House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Home Affairs, the Honourable Peter Dutton MP)

ATTACHMENT B - INDICATIVE COSTINGS AND ASSUMPTIONS

Regulatory costs and offsets

Assumptions

RELIANCE OPTION 2 - NO CDD ARRANGEMENTS

The assumptions for Reliance Option 2 are based on those for Option 3 (below).

In comparison to the full model in Option 3, we have assumed that all assumptions remain the same with the exception of the following:

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Reporting entities who choose to use reliance will not be required to prove that they have conducted due diligence on the institution they are relying on, as they will maintain the liability of the CDD activities at all times. This reduces the time associated with establishing reliance agreements, and removes the need for annual reviews of their partner institutions.

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Reporting entities will not be required to enter into formal agreements with other institutions in order to undertake reliance activities. This will reduce the time associated with commencing reliance arrangements.

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The number of reporting entities that will utilise the reliance provisions will drop significantly. This is due to the fact that the provisions will require every reporting entity to maintain liability for conducting due diligence on their customers, regardless of whether they have relied on the due diligence of another institution. This situation could pose too high a business risk for most reporting entities, and feedback received from industry indicates that domestic banks would be largely unwilling to consider reliance options.

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It is expected that foreign banks will be the primary users of the reliance provisions under this option. Some remitters and financial services intermediaries are also expected to utilise the provisions. Only approximately 695 reporting entities are expected to utilise the provisions under this model.

CALCULATIONS FOR RELIANCE OPTION 2

RELIANCE OPTION 3 - WITH CDD ARRANGEMENTS

We have assumed that all reporting entities will be required to consider the new regulatory provisions in the first instance to determine whether they suit their business model, business relationships, and customer base. All reporting entities will therefore require approximately 2 hours to interpret and consider the new provisions.

As part of our assessment, we have assumed that because the take up of reliance is not mandatory, its uptake will vary considerably between industry sectors. On this basis, we have assumed that it is:

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Likely for banks (also in the context of the Government's Open Banking initiative) and other financial service providers, but unlikely to be utilised by small credit unions and building societies ^[18] other than on a customer-by-customer basis

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Unlikely for casinos due to competition for high value or commission-based customers who are primarily domiciled overseas. Casinos do not have any corporate customers, they are all natural persons.

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Unlikely that businesses that operate in a (near-to) exclusively on-line environment, as their technology systems (including CDD) are likely to be highly automated and have minimal personal involvement.

The uptake and application of reliance depends on the size and structure of businesses, e.g.:

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Likely with global companies, corporate groups, businesses with foreign relationships and designated business groups

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Likely with businesses that have extensive existing relationships with other regulated businesses for the provision of services to common customers

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Likely with businesses that have large customer bases and customer turnover, and in particular, have a large number of corporate customers

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Likely with financial institutions that are participating in the New Payments Platform or impacted by the Government's open-banking initiative

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Unlikely with small businesses and independent operators where customers are not required to open or maintain an account

It is assumed that some businesses will not enter into a formal reliance agreement with other regulated businesses, preferring to use reliance as and when required.

This will be influenced by the size and scale of the entities involved. For example, it is assessed that the largest five banking institutions will enter into formal reliance arrangements, whereas 20 out of the remaining 94 banks may enter into these arrangements. The remainder are considered unlikely to enter into these arrangements, but may still use the expanded reliance measure as and when required. Similarly, just over half of the foreign and investment banking sector might enter into formal reliance arrangements. The assumptions recognise that some businesses will already have or are working towards having reliance style mechanisms in place through the New Payments Platform (NPP) arrangements. Under the NPP, those financial institutions that are currently using the platform for domestic transactions have agreed to trust one another in regards to the standards of CDD undertaken in regards to customers.

The estimated proportion of businesses in other cohorts in the financial sector that will adopt formal reliance arrangements is variable. For example, it is expected that no digital currency exchanges will enter into formal reliance arrangements because of the online nature of their businesses and the higher ML/TF risk of the sector. However, in the financial intermediary cohort (Financial Planners, etc.), it is expected that more than two-thirds of businesses in this sector will adopt formal reliance arrangements. These entities already have informal arrangements in place.

We have assumed an overall uptake of approximately 1630 reporting entities.

For those reporting entities who opt to utilise reliance provisions, each entity will be required to implement business processes, analyse the CDD activities of other reporting entities, and establish agreements with other reporting entities. The time required to prepare these reliance agreements and business processes will vary between reporting entities, from 5 - 20 hours, depending on the size, nature and risk profile of the sector. These would also need to be reviewed at least once every two years. It is likely that this review process would take approximately two hours.

Not all customers will be suitable for the use of reliance as part of the CDD process due to a range of factors, including the individual customer's risk profile, or the fact that they are not customers of an institution with which a reliance agreement is in place. Reliance is also dependent on customer consent during the on-boarding process or when an existing customer takes on additional services or products. The estimated number of "suitable customers" ranges from 50,000 to 25 per reporting entity.

Cost savings have been difficult to estimate due to the gaps in understanding the effort required to verify natural persons, non-individuals and beneficial ownership, having regards to the customer base and type, size of business, frequency or volume of use, and the nature of initial customer due diligence conducted by each cohort in the regulated sector. It is assumed that CDD activities currently require a minimum of approximately three hours to complete for a new customer, and cost approximately $15 per new customer in third-party service provider fees and database search fees. It is expected that CDD obligations under the new model will reduce the time costs to approximately 1 hour for basic information verification for natural person customers, and will reduce the third-party costs to approximately $2.50 - $3.00 for ID searches.

Therefore, it is expected that each affected entity will save approximately 2 hours in labour and $12.00 in third-party fees per new customer under this reliance model. When amplified by the number of affected reporting entities (1,630) and the number of new customers per affected reporting entity (which ranges from 50 up to 25,000 per entity), the cost savings from this initiative could be significant. It is important to note that the assumption used in this RIS are conservative, as the uptake could be higher than expected, resulting in additional affected entities and customers, and current compliance costs could be higher, resulting in higher savings per instance.

CALCULATIONS FOR RELIANCE OPTION 3