Estimating the cost of compliance of AMLCTF for financial institutions in Australia
| Date | 10 October 2008 |
| Published date | 10 October 2008 |
| Pages | 347-363 |
| DOI | https://doi.org/10.1108/13590790810907191 |
| Author | Milind Sathye |
| Subject Matter | Accounting & finance |
Estimating the cost of compliance
of AMLCTF for financial
institutions in Australia
Milind Sathye
University of Canberra, Bruce, Australia
Abstract
Purpose – The purpose of this paper is to find out the likely compliance cost of anti-money
laundering and counter terrorism financing (AMLCTF) for financial institutions in Australia to help
understand the regulatory burden of the legislation.
Design/methodology/approach – The paper adopts a case study approach. Using the method of
analogy, the cost of compliance is estimated.
Findings – It is found that the legislation brings substantial financial regulatory burden on the
financial institutions in Australia. It is also found that the compliance cost is quite substantial and
stands at about A$1.02 billion for the banking industry as a whole at 2007 prices. The per capita
burden has been estimated at A$50 approximately. The author’s estimate compares well with other
publicly available estimates.
Research limitations/implications – Limitations of case study research method apply. Through
this case study, prior work on regulatory cost burden on organisations is confirmed – in the context of
financial institutions.
Practical implications – Policy makers and reporting entities the world over would particularly
be interested in the findings as it helps gauge the cost impact of regulatory burden the legislation
imposes. The compliance cost burden could affect the overall competitiveness of Australian financial
institutions particularly because of the small size of the economy in terms of population.
Originality/value – This is the first paper in the literature that has attempted to estimate the cost of
AMLCTF compliance. It is believed that the study could provide an impetus for similar studies in
other jurisdictions.
Keywords Money laundering,Terrorism, Compliance costs,Australia
Paper type Case study
1. Introduction
Consequent up on the recommendations of the Financial Action Task Force (FATF)
several countries around the world introduced the anti-money laundering and counter
terrorism financing (AMLCTF) legislation. In Australia, the AMLCTF Act 2006 was
introduced in December 2006 to further strengthen the existing regime against money
laundering and terrorism financing. The new legislations addresses the concerns
raised in the FATF Mutual Evaluation Report 2005 on Australia’s anti-money
laundering and terrorism financing regime. Australian Transactions Reports Analysis
Centre (AUSTRAC) is the regulator of the AMLCTF Act (here in after the Act) and its
mission is to “to make a valued contribution towards a financial environment hostile to
money laundering, the financing of terrorism, other major crime and tax evasion”
(AUSTRAC, 2007).
The Act has imposed significant reporting obligations on entities carrying
designated businesses. The reporting entities – in the first tranche of reforms – mainly
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Estimating
the cost
of compliance
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Journal of Financial Crime
Vol. 15 No. 4, 2008
pp. 347-363
qEmerald Group Publishing Limited
1359-0790
DOI 10.1108/13590790810907191
include financial services providers (that is banks, credit unions, building societies,
etc.), bullion dealers and gambling service providers (for example, casinos) an d in the
proposed second tranche several more business entities would be brought within the
purview of the Act – real estate agents, accountants and the like.
The significant reporting requirements imposed by the Act have raised the question
of compliance cost for reporting entities. The reporting regime becomes particularly
complicated for financial institutions – in pa rticular banks –and concerns have been
raised about the enormous compliance cost burden that the regime imposes on them
and would in turn on their customers. Overseas estimates show that millions of dollars
would be spent on compliance. The British Bankers’ Association “estimates that banks
in Britain spend about 250 million pounds each year to comply with regulations ... ”
(The Economist, 2005). It has been estimated that customer-screening program alone
would cost a medium sized bank about £3-4 million. KPMG estimates that “tens of
millions” of pounds are spent in London alone on data storage and retrieval about
clients and their transactions. The compliance cost of the regime has been estimated in
the USA at US$3 billion at 2003 prices (Reuter and Truman, 2004).
Estimates of compliance cost of AMLCTF are not available in Australia. Several
major banks report that the cost would be substantial but decline to put a number. As
cost data are typically internal to banks for reasons of commercial confidentiality they
may not be prepared to release that information. A glimpse of the cost, however, is
available in the submissions made by some of the banks to the Australian government.
The BT Financial Group (BTFG) in their submission stated “Currently, we estimate the
potential cost of implementing the AML/CTF proposals appears to be unacceptably
high” (BTFG, 2006, p. 1). BT estimated that the cost burden due to AMLCTF would of
the order of A$5 million. The Bendigo Bank Limited (BBL, 2006, p. 3) – a
community-based bank – was more vociferou s in its submission. It stated:
[...] cost of implementation will be significant even using a “risk based” approach. BBL’s
early estimates for implementation of the IT solution alone will be in the vicinity of
$15M-20M which is a huge impost when considered as a proportion of net profit (about one
fifth of our 2005 net profit). We believe that the implementation of the legislation imposes a
disproportionate cost burden to smaller financial service organisations.
The Elders’ Rural Bank did not put any number on the compliance cost but stated that
“The currently proposed AML/CTF regime will require substantial and costly
modification of existing complex IT systems, management systems and staff training”
(ERB, 2006, p. 1). The Australian Bankers’ Association – which among others
represents the five major banks – was more cautious in expressing its concern.
It stated:
The problems outlined in this submission need to be addressed before the new AML/CTF
regime comes into force. Failure to do so would result in a regulatory regime that would be
both costly and fail to meet its objectives (ABA, 2006, p. 6).
The Credit Union Industry Association in their submission on April 13, 2006 stated
“for credit unions...compliance costs can have a dire ct impact on their operations”. It
added “... it is clear that credit unions face significant new compliance costs due to
AMLCTF reform”. Similar views were expressed by financial institutions in other
countries of the world. The estimates of the compliance cost in Australia vary from
A$538 million to A$1 billion for the banking system as a whole. These wide variations
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