How to spot money laundering: 3 red flags

In April this year the Attorney-General announced public consultation on Australia’s anti-money laundering and counter terrorism financing (AML/CTF) regime.

“No legitimate business wants to wittingly, or unwittingly, assist the laundering of money that aids the commissioning of serious crimes including terrorism, child abuse and the illicit drug trade. The purpose of the AML/CTF regime is to assist businesses to identify these risks in the course of providing their services,” read the Attorney-General’s statement.

Craig Dangar, Principal Accountant at Vault Accountants, says that Australia has already made significant progress in the past few years.

“The banks had to change their policies about taking cash via ATMs. There are now strict penalties which have pushed the banks into compliance with anti-money laundering expectations. Our standards have got substantially higher very quickly,” he says.

Australia has been a member of the Financial Action Task Force (FATF), the global body tackling money laundering, terrorist and proliferation financing, since 1990. In 2015, a mutual assessment found technical deficiencies in Australia’s efforts against money laundering and terrorist financing. A 2018 re-rating found that Australia is compliant with around a quarter of the FATF recommendations, largely compliant with another quarter, partially compliant with a quarter and non-compliant with the final quarter.

At this stage, the re-rating only assesses the technical compliance – not effectiveness.

Areas of partial compliance include customer due diligence, reliance on third parties and supervision of financial institutions. Non-compliant areas include correspondent banking, transparency and beneficial ownership of legal arrangements, and regulation and supervision of Designated Non-Financial Business and Professions (DNFBPs) – businesses that are susceptible to money laundering and terrorist financing, including accounting.

There is work to do yet, but Australian regulations have been updated.

“In the past 3-4 years, the fines for banks not complying with AML rules have changed. Punishments have been enforced, as opposed to just having legislation, which has increased the level of compliance with the AML. So the regulatory framework is actually being implemented,” says Dangar.

“Banks are now tracking the interests of beneficial owners who are effectively group directors, and they’re taking trust much more seriously. They’re doing their due diligence by looking at companies not just through their trust structures, but also looking at the ultimate beneficiaries.”

Accountants play a critical role – ensuring their clients are compliant.

“We need to understand the underlying business structure and understand who the ultimate beneficiaries are. We’re in a reasonably solid position to do that,” says Dangar.

He says there’s also been far more data matching in recent years.

“Clients in the cash economy are open to more scrutiny. A lot of my peers are having conversations with clients when the numbers don’t look right or when the income doesn’t appear to be reflective of what’s happening in those businesses. A lot of that has been guided by the ATO giving accountants parameters on what they would normally see in terms of cash turnover.”

“Accountants’ main interaction with the AML happens when we’re dealing with cash. For example, there are at-risk industries, such as pubs, where we advise them on the implications of the AML for cash handling.”

With society’s reduced reliance on cash, Dangar believes the cash economy will deplete in the years to come.

“During COVID the cash usage rate dropped dramatically and it doesn't look like that's going to change. So the prevalence of cash in the economy has dropped dramatically.”

Greater awareness of suspicious transactions is also improving, contributing to a greater likelihood that money laundering will be identified earlier.

“Large cash transactions are becoming more obvious. There’s been a lot of stories about arrests involving cash, so I think there’s a societal change in the acceptance of cash transactions.”

Red flags for money laundering and terrorism financing

Dangar identifies red flags which, while not certain to be accompanied by money laundering, are indicators that further consideration is warranted:

• Large cash transactions
• Offshore transactions
• Cryptocurrency trading

Large cash transactions, he says, are the main red flag to look out for, followed by the other two.

“Offshore transactions are a big one. That would definitely indicate something suspicious may be going on. Heavy reliance on cryptocurrency in a business could be suspicious. It isn’t always the case but in some industries, businesses that shouldn’t be transacting in a certain way stand out. The utilisation of crypto in certain businesses can be a big red flag.”

Accountants would be wise to trust their instincts and apply logical reasoning by, for example, considering whether business transactions for a particular business make sense.

“Does a fruit shop in Brisbane’s CBD sending money across to Syria make sense? A lot of it is logic. If it doesn't look right, generally it’s not,” says Dangar.

“If certain activities aren’t matching up, that’s usually a red flag that there’s something going on. The beauty of bookkeeping software is that it tells a very good story. If the story doesn’t look right, it usually isn’t. That’s usually the best approach to follow.”

Responding to suspicious activity

If accountants observe suspicious activity, they need to be careful in how they manage the situation.

“Any regular transactions that don’t seem normal need to be flagged to the owner of the business or the owner of the account,” says Dangar.

“If it looks really suspicious, you need to talk to the client and ask them what’s going on.”

Bringing this up delicately, and ensuring you aren’t coming in with the assumption that the client has committed illegal activity, can be difficult.

“It’s often the case that someone is using their account and committing cyber fraud. We might say to a client, ‘I’ve noticed this suspicious activity. Is there a problem? Have you been hacked? Did you authorise this transaction?’ That’s usually the most diplomatic way to ask. Given the amount of cyber fraud happening at the moment, there’s a high chance that would explain any anomalies,” says Dangar.

If the client’s explanation doesn't make sense, then accountants should take the matter to the ATO or Federal Police.

“We don’t have an investigative role with the client,” says Dangar – meaning that it is not up to the accountant to investigate further to verify their suspicions, only to report them. In some situations, however, Dangar does recommend further action.

“If we had a client at risk of substantial breaches, we would disengage immediately,” he says.

Avoiding trouble: It’s what you know

A robust and comprehensive onboarding process can help to ensure you’re only engaging with clients who have a legitimate business.

“As part of a standard onboarding process, we’ll know quite a lot about a client before we start working with them. If they are in a high-risk industry, such as doing substantial offshore work, we’ll rarely engage with them,” says Dangar. “Anyone who trades in a lot of cash is also high-risk.”

He cites pawn shops and currency exchange as particularly tricky, with a regulatory burden requiring specialist knowledge.

“Firms that look after businesses operating in currency exchange understand the unique business environment a lot better than we do. We might identify something as suspicious but they understand what it is. You need to find the right clients to match your business.”