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Introduction

In this section:


Executive summary

Overall risk rating

AUSTRAC assesses the overall money laundering and terrorism financing (ML/TF) risk for the superannuation sector as MEDIUM. This rating is based on an assessment of the criminal threat environment, the vulnerabilities within the sector, and the consequences or harms associated with the criminal threat. This assessment relates to superannuation funds regulated by the Australian Prudential Regulation Authority (APRA).

Criminal threat environment

The criminal threat environment is varied and multifaceted, ranging from opportunistic offences conducted by individual members, to complex and sophisticated attacks executed by organised crime groups, including from entities based overseas.

The size of the superannuation sector ($1.26 trillion in assets) (1) makes it an attractive target for money laundering and associated predicate crimes. Fraud is by far the most prevalent predicate 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.

Vulnerabilities

The specific characteristics of the superannuation sector that make it vulnerable to ML/TF and predicate crimes include:

  • the extremely large number of member accounts and volume of transactions
  • low levels of member engagement, which hampers timely detection of fraud
  • post-preservation accounts which have few restrictions on making transactions to and from the accounts
  • voluntary contributions to accumulation accounts by members, where the source of money is difficult to verify
  • payments to members and outgoing rollovers that are vulnerable to fraud and illegal early release
  • the growing reliance on online delivery of products and services, resulting in less face-to-face interaction with customers and increasing online data storage.

In addition, it is highly likely there is significant under-reporting and non-reporting of suspicious matters across the superannuation industry. Just five funds reported more than half of all suspicious matter reports (SMRs) over a two-year period. There is considerable scope for superannuation funds to expand their suspicious matter reporting and strengthen internal controls against financial crime.

Factors that limit the overall vulnerability of the sector include: the relatively simple customer type (mostly individual members); the relatively low level of customer anonymity; the very limited use of cash; and the non-transferability of superannuation accounts between people. The lack of foreign politically exposed persons (PEPs) and the low number of overseas customers and transactions indicate a low foreign jurisdiction risk for the sector.

Consequences

 

The most significant consequences of ML/TF and predicate crimes are generally borne at the individual fund level, particularly for funds with poor internal controls or a weak compliance culture.

Terrorism financing, though to date only involving a few cases, may have significant consequences, including financing the activities of individuals seeking to engage in foreign conflicts and potentially enabling terrorist acts in Australia and overseas.

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Purpose

This risk assessment provides sector-specific information to the superannuation industry on ML/TF risks. It also covers the main predicate crimes for ML/TF impacting the sector, including cybercrime, fraud and tax evasion.

The information in this risk assessment relates to funds regulated by APRA. These include corporate funds, industry funds, public sector funds and retail funds. It does not specifically assess the risks posed by self-managed superannuation funds (SMSFs), although there is some reference to SMSFs in the assessment.

This risk assessment represents AUSTRAC feedback to the superannuation sector and supports the important collaborative process between government and industry to combat ML/TF in Australia. AUSTRAC expects that this document will assist reporting entities to evaluate and improve the systems and controls necessary to mitigate these risks. Future AUSTRAC compliance activities of this sector will include assessing how reporting entities in the sector have responded to the information in the risk assessment.

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.

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Methodology

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

  • Criminal threat environment refers to the extent and nature of ML/TF and the relevant predicate crimes 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, delivery channels and the foreign jurisdictions with which it deals. It also considers the level of AML/CTF systems and controls in place across the sector.
  • Consequence refers to the impact or harm that ML/TF activity may cause.

Twenty-six risk factors are considered across these three categories. An average risk rating is determined for each category, then these ratings determine an overall risk rating for the sector. Further information on the methodology is at Appendix A.

There are three main intelligence inputs that form the assessments and risk ratings:

  • Analysis of SMRs and threshold transaction reports (TTRs), as well as other AUSTRAC information and intelligence.
  • Reports and intelligence from a variety of partner agencies, including intelligence, revenue, law enforcement, regulatory, anti-corruption and national security agencies across the Commonwealth and state governments.
  • Feedback and professional insights offered during interviews and consultations with a range of superannuation fund trustees, fund administrators, industry experts and industry associations.

This risk assessment has benefited from very significant industry collaboration, with some of the most frequent SMR reporters in the sector contributing highly valuable information. These funds – although representing only a small number of entities in the sector – demonstrated a high level of understanding of the ML/TF risk environment, and some described sophisticated strategies used to mitigate these risks. These have been highlighted in this assessment for the benefit of funds across the sector.

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Footnotes

  1. Australian Prudential Regulation Authority, Quarterly Superannuation Performance Statistics December 2015.

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Last modified: 31/10/2016 07:58