Anti-money laundering and counter-terrorist financing practitioners in Australia have called on the government to slash company search fees to allow them to comply with the beneficial ownership obligations that took effect in mid-2014. Compliance officers and consultants said they were alarmed the government would not commit to reducing corporate registry fees with the introduction of a cost recovery model for the Australian Securities and Investments Commission (ASIC), as reported yesterday.

AML/CFT professionals had hoped the introduction of a cost recovery regime for ASIC would spell the end of high company search fees, which are some of the highest in the world and deliver the federal government an annual profit of more than A$540 million each year; this goes into consolidated revenue.

Sources said compliance officers at reporting entities were struggling to justify the high cost of company searches to establish the beneficial owners behind corporate customers. They said the government should use the introduction of ASIC "cost recovery" as an opportunity to bring ASIC's fees into line with other jurisdictions. 

The enhanced due diligence obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) took effect from June 1, 2014. The government has given reporting entities a 19-month assisted compliance period during which it will not take enforcement action if reporting entities make reasonable steps to comply. This runs through until the end of 2015, at which point reporting entities are expected to be fully compliant.

Under the new rules, reporting entities are required to verify information about the settlor of any trust that is a customer, identify the beneficial owner of a customer and undertake enhanced customer due diligence (CDD) on any politically exposed persons.

Paddy Oliver, an AML/CTF consultant at Lexcel Consulting, said the government should aim to reduce registry search fees to encourage reporting entities to engage in genuine investigations into beneficial ownership. Given the public benefit from reporting entities' due diligence work he said it made sense to adopt the UK or New Zealand models. 

In the UK, Companies House recently made more than 170 million digital records on companies and directors available for free under the government's commitment to "open data". The information includes financial accounts, company filings and details on directors and secretaries. In New Zealand, most electronic searches are also free. 

Oliver said electronic searches were essential to conducting proper inquiries.

"There is a significant cost burden to buy the information for small-to-medium reporting entities. Even larger reporting entities baulk at the cost of obtaining information that could be provided either more cheaply or for free," he said.

The beneficial ownership conundrum 

Beneficial ownership has been a significant challenge for reporting entities over the past 14 months. A recent forum hosted by Thomson Reuters Regulatory Intelligence heard banks had dedicated significant resources to meeting their new obligations. Westpac, for example, has developed a 56-page internal guidance note on how to identify a beneficial owner. The bank's chief risk officer said this was an indication of the complexity and expense that such work was for reporting entities.

Bradley Brown, acting national manager for strategic intelligence and policy at AUSTRAC, said reporting entities' efforts to meet their enhanced due diligence obligations would be fundamental to the success of the Australian AML/CTF regime.

"We think these requirements and obligations are extremely important. They obviously bring us further into compliance with our international standards and expectations," Brown said. 

The recent Financial Action Task Force mutual evaluation report on Australia's AML/CTF regime singled out Australia's corporate register for criticism. The report said the register was "not sufficient to ensure that accurate and up-do-date information on beneficial owners is available in a timely manner". 

"Overall, legal persons and arrangements remain very attractive for criminals to misuse for ML and TF [money laundering and terrorist finance]," the report said.

AUSTRAC has drafted and consulted on a rule that would allow reporting entities to rely exclusively on third-party databases, such as the ASIC register, to conduct customer due diligence. The rules would increase businesses' reliance on third-party databases and increase the use of data held in the ASIC register, industry sources said.

At present, the standard practice is to collect information directly from the customer and then cross-check this against other sources.

Comprehensive database 

Dinesh Anand, head of sanctions compliance at ANZ, told the forum the government could support businesses by investing in a more comprehensive company database to help entities to identify beneficial owners.

"As the government is responsible for maintaining a register of corporate entities, they have a lot of influence over the amount of information that is provided by that entity on the ASIC register. If we, as a bank, try to get some information from customers then we need to independently verify this. It's not always possible to do this to the extent that we would like to and the information on the register is not as clear-cut as we'd perhaps like," Anand said.

Anand said if the ASIC register could provide more cost-effective information on beneficial ownership then reporting entities would be able to allocate more resources to high-end AML/CTF compliance work.

"I think the resources that banks are putting into trying to get that information on beneficial owners could perhaps be better spent on other compliance work," he said. 

Battle for budget

Oliver said there was a constant battle at most organisations for compliance resources. He said it was difficult for AML/CTF departments to put forward the case for spending scarce resources on company searches, especially when the government generated such a high profit margin from this data. 

"Many reporting entities are prepared to take a calculated risk in not obtaining detailed information, over and above the limited information that is available for free. It could be argued that making the user pay hinders the reporting entities from meeting their compliance obligations," Oliver said.

Jeffrey Knapp, accounting lecturer at UNSW Australia, said an analysis of ASIC's accounts showed ASIC was charging businesses and individuals around A$50 million each year for company searches.

"Anyone who has read an introductory economics textbook, let alone the treasurer and assistant treasurer, should know that markets work more efficiently when transaction costs for information are zero," Knapp said. He described the A$38 fee to do a search, soon increasing to A$40, as "fee gouging".

Out-of-date information 

A senior AML source, speaking on condition of anonymity, said the quality of the data in ASIC's registry left plenty to be desired from a due diligence perspective. It was common to do company searches as part of enhanced due diligence checks only to find that the registry information is incorrect or out of date. 

"The government has legislated that we have to check the identity of beneficial owners. So, on that basis, surely they should provide us with a cost-effective service that allows us to comply with the AML/CTF regime? When we do these checks with Companies House in the UK it's basically free," the source said.

The source said the Financial Action Task Force's Recommendations 23 and 24 urge countries to "ensure that there is adequate, accurate and timely information" that can be "obtained or accessed in a timely fashion by competent authorities". 

The source said, at present, reporting entities often pay for searches on the ASIC register only to discover that the information they have purchased is out of date or incomplete.

Strict obligations

Oliver said one of the bugbears of the Australian AML rules on beneficial ownership to date has been reporting entities' inability to access high-quality up-to-date company information. 

"The AML/CTF Act and Rules impose strict obligations upon reporting entities who struggle to meet these obligations, as either the company upon which they are performing the due diligence is not aware of their beneficial owners or the costs of obtaining a full ASIC search each time [they do] due diligence on a company is prohibitive," Oliver said. 

The registry's privatisation might address those problems but this should also be an opportunity to eliminate the "unjustifiable fees" on reporting entities and others who use ASIC's registry database, he said.

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.