The prevention and management of financial crime is a fundamental responsibility of superannuation trustees, to safeguard members entitlements and assist the Federal Government agency AUSTRAC (Australian Transactions and Analysis Centre) with the detection and management of money laundering and terrorism financing.
The National Financial Crime Discussion group meets 4 times per year and organised by the Association of Superannuation Funds of Australia (ASFA). Joe Strati and I recently attended the first meeting for 2020. Due to the new social distancing measures to prevent coronavirus, attendees were given the opportunity to attend this meeting online.
Over the last few years, Joe and I have been helping the NAB (National Australia Bank) with their financial crime management program. The discussion group provides industry participants the opportunity to discuss all things financial crime, and includes expert speakers from the industry.
The group highlighted that two of Australia’s big banks have recently had potential contraventions of the Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act). One of the issues involved the international transfer of money that was used for child slavery – a significant issue throughout the world and one that we would like to see stopped.
Coronavirus pandemic – compliance with AML/CTF Act
The importance of compliance with the AML/CTF Act cannot be understated. This is going to become even more important with the increased early release of super as a result of the coronavirus pandemic, and associated economic and social uncertainty.
The group noted some key activities that superannuation funds should be doing all the time, not just some of the time.
· AML/CTF Program should be up to date and relevant;
· Risk Assessments including Control Effectiveness should be updated as processes or circumstances change;
· Enhanced Customer Due Diligence and Ongoing Customer Due Diligence should be aligned;
· Record-Keeping should be in accordance with the law (very easy for AUSTRAC to verify whether this is the case);
· Funds should be aware what to do if they have an issue with AUSTRAC;
· Section 47 compliance report should be considered throughout the year and not just before it is due;
· Board reporting should ensure that the Board is aware of AML/CTF activities within the organistaion and any changes to the AML Program; and
· Board Management Oversight should be a standing agenda item.
The general theme of these recommendations is that documentation is up to date, relevant, considered, and that the Board is aware of the AML/CTF activities and any issues within their organisation.
If you need help understanding financial crime and the compliance standards, and particularly now with the new early release of superannuation, please email IQ Group at: firstname.lastname@example.org.
The application of Blockchain and Distributed Ledger Technology (DLT) in Superannuation.
What is Blockchain?
Blockchain is a shared or distributed ledger technology (DLT). The digital information “blocks” are distributed in a “chain” across a network of computers, rather than at a single source. When a block stores new data it is added to the chain.
Transactions on the blockchain network are approved by a network of thousands or even millions of computers and cannot be altered once they are made part of blockchain. Almost all human involvement in the verification process is removed, reducing the possibility of human error and the records are more accurate. An advantage of blockchain is that if a single computer on the network contains an error, the error would only be within one copy of the chain.
Blockchain is an example of a DLT, however not all DLTs are blockchains. Distributed ledger technology is currently at the forefront of some of the most significant financial market innovation in Australia.
Why use Blockchain in Superannuation?
Several potential benefits of blockchain and DLT identified for the financial services sector include:
- Reduction in costs –
Investments have a high volume of transactions requiring data to be verified by multiple parties. By using a distributed ledger, trades can happen faster, more efficiently and more cost effectively. Currently stock trading can take three days or more for the settlement and clearing process. This results in money and shares to be frozen during that time. ASIC is closely monitoring the transition in Australian market infrastructure taking place right now as the Australian Securities Exchange (ASX) implements a new DLT-based clearing and settlement system.
- Increased accuracy –
Current superannuation ledger systems are often siloed and can contain multiple versions of the ‘same’ data. Blockchain can reduce the complexity of data and number of interfaces. It also enables transaction approval on the blockchain network with almost no human involvement in the verification process, reducing the possibility of human error.
- Operational efficiency –
Blockchain can reduce the complexity of data and the number of interfaces so the administrative operations have the potential to be faster, more accurate and transparent. The introduction of blockchain can also supersede numerous existing superannuation ledgers, allowing organisations to consolidate their systems.
Anti-money laundering (AML) and know your customer (KYC) practices are also potential areas that may gain significant benefit through the introduction of distributed ledger technology. Currently, financial institutions must perform a multi-step process for each new customer. KYC costs can be reduced, and efficiency improved through cross-institution client verification. This will also allow for increased monitoring and more effective analysis.
- Minimise fraud –
Superannuation fraud is one of the main categories of fraud perpetrated in Australia. The ability to verify identity for financial transactions is key, and distributed ledgers offer enhanced methods for proving identity, as well as the possibility of digitising personal documents.
- Reducing external threats –
Cyber-attack, fraud and compromised data risks are significantly reduced when a ledger is distributed across multiple parties. Successful falsifying of records requires falsifying the entire chain – a near impossible task.
Why hasn’t DLT progressed further in the industry?
As noted above, Australia’s $3.0 trillion (at the end of the December 2019) superannuation system has potentially a lot to gain from adopting distributed ledger technologies (DLT). While much of the industry is well advanced in their consideration of DLT, there is some uncertainty regarding how to best apply blockchain applications to realise benefits.
In a speech at the China Financial Summit 2019, ASIC Commissioner Cathie Armour stated that the Australian government is demonstrating “ its strong support for the development of a varied and sustainable fintech sector in Australia.” The Commissioner also noted that the Senate established a Select Committee on Financial Technology and Regulatory Technology which will inquire into:
- the size and scope of the opportunity for Australian consumers and business arising from financial technology (fintech) and regulatory technology (regtech)
- barriers to the uptake of new technologies in the financial sector;
- the progress of fintech facilitation reform and the benchmarking of comparable global regimes
- current regtech practices and the opportunities for the regtech industry to strengthen compliance but also reduce costs
- the effectiveness of current initiatives in promoting a positive environment for fintech and regtech start-ups, and
- any related matters.
When the report is released towards the end of the year, we will have a clearer understanding of how the government and the sector may approach these opportunities. Adoption has not completely stalled however, and ASIC is closely monitoring ASX’s transition to a DLT clearing and settlement system.
The Regulator’s focus, regardless of the technology solution, “remains to ensure the Australian financial markets retain their integrity, resilience, and robustness, and operate fairly and effectively”. In the meantime, funds, administrators and trustees will have the opportunity to explore numerous options blockchain technology offers, which may deliver benefits for their organisations and members. Blockchain technology is certainly a growing area. It will be interesting to see how Blockchain progresses into the future across multiple industries and how the superannuation industry might use it.
If you have any questions about Blockchain, please contact IQ Group at: email@example.com.
Frea Packham – Senior Consultant
Overall, it’s hard to argue that the Financial Services Industry doesn’t need more accountability. Several of the major findings out of the Royal Commission regarded the professional misconduct of individuals, which can be hard to detect let alone regulate.
BEAR (Bank Executive Accountability Regime) has been in place for a time now, so it makes sense for FAR to come into play. That said, FAR is not only more sweeping, it also has some strengthened effects that some of us might consider going a bit far.
FAR is all about lifting standards of behaviour for executives across financial services – extending BEAR to superannuation and insurance – by making nominated Accountable Persons personally accountable for the activities of their company for which they are responsible. Their responsibilities will have to be identified, with these and any breaches reported to APRA. Penalties will apply at an individual and corporate level, including circumstances where things haven’t been done.
Increased accountability and transparency are a good thing but there’s been little consideration about the impact on people who may not be as senior – or as well paid – as executives in banks.
Firstly, it’s important to realise that one of the reasons FAR is stronger than BEAR is because of the difficulty of ASIC historically experienced getting convictions for misconduct in the current regulatory environment. Many companies under investigation in the past have been slow to comply in providing requested information or provide poor information upon request. However, an obligation that requires individuals (in addition to entities) to be “cooperative” to FAR allows ASIC to find fault without understanding why a person may not be cooperating.
ASIC can find fault based on perceived cooperation prior to even examining any evidence of misconduct. Thus, a lack of cooperation with someone accusing you of wrongdoing becomes a crime in and of itself, and a regulator who finds no misconduct whatsoever can still charge someone, potentially doing significant harm in the process.
This sort of regulation is banned in many democratic countries due to how they undermine due process. For example, the United States’ Fifth Amendment is a constitutional right that protects an individual from being forced to incriminate themselves and ensures that people are found guilty of actual crimes. These protections prevent the historical use of duress to extract information and confessions because, in practice, this type of power fosters “witch hunts” and abusive regulation. It would hard to argue an individual would not feel extreme fear and duress if ASIC suggested they are not being “cooperative enough” and that in itself is enough to find them guilty of not meeting their obligations whether they’ve done anything wrong or not.
Also, at least with BEAR it’s clear who your executives are, and the people targeted for BEAR were quite specific. FAR has definitions based on job function as to what an ‘accountable executive’ looks like across eleven spheres, including Human Resources. It’s entirely possible in smaller companies that people may be in a position of obligation without knowing it, particularly if their company is negligent in identifying them or telling them that they’ve been identified. With a company unable to provide professional liability insurance for these members, there’s a great deal of individual risk in taking these roles that people may be unprepared for.
While a lot of this has to do with how FAR is implemented – which we really don’t have a strong precedent for as BEAR itself is only a couple of years old – it seems reasonable to assume that the Financial Services Industry will see talent walking away and these roles becoming far more costly to fill.
The impact of this is magnified by the higher penalties proposed for FAR. Maximum penalties could be the greater of either $10.5m or the benefit derived (or detriment avoided) by the entity because of the contravention multiplied by three (where this can be determined by the court); or 10% of the annual turnover of the company (capped at $525m or 2.5m penalty units). What’s more, it’s suggested that companies will be limited in their capacity to insure their accountable persons against breaches of FAR.
Has FAR gone too far?
You walk through those doors on the morning of your very first day. You take a deep breath and try and stay out of everybody’s way. You walk along the polished floors past the reflective surfaces surrounding you, go up the escalators then eventually in the elevators to level 20. What have you gotten yourself into? Will you like the work? The people? How much training will you get, because you know next to nothing about superannuation or consulting? Will they think you’re stupid if you ask questions? Within the first few minutes of walking through the doors to the IQ group offices you’ve answered your questions.
It takes seven seconds to form a first impression about someone or something. These are our first impressions of IQ Group as graduate consultants.
IQ has the requisite leadership and culture ensuring its success without the superficiality and pretence reputably consuming the corporate world. It is filled with highly intelligent, knowledgeable subject matter experts, cementing IQ Groups reputation for delivering “better” services. All of this was visible within the first week of conversations and learning.
Personally, what makes IQ different to others in the Collins square towers are the people and the support genuinely available. As cliched as it sounds, the people that make up the company really do make a difference. Everyone I’ve encountered thus far have been genuine in their offers of assistance and support. “If you ever need anything or have questions, feel free to email or call” has been a sentence repeatedly and sincerely spoken. The fact that people follow through with their offers of support by reaching out to Arnold and I or stopping to assist when either of us asks is greatly appreciated.
My first impression of IQ was a good one, from the consultants popping in and out offering welcome smiles and conversation, to the back-office staff who keep the business running behind the scenes, the supportive foundations our learning has been built on are what makes IQ group an ideal place to work—especially as a grad just entering the industry. The near daily “mental health sweets” are an added bonus for any chocolate addicts (because chocolate releases endorphins and endorphins make you happy)!
As a graduate eager to enter the corporate world, university and general stereotypes paint a picture in my inexperienced mind of what this lifestyle entails; cut-throat, fast-paced, unforgiving, competitive.
Entering the office for my internship interview, my general perception of the industry changed as I was welcomed whole heartedly by Issy at the front door. My day then progressed to a professional but comforting conversation with Lindsay and Jodie, the uplifting atmosphere immediately motivated me to aim for the next step; the graduate program.
As I progressed through my internship, the inviting and genuine personalities proved to be consistent within the company, solidifying my decision of what type of environment I wanted to grow in. My first impressions entering the IQ family could not have been better, from the back-office team to the consultants and executives, IQ presented itself as a welcoming, caring environment, pushing not only for professional growth but personal. It seemed as if regardless of what corner you turned, there’s a plethora of colleagues willing to help and genuinely listen to assist you to navigate through the complex stages of life.
Whether it’s a laugh over a coffee, advice over the phone or a meeting to break-down a problem, from the beginning the IQ family presents to be all a young developing individual could ask for. I just wanted to personally thank all those who have happily reached out, providing lifelong advice while shining light on any doubts, simultaneously providing their interesting journeys before and during IQ. As repetitive as it may be a good company culture is the backbone to success, I guess that’s because the truth doesn’t change. The growth within IQ seems to be inevitable with all the helping hands; “the standards we walk past are the standards we accept”.
If you are interested in the IQ Group Graduate Program, please send us an email: firstname.lastname@example.org.
It was International Women’s Day (IWD) this week and my wife and I hosted a dinner over the long weekend. Although we’ve only known our guests for a few short years, the friendship we have built with them is exceptionally strong. The four women in this group have connected so well that it is clear to see that they look out for each other, step in when one of them needs a hand and provide support whenever required.
Now I’m starting to reflect, why is there still a need for a Women’s Day? After all, the first International Women’s Day was first held more than 100 years ago. My colleagues discuss forming a team for the Mother’s Day Classic (sponsored by Women in Super) and I commit to participating. I now need to persuade my family to get up early on the Sunday morning so we can walk/run together. *my fingers are crossed*
Unfortunately, despite all the progress we have made as a society, gender inequality persists, and so the need for IWD remains. I am naturally aware of the challenges women face regarding their superannuation account holdings given my job history however I decide that I should spend a few minutes to learn a little more about this inequality. Coincidentally one of IWD’s ten values is equality.
I read a research article stating that women retire with a super balance 42% less than men on average. Another report quotes 47%. Regardless of the actual figure, the difference is not right. I understand mathematically why this is the case. Proportionally more women work part-time and many of them are not in the workforce to care for family. However, my female friends, family and colleagues are also likely to retire with a lower super balance, often as much as $150,000 less.
What does equality mean though? It’s about ensuring everyone has the same opportunities, regardless of their gender, social-economic background or age. In my research I uncover an interesting publication by the World Economic Forum (WEF). Published annually since 2006, the Global Gender Gap Report reveals that the gap in equality is reducing. It is not only women who benefit from this progress. The entire world economy gains when the talents of all people are able to flourish. The impact this has on families should not be under-estimated.
As Australians we enjoy opportunities and freedoms people in other countries could only imagine. We aren’t world-beaters when it comes to gender equality though. The WEF report found that for eleven years in a row Iceland was the most gender equal country. Interestingly other Scandinavian countries (Norway, Finland and Sweden) round out the top 4. Rather than moving to Norway, what can be done here?
There is no single magical solution, otherwise this problem wouldn’t exist today. WEF’s research forecast that all things being equal, with current trends, the overall global gender gap can be closed in 99.5 years. If that is an appalling number, consider that the same report estimates that the economic gender gap will take 257 years to be eliminated.
Numerous suggestions are available online recommending ways for women to retire with more money (i.e. spousal contributions, contribution splitting, legislative changes – $450 cap, Low Income Superannuation Tax offset and concessional tax caps). Other suggestions are more generic in nature such as seeking financial advice, accessing online resources and tool, consolidating funds, checking for lost super with the ATO and confirm the right level of insurance within the super policy.
The real gains to be made though relate to bridging the wage gap and retaining women in the workforce. Fortunately, evidence indicates women are increasing their representation in management positions. Similarly, flexible working and access to childcare has resulted in approximately 20% more women return to work after paid parental leave.
Advances in equality are being made very slowly and a single day focusing on the prospects of women will not create a secure financial future for women in retirement. Perhaps the Retirement Income Review Final Report due in June will result in meaningful change. Time will tell.
Principal Consultant and Team Leader