Introduction

In this section:


Executive summary

Overall risk rating

AUSTRAC assesses the overall money laundering and terrorism financing (ML/TF) risk for the financial planning sector as medium. This rating is based on assessments of the criminal threat environment, the vulnerabilities in the sector, and the consequences associated with the criminal threat.

Criminal threat environment

AUSTRAC has assessed that Australia’s financial planning sector faces a variety of threats, some of which involve sophisticated tactics and methods. Intelligence agencies have observed instances of organised crime groups using financial planners to help navigate the financial sector.

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; however, financial planners should remain vigilant to this threat.

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.

The true extent of criminal activity in the financial planning sector is likely to be greater than reporting levels indicate, as AUSTRAC assesses that there is significant under-reporting of suspicious matters by financial planners. 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 some 25,000 financial planners across the country.

Vulnerabilities

Financial planners play an important facilitation role for their customers to access financial services. This can make financial planners susceptible to exploitation for criminal purposes.

The specific characteristics of the financial planning sector that make it vulnerable to financial crimes include:

  • the large customer base and significant amount of money movement being facilitated by financial planners
  • the range and complexity of products and investment strategies being facilitated by financial planners
  • the growing trend towards online delivery of financial planning services.

Financial planners who deal with foreign jurisdictions, accept cash, have customers who are politically exposed persons (PEPs), or make payments to third-party accounts may be exposed to higher levels of risk than those that do not undertake these activities.

Factors that limit the overall vulnerability of the sector include the low level of customer anonymity for personal advice services and the low level of agents acting for customers.

AUSTRAC assesses that, at a sector level, financial planners have only a partial understanding of their anti-money laundering and counter-terrorism financing (AML/CTF) obligations, with many not fulfilling the requirements to have risk-based customer due diligence procedures and to submit SMRs to AUSTRAC. Almost all entities engaged for this assessment saw this lack of understanding as a significant vulnerability which undermines the sector’s resilience to criminal financial activity.

Consequences

The consequences of ML/TF activity in the sector are assessed as minor overall; however, there can be quite significant personal consequences for customers who incur financial losses due to criminal activity.

Consequences for financial planners could include crime-related financial losses, reputational damage, and increased costs associated with combating criminal activity, particularly IT security costs.

There may also be loss of confidence in the financial planning sector as a whole by both customers and product issuers.

Financial crimes in this sector may also impact the broader Australian economy; for example, through loss of investments as a result of fraud and reduced government revenue from unreported welfare fraud and tax evasion.


Purpose

This assessment provides sector-specific information to the financial planning industry on ML/TF risks at the national level. Its primary aim is to assist the sector to combat ML/TF crimes in Australia’s financial system.

Financial planners have obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) when they make arrangements for a person to receive a financial product or service in their capacity as a holder of an Australian Financial Services Licence (AFSL) (1). This is listed as designated service item 54 in Table 1, subsection 6(2) of the AML/CTF Act (2).

This risk assessment has been developed as a feedback resource for the financial planning sector. AUSTRAC expects that reporting entities will use this assessment to refine their own compliance controls and mitigation strategies. This risk assessment also aims to help financial planners identify and monitor risks that may be applicable to their individual businesses, and to subsequently report suspicious matters to AUSTRAC. Reporting entities should apply information in this assessment in a way that is consistent with the nature, size and complexity of their businesses, and the ML/TF risk posed by their designated services and customers. Future AUSTRAC compliance activities will assess how reporting entities in the sector have responded to the information provided here.

AML/CTF obligations for financial planners

Reporting entities that only provide designated service item 54 have reduced obligations under the AML/CTF Act. They are required to adopt and implement a ‘special AML/CTF program’ in accordance with Chapter 5 of the AML/CTF Rules (3). Reporting entities that provide another designated service in addition to the item 54 service are required to implement a standard AML/CTF program.

Under a special AML/CTF program, financial planners are required to implement customer due diligence (CDD) procedures (4), including:

  • collecting and verifying customer identification information
  • identifying and verifying beneficial ownership
  • identifying whether a customer is a PEP
  • obtaining information on the purpose and intended nature of the business relationship.

When implementing the special AML/CTF program, reporting entities are also required to consider the ML/TF risks posed by various factors, including (but not limited to):

  • customer types
  • customers’ sources of funds and wealth
  • delivery channel
  • any foreign jurisdictions the reporting entity deals with.

Methodology

The methodology used for this risk assessment follows Financial Action Task Force (FATF) guidance that states that ML/TF risk at the national level should be assessed as a function of: criminal threat, vulnerability and consequence. According to this methodology:

  • Criminal threat environment refers to the extent and nature of ML/TF and other offences in a sector.
  • Vulnerability refers to the characteristics of a sector that make it attractive for ML/TF purposes. This includes features of a particular sector that can be exploited, such as customer types, products and services, designated service delivery channels and the foreign jurisdictions with which the sector deals. Vulnerability is also influenced by the AML/CTF systems and controls in place across the sector.
  • Consequence refers to the impact or harm that ML/TF activity may cause.

This assessment considered 26 risk factors across these three categories. An average risk rating is determined for each category, which is then used to determine an overall risk rating for the sector. Further information on the methodology and how this was applied to the financial planning sector is at Appendix A.

Three main intelligence inputs informed the risk ratings within this assessment:

  • analysis of SMRs, as well as other AUSTRAC information and intelligence
  • reports and intelligence from a variety of partner agencies, including intelligence, revenue, law enforcement and regulatory agencies across government
  • feedback and professional insights offered during interviews and consultations with a range of financial planning entities, as well as industry experts and industry associations.

Footnotes

  1. Or as an authorised representative of an AFSL holder
  2. For further information on designated service item 54
  3. For further information, see the AUSTRAC Compliance Guide, Chapter 6 – AML/CTF programs
  4. For the purpose of this risk assessment, the term ‘customer due diligence’ is used in reference to the requirements as outlined in Chapter 4 of the AML/CTF Rules to conduct ‘applicable customer identification procedures’ (ACIP). Ongoing customer due diligence requirements (OCDD) do not apply to providers of designated service item 54, in accordance with subsection 36(3) of the AML/CTF Act.
Last modified: 21/12/2016 11:04