customer relationship and possibly jeopardise their future revenue stream. However, financial planners that submit an SMR are not required under the AML/CTF Act to discontinue the business relationship. Furthermore, there are provisions in the AML/CTF Act which enable reporting entities to report on suspicious matters without compromising the confidentiality of the customer or the reporting entity. ‘Tipping off’ provisions prohibit reporting entities from disclosing information relating to an SMR to the customer or to other financial institutions. Should a court case be brought against a customer, the information in the SMR cannot be introduced as evidence in criminal proceedings, which provides further protection of confidentiality.

4.“Reporting means my business has done something wrong.” Reporting suspicious matters to AUSTRAC demonstrates that the financial planner is acting in accordance with its AML/CTF obligations. In contrast, financial planners who do not submit SMRs, despite forming a suspicion on reasonable grounds, may become implicated.

Superannuation risk assessment

The Austrac review found the size of the superannuation sector ($1.26 trillion in assets) makes it an attractive target for money laundering and associated crimes.

Fraud is the most prevalent crime, with many reported cases of falsified documents and attempted illegal early release of superannuation savings. Many cases of fraud are enabled by cybercrime, with funds observing regular and sophisticated hacking attempts.

Terrorism financing is a limited but emerging threat. Foreign terrorist fighters (FTFs), who are generally self funded, have accessed superannuation accounts to finance their activities.

A range of other suspicious matters, including potential tax evasion, unusual account activity, unusually large transfers and unauthorised account transactions were also reported.

Some common themes included:

• large contributions into superannuation accounts, followed soon after by benefit withdrawal requests
• unusually large and/or regular contributions that did not match the financial profile of the member
• members making a series of structured contributions or withdrawals under $10,000 in an attempt to avoid detection.

Common misconceptions about suspicious matter reporting: superannuation

According to Austrac superannuation funds have the following misconceptions:

1. “A report means the fund has done something wrong”. Some superannuation funds may believe that submitting an SMR could lead to criticism that the fund has done something wrong or has weak controls. This is not correct and in fact, reporting SMRs is viewed by AUSTRAC as evidence that a fund is likely to have effective AML/CTF systems and controls. Low levels of reporting compared to industry peers may be an indicator of an ineffective AML/CTF program.

2. “Funds should not submit an SMR unless they have complete and comprehensive details of the suspected criminal activity.” This is not the case. A partially completed SMR from one fund can be linked to other SMRs and other intelligence sources, helping AUSTRAC build more comprehensive financial intelligence.

3. “Superannuation fund trustees should only report suspicions directly relating to transactions associated with ML/TF”. Again, this is not the case. Superannuation fund trustees should also report suspicious matters associated with a range of financial criminal activity and other offences, including fraud, corruption and tax evasion.