AUSTRAC flags foreign banks over weak money laundering

AUSTRAC has completed two supervisory campaigns into foreign-owned banks in Australia, finding weaknesses in controls and reporting across branches and subsidiaries.

The reviews examined low levels of reporting of suspicious activity in foreign bank branches and money-mule risks in foreign bank subsidiaries, reflecting different business models and risk profiles across the sector.

One campaign focused on foreign bank branches operating in Australia. AUSTRAC found that many institutions had settled on the view that their businesses carry limited money-laundering risk, but said that assessment did not align with the exposure it observed in parts of their operations.

Higher-risk areas included services for foreign politically exposed persons, their relatives and associates, as well as domestic and foreign private companies, trusts, foundations and high net worth individuals.

Several banks had anti-money laundering systems and processes that were not effective enough to detect high-risk behaviour and unusual or suspicious customer transactions, the regulator found. It warned that such weaknesses could allow criminals to move proceeds of crime across borders without detection.

Brendan Thomas, AUSTRAC Chief Executive, set out the regulator's concerns in direct terms.

"Although some parts of these businesses may constitute lower levels of risk, many of them have exposure to higher risks areas as well," Thomas said.

He added that transaction volumes made the issue more significant. The 50 foreign branches operating in Australia moved AUD $2.5 trillion in and out of the country in the past year.

"Low reporting doesn't mean low risk - it means blind spots criminals can exploit. If you're moving money globally, you're exposed to global crime risk," Thomas said.

AUSTRAC also raised concerns about the small number of banks in this group that are filing suspicious matter reports. It expects an increase in both the number of institutions reporting and the overall volume of reports from the sector.

"The 50 foreign branches operating in Australia move significant funds around the world - last year, reporting to AUSTRAC showed they moved $2.5 trillion in and out of Australia. Moving trillions of dollars but barely reporting suspicion is a concern for us," said the AUSTRAC CEO.

"AUSTRAC is concerned about the extremely small number of banks reporting suspicious matters and expects to see an increase in both the number of banks reporting, as well as the overall number of SMRs, from this sector. I strongly urge foreign banks with Australian branches to take on this feedback, including the detailed information provided in the letter, as they transition to the new AML requirements that went live on 31 March," Thomas continued.

Money mule risks

The second campaign examined six foreign bank subsidiaries in Australia and found a very high degree of exposure to money mules. Unlike branches, these subsidiaries are separately incorporated in Australia and offer retail banking services to millions of customers.

Money mule accounts are used by laundering networks to move funds through the accounts of unrelated people to avoid detection. The method remains common in Australia and overseas, and is used to handle proceeds from fraud, scams, drugs and other crimes.

The review centred on how well the banks understood the issue and what steps they were taking to address it. AUSTRAC highlighted risks at customer onboarding, after accounts are opened, and in cross-border transactions.

"AUSTRAC sent these banks a detailed letter outlining best practice to combat money mule risks. Each of these banks has room to improve, even those that already have strong controls in place. We're seeing significant risks at the client onboarding stage as well as post-onboarding, where customers are transacting on their accounts," said Thomas.

"We're also seeing risks associated with cross-border transactions through money mule accounts. This includes the risks of undetected scambling accounts, where people are tricked into depositing money for fake online gambling sites via payID or bank transfers. Victims of scambling will almost never see their winnings as their money has been quickly transferred from the account and offshored."

"I encourage all of these banks to carefully review this information and tighten their AML controls to detect and prevent money mule activity in their organisations, and to report suspicious activity to AUSTRAC. Your actions are critical to safeguarding Australia from financial crime and keeping your customers safe," Thomas prompted.

The findings put a spotlight on a diverse segment of the banking market linked by cross-border exposure. For branches, the concern is whether low reporting is masking weak detection of suspicious activity. For subsidiaries, the issue is whether retail banking controls are strong enough to identify and stop the use of customer accounts by criminal networks.

AUSTRAC's review shows that both parts of the foreign-owned banking sector face pressure to strengthen anti-money laundering controls and lift suspicious activity reporting, particularly around cross-border money flows and customer accounts used by money mules.