Austrac has recommended that lenders restrict the use of cash to repay loans and also limit the use of offsets and redraws as part of a money laundering risk mitigation strategy.
In a review of non-bank lenders and finance companies, Austrac has assigned a “medium” money laundering and terrorism financing risk rating to the sector. It said the key threat to the sector is fraud.
Its assessment is based, in part, on 2279 suspicious matter reports submitted by 83 reporting entities over the 12 months to January 2019. The great majority of the 600-plus reporting entities in the sector did not submit any SMRs over the period.
Austrac said loan application fraud is often associated with identity theft or the presentation of false or misleading information by the applicant.
“The non-bank lending and finance company sector is increasingly moving to online delivery channels. This shift exposes the sector to cyber-enabled fraud, including fraudulent online loan applications and attempts to obtain loans using stolen or fraudulent identities.”
The sector is exposed to money laundering in the form of unexpected early loan payouts using criminal proceeds, allowing criminals to convert the proceeds of crime into assets such as real estate and luxury vehicles.
“Loans are well established vehicles for money laundering, particularly when the loan is used to purchase high-value assets in which the proceeds of crime can be invested through loan repayments.”
Several suspicious matter reports highlighted purchases of unusually large numbers of gift cards. Gift cards form a part of the money laundering cycle when reloaded using cash, used overseas and if purchased with the proceeds of crime and then on-sold. They can also be used to purchase goods and services anonymously.
One reporting entity discovered a customer that had purchased more than A$2 million of gift cards over a 12-month period.
Austrac has recommended a number of risk mitigation strategies, including restricting the extent of cash deposits to repay loans; disbursing funds to the vendor of the goods being purchased, rather than the borrower, to ensure the loan is used for the stated purpose; and audits of completed loan applications for additional fraud checking.
It suggests that the use of redraws and offsets be limited. When money is deposited into an offset account with a lender and then transferred into an account held at another financial institution, it creates vulnerability in relation to layering that is not present in loan structures that don’t allow withdrawals.
It would like to see better communication and collaboration between reporting entities and between the sector and government.
It is concerned about the use of outsourced customer identification processes and transaction monitoring, saying insufficient oversight of these arrangements places the sector at risk of unintentional non-compliance. It recommends more active monitoring of processes provided by third parties.