With Australia’s banking and finance industry under the spotlight in 2018, the need for transparency is stronger than ever.
The Banking Royal Commission highlighted just how seriously the government takes finance-sector standards when it handed down the Commonwealth Bank of Australia (CBA) the largest fine in Australian corporate history – $700 million for breaches of Anti-Money Laundering and Counter-Terrorism Finance laws, which resulted in millions of dollars flowing through to drug importers.
CBA’s breaches were not an obscure area of finance law, but instead, a key obligation of the finance sector called ‘Know Your Customer’ or ‘Know Your Client’ (KYC).
What is KYC compliance in banking?
KYC is the process a business goes through to verify the identity of its customers, and better understand its customers and their financial affairs. The term is mainly used in the banking and finance industry and can mean one of two things:
- The Corporations Act 2001 requires advisors who give financial advice or sell financial products to know their customer, ensuring they receive appropriate advice or products that are suitable for them. This is regulated by the Australian Securities and Investments Commission (ASIC).
- Banks and other entities (defined by the Act) are required by law to know their customers – that is, who they are doing or proposing to do business with. The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 provides the legal framework and establishes obligations.
The Australian Transaction Reports and Analysis Centre (AUSTRAC) oversees compliance with the Act. It is Australia’s financial intelligence unit and also its anti-money laundering regulator. AUSTRAC oversees the compliance of more than 14,000 Australian businesses ranging from major banks and casinos to single-operator entities.
KYC and AML
Melissa Grundy is a senior advisor with Effective Governance, the largest and oldest specialist corporate governance advisory firm in Australia, which is part of the HopgoodGanim Advisory Group. She believes ‘Know Your Customer’ offers dual protection.
“KYC protects the banks from a risk perspective, so they are compliant with the legislation,” Grundy says. “But it’s also designed to protect the wider community by ensuring that financial institutions aren’t used to facilitate criminality or terrorism.”
In the context of Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF), Grundy says it’s important to establish whether the customer you’re dealing with is legitimate.
“For example, in today’s digital environment – where people communicate by email in a less personal way – then KYC obligation takes on another added dimension,” she says.
“It’s important to know that the person on the end of an email is who they say they are.”
AUSTRAC’s system for compliance is an involved process, which Grundy explains in two parts:
- Part A: Sets out how an AML/CTF program identifies, mitigates and manages the risks arising from the provision of a designated service by a reporting entity.
- Part B: Refers to customer due diligence. This means ensuring the reporting entity knows its customers and understands its customers’ financial activities.
AUSTRAC’s AML/CTF ongoing reporting obligations are extensive, but clearly set out.
One of the main reporting obligations is for large transactions. Knowing your customer can help with this, according to Grundy. The limit beyond which you have to report transactions is $10,000.
“Ultimately what they’re trying to do is ensure that banks aren’t used intentionally or unintentionally for money laundering,” she says.
“The aim is to ensure that banks understand customers and their customers’ dealings so they can better identify whether any of the transactions they’re processing could be – for want of a better technical word – questionable.”
What does this mean for hiring managers in banking and finance?
Grundy says HR has two key functions with respect to AML and CTF – background checks and training staff in KYC.
“When recruiting, you need to do appropriate checks before employment to make sure the person is not banned in any way,” she says.
“And you’d want to make sure they can demonstrate to you they understand what know your customer means, including what the obligations that devolve on them under the Corporations Act as a financial advisor are.”
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What is required for KYC?
CVCheck can help with this by running a number of checks that are useful to HR managers in banking and finance, such as:
- Anti-Money Laundering & Counter-Terrorism Financing
- Business Interests
- Credit Default
- Credit History
- Financial Regulatory
In particular, AML/CTF, Bankruptcy and Financial Regulatory Checks could be the most useful to KYC.
The AML/CTF Check assists organisations to comply with their obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and is commonly used for occupations such as company directors, finance brokers, loan officers, financial planners and cash carriers. The check involves an online search of the following lists:
- Law enforcement
- Regulatory enforcement
- High-profile persons
- Politically exposed persons (PEP)
A Financial Regulatory Check will reveal if an individual has been involved in any activities that make them unsuitable for a position. This check is used for occupations such as directors, insurance brokers, investment bankers and mortgage brokers.
A Financial Regulatory Check will include a search from the following registers:
- ASIC’s banned and disqualified registers
- ASIC’s enforceable undertakings register
- APRA’s disqualification register
To obtain an Australian Financial Services Licence (AFSL), a Bankruptcy Check is required by ASIC.
Training to ensure compliance
Grundy believes it’s important that HR practitioners ensure people within organisations are informed in relation to KYC, in particular AML and CTF.
“It may be necessary to undertake a training program across the organisation to ensure that employees involved in frontline roles or key positions are aware of the obligations and the importance the organisation places on know your customer,” she says.
Online training is efficient, flexible and can be reviewed regularly to ensure it remains up to date.