AUSTRAC has published a report on money laundering and terror financing (ML/TF) risks for the securities and derivatives sector, assessing the overall risk to be medium, on a scale of low to high. In accordance with Financial Action Task Force guidance, the report considered 26 risk factors across the categories of criminal threat, vulnerability and consequence, using suspicious matter reports (SMRs), intelligence from partner agencies and industry feedback.
AUSTRAC found that Australia’s securities and derivatives sector attracts a wide range of criminal threats that utilise sophisticated tactics and methods. The most commonly reported crimes included fraud, money laundering, tax evasion, insider trading and market manipulation. The report also flagged terror financing as requiring increased awareness to boost detection and SMR reporting.
The report identified key sources of vulnerability for criminal misuse, including products and services such as accounts, trading activity, off market transfers and third-party payments. The use of agents and third parties also created significant vulnerabilities in the sector due to difficulties in obtaining customer identification and authorisation, and conducting assurance activities. Further vulnerabilities were noted such as customers trending towards using online services and ‘white labelling’ trade platforms, creating delivery channel challenges and undermining the AML/CTF framework by not indicating which entities are responsible for AML/CTF obligations respectively.
Accordingly, AUSTRAC indicated that there is considerable scope for improvement in relation to AML/CTF systems. Only 40 per cent of market participants and 26 per cent of CFD/FX providers submitted SMRs to AUSTRAC over the two year sample period despite the significant risks associated with ML/TF activities (ie, reputational damage, increased regulatory action and decreased dividends). The low level of SMRs reflects scope for technology providers to create solutions in the securities and derivatives sector to improve compliance outcomes in relation to AML/CTF.