Bankrolling pedophiles, facilitating massive money-laundering schemes and terrorist-financing have branded Westpac, deservingly, an instant pariah of the banking world. As regulatory intelligence expert Nathan Lynch reveals here however, Westpac is unlikely to be alone. The story behind the story is industrial scale tax avoidance, the concealing of enormous cross-border payments.

The Australian anti-money laundering (AML) regulator’s case against Westpac for more than 23 million alleged reporting breaches will shine an international spotlight on SWIFT data reporting avoidance. Anti-money laundering experts have said the case will provide an unprecedented view into the processes that banks put in place to circumvent the SWIFT MT202 COV obligations, which took effect in 2009.

The MT202 COV requirement was introduced to allow banks and their regulators to trace the senders and recipients of international wire transfers. The cover note on SWIFT payments was an international format that SWIFT developed to facilitate data sharing on cross-border funds transfers between financial institutions.

Prior to the introduction of the MT202 COV format, the banks that processed these transactions had little visibility over the transactions they were processing on behalf of their correspondent banks.

The older MT202 messaging format did not require financial institutions to provide information on the sender and recipient of cross-border payments. This was particularly problematic with cover payments, where a combination of the MT103 and MT202 messaging formats were used.

AUSTRAC’s statement of claim makes it clear that Westpac’s decision to offer services such as LitePay and the Australasian Cash Management (ACM) platform were designed to bypass SWIFT. This in turn had a devastating impact on financial intelligence gathering.

“Westpac considered that the SWIFT payment network was costly and not an efficient means of sending low value, large volume payments for clients of global banks that need to make and receive payments around the world,” the regulator has alleged.

“For this reason, under a number of the ACM arrangement, the correspondent banks ‘batch’ funds transfer instructions from multiple payers to multiple payees and send the instructions to Westpac in a single structured data file, via non-SWIFT channels.”

The cost savings were not in the avoidance of payments to SWIFT, however. It was in the circumvention of compliance, reporting and data collection. There was a steady line of correspondent banks and their customers who wanted to avail them of this lite-cost, lite-visibility service.

SWIFT manoeuvres

The banking sector has a number of dark secrets. One is that many institutions around the world put complex systems in place following the 2009 SWIFT reporting changes to ensure they could continue to facilitate lucrative transactions in the shadows. The U.S. Department of Treasury’s recent case against UniCredit, for example, found that the Italian-headquartered bank had sought specific advice from consultants on circumventing the SWIFT reporting obligations.

The settlement agreement said UniCredit engaged a German consulting firm, which helped it “construct the evasive process by which UniCredit AG carried out this illegal conduct, apparently conducted a compliance analysis at the AG NY Branch in or about 2006.”

In internal emails bank staff made it clear that this was designed to mask payments to “sensitive” countries, such as Sudan, Syria, Iran, Cuba, Myanmar, Belarus, North Korea. The aim was to ensure there was no data in field 72 of the SWIFT message for transactions involving a U.S. bank.

The bank was intentionally avoiding oversight from the fearsome U.S. Office of Foreign Assets Control (OFAC).

As the AUSTRAC statement of claim has demonstrated, however, some banks had developed an even simpler way to avoid submitting SWIFT data. With its LitePay and ACM products for international cross-border payments, Westpac could bypass the SWIFT rails completely.

The claim says this concealed evidence of cross-border payments moving to and from sanctioned countries such as Sudan, Cuba and Iran.

The statement of claim indicates that several major international banks took advantage of this service.

Australian connection

The tripwire for banks that used these strategies in Australia, however, will be the country’s unique International Funds Transfer Instructions (IFTI) reporting rules. Australia was the first country to introduce these wire reporting obligations under pressure from AUSTRAC’s former chief executive Neil Jensen way back in 1989.

“Over the past 20 years I have been concerned that not enough is being done to readily identify cross-border funds transfers, whether the funds arise from corrupt practices, drugs, fraud, people smuggling and trafficking, or any other serious crime. I have made it a point to highlight in many speeches around the world since the early 1990s that we have ‘left the door open’ to sophisticated criminals to launder money through the global financial system and that we need to start to close that door by having ready access to these transactions in real time,” Jensen said in an article for Thomson Reuters Regulatory Intelligence.

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“I did something about it back in 1989, and subsequently the Australian government implemented legislation in 1991 to enable AUSTRAC, the Australian FIU, to receive reports of inbound and outbound international funds transfer instructions (wire transfers) from financial institutions and other remitters,” he explained.

Australia’s vision in introducing IFTI reporting 30 years ago, when AUSTRAC was established, will be fundamental in the legal crackdown on these arrangements. International regulators, including OFAC, will be looking into whether Westpac developed these services to circumvent the cost and reporting obligations associated with SWIFT’s MT202 requirement.

Nick Armstrong, chief executive of Australian regtech company Identitii, said SWIFT reporting would be a cornerstone of the Westpac case.

“At a time when Australia’s international trade flows are growing and supply chains are becoming more complex, Australia is unique in that it requires every transaction coming into or going out of the country to be reported,” Armstrong said.

“IFTIs are causing headaches for banks and non-bank financial institutions across the globe, not just here in Australia. While some banks have been vilified for failing to report properly, the problem is actually much bigger.”

Armstrong said AUSTRAC wanted all reporting entities to satisfy the same levels of regulatory compliance when it comes to reporting cross-border transfers.

“This doesn’t just apply to Australian banks and non-bank financial institutions (NBFIs). Foreign banks transacting into and out of Australia face the same requirements. There is also a cost associated with this on both a local and a global level, not least of all because of Australia’s additional requirements and the need for the local headquarters of global institutions to have a different set of processes and procedures in place.”

Bambos Tsiattalou, a UK-based criminal defence lawyer at Stokoe Partnership Solicitors, said the rest of the world would be watching AUSTRAC’s case against Westpac closely.

“Regulators have been pressing banks and other financial institutions to strengthen their AML/CFT practices and systems for years. Failing to prevent money laundering over a long period of time highlights a systemic problem within the banking sector,” he said.

“The due diligence that banks carry out on clients and complex transactions can be perfunctory, and lacking in real depth and understanding. While processes and monitoring systems are important, human intelligence is often crucial in detecting issues.”

IFTI business

Banks need to work together internationally to solve these challenges and ensure that the right data is getting centralised through SWIFT, Armstrong said. The AUSTRAC case could act as a catalyst to expose the extent of the problem with fund transfers that move outside the SWIFT rails and, in some cases, outside national reporting obligations, he said.

“We need to recognise this isn’t a new problem. AUSTRAC reporting has been happening for years. And many of the breaches the media is talking about have been self-reported by the institutions themselves. So, in a way, it’s a known problem,” he said.

“Banks have all of the data they need to report. It’s just that it’s hidden in siloed and often legacy technology infrastructure that makes it very hard to find the data they need. Once they then find it and send it to AUSTRAC, the quality of the data often isn’t good enough. This means it all needs to be manually processed. AUSTRAC, on the other hand, has neither the time nor resources to do this and therefore rightly pushes back on its reporting entities to provide exactly what is required.”

Armstrong said the AUSTRAC case was going to be a landmark prosecution.

“The $2 trillion that is laundered through the financial system every year is a major public policy issue, some of which ends up flowing into socially destructive activities like financing terrorism,” he said.

“Based on where we currently sit, we believe that bank internal systems and processes need to change. Most banks are reticent because they fear this is a complex and costly problem to solve. That isn’t necessarily the case. Technology is rapidly emerging to address many of these problems swiftly and easily.”

International cooperation

Jensen, meanwhile, said that to tackle this problem effectively, all FATF member countries need to push ahead with laws that treat interbank payments (such as those in the Westpac case) as reportable transactions.

“Countries should ensure that financial institutions include required and accurate originator information, and required beneficiary information, on wire transfers and related messages. The information must remain with the wire transfer or related message throughout the payment chain,” Jensen said.

“[They] should ensure that financial institutions monitor wire transfers for the purpose of detecting those that lack required originator and/or beneficiary information, and take appropriate measures.”

Jensen said the Australian approach offered a very simple answer to this global problem, by forcing the data to flow to financial intelligence units regardless of whether it is a SWIFT payment or a correspondent banking intra-bank transfer.

“Put all of the information in one place so that it can be monitored effectively, where it can be readily linked to other highly relevant financial intelligence and from where appropriate investigative action can be quickly commenced. One of the major benefits of the reporting of cross-border funds transfers to AUSTRAC has been the ability of its analysts to identify criminals not previously identified by law enforcement agencies,” he said.

“The results in Australia speak for themselves. Many cases that have been identified and investigated are referred to in AUSTRAC’s various publications.”

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