AUSTRAC regulations state that if the direct participant fails to submit the report on a third party’s behalf, both entities are at risk of regulatory penalties.
In today’s economy, no phenomenon is multiplying the AML compliance burden more for FIs than globalisation and the growing complexity of interconnected supply chains. As a result, FIs find themselves navigating and attempting to reconcile a plethora of divergent regulatory regimes and their unique reporting requirements.
Furthermore, for banks to capture the lucrative opportunity in cross-border payment revenues, a figure that now exceeds US $200 billion, according to McKinsey research, they must maintain compliant correspondent banking relationships (CBRs). In Australia and beyond, compliant CBR business means sending and receiving banks must report on behalf of third-party institutions, wherein they lack visibility into their AML compliance programs and reporting processes.
As such, AUSTRAC-covered respondent banks are at the mercy of their CBR partners’ compliance controls. Lacking visibility, respondents must rely on their CBR counterparty to report payment data in full compliance with the regulatory regimes where they are operating. Unwitting mistakes can be expensive, and punitively so.
AUSTRAC regulations require that even if reporting is being executed by a direct participant, the institution that initiated the transaction is still liable for the report.
So, if the direct participant fails to submit the report on the third party’s behalf, both entities are at risk of regulatory penalties, with fines upwards of AU $20 million per breach.
One problem here is that globally managed reporting systems, like those used by foreign banks reporting to AUSTRAC, often have to execute this process via a central and poorly integrated system that is not specifically engineered for compliance with local regimes.
Thus, if AUSTRAC requests any type of remediation, foreign banks have to expedite the regulators’ request to their global team and bear the swelling costs of time-testing the system, while competing with other international markets that have similar regulatory hold-ups.
Under AUSTRAC, this third-party reporting risk is also a consideration for NBFIs like money-transfer businesses (MTBs). According to a 2019 report in Finance Magnates, Australian MTBs processed some AU $60 billion in remittance funds.
Aussie NBFIs, like remitters and casinos, are especially vulnerable to professional money laundering (PML), and the risks of not properly reporting third-party financial participants pose an existential threat to their continuity and survival.