Money laundering and terrorism financing

Cat Barker, Foreign Affairs, Defence and Security

Key Issue
Two major reviews of Australia’s anti-money laundering and counter-terrorism financing regime, released in 2015 and 2016, identified continuing weaknesses in the current framework.
One of these is the lack of coverage of a range of non-financial businesses and professions that can be exploited to launder illicit funds and support terrorism. Consultations on laws to extend the regime to include them began in 2007, but the work was later put on hold and a Bill is yet to eventuate.

Money laundering is the processing of the proceeds of crime to disguise their origins, making the funds appear to have been legitimately obtained. It is a key enabler of serious and organised crime and can undermine the financial system and distort the economy.

Australia’s anti-money laundering efforts are guided by international legal obligations and the International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation (FATF Recommendations) developed by the Financial Action Task Force (FATF), of which Australia is a founding member.

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and related regulations and rules provide the framework for the Australian regulatory regime aimed at preventing and detecting money laundering and terrorism financing. The Act applies to ‘designated services’ provided by financial institutions, bullion dealers and the gambling industry, as well as designated remittance service providers. The obligations imposed on these organisations include registering with Australia’s regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC); conducting risk assessments and maintaining a program to respond to identified risks; undertaking customer identification and due diligence; and reporting certain transactions and matters to AUSTRAC. In its other role as Financial Intelligence Unit, AUSTRAC analyses the information contained in those reports, along with other inputs, to develop financial intelligence that it shares with partner agencies, including law enforcement agencies, the Australian Taxation Office and international counterparts.

A typical money laundering scheme
Source: United Nations Office on Drugs and Crime

Draft legislation to extend the coverage of the AML/CTF Act to include all ‘designated non-financial businesses and professions’ (DNFBPs), as required by the FATF Recommendations, was released for public consultation in 2007. This would have brought real estate agents, dealers in precious metals and stones, lawyers, accountants and trust and company service providers under the scheme. However, the process was put on hold to allow time for recovery from the Global Financial Crisis and appears not to have recommenced. While other improvements have been made in the meantime, these outstanding reforms represent a significant gap in Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime.

Exploitation of DNFBPs

AUSTRAC has stated that high value goods such as real estate are a significant money laundering channel in Australia, and also that laundering through commercial and residential real estate is relatively simple compared to many other methods. Its typologies and case studies reports outline some of the specific methods it has uncovered.

Reports by AUSTRAC and the Australian Criminal Intelligence Commission have also highlighted a trend towards the use of professionals such as lawyers, accountants and company and trusts service providers to (knowingly or unwittingly) facilitate money laundering. Criminals have been using increasingly complex and sophisticated money laundering schemes to evade detection, drawing on the specialised skills and advice of these professionals to do so.

Media reports over several years have pointed to the use of Australian real estate and professional facilitators to launder illicit funds obtained through corruption in other countries in the region, including Papua New Guinea and Malaysia.

The FATF’s report

FATF released its third evaluation of the effectiveness of Australia’s AML/CTF measures, as assessed against the FATF Recommendations, in April 2015. FATF found that Australia has strong legislative, enforcement and operational measures in place, including effective national coordination and international cooperation, but that improvements were required in several key areas. Overall, Australia was found to be compliant with 12 standards, largely or partially compliant with 22 and noncompliant with six. The six standards included those relating to DNFBPs, not-for-profit organisations, correspondent banking, and transparency and beneficial ownership of legal arrangements (such as trusts).

While several of the eight priority actions identified for Australia can be addressed at the operational level, others may require legislative amendments. Extending the regulatory regime to all DNFBPs would require amendments to the AML/CTF Act. Other priority actions that could result in legislative amendments include:

ensuring supervision of financial institutions’ compliance with targeted financial sanctions

a targeted approach to preventing the abuse of not-for-profit organisations by terrorist financing and

measures to improve transparency and information about ‘beneficial ownership’ of legal structures.

Beneficial ownership refers to the individual who ultimately owns or controls a customer, or on whose behalf a transaction is being conducted. Misuse of corporate vehicles can be reduced where accurate information is available on both their legal and beneficial owners.

The Coalition Government undertook to take account of FATF’s findings in the statutory review outlined below.

Statutory review

The Government commenced a statutory review of the AML/CTF Act and associated rules and regulations in December 2013 and reported in April 2016. The review considered the FATF’s findings; submissions; consultations with representatives from industry groups, private and not-for-profit organisations and government agencies; and the fit of the AML/CTF regime with broader policy considerations such as the ‘better regulation’ agenda and responding to national security threats.

The detailed review produced 84 recommendations designed to strengthen the regime and ensure it can be responsive to future challenges, and also simplify and streamline the framework. The report includes several general recommendations, including simplifying the AML/CTF Act, simplifying and rationalising the associated rules, embedding the principle of technology neutrality and reviewing counter-terrorist financing measures in light of international developments. Some of the key recommendations on more specific matters include:

bringing additional high risk services and payment types and systems within the regulatory scheme, including developing options for bringing the remaining DNFBPs within the scheme and conducting a cost-benefit analysis of those options (Recommendations 4.6–4.10)
reconsidering the current inclusion of some services that are now lower risk (such as travellers cheques) (4.1–4.2)
simplifying obligations relating to ‘correspondent banking’ (provision of banking services by one financial institution to another) and bringing them into alignment with FATF standards (10.1–10.3)
strengthening the reporting regime for cross-border movements of cash and bearer negotiable instruments (12.1–12.7) and
simplifying secrecy and access provisions to facilitate improved sharing of AUSTRAC information. (14.1).

While the review produced a long list of recommendations, many of them address only what should happen, not how. This provides a clear framework for modernising the AML/CTF regime, but means that a lot of work remains to be done before amendments to implement the recommendations are ready to be brought before the Parliament. A staggered approach might be one way to act quickly on priority issues while work continues to address the remaining recommendations.

Money laundering and terrorism financing

Exploitation of DNFBPs

The FATF’s report

Statutory review

Further reading