FIGHTING MONEY LAUNDERING

Are Australian Financial Institutions doing enough?

Whether it's the proceeds of a
robbery, drugs trading or tax
evasion, banks and financial
institutions still rl!..nk amo,?g the
top conduits for money laun,daring,
. ,
a global problem which involves as
, much as $US1 trillion a y e ~ r .
. .\
Yet a new survey of the officers\
,
who are required to report;'
suspicious transactions suggests
that training by Australian bankS
and financial institutions is lax
indeed. Not only would the skills
deficiencies be of concem to
regulatory authorities, but there
may well be a failure by Australian
institutions to meet their
internationallegel obligations.
A
1, Imost daily we read of money
'; being laundered through the
"" world's banking system.
It appears to be reaching epiderrdc
proportions, due mainly to the increasing
profit from the sale of illegal drugs -
estimated at nearly SUS400 billion a year
- and the continuing growth of
organised crime, particularly in Russia.
Money laundering is said to be the
world's third-largest business, behind
foreign exchange trading and oil, I with
estimates of funds involved ranging from
$US300 billion to SUSl trillion.'
So what constitutes money laundering?
Quite simply, it is the conversion of
profits derived from illegal activities into
financial assets which subsequently
appear to have a legitimate origin.
The money laundering process is
typically done in three stages: placement.
layering and integration.
Placement is the task of getting the
currency into the financial system
undetected. Layering involves
disassociating the money from its illicit
source. This often involves moving the
money between as many accounts and
companies as possible, through as many
jurisdictions as possible, and relying on
bank secrecy and attorney-client
privilege to hide the launderer's identity.
The last stage is integration when the
money is brought back into circulation.
Then the funds appear to come from a
legitimate source, and may even be taxable.
Banks and other financial institutions
are essential to the money laundering
process, and may be willingly or
unwittingly used as intermediaries. While
there has been some shift of laundering
into non-traditional areas such as bullion
dealing, casinos and underground or
alternative remittance systems such as
hawala, hundi or chit operations, banks
or bank-like institutions are still the
'linch-pin' for most money laundering
operations and fraudulent money
transfers, for they add an air of legitimacy. 1
Anecdotal evidence
emphasises the continuing
involvement of banks in
laundering money.
Recent examples include the
involvement of some Mexican banks in
laundering drug money (brought to light
in Operation Casablanca
4
), Citibank's
handling of its private accounts,' and the
Bank of New York's alleged involvement
in laundering money for the Russian
Mafia.
h
These cases portray a dose
relationship between banks and money
laundering.
It was in response to the increase in
the volume of funds being laundered,
and concern for its impact on the
stability of the global financial system,
that in 1989 the Financial Action Task
Force (FATF) was established.
In early 1990, FATF issued a report
derailing 40 recommendations designed to
fight money laundering.
7
They cover the
criminal justice system and law
enforcement, the financial system and its
regulation, as well as international
co-operation. The recommendations are
not binding,. but each member country is
expected to make a commitment to combat
." Journal of BANKING & FINANCIAL SERVICES - June 2000
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money laundering, and is expected to
implement these recommendations.
FATF currently has 26 member
countries. Australia is a member country
and its response to tht:: incrt::ast:: in money
laundering was the Financial Transaction
Reports (FTR) Act. 1988 and the
formation of the Australian Transaction
Reports and Anaiysis Centre (AUSTRAC).
The FTR Act places a number of
obligations on cash dealers
rl
who must:
report to AUSTRAC, suspicious
transactions of any size, cash transactions
of A$iO.OOO or more (or the foreign
currency equivalent) and international
funds transfer instructions.
verify account signatories, as it is
prohibited for accounts to be opened
or operated in a false name.
There are penalties for non
compliance and to ensure compliance
the FTR Act provides for AUSTRAC to
inspect cash dealers' systems.
In this environment it is essential that
reporting staff in Australian financial
institutions are well trained. This enables
them to comply with the reporting
requirements, and recognise and report
suspicious activity. FATF's
recommendation No. 19 specifies that
there must be ongoing staff training, yet
this requirement is not included in the
FIR Act. The requirement is implicit
ratht::r than explicit in that it is assumed
that staff will be traint::d so that they can
o)mply with the reporting requirements.
However, in Britain, where
Regulation 5(2)(c) of the Money
Laundt::ring Regulation requires
employers to provide ongoing training,
13 per cent of respondents to a
questionnaire relating to the attitudes of
money laundering reporting officers
towards the money laundering
regulations, admitted they had not
received any training in money
laundering identification or prevention.
A further 20 per cent had received very
poor or unsatisfactory training.
A significant proportion of these poorly
trained or untrained officers believed that
they had received enough training and
did not need any more. The officers who
wanted more training were those who
had already received a considerable
amount of training, recognising the need
to keep up to date and the neceSSity of
ongoing training. The benefits of training
were observt::d in the higher number of
suspicious transaction reports that were
filed by trained officers:'
Inadequate training of
officers will lead to
problems. Automated
systems can only cope with
routine transactions, such
as international transfers
and cash transactions
above a prescribed limit.
Individual reponing officers must make
their own decisions about suspicious
transactions. These transactions go
unreported, and hence undetected, if
reponing officers are not observant, or
are careless, inefficient or unprepared.
Training of reporting officers is therefore
very important, and if financial
institutions neglect to train their staff, they
put the effectiveness of their COUD,try's
financial intelligence unit at risk.
For the legislation to be most
effective, scrutiny should be made.of the
adequacy of the training received by
front tine staff. To this end, a
questionnaire was sent in September
1999 to 434 reporting officers at 120
cash dealers around Australia. There
were 118 usable responses - 60 from the
banking sector and 58 from a range of
nonbank financial institutions {NBFIs} -
representing an acceptable response rate
of 27.2 per cent.
There were no responses from either
bullion dealers or securities traders, and ,I
a lower response rate from the larger
sectors of the financial industry: banks;'
lixclu.WL)1i L1'tfc{ir0 fitlLi
,I . f 0...;.." .;
oil,
iL!llLis illl:]
} ,./
!i'Olll 'Boo iJiIIiUll
"-.I
credit unions and ____
Journal of BANKING & FINANCIAL SERVICES - June 2000
FIGHTING MONEY LAUNDERING Are Austmiian financialllJstituticns doing enough?
Continued f,.om p,.eviDus page
The results
If the responses are indicative of the
finandal sector as a whole, training
levels are clearly inadequate.
Oniy 38 of the liB respondents, or
32.2 per cent, had received any money
laundering training: 26 bank staff and 12
from the NBFls. In the banking sector 65
per cent had been trained within the last
year, while most of the NBFI staff received
their training more than a year previously.
Training sessions typically were short,
only rarely lasting more than a day and,
in most cases, the training focused on
reporting requirements or money
laundering awareness.
Most sessions were
conducted in-house by the
employing organisation
using its own staff with
some help from AUSTRAG.
Training material most often was
delivered using a lecture or presentation
format, and it sometimes included a
training video.
As indicated by the mean responses
given in Table 1, respondents believed
training sessions improved their
understanding of the topics covered
(Table I, panel A) and generally met
their objectives (Table I, panel B).
Respondents also indicated their desire
for more frequent courses (Table 1, panel
C) and their willingness to partidpate in
further training (Table I, panel D). Even
TABLE 1
RESPONDENTS' OPINIONS OF THEIR LAST MONEY LAUNOERING
TRAINING SESSION
_ Ukert+Anchors: 1"" ;;-;i'iy:
' r;. 'c" .. ",,,-,';,,-=!,.tti,i
""'+ '" '" ",," fr<t' ,,':rJ -" ..!o .. '," , 'f. J
A 1 . The training session did not improve Banks: 26 5.23 1.42 0.54
my of the topic covered. NBFls: 12 4.83 1.70
7 . training session did improve my
understanding of the,topic covered.
B 1. The training session did not meet its Banks: 26 5.54 1.02 0.03
aim(sJ.
NBFI.: 12 '.5.50 1.00
7. The training session did its eim(s}.
C 1. Such training sessions not be Banks: .26 5.77 1.03
. 0.19
, held at an.
,

7. Such training: sessions should be held
NBFIs: 12 5.33 1.72
'.
mare frequently, .
c
"
".
D 1. I Would not be interested in . Banks: 26 5.96 0.82 _,2 .. 7!?.
, . '.participating in future training sessio'!5.
NBFls: 12 4.83 1.99 .
,
,.
l i ,.Wou,ld be interested in' pa;.bcipating
"
.. ..
fi:rt;Ure. training sessions ..

. ;., .
. ,
-
+ The Ukert anchors labelled 1 and 7 are the extremes of the Ukert 7 point sc:ale on which respondents
had to indicate their level of agreement or disagreement with the partic:ular issue in question. Response
means greater than 4 indicate that on average respondents are leaning tawards the 7 point anchor.
Less than 4 leans tawards the 1 point anchor.
* The Kruskal-Wallis test is used to compare the responses from the banks and NBFls, but in all cases
there is no significant difference in their responses.
Journal of BANKING & FINANCIAL SERVICES - June 200J
though the Kruskal-Wallis (KW) statistic
indicated no significant difference between
the responses of bank and NBFI reponing
officers, response means and standard
deviations indicated that on the whole
bank officers were more satisfied with
their training, more willing to
partidpate in further training, and were
more consistent in their responses than
NBFI reporting officers, who typically
were not so definite (response means
doser to four). NBFI reponing officers also
had more divergent views (higher
standard deviations) on the question asked.
The questions in Table 2 were asked
of all respondents. not just those that
had attended training sessions.
Responses are grouped by institution
type and training. With only 118
respondents it was difficult to cluster
respondents into other groups and still
get any meaningful results. Questions
relate to familiarity with the FTR Act and
money laundering training in general.
Overall, untrained respondents were
(as expected) less familiar with the FTR
Act than their trained colleagues (Table 2,
panel A). However, it was of some
concern that 65 per cent of untrained
officers considered that they had some
degree of familiarity with the Act.
The KW statistic indicated a discernible
difference between the responses of
trained and untrained respondents.
We can therefore conclude that training
does give finandal institution officers
exposure to the FTR Act allowing them
to become more familiar with
its requirements.
Untrained bank and NBFl officers did
recognise that they needed more training
(Table 2, panel B) giving a significantly
stronger response than trained staff
(mean of 4.19 compared to 3.24).
However when asked whether money
laundering sessions build awareness of
money laundering issues (Table 2,
panel C), NBFl staff indicated less
satisfaction with these sessions than bank
staff (mean of 4.76 compared to 5.53).
This may indicate that banks ran more
Continues page 12"
FIGHTING MONEY LAUNDERING AI'" Australian financial insi:Jwtions doing enough?
Continued from page 10
TABLE 2
GENERAL ATIITUDES TO MONEY LAUNDERING TRAINING
+ The Likert anchors labetted 1 and 7 are the extremes of the Likert 7 point scale on which respondents
had to indicate their level of agreement or disagreement with the particular issue in question. Response
means greater than 4 indicate that on average respondents are leaning towards the 7 point anchor.
Less than 4 leans towards the 1 point anchor.
* The two groups being compared using the Kruskal-Wallis test. are significantly different at the a level
indicated. To be classified as significantly different a should be s 0.05 (5%1. The smaller the a level the
more sure you are that the difference is significant.
effective and more up-to-date_ training
sessions than NBFls. Certainly staff
employed by banks had attended
training sessions more recently than
NBFI staf!. Another explanation may be
a simple, general lack of understanding
of the contents of the money laundering
courses, considering the lack of training
in the NBP! sector.
Of course self-learning can help in
understanding important issues, and the
majority of respondents indicated that
reading professional journal articles
concerning money laundering issues
(Table 2, panel D) helped to increase
their knowledge of the subject. But it is a
concern that 22 untrained respondents
don't believe that reading helps. It is
likely that without training the benefits
of reading are not obvious and they don't
have the skills to understand the articles .
Conclusion
Given Australia's commitment to
FATF's 40 recommendations and the
requirement for ongoing training .. which
is explidt in recommendation No. 19.
the apparent incidence of staff receiving
(32.2 per cent) is inadequate.
If the survey responses are
representative of training
in the financial sector,
then only a third of front-
line staff are being trained,
Some of that training is more than a
year old and was gleaned in training
sessions lasting less than one day.
"1 Journal of BANKING & FINANCIAL SERVlCES - June 2(0)
Given the change in money laundering
trends, staff training is falling behind and
should be cause for concern.
Better training sessions are needed in
the NBFI sector. More training would
enable respondents to better understand
published money laundering articles and
therefore enhance self-learning. Of
particular concern are the number of
respondents unfamiliar with the FI'R Act
who believe:
t they need no money laundering
training,
t reading doesn't help; and
t training sessions are not helpful.
Given these are the people who are at
the forefront of the war against money
laundering you would hope they would
either be better prepared, or at least
realise they need to be better educated .
Endnotes;
1 Robinson. J. (1996). Laundrymmw.
Arcade Publishing. New York.
2 Flanders S .. Cltaning up tht global Wrlomy, Finandal
TImes. 261l1l96.
3 Ash M. & Reid P .. (1997).
Equity and tht pursuit of hot mont)' a warni1f9 to banks,
Legal News from A & L Goodbody.
hnp:lJwww..a1JOOdbodyJe/newsl9710M.htmlpp. 12.
4 "()po'oti.m Casablam:o" was a .... year undercover
operation involving mor .... than 200 customs alg .... nts and
six countries. Thre .... M .... xlcan banks: Bancom .... r. Banca
Serfin and Banco Confia were indicted for money laun
dering. The case Is on.going.
5 Privatt Banking Coming Under Public Scrutiny,
Los Angeles TImes. 21111199, p. I; Admits
Laps ....s in Ov .... rsight Helped Foreigners Laun(kr
Millions. W Los Angel ....s TIm ....s. IOlllf99, p. 3.
6 US Bankins Fas C/tan Swttp Ovtr Money Laundering.
Flnandal TImes. 22112199, p. 9; "Banks 'Fail to Stnn
Money lAundmn!1. Financial Times. 10/11199. p. 6;
U.S. IHdarrs War on Money lAundmng. Rlports link up to
10 Banks with Crime", National Post, 24/9199.
7 For a detailed Ust of th .... 40 Recommendations and
Revised Interpr .... tatlve Notes se .... FATF'$ 199596 Annual
Rtpan, Annex I and 2. Availalble from
http://www.oecd.orJlfatf/reporu.html
8 Cash dealers as defined in the FTRA Act indude banks.
building socletl ....s and credit unions, financial
corporations. Insurance companies. Insuranc ....
inlennediaries. s .... curitles dealef5. futures brokers. cash
carriers. manag .... rs and trustees of unit trusts. flnns that
deal In travell .... rs cheques and money orders. currency
deal .... rs. bullion dealers. casinos. gambling houses,
totalisator agency boards and bookmakers.
9 BosworthDavies. R . (1998). "Living with the lAw:
A Surwy of Reporting OffiCl'S and Thtir
Affitudt Towards fhe Rtgu!ations, "
Journal of Money Control. Vol. l. No. 3.
pp.24S2S3.