For registered clubs, one of the more difficult parts of AML/CTF compliance can be knowing when unusual gaming or cash activity should move from an observation to an investigation – and potentially to a Suspicious Matter Report (SMR).
A practical way of approaching this is to ask two important questions:
Where did this particular money come from?
and
Does the customer’s overall financial position reasonably explain the activity we are seeing?
These are essentially questions about source of funds and source of wealth.
The important point for clubs is that an unusual transaction does not automatically mean an SMR should be lodged.
It should, however, cause the club to consider whether it needs to look further.
A simple process is:
- Identify
- Review
- Ask
- Verify
- Assess
- Decide
What is Source of Funds?
The source of funds is the origin of the money used for a particular transaction or series of transactions.
It is not simply asking:
“Which bank account did the money come from?”
The question is really:
“How did the customer obtain this money?”
For example, legitimate sources of funds could include:
- salary or wages
- business income
- savings
- investment income
- sale of property
- sale of another asset
- inheritance
- a gift.
AUSTRAC specifically explains that source of funds concerns how the money was originally earned or obtained, rather than simply the account or location from which it was transferred.
A club example
Consider a member who normally attends the club once or twice each week and generally spends relatively small amounts.
Staff then observe the member putting several thousand dollars in cash through gaming machines during repeated visits.
The important question isn’t simply:
“Where did the cash come from today?”
The club may need to understand:
“What is the underlying source of the money being used?”
What is Source of Wealth?
Source of wealth is broader.
It examines how the customer accumulated their wealth and financial position over time.
For example:
A customer might say:
“The $15,000 cash came from my savings.”
That may explain where the immediate funds were held, but it doesn’t necessarily explain how those savings were accumulated.
The club may therefore need to understand the customer’s source of wealth.
Examples might include:
- long-term employment
- ownership of a successful business
- property investments
- shares and other investments
- inheritance
- accumulated retirement savings.
AUSTRAC describes source of wealth as understanding how the customer came to their overall financial position and whether there may be illicit sources behind that wealth.
When Should a Club Start Asking?
Clubs don’t need to interrogate every member about their finances.
The process is risk-based.
The trigger should generally be something about the customer’s transactions, behaviour or known circumstances that doesn’t make sense.
AUSTRAC identifies suspicious indicators for pubs and clubs, including customers with unexplained sources of funds or wealth, or sources inconsistent with their profile. Other indicators include large amounts of cash with little or no gaming activity, attempts to avoid identification, questions about reporting requirements, and attempts to have payments made to other people.
Think about the customer’s normal profile
Suppose a club knows that a member:
- has been a member for several years
- is retired
- normally attends twice a week
- normally spends $100–$300
- suddenly begins bringing $5,000–$10,000 cash into the club regularly.
That change doesn’t prove anything illegal has occurred.
But it creates a legitimate question:
Why has this customer’s activity changed?
The club’s transaction monitoring process should identify activity that isn’t consistent with what it reasonably knows about the customer, including their expected activity, risk profile and source of funds or wealth.
Step 1 – Identify the Unusual Activity
The first step is often an observation by staff or a transaction monitoring alert.
For example:
A member attends three times in one week and inserts approximately $8,000 cash into gaming machines on each occasion. The member conducts limited play before redeeming significant amounts.
The staff member doesn’t need to decide whether money laundering is occurring.
Their responsibility is much simpler:
Recognise that the activity is unusual and report it internally.
This is why good transaction monitoring, shift reporting and staff training are so important.
Step 2 – Look at the Whole Picture
The Compliance Officer or appropriate manager should then review the available information.
Don’t look at the $8,000 transaction in isolation.
Consider:
- previous gaming activity
- frequency of attendance
- cash-in and cash-out activity
- gaming turnover
- previous payouts
- transaction monitoring alerts
- security or incident reports
- previous CDD information
- occupation or employment information already known
- previous source of funds enquiries
- customer risk rating
- other unusual behaviour.
AUSTRAC recommends comparing unusual activity with previous transactions and what the reporting entity already knows about the customer.
The question becomes:
Does the activity make sense based on what we know?
Step 3 – Consider Source of Funds
If the activity cannot reasonably be explained, the club may need to make further enquiries.
For example:
“As part of our compliance requirements, we periodically need to understand the source of funds associated with certain transactions. Can you please explain where the funds being used today have come from?”
The answer might be perfectly reasonable.
For example:
“I sold my caravan last week for $28,000.”
That gives the club something it can potentially verify.
Another customer might say:
“They’re just my savings.”
Depending on the circumstances and risk, that may not be enough.
The club may need further information.
Step 4 – Verify Where Appropriate
Source of funds and source of wealth checks should not simply become a box-ticking exercise.
The information should be assessed and, where required, verified using appropriate reliable information.
Depending on the circumstances, evidence might include:
- payslips or employment information
- bank records
- evidence of property sale
- business ownership information
- accountant confirmation
- investment records
- probate or inheritance documentation
- other reliable and independent information.
Importantly, cash presents particular challenges.
AUSTRAC points out that a bank statement showing a cash withdrawal doesn’t necessarily prove that the cash subsequently presented by a customer is the same money.
The club therefore needs to apply judgement rather than simply collecting a document and closing the matter.
Step 5 – Does the Explanation Make Sense?
This is the critical point.
Consider three possible outcomes.
Outcome 1 – Reasonable explanation
A long-term member suddenly undertakes significantly larger transactions.
The club asks about the source of funds.
The member explains they recently sold an investment property and provides appropriate supporting information.
The explanation is consistent with the customer’s circumstances.
The club documents its assessment and determines there are no reasonable grounds for suspicion.
An unusual transaction has been explained.
That doesn’t automatically require an SMR.
Outcome 2 – Explanation requires further investigation
The customer says:
“It’s business money.”
The club knows little about the business.
The customer has recently started undertaking frequent large cash transactions.
This may justify additional CDD, further source of funds/source of wealth enquiries, increased transaction monitoring and reconsideration of the customer’s risk rating.
Outcome 3 – The explanation doesn’t make sense
The customer is conducting repeated large cash transactions.
When questioned, they provide inconsistent explanations.
On one occasion they say the money is savings.
Later they say it comes from their business.
They cannot provide reasonable supporting information.
Their transaction activity is significantly inconsistent with what the club knows about them.
There may now be reasonable grounds for suspicion.
That is when the club needs to seriously consider its SMR obligation.
You Don’t Need Proof to Lodge an SMR
This is an important point for Compliance Officers and senior managers.
The club doesn’t need to prove money laundering.
The test isn’t:
“Can we prove this person committed a crime?”
The question is whether the information available gives the club reasonable grounds for a suspicion.
AUSTRAC states that once suspicious activity is identified, the reporting entity should assess the activity and relevant information. If a suspicion is formed on reasonable grounds, an SMR must be submitted within the applicable timeframe. You don’t need certainty that a crime has occurred.
Don’t Delay an SMR While Trying to Complete the Investigation
Another important practical issue is timing.
A club shouldn’t think:
“We can’t lodge the SMR until we’ve completed the ECDD.”
AUSTRAC’s current guidance specifically states that enhanced CDD does not need to be completed before an SMR is submitted.
If the club has already formed reasonable grounds for suspicion, the SMR must be submitted within the required timeframe even if further enhanced CDD enquiries are continuing.
That distinction is important.
ECDD helps the club understand and manage the risk. It should not become a reason to delay an SMR.
A Practical Club Example
Consider this scenario.
A member has been attending the club for approximately two years.
Historically, their gaming activity has been moderate.
Over the last six weeks the club’s transaction monitoring identifies:
- significantly increased attendance
- repeated use of large amounts of cash
- significant cash inserted into EGMs
- relatively limited gaming compared with the amount inserted
- repeated redemption activity.
A supervisor raises an internal transaction monitoring report.
The Compliance Officer reviews the customer’s activity.
Question 1 – Is the activity unusual?
Yes.
It represents a significant change from previous behaviour.
Question 2 – Can existing information explain it?
No.
Question 3 – Should further CDD be considered?
Yes.
The club conducts appropriate enhanced CDD and asks about source of funds.
The member says:
“I’ve just got plenty of money.”
The club seeks further information.
The member then says:
“It’s from my business.”
The club asks reasonable questions about the business and source of the cash.
The member becomes evasive and provides inconsistent information.
Question 4 – Is the activity now suspicious?
The Compliance Officer considers:
Transaction activity + change in behaviour + large cash usage + limited play + inconsistent explanation + inability or unwillingness to reasonably establish source of funds.
Taken together, these factors may provide reasonable grounds for suspicion.
The club should assess whether an SMR must now be lodged with AUSTRAC.
Think of it as a Funnel
A useful way for clubs to explain the process to staff is:
Unusual Activity
↓
Internal Report / Transaction Monitoring Alert
↓
Review the Customer and Transactions
↓
Does it make sense?
↓
If not – further CDD / ECDD
↓
Consider Source of Funds
“Where did this particular money come from?”
↓
Consider Source of Wealth
“How has this person accumulated their overall wealth?”
↓
Does the explanation reasonably match the customer’s profile and activity?
↓
YES → Document the assessment and continue appropriate monitoring
NO → Consider whether reasonable grounds for suspicion exist
↓
If reasonable grounds exist → Lodge an SMR
The Most Important Part – Document Your Reasoning
A strong AML/CTF system shouldn’t simply record:
“Source of funds checked.”
The record should tell the story.
For example:
Trigger: Customer conducted approximately $24,000 of cash transactions across three visits within seven days, substantially above historical activity.
Review: Previous gaming and transaction activity reviewed for the preceding six months.
Customer explanation: Customer advised funds were generated through their business.
Further enquiries: Additional information requested regarding the business and source of cash.
Assessment: Explanation was inconsistent with information previously provided and sufficient reliable information could not be obtained to reasonably establish the source of funds.
Risk decision: Customer risk reassessed and enhanced monitoring applied.
SMR assessment: Compliance Officer determined whether reasonable grounds for suspicion existed and documented the reasons for the decision.
This type of record demonstrates that the club has a process, rather than simply collecting information.
The Practical Message for Clubs
Source of funds and source of wealth shouldn’t be seen as uncomfortable questions that clubs only ask when they already believe someone is committing a crime.
They are risk-management tools.
They help answer a much simpler question:
Does what we’re seeing make sense?
For clubs, the process should therefore be:
Notice something unusual.
Look at what you already know.
Ask reasonable questions.
Verify information where appropriate.
Consider whether the explanation makes sense.
Reassess the customer’s risk.
And where the information provides reasonable grounds for suspicion:
Lodge the SMR.
The objective isn’t for frontline staff to become investigators.
Their job is to observe, record and escalate.
The role of the Compliance Officer and the club’s AML/CTF framework is to bring the information together, undertake the appropriate CDD or ECDD, assess the customer’s source of funds and source of wealth where relevant, and determine whether the circumstances have reached the point where an SMR is required.
That is how transaction monitoring, customer due diligence and suspicious matter reporting should work together as one practical AML/CTF process.
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