The Money Trail: Recordkeeping on the frontline of tracking $1 trillion in missing funds

By Angela Priestley

January/February Edition, 2008: Fed up with the massive portion of global GDP disappearing every year, the International Community has made a united stand to stop crime and terrorism by targeting the money that finances it. Now, organisations undertaking financial transactions are taking to the frontline of defence and using recordkeeping as a weapon of mass destruction in preventing money laundering and terrorism financing.

A state of disarray

When a number of Australians were telephoned and asked to invest in options traded on mysterious foreign currency exchanges, some unwilling victims took the callers advice, transferring sums of cash into accounts located in Asia. The numerous complaints received by authorities on the scam were not enough to identify the perpetrators. Instead, it was the detail on the whereabouts of the cash that led to prosecution.

The crime was fraud. The victims were unsuspecting pawns in a game of opportunist, non-existent investment. The red flag? Records indicating a ‘U-turn’ of transactions transferred in and out of Australia, and an income that did not fit the economic situation of account owners.

It’s this style of money laundering that’s common in Australia, contributing to the estimated 3-5 percent of global GDP annually and a factor in KPMG’s projected US$1 trillion that disappears every year. It’s a crime usually committed on top of another, and one generating a tail of evidence in the records of transactions it leaves behind.

Globalisation may have progressed the problem, but it’s the globalised nature of financial institutions that may be able to prevent it. An international push is now placing the onus of responsibility on organisations undertaking financial transactions to ‘know their customer.’ Through effective identification and recordkeeping vigilance, the idea is to track monies better, note the patterns of suspicious behaviour, and maintain a trail of evidence for law enforcement agencies.

The global initiative is formally known as the Anti-Money Laundering/Counter-Terrorism Financing Act (AML/CTF) passed by the Australian Parliament in December 2006. As of December 12th 2007, organisations undertaking financial transactions – like banks, betting agencies and casinos – were required to comply with regulations and step up their identification and reporting procedures around transactions. By March 2008, these same organisations are required to submit their first compliance report.

A global mission

Neil Jensen, CEO of the Australian Transaction Reports and Analysis Centre (AUSTRAC), the designated agency dealing with the changing legislation locally, says compliance is essential if Australia is going to play its role in combating the money laundering problem.

The barriers being set up internationally, says Jensen, are modelled to deter the conduct of money laundering and terrorism funding by maintaining records of identification. “You need to identify and verify the identity of customers and ensure those people are who they say they are. If you verify them but don’t retain the record, you won’t know in the future if it’s the same person” he says.

“On the law enforcement side, it’s these records that will make an investigation.”

At AUSTRAC, the organisation is evolving to meet its own responsibilities as Australia’s AML/CTF regulator. With new staffing and relevant talent sourced to deal with the increasing challenges, Jensen says their number one priority is educating organisations on how to conform to the changing legislation.

“We’ve engaged in extensive consultation over the past two years in industry, in firstly developing and drafting rules to underpin the legislation,” says Jensen. “Where there are industry associations, we work closely with them – these have been effective in passing their messages on to their members, and developing solutions to help.”

Battle obligations

By way of recordkeeping obligations, Jensen says the main differences between the existing 100 point system for identification and what’s required from AML/CTF is the collection, in electronic format, of a wider number of records.

Besides this, a major change will be the compliance report, required by every entity engaging in financial services by the 31st March 2008. Already AUSTRAC has sent details to 19,700 entities alerting them of these procedures and Jensen believes most, but not all, are taking the appropriate actions.

“The response has been good but there are people who are not doing as much as they should be doing, at this point in time,” he says.

The requirements are clear: Transactions over $10,000 will now require mandatory checks, suspicious movement reported, and better recordkeeping practices adopted to consistently assure the identify of a customer during every transaction. As AML/CTF is risk based, it’s up to the reporting entity to make the call on the level of information in need of collection from customers.

The commitment to move forward can be seen in the flurry of spending activity, particularly from banks, on electronic verification systems and technologies that can assist in efficiently verifying customers and retaining the record.

A chance for technology

Paul Magee, CEO of VeCommerce says the role of technology in meeting these regulations and consequently assisting in combating money laundering is significant. “Most organisations find it relatively easy these days to establish an account or a customer profile for somebody,” he says.

“But we need to make sure people accessing that profile are the same person, and that their activities can be reported and referenced.”

Magee believes technologies like speech recognition could be key to having customers identify themselves, and establishing an efficient process for maintaining that identification for reference at a later point.

From a VeCommerce perspective, the answer is a biometric voiceprint framework outlining how voice biometrics can assist affected organisations in meeting their obligations. However Magee admits, this is not necessarily a perfect fit for all organisations and transactions.

“The Act goes to some lengths not to actually specify how they obligations will be filled, leading organisations to have the flexibility to adopt processes and procedures in their systems,” he says.

“The Act has put the onus of responsibility for outcomes, and sometimes the ways needed to do this are case dependant.”

Weapon of mass counter terrorism

Where criminals launder their money for profit, a potentially more serious situation is developing from so called terrorist organisations, where the intention is usually ideological rather than profit driven.

But where recordkeeping can assist in anti money laundering, authorities still have their work cut out for them in using these same records for counter terrorism. Jensen likens identifying terrorism financing to not just finding a needle in a hay stack, but in a whole field of hay.

“Very minor incidences can have extremely major international consequences,” says Jensen. “The economic and social consequences are astronomical, the need to be diligent is very important.”

The innocent customer

Already, AML/CTF has inspired privacy concerns around how businesses will collate, keep and record the personal information they collect. Privacy commissioner Karen Curtis has outlined fears that organisations may use the Act to risk the privacy of customers with no criminal connections.

The balance, Curtis says, is to be able to meet to the requirements of AML/CTF while being careful not to ‘over-collect’ and avoid unnecessary actions that may breach customer privacy rights. “They should not try to apply an ‘arbitrary standard’ to their collection process,” says Curtis.

As for the perpetrators of fraud attempting to cover up the fruits of their crime by bouncing transactions back and fourth, the criminal life may soon get a little more complicated as financial institutions move to apply more stringent vigilance on their recordkeeping practices.

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