Banks at high risk of broker fraud – AUSTRAC

The financial crimes watchdog warns that big banks' dominance of the home loan market exposes them to money laundering risk

Banks at high risk of broker fraud – AUSTRAC

Australia’s financial crimes watchdog has warned banks that they have high exposure to criminal activity, flagging broker fraud among the risks faced by financial institutions.

AUSTRAC recently published four new risk assessments on money laundering and terrorism financing (ML/TF) in the banking sector, examining the threats criminals pose to Australia’s major banks, other domestic banks, foreign subsidiary banks and foreign bank branches operating in Australia.

The assessments cover the major banks, other domestic banks, foreign subsidiary banks, and foreign bank branches.

AUSTRAC gave the big four and other domestic banks a high ML/TF risk rating. Foreign banks received a medium risk rating.

Most suspected money laundering - and to a lesser extent terrorism financing activity - involves retail banking products and services, particularly those that facilitate cash transactions or rapid transfer of funds, domestically or internationally.

AUSTRAC said that the major banks – which hold about 73% of the banking sector’s assets and serve around 47 million customers – were hugely exposed thanks to their large customer base, high exposure to cash and remote service delivery channels (like online banking).

Westpac, National Australia Bank, ANZ and Commonwealth Bank facilitated a combined $3.5 trillion in international funds transfers during the 2018--2019 reporting period – more than all other AUSTRAC reporting entities combined.

Detailing the consequences of ML/TF activity, AUSTRAC's report said it could have "major consequences for national and international security".

AUSTRAC’s report found that loan application fraud was the second-most commonly reported fraud from the banks, usually using fraudulent identity documents and forged or altered pay slips.

AUSTRAC also cited a number of cases in which fraud had been enabled by mortgage brokers. One example involved a syndicate of lending managers and mortgage brokers suspected of altering information provided by mortgage applicants, resulting in hundreds of fraudulent loans, most of which were held by major banks.

In another instance, partner agencies identified a large-scale loan application fraud operation that had been enabled by a number of mortgage brokers. It "involved high-level document forgery and was believed to be orchestrated by a serious and organised crime group".

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In yet another example, a number of brokers were helping known criminals secure home loans, knowing the loans were to be repaid with illicit funds. 

Money laundering was identified as the primary threat facing major banks. Around 46% of 'suspicious matter reports' (SMRs) reported suspected money laundering. 

"Major banks are also exposed to money laundering through the purchase of high-value assets, particularly real estate. This is largely due to the subsector’s dominance of the home loan markets and provision of tailored products to real estate agents and other high-value asset dealers," the report said.

When ranking the risk exposures of various banking products, AUSTRAC assigned home loans a high vulnerability perception rating. The watchdog’s assessment said that there was a high known or suspected criminal misuse of home loans.