AML/CTF 101: How will it impact brokers?

What you need to know about the Anti-Money Laundering Counter-Terrorism Financing Act

Money being hung out to dryThe introduction of the Anti-Money Laundering Counter-Terrorism Financing Act 2006 (AML/CTF Act) has triggered unprecedented regulatory change across the finance industry - including the mortgage broker segment. We look at how the Act will impact on the broker industry

Although the new AML/CTF legislation was passed back in December 2006, its full repercussions were not felt until December last year.

For brokers, the new year has brought about tremendous change, to which they have had to adapt relatively quickly. And the full impact has not been felt yet, with the final stages of the legislation coming into effect at the end of the year.

However, despite the shift in how brokers deal with their customers, FBAA president Peter White maintains that the Act can only be looked at as a good thing for brokers. And the first thing he recommends brokers do is learn exactly what the legislation entails.

What is the AML/CTF Act?

"What most brokers need to do is understand what money laundering and counter-terrorism financing is all about," White states. "And when they understand this and where the Act positions them, I think they'll realise that it's not going to present an insurmountable problem for them."

So what exactly is laundering and counter-terrorism financing and what are the AML/CTF laws? According to the Australian government's Attorney-General's Department, money laundering is the processing of criminal profits to disguise their legal origin, and terrorism financing is the financing of terrorist acts, terrorists and terrorist organisations.

The new laws require businesses that provide certain financial or gambling services or those involved in bullion dealing to identify their customers before providing a service, to report certain transactions, and to report suspicious matters.

According to the Department, the new laws were introduced to "bring Australia's AML/CTF system into line with international standards, reduce the risk of Australian businesses being misused for the purposes of money laundering or terrorism financing, and meet the needs of law enforcement agencies for targeted information about possible criminal activity and terrorism".

What it means for brokers

So how does all this affect brokers? White admits that the Act will certainly put an "additional burden" on brokers.

"It puts a significant onus on them to understand their client far better than they did in the past," White explains. "And what I mean by that is they now need to ask [a client] more questions than they've needed to in the past.

"There are also issues in regards to the identification process of the borrower. So if something doesn't look right, then again it needs to be questioned further or there may be additional information required to ensure that the identification is actually up to the standard and calibre that their funder wants to see."

However, White says it is simply a matter of taking something the industry has been doing for a while - being on the lookout for fraud - "up another level".

"A lot more onus will be on the broker to make sure they're scrutinising these things properly and they're undertaking that level of due diligence," he says.

"So it's going to take them a bit more time on their loan file and take a bit more work and effort in asking questions that need to be asked that the borrower may or may not want to respond to."

However, Deloitte account director for forensic John Alfano says it may not be all smooth sailing for brokers.

"In the short term, with the new identification obligations commencing from December 2007 and many institutions still to roll out these standards, there's likely to be more inconsistency and potential complications for brokers in following standards set by lenders," he warns.

However, in saying this, Alfano adds that due to requirements on lenders, he also expects there will be greater communication between lenders and brokers concerning day-to-day identification issues and more formalised agent arrangements.

"Over time, much will depend on how the regulator, AUSTRAC, approaches the broker industry and its perceptions on how vulnerable the industry is to moving the proceeds of crime."

Alfano adds that the most important thing for brokers to know is that the regulatory obligations under the legislation are placed on lenders. "So brokers are essentially the agents of the lenders and need to know what the lenders expect of them," he says.

While this may reduce regulatory risk, Alfano points out that business and reputational risk remain key issues for brokers.

MFAA head of legal and compliance Calvert Duffy says brokers must also be mindful about defamation, slander, the Privacy Act and its implications in terms of what they can say and do.

"The AML/CTF Act itself states that persons can't 'tip off'," he explains. "So you can't say 'this guy looks like a terrorist or a money launder, I'm happy to dob him into someone'.

"You can't do that as a broker or even as a lender, so you have to be mindful of those things," he says. "But it will make it easier I think for people to recognise conduct that may be fraud; however, someone else will normally have to do the investigation of that."

How to prepare

So what do brokers need to do to get a headstart on the new legislation? Alfano says it is vital for brokers to have an understanding not only of the Act and its rules, but also of what their lenders expect of them through contracts and service level agreements.

"Communication on this issue with their lender(s) should also be a priority," Alfano states.

"If you haven't done so already, start with understanding the purpose of the rules and how criminals can potentially use your business to move the proceeds of crime."

He says the next step is education and training. "Both the FBAA and MFAA offer training for their members," he adds.

Both bodies are offering AML/CTF training courses online, which White says all brokers need to undertake if they have not already done so. "Every broker needs to undertake AML/CTF training, and if they haven't done it now then they need to get it done ASAP because it's now a requirement in the industry.

"It goes towards your accreditation of an association, as well as your accreditation with a lender. So your lender will want to know that you've undertaken a recognised course."

What happens if you do not comply?

For those brokers who fail to comply with the new laws, Duffy says the penalties can range from a fee to a regulatory investigation.

"It depends on where the failure is," he explains. "If they fail to collect the information when they're acting as agent of a lender, the lender may discredit them as a broker for their products.

"If it's a serious matter of breach of the AML/CTF guidelines, they might find themselves being caught up in a regulatory investigation and/or fines and/or penalties of some sort or another - it just depends on the circumstances."

Duffy points out that if a broker has been complacent, lax or slap dash, it may mean not only a loss of business, but also disaccredition by a lender or lenders.

"However, if they've unwittingly passed information on and they did their proper due diligence in terms of identification, it probably will come to nothing at all."

Alfano adds that many organisations impacted by the Act have already failed to comply with the new laws.

"New identification obligations commenced in December 2007 and many are yet to roll out changes," he says. "Of course, there is a 15-month prosecution-free period where AUSTRAC won't take civil action, so long as the entity is seen to be acting reasonably - essentially doing what they can to meet the obligations within the timeframes.

"Though for brokers, the regulatory obligations are principally on lenders."

However, White warns that this does not mean that brokers will get off scot-free. "As far as legal recourse concerns, if a broker breaches the law after they've done their training, technically speaking they act as an agent to the lender so the lender is the one that will be sued.

"However, the lender in turn will then sue the broker. So it's going to push down the line.

"So while the broker isn't directly accountable to AUSTRAC - it's the lender who is the reporting entity and who is accountable to AUSTRAC - one will push down to the other."

The reaction

Overall, Duffy says most brokers are happy with the new laws. "The MFAA did a roadshow about this quite some months ago and for most of the brokers I spoke with - and I think I saw somewhere in the vicinity of 2,500 - they saw this as a good thing," he says.

"It allowed them to know their customer a bit better, and while it meant a bit more work in terms of keeping records of things, it also meant that it was less likely for a fraud to occur and therefore less likely for a loan to go sour and have clawbacks and those sorts of things that adversely affect their business."

Alfano agrees: "Once understood, from my personal dealings with brokers, many have embraced the change as a positive move for the industry, and are moving towards achieving compliance."



The definitions

  • Money laundering: The processing of criminal profits to disguise their legal origin.
  • Terrorism financing: The financing of terrorist acts, terrorists and terrorist organisations.


Source: Australian government, Attorney-General's Department

New AML/CTF laws in a nutshell

The government has introduced new laws in the form of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

The laws require businesses that provide certain financial or gambling services or those involved in bullion dealing to:

  • identify their customers before providing a service
  • report certain transactions
  • report suspicious matters

Source: Australian government, Attorney-General's Department

AML/CTF timeline

12 December 2006 - The AML/CTF Act was introduced.

13 December 2006 - Reports about cross-border movements of physical currency, electronic fund transfer instructions, register of providers of designated remittance services, counter-measures, record-keeping requirements, secrecy and access, offences, audit, information gathering powers, enforcement, administration and vicarious liability obligations were all introduced.

12 June 2007 - Reporting obligations of reporting entities for AML/CTF Compliance report, correspondent banking provisions and record-keeping requirements about due diligence assessments of correspondent banking relationships were introduced.

12 December 2007 - Identification procedures provisions introduced, covering identification procedures for pre-commencement and certain low-risk customers, as well as general provisions. Anti-money laundering and counter-terrorism financing programs and record-keeping requirements of identification procedures and ATM/CTF program record requirements were introduced.

12 December 2008 - Identification procedures for ongoing customer due diligence and reporting obligations of reporting entities for suspect matters, threshold, international funds and transfer instructions will be introduced.

Source: Australian government, Attorney-General's Department