Cash Converters in AUSTRAC’s gunsights, as regulator sizes up next enforcement targets

Pawnbrokers, payday lenders and other non-bank reporting entities have been urged to review their financial crime controls, as the Australian Transaction Reports and Analysis Centre (AUSTRAC) broadens its supervision and enforcement crackdown. The country’s largest payday lender, listed pawnbroker Cash Converters, is the latest reporting entity to be referred to AUSTRAC’s enforcement division for suspected long-running anti-money laundering (AML) failures.

The company’s financial crime compliance controls are deeply inadequate and it has failed to put in place a consistent AML/CTF program across the organisation’s international network of franchised stores, sources said.

Cash Converters received a notice from AUSTRAC under s167 of the AML/CTF Act on August 7, which is often an indicator that further enforcement action is being considered. AUSTRAC was seeking further information and documents which had to be provided to the agency by October 2, 2020. Since the issue of the s167 notice there has been a wave of senior resignations from the company, including Stuart Grimshaw, its high-profile chairman, and Kevin Dundo, a non-executive director who was chair of the audit and risk committee.

Grimshaw was formerly with Commonwealth Bank of Australia (CBA), which received an A$700 million penalty from AUSTRAC in 2017, and was the chief executive of Bank of Queensland (BOQ), which has also been involved in a long-running remediation project with AUSTRAC’s AML/CTF enforcement team.

Grimshaw was lured from Sydney to the United States in 2014 by Phillip Ean Cohen, an Australian-born private equity investor who poached the BOQ chief executive to run his EZCORP pawnbroking business. Cohen controls all of the voting stock in the Nasdaq-listed company, which owns a network of around 1,000 pawnbroking stores across North and South America.

EZCORP also owns just under 35% of Cash Converters’ shares on the Australian Securities Exchange (ASX), making the U.S. company Cash Converters’ largest shareholder. As the former chief executive of major shareholder EZCORP, Grimshaw also took on the chairman’s role at Cash Converters in late 2016, until his unexpected resignation in August.

AUSTRAC is looking into potential breaches during a six-year period, from February 2014 to February 2020. The problems are understood to involve serious inadequacies in the company’s AML/CTF program. The court judgments in AUSTRAC’s cases against CBA and Westpac have confirmed that a reporting entity commits a breach every time it provides a designated service without an AML/CTF program in place. This provision under s81 of the AML/CTF Act has led to what Justice Jonathan Beach described as an “unquantifiable” number of breaches in the Westpac case.

“AUSTRAC can confirm that we are actively engaging with Cash Converters in relation to their AML/CTF obligations,” an AUSTRAC spokesperson told Thomson Reuters Regulatory Intelligence.

“As that engagement is continuing, AUSTRAC will not comment further on the specific nature of matters under review.”

Bombshell development

The commencement of a formal AUSTRAC investigation is understood to have sent shock waves through Cash Converters’ network of franchisees. This was particularly worrying for reporting entities as AUSTRAC was, at the time, in the final stages of its record A$1.3 billion litigation against Westpac Banking Corporation.

Grimshaw resigned as Cash Converters’ non-executive chairman on August 28, 2020, three weeks after receiving the formal notification from AUSTRAC. Dundo, who resigned as a non-executive director on November 23, had been an independent director at Cash Converters since early 2015 and is a corporate lawyer with KD Legal in Perth. Thomson Reuters Regulatory Intelligence approached Cash Converters and its board for comment but had not received a response at the time of publication.

Cash Converters has been a high-profile face of banks’ financial crime and reputational risk aversion in recent years, amid a heightened AUSTRAC enforcement climate. The company found itself a victim of “de-risking” in 2016, as the major banks withdrew from the payday lending sector following AML/CTF concerns. Cash Converters had a securitisation trust with Westpac, which it unwound in March 2016 and moved to an A$100 million securitisation facility with Fortress Investment Group.

The company has also been caught up in the broader focus on non-financial risk in the wake of the Royal Commission into Misconduct in the Banking, Superannuation and Financial Services Industry and a number of responsible lending class action lawsuits. In March, Cash Converters settled an A$42.5 million class action lawsuit over consumer credit loans in Queensland.

Cash Converters said in its latest annual report that it “welcomes the industry emphasis toward non-financial risk, including conduct and culture as well as detecting, deterring and disrupting criminal abuse of the financial system.”

“The company views these commitments as an area of continuous improvement and continues to strengthen its risk management and compliance capabilities while engaging transparently with regulators (ASIC and AUSTRAC),” it said.

Contingent liability

Cash Converters has disclosed a contingent liability for AML/CTF enforcement action in its 2020 financial report, though it has not set aside any provisions at this stage. The company is still hoping to resolve the issues directly with AUSTRAC’s supervision and enforcement teams.

“Following an AUSTRAC assessment, the group continues to engage with AUSTRAC with respect to concerns expressed on the group’s compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. The group is cooperating fully with AUSTRAC and intends to comply by responding to the requirements outlined in the notice on or before the requested due date,” Cash Converters said in its 2020 annual report.

“Additionally, the group is continuing to strengthen its anti-money laundering and counter-terrorism financing program,” the company said. “AUSTRAC has not completed its investigation and, therefore, it is not possible to determine the extent of any potential financial impact to the group.”

Sources in the AML community said the problems at Cash Converters appeared to be extensive, serious and long-running. As a franchise operator, Cash Converters has not set up a designated business group (DBG) structure to cover franchisees and to centralise their AML/CTF compliance controls and reporting obligations.

“Most, if not all, franchisees will not be able to join any DBG as they are not related entities. As these franchisees are reporting entities in their own right, they must comply with the Act. I strongly suspect they were getting minimal assistance from the franchisor. So there could be a lot of franchisees with individual compliance issues,” said an Australian AML/CTF expert, on condition of anonymity.

“Cash Converters has several different products — all loans, and several different delivery channels. There are lots of opportunities for getting things wrong.”

The listed company recently began advertising for a “group AML/CTF compliance officer” who will report to the chief risk officer and oversee the financial crime program, along with a dedicated “financial crime analyst”.

“We need an experienced [financial crime analyst] to hit the ground running,” the company’s job advertisement stated.

Raising awareness

AUSTRAC’s enforcement investigation into Cash Converters has highlighted the agency’s broadened supervisory focus in the wake of the CBA and Westpac AML/CTF litigation. Its goal for the next 12 months will be to improve standards across the 15,000 reporting entities, and this will include prioritising sectors such as casinos, second and third-tier lenders and remittance providers.

The regulator is also working closely with the fintech sector and has appointed external auditors to major fintech players, such as PayPal and Afterpay, to ensure they are meeting their AML/CTF obligations. Many players in the fintech community have struggled to understand their AML/CTF obligations. The reviews into PayPal and Afterpay, for example, found that the companies had received problematic legal advice on their obligations under the AML/CTF Act.

Pawnbrokers are another example of a sector that provides designated services but traditionally has struggled with compliance. The designated services provided by pawnbrokers are classified as lending services, under items 6 and 7 of the AML/CTF Act.

AUSTRAC said it was prioritising industry education and outreach across the reporting entity population.

“AUSTRAC works with reporting entities to assist them to strengthen their compliance capabilities,” a spokesperson said. “AUSTRAC has a comprehensive industry education program in place to educate reporting entities offering lending services to meet their compliance and reporting obligations and understand their risks.”

Executive accountability

The enforcement investigations into Cash Converters, BOQ, Westpac and CBA have shone a spotlight on the role of highly paid executives in managing “non-financial risk”. The Australian Prudential Regulation Authority (APRA) released a report in November 2019 on governance, culture, remuneration and accountability.

“The [Hayne Royal Commission] and the prudential inquiry into the Commonwealth Bank of Australia highlighted that the health and reputation of a regulated entity (and hence the outcomes it delivers) can be seriously damaged by weak leadership, misaligned remuneration structures, and/or a lack of accountability for operational or other failings,” APRA said in the report.

“Poor governance, remuneration structures and accountability mechanisms, leading to and reinforcing a poor risk culture, can undermine the prudential soundness of an entity and the outcomes for its customers. These issues are of primary interest to a prudential supervisor such as APRA,” the regulator said.

Cash Converters and EZCORP shareholders, along with regulators, will now be raising questions about the role that “misaligned” incentives played in the AML/CTF crisis that now surrounds the Australian company’s “refreshed” board, sources said.

Grimshaw was paid more than A$50 million over six years as part of Cohen’s quest to arrest EZCORP’s multi-year stock market slide. In the past six years the company’s fortunes have worsened, however, with the share price halving despite an extensive expansion across the emerging growth markets of South America.

Grimshaw had been attempting to expand EZCORP’s network of pawnbroking stores in the United States, Mexico, Guatemala, Honduras, El Salvador and Peru. The strategic goal was to build EZCORP into a modern fintech and payments company, with an online presence through its Lana platform. The goal was to enter the high-risk Latin American payments corridor, where EZCORP had built a presence of almost 500 physical stores.

Given the close cooperation between financial intelligence units in Australia and the United States, it is highly likely that AUSTRAC will share the findings from its AML/CTF investigation with its partner agencies abroad.

As AUSTRAC’s enforcement investigation gathers steam, it remains to be seen whether the U.S. Financial Crimes Enforcement Network (FinCEN) will apply extra scrutiny to EZCORP’s dream of building a digital payments service to bridge the high-risk remittance corridor between North and South America.

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