08 Nov 2019
Recent commentary on AUSTRAC and the risk of money laundering, as well as high profile investigations into banks such as Westpac and money remitters like PayPal, has raised some important points around how Australia governs funds coming into and going out of the country. At a time when Australia’s international trade flows are growing and supply chains are becoming more complex, Australia is unique in that it requires every transaction coming into or going out of the country to be reported.
The result is that these IFTIs (International Fund Transfer Instructions) are causing headaches for banks and NBFIs (non-bank financial institutions) across the globe, not just in Australia. While some banks have been vilified for failing to report properly, the problem is actually much bigger: NBFIs such as Afterpay have until recently flown under the radar.
The extension to include NBFIs in AUSTRAC IFTI reporting is all about trust. AUSTRAC wants everyone to go through the same level of regulatory compliance. This doesn’t just apply to Australian banks and NBFIs. Foreign banks transacting into and out of Australia face the same requirements.
There is also a cost associated with this on both a local and a global level, not least of all because of Australia’s additional requirements and the need for the local headquarters of global institutions to have a different set of processes and procedures in place.
So how do we solve the IFTI problem?
The Attorney General proposed a number of recommendations in 2016 to streamline and strengthen Australia’s IFTI reporting framework. This has come back into focus as reporting entities seek greater clarity on reasonable expectations around the transactions they report on.
Two points are worth noting upfront. The first point is that we need to recognise this isn’t a new problem. AUSTRAC reporting has been happening for years. And many of the breaches the media is talking about have been self-reported by the institutions themselves. So in a way, it’s a known problem.
The second is that banks have all of the data they need to report. It’s just that it’s hidden in siloed and often legacy technology infrastructure that makes it very hard to find the data they need. Once they then find it and send it to AUSTRAC, the quality of the data often isn’t good enough. This means it all needs to be manually processed.
AUSTRAC, on the other hand, has neither the time nor resources to do this and therefore rightly pushes back on its reporting entities to provide exactly what is required.
To orient an appropriate policy response, it is important to bear in mind why we need reporting in the first place. It is important that AUSTRAC know exactly who is transacting and what they are transacting for because Australia wants a fair and clean economy, free of fraudsters engaged in financial payments. The USD 2 trillion that is laundered through the financial system every year is a major public policy issue, as some of these funds end up flowing into socially destructive activities like financing terrorism.
Based on where we currently sit, we believe that bank internal systems and processes need to change. Most banks are reticent because they fear this is a complex and costly problem to solve. That isn’t necessarily the case. Technology is rapidly emerging to address many of these problems swiftly and easily.
Indeed, even though blockchain has been much maligned recently for its socially questionable use in cryptocurrency, we believe that making international payments safer and more compliant is arguably one of the most important use cases for blockchain.
By Eric Knight and Nick Armstrong, Regulation Asia, 8 November 2019
Read more at Regulation Asia
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