Protection against financial crimes: lessons from the global experience

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Extract from Executive summary

Money laundering and its associated financial crimes pose significant economic consequences for nations worldwide. The extent of their impact is evident in the aggregate volume of funds laundered globally, estimated by the International Monetary Fund (IMF) to be around 2-5 percent of global GDP. This figure translates to around $2.5 trillion each year and supports suggestions that the money laundering business is the third biggest industry worldwide behind the international oil trade and foreign exchange.[1]

In Australia money laundering costs the economy approximately $11.5 billion annually, with fraud costs estimated to account for $2 billion of that figure. However with less than 50 per cent of fraud incidents in Australia being reported to police or other authorities the real cost could potentially be twice that estimate.[2]

In the UK direct losses from fraud are estimated to have been over £13 billion in 2005, while in the US fraud is estimated to cost businesses around US $600 billion per year. Terrorist financiers in the US have added even more complexity to the sophisticated money laundering techniques already used by serious criminals thereby increasing the risk to business and highlighting the need for stringent risk mitigation practices.

Money laundering crimes, which can cause a significant weakening of a country's financial systems, have traditionally been associated with funds that are illegally acquired (often through money from drug trade, crime or corruption) and then 'washed' through a financial institution to appear legitimate. However the definition of money laundering has evolved over time and now includes the movement of legitimate funds through a financial institution to fund potentially illegitimate activity such as terrorism.

Anti-Money Laundering (AML) practices go beyond protecting an institution from financial crimes such as fraud and attempt to break the connection between money laundering and terrorist financing. The focus on disconnecting these activities is a central component of AML reforms in Australia and around the world.

In the lead up to the introduction of Australia's Anti- Money Laundering and Counter-Terrorism Financing Act (AML | CTF) in 2006, the legislation was the subject of much debate. AML | CTF reforms put Australia's regulators under the spotlight, accused of lagging behind other nations in the development of appropriate AML laws. Although Australia had been tackling money laundering for the last two decades, the landscape has changed, causing the former Financial Transactions Reporting Act (FTRA) to become outdated.

In this twenty year period a better understanding of the cost and risk of financial crime evolved and accordingly the new regime which was developed is predicated on allowing financial institutions to satisfy heightened international standards and keep pace with the changing nature of the financial services sector. As a consequence the scope of the risks that financial institutions need to assess and mitigate has grown significantly.

What Australian organisations need now is greater certainty over how AML programs can be implemented to effectively combat these risks. In addition, companies need to focus on the cost benefits that can be realised from compliance initiatives and risk mitigation systems and controls - this has been a muted focus area in the past.

Managing the cost associated with AML compliance poses a significant challenge to regulated businesses however a carefully designed program will ensure that costs are minimised. Developments in the UK indicate that Australian regulators have got it right by introducing legislation that shifts from a rules-based compliance framework to a risk-based approach, however it is up to each individual business to make the most of this opportunity.

It is estimated that the financial services sector will spend $1 billion upgrading existing AML systems. By examining some of the issues that businesses in the US and UK have faced as they have tackled AML reform, Protection against Financial Crimes aims to assist Australian businesses get their risk mitigation systems right and ensure that they stay ahead of the risk game.

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[1] A.V.M. Leong, 'Anti-money laundering measures in the United Kingdom: a review of recent legislation and FSA's risk-based approach', Company Lawyer, Vol. 28 No. 2 (2007), pp. 35-42.

[2] Australian crime : facts and figures 2007, Australian Institute of Criminology 2008, available at http://www.aic.gov.au/publications/facts/2007/01_recorded_crime.html

 

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