Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017


Bills Digest No. 57, 2017–18                                                                                                                                                      

PDF version [252KB]

Cat Barker
Foreign Affairs, Defence and Security Section
6 December 2017

 

Contents

Purpose of the Bill

Background

Huang (2016)
Hart & Ors (2016)
Money laundering through real estate and high value goods

Committee consideration

Senate Standing Committee on Legal and Constitutional Affairs
Senate Standing Committee on the Scrutiny of Bills

Policy position of non-government parties/independents

Position of major interest groups

Financial implications

Statement of Compatibility with Human Rights

Parliamentary Joint Committee on Human Rights

Key issues and provisions

Unexplained wealth
Proceeds and instruments of an offence
Property and wealth partly derived or realised from the commission of an offence

 

Date introduced:  18 October 2017
House:  House of Representatives
Portfolio:  Justice
Commencement: The day after Royal Assent.

Links: The links to the Bill, its Explanatory Memorandum and second reading speech can be found on the Bill’s home page, or through the Australian Parliament website.

When Bills have been passed and have received Royal Assent, they become Acts, which can be found at the Federal Register of Legislation website.

All hyperlinks in this Bills Digest are correct as at December 2017.

 

Purpose of the Bill

The purposes of the Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017 (the Bill) are to:

  • amend key terms and definitions in the Proceeds of Crime Act 2002 (the PoC Act) relating to when property becomes proceeds or an instrument of an offence, and when property or wealth has been lawfully acquired, and
  • expand the grounds on which orders relating to unexplained wealth can be made under the PoC Act.

Background

The PoC Act provides the Commonwealth scheme to trace, restrain and confiscate the proceeds of crime. There are several mechanisms through which assets may be confiscated, including conviction-based (criminal forfeiture), non-conviction based (civil forfeiture), and unexplained wealth orders.

The Government has proposed the amendments in the Bill primarily in response to two recent court decisions affecting the interpretation of the PoC Act: Commissioner of the Australian Federal Police v Huang [2016] WASC 5 (Huang) and Commissioner of the Australian Federal Police v Hart & Ors [2016] QCA 215 (Hart & Ors).[1]

Huang (2016)

Section 94 of the PoC Act allows a person whose property is subject to a restraining order and will be automatically forfeited because the person has been convicted of a serious offence to which the restraining order relates, to apply to the court to have property excluded from forfeiture. The court must make an order excluding particular property from forfeiture if it is satisfied of certain matters, including that ‘the applicant’s interest in the property was lawfully acquired’.[2] In Huang, the Court considered an application under section 94 of the PoC Act to exclude certain property of Mr Ly. The Court considered that the source of funds used by Mr Ly to repay the loan he took out in 2005 to acquire a property was not relevant to whether that property was ‘lawfully acquired’ (despite the possibility that those funds were not lawfully acquired).[3]

In response to Huang, Parliament passed amendments to the definition of lawfully acquired in the PoC Act that were intended to ensure that ‘where illegitimate funds are used to discharge a legitimately obtained security (such as a mortgage), property or wealth obtained using this security is not considered “lawfully acquired”’.[4]

Hart & Ors (2016)

In Hart & Ors, the Court considered, among other matters, if the source of funds used for repairs and restoration of assets, or to repay a mortgage acquired after a property was purchased, was relevant to determining whether those assets had been derived from unlawful activity. The majority held that the source of funds used for repairing or restoring assets would not normally be relevant in determining whether the assets were derived from unlawful activity.[5] The Explanatory Memorandum contends that this outcome ‘may implicitly prevent’ the seizure of property where illicit funds have been used for payments on mortgages taken out after an initial purchase or to pay for improvements to the property.[6]

Money laundering through real estate and high value goods

Australia’s anti-money laundering and counter-terrorism financing regulator and financial intelligence unit, the Australian Transaction Reports and Analysis Centre (AUSTRAC), published a strategic analysis brief on money laundering through real estate in 2015. Included among the ten methods outlined in that report are the use of loans and mortgages to layer and integrate illicit funds into high value assets such as real estate, and the use of illicit funds to pay for renovations and improvements that increase the value of property (which may be legally owned), before selling it at a higher price.[7] The way that the PoC Act has been interpreted in the cases outlined above could mean that assets acquired (either wholly or in part) through the use of such methods are nonetheless taken to be lawfully acquired and therefore not subject to confiscation. In his second reading speech for the Bill, the Minister argued:

These amendments are necessary as recent developments in case law have indicated that a person's interest in property is fixed at the moment of initial acquisition, and that any subsequent payments on the property are irrelevant to determining if the property is lawfully acquired or derived from crime.

This is a loophole that could allow organised crime groups to use a web of financial arrangements and asset protection structures to avoid forfeiture of property. For example: criminals may be able to avoid the current proceeds of crime regime by funnelling money into ongoing property maintenance and restoration costs, mortgage repayments and improvements.

The existence of this loophole is contrary to the central purpose of the Act, which is to undermine the profitability of criminal enterprise.[8]

The Bill will build on the amendments to the PoC Act passed in 2016 by amending key terms and definitions relating to when property becomes proceeds or an instrument of an offence, and when property or wealth has been lawfully acquired. It will also expand the grounds on which orders relating to unexplained wealth can be made to include instances where the whole or any part of a person’s wealth was derived or realised, directly or indirectly, from the commission of certain offences.

Committee consideration

Senate Standing Committee on Legal and Constitutional Affairs

The Bill has been referred to the Senate Standing Committee on Legal and Constitutional Affairs for inquiry and report. A reporting date had not been set at the time of publication of this digest, but the deadline for submissions is 21 December 2017.[9] Details of the inquiry are at the inquiry homepage.

Senate Standing Committee on the Scrutiny of Bills

The Senate Standing Committee on the Scrutiny of Bills reported on the Bill on 15 November 2017.[10] The Committee commented on item 14 of Schedule 1 to the Bill, which will provide that the substantive amendments apply after commencement, but to property and wealth acquired, derived or realised through certain means, including the commission of an offence, before or after commencement. The Explanatory Memorandum states that applying the amendments in this way is:

... necessary to ensure that relevant orders are not frustrated by requiring law enforcement agencies to obtain evidence of, and prove, the precise point in time at which certain property or wealth was derived, acquired , or became tainted...

Such a requirement would be unnecessarily onerous and would be contrary to the objects of the Act, as it will be practically impossible to satisfy in complex cases of fraud or money laundering.[11]

The Committee noted the justification set out in the Explanatory Memorandum, but remained concerned about retrospectivity of the amendments. It reiterated its concern that provisions that apply retrospectively ‘challenge a basic value of the rule of law’ and left the question on the appropriateness of the application provisions in item 14 to the Senate as a whole.[12]

Policy position of non-government parties/independents

At the time of publication of this Digest, there was no public indication of the policy position of any non‑government parties and independents on the Bill.

Position of major interest groups

Major interest groups did not appear to have publicly stated their positions on the Bill as at the date of this Digest.

Financial implications

The Explanatory Memorandum states that the Bill will have no financial impact.[13] As the Bill is intended to narrow the circumstances in which property or wealth is taken to be lawfully acquired for the purposes of the PoC Act, it may result in amounts forfeited to the Commonwealth under the Act being higher than would otherwise have been the case.

Statement of Compatibility with Human Rights

As required under Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011 (Cth), the Government has assessed the Bill’s compatibility with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of that Act. The Government considers that the Bill is compatible.[14]

Parliamentary Joint Committee on Human Rights

The Parliamentary Joint Committee on Human Rights reported on the Bill on 28 November 2017.[15] The Committee restated its concerns about the PoC Act more broadly and recommended that the Government undertake a detailed assessment of the PoC Act to determine its compatibility with the right to a fair trial and the right to a fair hearing.[16]

Turning to the amendments proposed in the Bill, the Committee sought the Minister’s advice on:

  • whether the freezing, restraint or forfeiture powers that will be broadened by the amendments to provisions affecting when property becomes proceeds or an instrument of an offence may be characterised as criminal for the purposes of international human rights law
  • the extent to which those amendments are compatible with criminal process guarantees set out in articles 14 and 15 of the International Covenant on Civil and Political Rights (ICCPR)
  • whether the limitation on the right to privacy that will result from those amendments (specifically, the right not to be subject to arbitrary or unlawful interference with a person’s home) is proportionate to the objective of ensuring that criminals are unable to restructure their affairs so as to avoid the operation of the PoC Act and
  • whether the amendments relating to unexplained wealth are compatible with the right to a fair trial and the right to a fair hearing, including:
    • whether they may be characterised as criminal for the purposes of international human rights law and
    • the extent to which those amendments are compatible with criminal process guarantees set out in articles 14 and 15 of the ICCPR.[17]

Key issues and provisions

Unexplained wealth

The unexplained wealth provisions in Part 2.6 of the PoC Act, enacted in 2010, enable a court to issue an order unless the subject of proceedings can establish, on the balance of probabilities, that his or her wealth was lawfully acquired. An assessment is made of the difference between the person’s total wealth and the amount shown to be derived lawfully, and the subject of the order must pay that amount to the Commonwealth.[18]

The PoC Act provides for three types of orders relating to unexplained wealth:

  • unexplained wealth restraining orders (under Part 2.1, section 20A), which restrict a person’s ability to dispose of or otherwise deal with property if certain thresholds are met (see below)
  • preliminary unexplained wealth orders (Part 2.6, section 179B), which require a person to attend court for the purpose of enabling the court to decide whether to make an unexplained wealth order on the grounds that the person’s total wealth exceeds the value of the person’s wealth that was lawfully acquired and
  • unexplained wealth orders (Part 2.6, section 179E), which require a person to pay the amount determined by the court to be the difference between the person’s total wealth and that which has been lawfully acquired, reduced by any amount previously deducted for forfeiture or pecuniary penalties (section 179J).[19]

A court must make an unexplained wealth restraining order if all of the criteria set out in paragraphs 20A(1)(c)–(g) are met. The criterion at paragraph 20A(1)(g) is that there are reasonable grounds to suspect that:

  • the person has committed an offence against a law of the Commonwealth, a foreign indictable offence or a State offence that has a federal aspect and/or
  • the whole or any part of the person’s wealth was derived from such an offence.[20]

Item 2 of Schedule 1 to the Bill will expand subparagraph 20A(g)(ii) so that the threshold will be met if there are reasonable grounds to suspect that the whole or any part of the person’s wealth was derived or realised, directly or indirectly, from an offence against a law of the Commonwealth, a foreign indictable offence or a State offence that has a federal aspect (emphasis added).

Items 4 and 5 will make equivalent amendments relating to (final) unexplained wealth orders by amending subsections 179E(1), (2) and (3).

Items 1 and 3 will make consequential amendments to sections 5 (principal objects of the Act) and 179A (simplified outline of Part 2.6) respectively.

These amendments align the requirements for unexplained wealth orders more closely to those for other types of orders that may be made under the PoC Act, which rely on the defined terms proceeds and instrument of an offence.[21] Subsection 329(1) of the PoC Act provides that property is proceeds of an offence if it is wholly or partly derived or realised, whether directly or indirectly, from the commission of an offence (whether within or outside Australia).

Proceeds and instruments of an offence

The concepts of proceeds and instruments of offences are fundamental to the operation of the PoC Act. The definition of proceeds is noted above. Subsection 329(2) of the PoC Act provides that property is an instrument of an offence if it is:

  • used in, or in connection with, the commission of an offence or
  • intended to be used in, or in connection with, the commission of an offence

whether within or outside Australia.

Section 330 of the PoC Act sets out when property becomes, remains and ceases to be proceeds or an instrument. Item 6 of Schedule 1 will repeal and replace subsections 330(1) and (2), which set out when property becomes proceeds or an instrument of an offence. Revised subsections 330(1) and (2) will provide as follows:

(1)   Property becomes proceeds of an offence if:

(a) the property is wholly or partly derived or realised from a disposal or other dealing with *proceeds of the offence; or

(b) the property is wholly or partly acquired using proceeds of the offence; or

(c) an *encumbrance or a security on, or a liability incurred to acquire, retain, maintain or make *improvements to, the property is wholly or partly discharged using proceeds of the offence; or

(d) the costs of retaining, maintaining or making improvements to the property are wholly or partly met using proceeds of the offence; or

(e) the property is improved using proceeds of the offence;

including because of one or more previous applications of this section.

(2) Property becomes an instrument of an offence if:

(a) the property is wholly or partly derived or realised from the disposal or other dealing with an *instrument of the offence; or

(b) the property is wholly or partly acquired using an instrument of the offence; or

(c) an *encumbrance or a security on, or a liability incurred to acquire, retain, maintain or make *improvements to, the property is wholly or partly discharged using an instrument of the offence; or

(d) the costs of retaining, maintaining or making improvements to the property are wholly or partly met using an instrument of the offence; or

(e) the property is improved using an instrument of the offence;

including because of one or more previous applications of this section.[emphasis added][22]

The means by which property becomes proceeds or an instrument outlined in proposed paragraphs 330(1)(a) and (b) and 330(2)(a) and (b) replicate those currently in subsections 330(1) and (2). Those outlined in proposed paragraphs 330(1)(c)–(e) and 330(2)(c)–(e) (italicised above) will be new. These amendments will expand the range of circumstances in which something is taken, under the PoC Act, to become proceeds or an instrument of crime, thereby increasing the scope of property that could be restrained and confiscated.

The amendments are intended to address the issues that arose in Huang and Hart & Ors by providing that property for which some or all of the:

  • loan repayments (including for loans taken out after the initial purchase, such as a second mortgage) or
  • costs of retaining, maintaining or making improvements

have been met from the proceeds or instruments of offences, itself becomes proceeds or an instrument of crime, as does property which is directly improved using proceeds or an instrument of an offence.

Item 13 will insert a definition of improvements into section 338 of the PoC Act. Improvements to property or wealth will include additions, alterations, repairs, restoration, structuring, restructuring or any other change to the whole or part of the property or wealth, whether or not the change actually results in an increase to the value of the property or wealth. The Explanatory Memorandum states that the definition is ‘designed to ensure a person cannot avoid operation of the term ‘improvements’ because the alterations did not actually increase the value of the property’.[23] This would accord with Morrison JA’s dissenting judgment in Hart & Ors, where he considered:

The question whether something has been derived from unlawful activity does not depend on the value added. It may be that considerable expenditure has been outlaid on property without actually adding to its value. That would not mean that the property had not been derived from the expenditure. Instead the question involves an examination of the contributions to the property or interest as part of the tracing back exercise, to see where or how the property or interest, as it stands at forfeiture, arose.[24]

The Explanatory Memorandum provides examples of what is intended to be captured by the amended provisions, including an example of how proceeds could be used directly to improve a property:

For example, where a person fraudulently obtains the materials used to make a garage from the Commonwealth Government, these materials will likely constitute ‘proceeds’ of crime under subsection 329(1). If the person subsequently uses the material to build a garage on their property, the property will now also constitute the ‘proceeds’ of an offence under paragraph 330(1)(e).[emphasis in original][25]

Item 11 will insert proposed subsections 330(7) and (8) to clarify that paragraphs 330(1)(a)–(e) and (2)(a)–(e) do not limit each other and that section 330 does not limit section 329 (in which proceeds and instrument are defined).

Item 12 will repeal and replace paragraph (c) of the definition of lawfully acquired in section 336A of the PoC Act (inserted in 2016 to address the issue that arose in Huang) so that property or wealth will be lawfully acquired only if:

(a) the property or wealth was lawfully acquired; and

(b) the consideration given for the property or wealth was lawfully acquired; and

(c) the property or wealth is not *proceeds or an *instrument of an offence.

The repealed paragraph was intended to deal with situations in which securities on, or liabilities incurred to acquire or retain, property or wealth were discharged with illicit funds. The definition as amended will instead draw on the definitions of proceeds and instrument in section 329 and the guidance on when property becomes, remains and ceases to be proceeds or an instrument in section 330 as amended by item 6.

Property and wealth partly derived or realised from the commission of an offence

The Bill will expand definitions relating to when property or wealth becomes proceeds or an instrument of an offence, and narrow the scope of what is taken to be lawfully acquired. As is currently the case, property will be proceeds of an offence if it has been wholly or partly derived or realised from the commission of an offence. Likewise, unexplained wealth orders will be able to be made where the whole or part of a person’s wealth was derived or realised from the commission of an offence.

However, this does not mean that where property or wealth has been only partly derived or realised from the commission of an offence, all of the property or wealth will be subject to restraint and confiscation. There are differences between the provisions in the PoC Act that govern orders relating to unexplained wealth and those that govern other types of orders. However, in both cases, restraining orders may be made in relation to all or specified property of a person, and there is scope for property to be excluded from orders.[26]

 

[1].         Commissioner of the Australian Federal Police v Huang (Huang) [2016] WASC 5; Commissioner of the Australian Federal Police v Hart & Ors; Flying Fighters Pty Ltd v Commonwealth of Australia & Anor; Commonwealth of Australia v Yak 3 Investments Pty Ltd & Ors (Hart & Ors) (2016) 336 ALR 492, [2016] QCA 215.

[2].         Proceeds of Crime Act 2002 (PoC Act), section 94 and paragraph 94(1)(f).

[3].         Huang, [149]–[158].

[4].         Explanatory Memorandum, Law Enforcement Legislation Amendment (State Bodies and Other Measures) Bill 2016, p. 4. See further C Barker, Law Enforcement Legislation Amendment (State Bodies and Other Measures) Bill 2016, Bills digest, 38, 2016–17, Parliamentary Library, Canberra, 2016, pp. 8–10. Amendments to the PoC Act in Schedule 3 to the Law Enforcement Legislation Amendment (State Bodies and Other Measures) Act 2016 commenced on 1 December 2016.

[5].         Hart & Ors; see in particular [833] and [1108] (Douglas and Lyons JJ) and [667]–[679] (Morrison JA, dissenting).

[6].         Explanatory Memorandum, Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017, p. 2.

[7].         Australian Transaction Reports and Analysis Centre (AUSTRAC), Money laundering through real estate, Strategic analysis brief, AUSTRAC, 2015, pp. 7, 10. See further ‘Case 28—Front company helped suspect profit from major conflict of interest’ in AUSTRAC, Typologies and case studies report 2009, AUSTRAC, Canberra, 2009, pp. 44–5. The money laundering cycle typically used to conceal the source of illicit funds involves three stages: placement, layering and integration: AUSTRAC, Money laundering in Australia 2011, AUSTRAC, Canberra, 2011, p. 9.

[8].         M Keenan, ‘Second reading speech: Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017’, House of Representatives, Debates, 18 October 2017, p. 11031.

[9].         Senate Standing Committee for Selection of Bills, Report, 13, 2017, 16 November 2017.

[10].      Senate Standing Committee for the Scrutiny of Bills (Scrutiny of Bills Committee), Scrutiny digest, 13, 2017, The Senate, 15 November 2017, pp. 46–8.

[11].      Explanatory Memorandum, Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017, pp. 14–15.

[12].      Scrutiny of Bills Committee, Scrutiny digest, op. cit., p. 48.

[13].      Explanatory Memorandum, Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017, p. 3.

[14].      The Statement of Compatibility with Human Rights can be found at page 4 of the Explanatory Memorandum to the Bill.

[15].      Parliamentary Joint Committee on Human Rights (PJCHR), Report, 12, 2017, 28 November 2017, pp. 34–42.

[16].      Ibid., pp. 35–38. The Committee suggested but did not formally recommend that such an assessment be undertaken when it considered the Law Enforcement Legislation Amendment (State Bodies and Other Measures) Bill 2016: PJCHR, Report, 1, 2017, 16 February 2017, pp. 41–44.

[17].      Ibid., pp. 35–42.

[18].      PoC Act, Part 2.6

[19].      A court may refuse to make a preliminary unexplained wealth order if it is satisfied that there are not reasonable grounds to suspect that the person’s total wealth exceeds by $100,000 or more the value of the person’s wealth that was lawfully acquired (subsection 179B(4)). It may refuse to make an unexplained wealth order on the same basis, or if it is satisfied that it is not in the public interest to make the order (subsection 179E(6)).

[20].      Foreign indictable offence and State offence that has a federal aspect are defined in sections 337A and 338 of the PoC Act respectively. Unexplained wealth laws do not generally require proof of a link to a specific offence. However, due to the need for a connection with a constitutional head of power, in practice, the Commonwealth unexplained wealth regime requires a connection to be made to a specific offence or fairly specific type of offence in order to satisfy the jurisdictional requirement. See further C Barker, Crimes Legislation Amendment (Unexplained Wealth and Other Measures) Bill 2014, Bills digest, 57, 2013–14, Parliamentary Library, Canberra, 2014, pp. 4–5.

[21].      PoC Act, sections 17, 18 and 19 (restraining orders in relation to people convicted of or charged with indictable offences or suspected of committing serious offences, and property suspected of being proceeds of certain offences) and 47, 48 and 49 (forfeiture orders relating to conduct constituting serious offences, convictions for indictable offences, and property suspected of being proceeds of certain offences).

[22].      The asterisks indicate terms that are defined in Chapter 6 of the PoC Act.

[23].      Explanatory Memorandum, Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017, p. 14.

[24].      Hart & Ors, [670].

[25].      Explanatory Memorandum, Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017, p. 11. For other examples see pp. 11–12.

[26].      PoC Act, Part 2.1 (restraining orders), Part 2.2 (forfeiture orders) Part 2.3 (forfeiture on conviction of a serious offence) and Part 2.6 (unexplained wealth orders). See also, Explanatory Memorandum, Proceeds of Crime Amendment (Proceeds and Other Matters) Bill 2017, pp. 7–8.

 

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