Major reporters under the Australian anti-money laundering regime have called on the government to review the funding model for AUSTRAC ahead of any moves to introduce a "second tranche" of the laws. 

The country's largest financial institutions are concerned they will be facing another significant increase in fees if the government extends the anti-money laundering and counter-terrorism financing (AML/CTF) laws to include a raft of new entities. 

Sources said the existing fee structure was based on political expediency rather than principles of equity. This left major reporters carrying a disproportionate burden of AUSTRAC's operating costs. They said that if accountants, lawyers, real estate agents and jewellers were captured under theAnti-Money Laundering and Counter-Terrorism Financing Act 2006 it would lead to another huge increase in fees.

Under the so-called "industry contribution levy" for AUSTRAC, large reporting entities are required to pay around A$70 million per year, phased in over four years, for AUSTRAC's regulatory and intelligence work. This financial year, 660 of the largest reporting entities will cover 90 percent of AUSTRAC's operating budget. An estimated 13,800 smaller reporting entities, meanwhile, have been exempted from the fee regime.

By the 2018 financial year AUSTRAC will be fully funded by those 660 large reporting entities, whose contributions will pay for the cost of providing intelligence services to other government departments, which has been estimated at A$25 million per year.

The industry levy has replaced the previous "cost recovery levy", which restricted the government to recouping the cost of AUSTRAC's regulatory work. 

Major impost

The four major banks in Australia are each understood to be paying up to A$9 million per year to cover the cost of AUSTRAC's regulatory and intelligence work under the new model. AUSTRAC has said that although only 5 percent of reporting entities were contributing to its operating costs, this "represents a meaningful step in reducing the burden on small business".

Sources said these fees had triggered significant problems for AML/CTF compliance teams, which had to justify their operating budgets on top of a large increase in industry fees. This was compounded by the fact that AUSTRAC usually announced fee increases mid-way through a financial year, so that institutions had not budgeted for the increases and then had to put in special budget requests to pay the mandatory reporting entity fees. Some sources said additional fees were being drawn from existing operating budgets, which meant compliance teams had to do more AML work with fewer resources.

"The government seems to think that the major reporters have the greatest ability to pay, so that's how they've structured the fees. What it doesn't appear to realise is that these inequitable fees can undermine the goodwill of reporting entities who are already allocating massive amounts of resources to AML/CTF compliance," said a senior compliance practitioner.

Large reporting entities, including the major banks and wealth managers, are growing increasingly concerned that the introduction of tranche two of the AML/CTF Act could saddle them with a raft of new fees. The statutory review of the AML/CTF Act is expected to recommend that the government push ahead with the second tranche of the legislation as a matter of priority. 

Most of the entities in tranche two will be low-volume reporters or small businesses, such as small real estate agencies, legal practices and accounting firms. Under the existing model those smaller entities would not be charged any regulatory levies. The larger reporters would, in effect, be saddled with the cost of regulating other industry sectors.

"The inequity of the existing model is a bugbear for large reporters and this is likely to become a major problem if the existing model is applied to tranche two. At present only a fraction of entities are covering the cost of the entire regime," another source said.

An equitable model 

The nation's large reporters are understood to be working behind the scenes to urge the government to deal with this problem as part of the proposals for tranche two. Many were frustrated that the recent statutory review of the AML/CTF Act specifically excluded any discussion about industry levies, which were the subject of a separate consultation.

Aidan O'Shaughnessy, director of industry policy at the Australian Bankers' Association (ABA), said when the government changed the name of the "cost recovery" levy to "industry contribution levy", it meant it was no longer bound by the Commonwealth Cost Recovery Guidelines. These were designed to ensure that any cost recovery was done in a transparent and equitable manner.

"It is a very, very inequitable system. Banks are not only paying their own costs of regulation, they're paying substantially higher industry contributions year-on-year. The small end of town, which is arguably where the higher risk lies, doesn't contribute at all. AUSTRAC spends a disproportionate amount of time supervising these smaller, higher-risk sectors of the industry and yet they don't pay for this supervision," O'Shaughnessy said.

Robert Colquhoun, policy director at the Australian Financial Markets Association (AFMA), said his organisation had ongoing concerns about the inequities associated with the AUSTRAC industry contribution framework. He said these concerns were at the broad policy level, particularly in relation to the abandonment of the government's cost recovery guidelines, and also with regard to the framework's implementation. 

Colquhoun said the 2014-15 contribution model saw the payment burden fall primarily on the larger financial institutions in a manner that is "not commensurate to the risk that those reporting entities pose". He said this point was illustrated by the significant amount of compliance activity that AUSTRAC undertakes against entities in the remittance sector, which are largely exempted from the fee model. 

"AFMA would be very concerned if the current skewing of the burden of contribution were to be continued once tranche two entities fall within AUSTRAC's regulatory oversight. The current minimum charging amount of $1,000 would suggest that these concerns have merit," he said.

Pillars carrying the weight 

The recent Financial System Inquiry (FSI) report noted that, out of eight major streams of regulatory reform since 2005, industry spending had been the highest on AML/CTF compliance. Sources said these costs were becoming even more difficult to justify for major reporters as the impact of the A$70 million AUSTRAC funding model started to bite into compliance budgets.

Several sources, speaking on condition of anonymity, said the public interest would be better served if the government cut fees and treated the reporting entities as essential partners in the fight against laundering, terrorism and organised crime.

AUSTRAC itself has described major reporters as reporting entities with high-volume reporting behaviour, including larger banks and corporate remitters. "These entities tend to be well-resourced, accustomed to regulation, skilled in risk management and have the ability to access external expertise when required," AUSTRAC said.

Larger reporting entities are concerned that being "well -resourced" has made them an easy target for the imposition of regulatory fees — regardless of whether those fees are justifiable or equitable.

"The major reporters have to add to these fees the fact that they still have to pay for their own internal AML/CTF compliance resources. So that imposes enormous costs," O'Shaughnessy said. He said the lack of advance warning about operating cost increases had also caused problems for banks.

"Banks run on a yearly budget. They have a rough idea of how much they're going to need to spend on AML/CTF resources and then suddenly AUSTRAC, without warning, hits them with this enormous increase halfway through the year with a short time to pay. So it goes back to the fact that it's an inequitable model and there's not enough transparency," O'Shaughnessy said.

Tracey Lyons, head of policy at AFMA, said her organisation strongly supports the implementation of "tranche two" but is concerned about the implications for the "industry contribution".

"AFMA expects that if the regulated population is broadened to include tranche two entities, then the cost of regulating those entities would be applied directly to them. It does appear though, to the extent that large financial institutions are already subsidising regulation by AUSTRAC, that the inequity problem will be exacerbated," Lyons said.

Key players in the financial services sector are hopeful that under a new prime minister the government will be more responsive to the concerns that they have raised in this area.

"More generally, AFMA is alarmed by the imposition of regulatory costs on industry through existing AUSTRAC and APRA levies, shortly to be joined by the ASIC industry funding model, without any regard for the aggregate impact on Australian businesses of those costs," Lyons said.

A true "user pays" model 

During the consultation on AUSTRAC's new cost recovery model numerous respondents observed that government departments and taxpayers were the ultimate beneficiaries of AUSTRAC's intelligence work. This has made the fees deeply unpopular with the 660 reporting entities that have been required to fund AUSTRAC's total operating costs during the four-year phase-in period.

O'Shaughnessy said the ABA supported the view that government departments should be charged directly for the use of AUSTRAC's data. 

"The government is the sole beneficiary of the AUSTRAC data and it also makes a lot of money off it. There is a good argument to say they are the primary beneficiary, so therefore they should also contribute to the cost of running AUSTRAC," he said.

AUSTRAC's data has proved profitable for the federal government. In the 2013 financial year, for instance, AUSTRAC's intelligence contributed to 1,428 tax cases, which led to A$572 million in new tax assessments. More recently the government has been using AUSTRAC's data in proceeds of crime cases, a strategy that has proved lucrative for the government in the United States. 

AUSTRAC's data is also used to identify and recover funds associated with, among other things, social security fraud, immigration offences, frauds (such as advance-fee frauds) and intellectual property crimes.

This article was first published by the Regulatory Intelligence service of Thomson Reuters Accelus. Regulatory Intelligence (http://accelus.thomsonreuters.com) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.