Loan fraud is greatest AML/CTF risk to non-banks: AUSTRAC

Conducted by the Australian Transaction Reports and Analysis Centre (AUSTRAC), the 51-page risk assessment pulls on:

• analysis of transaction reports (as well as other AUSTRAC intelligence)
• reports from partner agencies (including regulatory and law enforcement), and
• “feedback and professional insights offered during interviews and consultations with a range of non-bank lenders and financers, as well as industry experts and associations”.

It aims to identify the key ML/TF risks to the sector at a national level in order to help the 600 non-bank lenders and financiers in the Australian market “in identifying and disrupting ML/TF risks to Australia’s financial system, and reporting suspected crimes to AUSTRAC”.

While it does not go so far as to provide targeted guidance or recommendations as to how reporting entities should comply with their AML/CTF obligations, the Australian government’s financial intelligence agency says it hopes the report will help the sector inform their own risks assessments and enhance their understanding of risk in the sector.

The non-bank market is estimated to account for approximately 7 per cent of debt financing in Australia.

What the risk assessment found

According to AUSTRAC, the overall ML/TF threat associated with the non-bank lending and financing sector’s criminal threat environment is medium, as is its level of ML/TF vulnerability.

It noted, for example, that 2,279 Suspicious Matter Reports (SMRs) had been lodged by the sector between 1 February 2018 and 31 January 2019, with the total value of transactions reported in these coming in at $366.8 million.

AUSTRAC highlighted that 72 per cent (1,632) of the reports most commonly described loan application fraud, identity fraud and welfare fraud. 

According to the assessment, this was often associated with the person seeking to secure funding using someone else’s identity to avoid having to make repayments, or presenting false and misleading information about themselves to the non-bank lender and financier to increase their chances of obtaining finance.

Of these, two-fifths (39 per cent) included indicators of loan application fraud, the majority of which was conducted online.

“The non-bank lending and financing sector is increasingly moving to online delivery channels,” AUSTRAC stated.

“This shift exposes the non-bank lending and financing sector to cyber-enabled fraud, including fraudulent online loan applications and attempts to obtain loans using stolen or fraudulent identities.”

Reliance on brokers 

However, AUSTRAC also noted that because the non-bank sector relies heavily on brokers and aggregators to deliver their products to customers (rather than having a branch presence/public-facing staff), this reliance on third-party relationships also carries risks to the sector.

While the report did state that brokers play a critical role in the home loan and vehicle finance market for both banks and non-banks, it warned of the potential security issues that third-parties could open up to non-banks.

The assessment reads: “While outsourcing to third parties, including through agent banking arrangements, can provide advantages such as greater accessibility for customers and improved sophistication of services, using third parties can create vulnerabilities in the ability to detect and act upon suspicious activity due to the increased distance between the reporting entity that holds the AML/CTF obligations and the ultimate customer.”

“The … non-bank lending and financing sector also has a relatively low rate of direct customer interaction, placing significant reliance on brokers and other external loan originators, which can seriously undermine the benefits of a transparent customer-type. 

“Brokers and aggregators lengthen the value chain, diminishing the oversight the non-bank lending and financing sector has over the customer identification and document-verification procedures carried out on their behalf.”

It said it had identified 12 SMRs (0.5 per cent), which related to fraudulent behaviour by brokers, which it said highlighted the “risks posed by brokerage arrangements and the importance of robust systems and controls to monitor this activity”.

It went on to flag the risks of misconduct (whether by brokers or by retail staff) regarding loan fraud, both of which were flagged in submissions to the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry.

As such, AUSTRAC assessed that the complexity of the product delivery arrangements associated with the sector presented a medium level of ML/TF vulnerability. 

Early loan payout risk

After loan fraud, non-bank lenders and financiers were also found to be a risk target for money laundering, relating predominantly to “unexpected early loan payouts”.

It outlined that 46 per cent of SMRs related to money laundering, indicating that “criminals use loans to launder money by making loan repayments to the lender using the proceeds of crime”.

For example, this was seen in early loan payouts, which AUSTRAC said could “indicate that illicitly generated funds are being used to pay back the loan, thereby converting the proceeds of crime into high-value assets such as real estate and luxury vehicles”.

“Even where the loan is not secured by a specific asset, funds that are sourced from legitimate lenders have a prima facie justifiable source, which, when repaid with the proceeds of crime, are effective tools for money laundering,” it added.

Other risks flagged related to low-doc loans, given that “some money launderers may seek to exploit this offering to avoid having their source of funds thoroughly investigated during the application process”.

“AUSTRAC encourages additional due diligence activities in relation to low or no-doc loan applicants to mitigate the risks associated with these products,” it said.

The agency found only a handful of evidence to show that there are tax evasion or national security risks through SMRs, but noted that it was “highly likely there is significant under-reporting and non-reporting of suspicious matters across the non-bank lending and financing sector”.

“AUSTRAC assesses there is considerable scope for the sector as a whole to improve their systems to identify and report suspicious matters,” it said.

The agency concluded: “AUSTRAC expects the non-bank lending and financing sector to use this risk assessment to protect their businesses and the Australian community from criminal threats.”

Upcoming risk assessments, focused on Australia’s banking sector, are due to be released in the coming months.

[Related: Westpac sues Forum Finance for potential fraud]