The war on terror is set to profoundly alter business practice across the globe – especially in financial services – as governments seek to attack the money trail that funds terror targets, and to toughen safeguards against criminal money laundering.

Every year, around USD 200 billion is estimated by the United Nations to circulate in global ‘informal banking systems’, and a sizeable chunk of this - up to USD500 million – is thought to be at the disposal of terrorist networks like al-Quaeda.[1]

In response, governments in Australia and New Zealand are pursuing new Anti-Money Laundering laws[2] to implement tough new global standards announced in 2002 by the Financial Action Task Force (FATF) of the OECD, and Baycorp Advantage is working closely with governments so that these new laws may meet our customers’ needs.

How does AML Reform affect you?
Terrorist financing may seem a long way from the concerns of many Australasian businesses, but these AML reforms are likely to affect a very large number directly or indirectly.

If you are a financial services provider, lawyer, accountant, real estate agent, jeweller, or trust or company services provider, it is likely that the new Australian laws will impose new or expanded Customer Due Diligence obligations, requiring you to verify the identity of your customers. As well, the law will impose reporting requirements for suspect transactions (or change existing requirements). There are also special requirements for “politically exposed persons”.

Many Australian and New Zealand financial institutions already meet some requirements along these lines. The new Australian legislation will expand and alter these obligations.

Even if you are not caught under the new laws, the AML provisions are still likely to affect you indirectly. Just as the 100 point check became the benchmark for identity verification after it was introduced in Australia in 1988, so the principles of Customer Due Diligence are likely to set the new standard for identity verification across the market. It is no accident that at the same time as Australia’s Commonwealth Government is pursuing AML reforms, AUSTRAC’s Proof of Identity Steering Committee is considering fundamental reforms to strengthen the existing 100 points system.

Customer Due Diligence
The principles of Customer Due Diligence laid out in the FATF recommendations are a useful guide to good practice for all businesses, not just financial institutions. With the rapid growth in the volume and velocity of electronic commerce (see Table 1), establishing a clear framework for best practice Customer Due Diligence is a must for businesses. Since 1994, Australian cheque volumes have declined by more than 1/3, while in the same period, direct entry volume has almost doubled, and credit card volumes quadrupled, giving a good indication of the rapid transition to electronic, remote forms of payment in the economy as it enters the century of the information economy.

(Source: Australian Payments Clearing Association)

To meet the increased risk of identity crime from these changes in market and technology, the FATF Recommendations suggest that a business should:

1. Identify the customer and verify that customer’s identity using reliable, independent source documents, data or information;
2. Identify the beneficial owner, and take reasonable measures to verify the identity of the beneficial owner…[including] taking reasonable measures to understand the ownership and control structure of the customer.
3. Obtain information on the purpose and intended nature of the business relationship.
4. Conduct ongoing due diligence on the business relationship and scrutiny of transactions undertaken throughout the course of that relationship to ensure that the transactions being conducted are consistent with the institution’s knowledge of the customer, their business and risk profile, including, where necessary, the source of funds.

Put simply this means that there will be a greater onus on more diligently determining who the customer really is, rather than accepting at face value the person on the other side of the desk, phone, web or application form.

These requirements are to be applied on a risk basis (and, in Australia, fleshed out in industry codes of conduct) so that not all industry sectors or companies will CDD procedures as intensive as, say, a large internationally operating bank. A large number of businesses will however, have a CDD obligation.

Fortunately, the FATF recommendations also allow businesses to verify a customer’s identity from “reliable independent source documents, data or information” meaning that businesses can rely on identity verification services, such as Baycorp Advantage’s VeriCheck, to help meet their CDD obligations. 

Using data or information for verification
Many credit providers already use Baycorp Advantage’s fraud and verification services as part of their good credit risk management practice. But with an eye to the new AML reforms, Baycorp Advantage is now working to expand the scope of its verification services to provide enhanced support for businesses in performing best practice Customer Due Diligence.

In Australia, Baycorp Advantage is seeking to expand access to public sector registers (electoral roll, drivers’ licence, birth certificate, passport) to help verify Proof of Identity documents and identity elements, and has already developed its Trading History reports that have created a more powerful tool to identify the legal entity and assessing the credit risk of the entity along with the owners of the business.

For New Zealand customers, Baycorp Advantage has just secured a driver’s licence verification service and will add other checks over the coming year.

Baycorp Advantage is working closely with government on both sides of the Tasman so that the new legislation may meet the needs of customers and is expanding its fraud and verification products to provide enhanced support for financial service providers and others in complying with the new requirements.

What’s next?
The new Australian laws, due out in draft form towards the end of this year, will establish a framework for the major obligations to be fleshed out in industry codes. Following a period of consultation, we would expect the new Australian laws to be introduced into the Commonwealth Parliament in the autumn or budget sittings in 2005, before the expected review of Australian Anti-Money Laundering arrangements by the FATF. Baycorp Advantage will continue to work closely with the Australian government to promote cost effective verification services as a viable means for businesses to comply with the law.

In New Zealand, the Ministry of Justice is still conducting a comprehensive review of the AML system following the release of the FATF Review.

While it is extremely unlikely that most businesses will ever come in contact with a terrorist or a major criminal money launderer, the logic behind AML reforms says that the best way to limit their activity is to have strong CDD systems across the economy. The upside for business is that strong CDD systems will also help them deter other more mundane, but far more costly, types of fraud and get a better grasp of credit risk when establishing relationships.

If you haven’t considered the impact that AML might have on your business, now might be a good time to raise the issue with your Baycorp Advantage representative.  Alternatively visit our website to view our range of verification services.