AMLCTF compliance and SMEs in Australia: a case study of the prepaid card industry
| DOI | https://doi.org/10.1108/13685201011057109 |
| Pages | 184-201 |
| Published date | 20 July 2010 |
| Date | 20 July 2010 |
| Author | Juni Gurung,Marcell Wijaya,Asha Rao |
| Subject Matter | Accounting & finance |
AMLCTF compliance and SMEs
in Australia: a case study of the
prepaid card industry
Juni Gurung, Marcell Wijaya and Asha Rao
School of Mathematical and Geospatial Sciences, RMIT University,
Melbourne, Australia
Abstract
Purpose – The purpose of this paper is to explore the possibility of effectively enforcing the
Anti-money Laundering and Counter Terrorism Financing (AMLCTF) Act compliance on prepaid
card small and medium enterprises (SMEs). Currently, certain types of prepaid cards providers are
exempt from compliance. This paper looks at this situation bearing in mind the necessity of keeping
regulation manageable for SMEs.
Design/methodology/approach – The paper adopts the case study approach facilitated by an
online search of different prepaid card vendors. Using this as a basis, a feasibility analysis of the
AMLCTF Act is conducted for prepaid card SMEs.
Findings – It is found that not all regulation compliance requirements are applicable to SMEs.
Regulation enforcement without considering the capabilities of the regulated entities will only increase
avoidance. It is also found that the AMLCTF Act does not effectively address the issue of prepaid
cards’ vulnerability to money laundering and terrorism financing (ML/TF) illustrated by exclusion of
prepaid cards that cannot be used to withdraw money from the compliance. Given that there are
records of such cards been exploited for illegal trading, Australian Transactions Reports Analysis
Centre appears not to be up to date with the ongoing trend in ML/TF around the world.
Research limitations/implications – Limitations of case study research methodology apply. Also,
the prepaid card vendor information is based on an online search of their web sites and did not involve
in-person interactions to gather the information.
Originality/value – This is the first paper in anti-money laundering literature that has considered
SMEs and attempted to look into the AMLCTF Act compliance requirements’ applicability for them. It
is believed that the case study can facilitate further research related to regulation enforcement issues
for SMEs.
Keywords Money laundering,Terrorism, Financing, Small to medium-sized enterprises, Australia
Paper type Case study
1. Introduction
This paper examines the enforcement of the Anti-money Laundering and Counter
Terrorism Financing (AMLCTF) Act of Australia on small and medium prepaid card
service providers. Prepaid cards also known as stored value cards (SVCs), are a new
means of payment which are becoming popular (Jacob, 2004, p. 6) in various forms
such as gift cards or network branded cards where funds to be used should be paid
in advance. Also referred to as “pay early” cards (Sienkiewicz, 2007), they offer
several advantages over traditional payment cards (credit and debit cards) (Sienkiewicz,
2007) and even cash (Linn, 2008): anonymity, convenience of accessing the services in
non-financial institutions such as retailers, no credit checks and worldwide
acceptance (Choo, 2008) to name a few. Such features of prepaid cards attract not
only legitimate customers but also criminals (Linn, 2008) who are constantly seeking to
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JMLC
13,3
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Journal of Money Laundering Control
Vol. 13 No. 3, 2010
pp. 184-201
qEmerald Group Publishing Limited
1368-5201
DOI 10.1108/13685201011057109
disguise illegitimate transactions. Much research in anti-money laundering has
focused around the potential use of prepaid cards as a money laundering vehicle
(TCSR, 2006; Sienkiewicz, 2007; Choo, 2008), on control strategies to prevent such
exploitation (Khairuddin et al., 2008), the vulnerabilities in regulating the movement of
prepaid cards across border (Linn, 2008). In addition, Zahn et al. (2007) compared the
anti-money laundering regimes of two different countries Australia and Ukraine while
Sathye (2008) looked at AML/CTF Act compliance cost estimation for Australian
financial institutions. However, no study has yet been done on the feasibility of
enforcement of the AML/CTF Act on small and medium enterprises (SMEs). This study
fills this gap in money laundering literature by taking into account a major player in the
Australian economy: SMEs.
SMEs comprise over 90 percent of the Australian economy (ABS, 2001) and provide
around 42 percent of total employment in Australia (Ergas and Orr, 2007). Regarded as
the “engine of growth” (Fan, 2003) for being major job providers in the country, the
contribution of SMEs does not end there. Their involvement in the economy helps
maintain market competition (Fan, 2003) preventing monopoly by larger organizations.
In addition, they encourage entrepreneurship by providing necessary funding and skills
enhancement plans to make alliance of skills and innovation possible (Dickinson, 2008).
Just like larger firms involved in financial activities, SMEs working in this area are also
vulnerable to money launderers whose intention is to disguise the source of illegally
generated money. The AMLCTF Act came into enforcement to address such money
laundering and additionally terrorism financing issues in 2006 (AMLCTF, 2006).
According to the compliance requirements of the AMLCTF Act, the regulated entities
need to have appropriate controls in place to prevent and detect money laundering and
terrorism financing (ML/TF) crimes (AMLCTF, 2006). According to Liondis (2008),
small businesses are required to comply with the Act more for their own sake as
otherwise they may fall victim to criminals. This is supported by the argument that
money launderers hunt for unsophisticated financial markets and economies as their
intermediaries to hide from the law (IFOA, 2004).
The AMLCTF Act requires every business providing certain services referred to as
“designated services” to comply with it. As prepaid cards are one of the designated
services (AMLCTF, 2006), the prepaid card service providers are required to adhere to
the AMLCTF Act. However, prepaid cards with monetary value less than a threshold
amount ($1,000 for cards that can be used to withdraw cash and $5,000 for cards
without the facility to withdraw cash) are exempt from the compliance (AMLCTF,
2006, pp. 40-1). The objective of this move seems to be to provide relative relief to small
and medium prepaid card service providers. However, we consider this exemption a
loophole in the legislation. The argument is that since larger financial institutions have
resources and a history of exposure to anti-money laundering legislation (Drummond,
2009), criminals may consider these small businesses to be the weakest link to exploit
legitimate financial systems. However, we also do not agree with the compliance
requirements demanded from small and medium businesses (when not exempted)
which demonstrate a “one size fits all” approach. Although, Australian Transactions
Reports Analysis Centre (AUSTRAC), the regulator of AMLCTF, has allowed a “risk
based” approach to tackle risks according to the scale and size of businesses
(AUSTRAC, 2007), there are considerable disadvantages of such approach for SMEs
(Geary, 2009). Therefore, we emphasize that prescriptive or rule-based approach is
AMLCTF
compliance
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