By :- Nathan Lynch, Regulatory Intelligence, Thomson Reuters
When money transfer agent Ram Karuppiah opened an outlet in Darwin in 2010 he inadvertently stumbled upon a hotbed of illegal hawala activity. At the time Darwin hosted a significant Filipino community, many of whom were sending thousands of dollars home each year using the cheap, fast and illegal hawala transfer channel. Darwin had a thriving “sea cargo” industry at the time which was operating largely as a front for illicit money transfer businesses. In addition, grocery stores and other retail outlets were servicing the black market demand for cost-effective ways to transfer funds abroad in small, regular instalments.
“I was really surprised to come across this. In the early stages of setting up my Darwin office I had to convince these people, one by one, to use a legitimate remittance agency to transfer their funds legally. I was literally putting a hand on their shoulder, explaining the situation to new customers for 45 minutes. That was what it took to win their trust. One customer at a time,” Karuppiah recalls.
For the past nine years, Karuppiah, the managing director and part-owner of Remittances and Money Exchange (Remox), has been at the coalface of the Australian government’s quest to move migrant communities away from underground money transfer agents. He has witnessed the sea cargo outlets close down as customers moved to remittance as a legal, yet still cost-effective, way to send funds to their families.
Karuppiah has also observed huge changes in the remittance sector since he began working for a business that provided money transfers in 2004. During that time he has observed the introduction of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, become qualified as a Certified Anti-Money Laundering Specialist (CAMS) and registered as an AML/CTF Auditor accredited by AUSTRAC.
Karuppiah has also been a strong advocate for the introduction of a national Remittance Sector Register, which took effect in November 2012 following a 12-month transition period. The register was part of the package of reforms introduced under the Combating the Financing of People Smuggling and Other Measures Act 2011.
Under the reforms, all remittance providers must register with AUSTRAC. The regulator, which administers the register, has the power to refuse or revoke a remitter’s registration or to place conditions on an applicant’s request to operate.
Considering the way that Karuppiah has embraced AML/CTF compliance, it is perhaps ironic that this register has facilitated the destruction of his business and his livelihood. Over the past five years Remox, like many other remittance providers, has been progressively “de-banked”. First it was Commonwealth Bank in 2010, then ANZ in 2012, then Westpac in 2015. His final refuge, National Australia Bank, plans to close his accounts in January. Remitters rely on relationships with larger banks with a broad branch network and the ability to transfer funds abroad via correspondent banks.
Karuppiah said his business had never been involved in any AML-related incidents and the banks will not offer an explanation for their decision to close the accounts. Industry sources said many banks have de-banked, or “de-risked”, remitters across the board under pressure from their U.S.-based correspondent banks. Without these relationships the Australian banks are unable to clear U.S. dollars, which means the banks are in no position to resist this type of pressure.
Ironically, some banks are using AUSTRAC’s register of remitters as a “red flag” list to wash against their customer databases. Remitters such as Remox argue that they have done everything that has been requested of them by the government and AUSTRAC and now they find themselves being “de-banked” as a result of appearing on AUSTRAC’s remittance register.
Sources have revealed that the remittance sector is notorious for triggering high numbers of suspicious matter reports (SMRs) from the banks. Some banks have a policy of closing the accounts of any customer that triggers three or more SMRs. This is despite the fact that SMRs merely mean the reporting entity has “formed a suspicion”. It does not necessarily mean that there is any substance to that suspicion.
For Karuppiah, the consequences of this de-banking will be catastrophic. He reports carrying A$900,000 of debt in his business, much of it due to building up a national network of seven branches, 20 employees and investing in extensive compliance systems and controls.
If NAB closes Remox’s accounts on January 23, 2016, as it has said in correspondence seen by Thomson Reuters Regulatory Intelligence, this will mark the end of Remox as a going concern. It will also trigger the bankruptcy of Karuppiah, who has provided personal guarantees against the business’s debts.
“After moving to Australia, I lost my job as the only breadwinner in June 2007. I applied for many jobs and did not get any interviews. I had a very brief engagement in a practicing accounting firm but was made redundant,” Karuppiah recalled, looking back on his experience since arriving in Australia on a skilled migrant visa in 2000.
“My wife and my close friends suggested that we start a currency exchange and remittance provision firm. This sounded good and we incorporated a company and started one branch in March 2008. With our ethical pricing, face-to-face customer service and compliance practices we had instituted one branch every year and reached seven branches,” he said.
Karuppiah said he had invested significantly in compliance systems and controls over the past nine years but these assurances had little impact on the banks that have closed his accounts.
“We had then transformed from job seekers to job providers for over 50 people, with 20 employees at any point in time. We always believed in conducting know-your-customer (KYC) checks face-to-face and never slipped that principle so far. The customer would have walked into one of our locations at least once to undergo KYC,” he said. “Being an AML specialist myself, we have put compliance before profit and that’s the reason we had not made any money during these past nine years but kept borrowing for the developments.”
Karuppiah has refused to let his business die quietly and has taken his fight against what he terms a “regulatory injustice” to the highest levels. At conferences he is often seen in the crowd asking questions of AUSTRAC. He has also received significant support from two high-profile local politicians, Labor’s Bernie Ripoll and Queensland Liberal MP Ross Vasta.
Vasta said he sympathised with Karuppiah’s situation, particularly in the light of the significant time and money he has spent complying with AML/CTF legislation.
Vasta has made representations to the minister for finance Mathias Cormann; minister for justice Michael Keenan; assistant treasurer Josh Frydenberg; attorney general George Brandis; the treasurer Scott Morrison; and minister for small business Kelly O’Dwyer.
The problem is difficult to resolve in view of the fact that the government is not in a position to dictate to banks how they should assess their AML/CTF risks — or for whom they should provide accounts. There is no legal right to banking services in Australia.
In addition, this is a worldwide challenge and the Australian government has no influence over the behaviour of the U.S.-based correspondent banks that are arguably driving much of the “de-risking” activity in relation to remitters.
The best hope for the remittance sector at this stage is the statutory review of the AML/CTF Act, which is due to report in the coming months, according to Vasta.
“I’m also encouraged to hear that the government is engaging with the banking industry and the remittances sector to identify possible solutions to these issues,” he said.
Vasta also said the banks should heed the comments from AUSTRAC that banking customers should be assessed on a “case-by-case basis”, and banks should ideally engage with money transfer businesses on measures that could assist them to meet their internal risk standards.
“I support any measures that could be taken by individual banking institutions that would prevent future bank account closures and unduly impact remittance providers,” Vasta said.
Karuppiah, however, spends each day plagued with the fear that this may all be too little too late. As someone who has fought “unethical de-risking” for five years, he has now reached a point of desperation.
Karuppiah has done a great service to the AML/CTF cause in Australia by single-handedly convincing migrant workers to stop using hawala; explaining to them face-to-face that it was illegal in Australia and they needed to use legitimate channels. As a savvy businessman, he was happy to offer them a legal alternative. In Darwin, in particular, the success of his business was due to the success of this campaign.
He observes that the decimation of the legal remittance sector in Australia, at the hands of the country’s banks, may turn the tide back towards the use of hawala networks. This is a concern that officials at AUSTRAC and the Attorney General’s Department share.
Despite this, he has been encouraged in a letter from the Department of the Prime Minister and Cabinet to seek out other banks that will provide services to his industry. Karuppiah says this advice is out of touch; there are none left.
Keenan said in a letter to Karuppiah that the government is “involved in ongoing talks with banks and remitters to seek a solution”.
“A working group has been formed to facilitate liaison between financial institutions and remitters and to consider possible market-led solutions to this issue,” Keenan said.
Banking sources said remitters should not hold out any hope for such a “market-led solution”. They said in most cases it costs the banks more in compliance costs and due diligence to keep these types of accounts open than they can ever recoup in fees. Add to that the risk of souring a U.S.-correspondent banking relationship and the banks have little incentive to provide services for these customers.
For Karuppiah, meanwhile, the clock has been ticking for five years and he now has just under two months left. He fears the impact of bankruptcy on himself, his wife who can no longer work due to illness and their three children.
“The suffering I am going through is not small, nor short ended. I am socially and economically assassinated. I am not seeing a light at the end of the tunnel. It could take my lifetime to come out of this. I need comfort and my family needs to be safe,” he said in a final appeal to government and banking officials.
This article was first published by the Regulatory Intelligence service of Thomson Reuters Accelus. Regulatory Intelligence (http://accelus.thomsonreuters.com) provides a single source for regulatory news, analysis, rules and developments, with global coverage of more than 230 regulators and exchanges.
Head Regulatory Analyst | Australia & New Zealand
Financial and Risk