Terms of reference
On 23 June 2021, the Senate referred the adequacy and efficacy of Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime to the Legal and Constitutional Affairs References Committee for inquiry and report by 2 December 2021. On 18 October 2021 the committee's reporting date was extended to the last sitting day in March 2022 (30 March 2022).
The committee was asked to inquire into:
the extent to which the Australian Transaction Reports and Analysis Centre:
responds to and relies upon reporting by designated services, and
identifies emerging problems based on this reporting;
the extent to which Australia’s AML/CTF regulatory arrangements could be strengthened to:
address governance and risk-management weaknesses within designated services, and
identify weaknesses before systemic or large-scale AML/CTF breaches occur;
the effectiveness of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the Act) to prevent money laundering outside the banking sector;
the attractiveness of Australia as a destination for proceeds of foreign crime and corruption, including evidence of such proceeds in the Australian real estate and other markets since the enactment of the Act;
Australia’s compliance with the Financial Action Task Force (FATF) recommendations and the Commonwealth Government’s response to:
applicable recommendations in applicable FATF reports, and
the April 2016 Report on the statutory review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and associated rules and regulations;
the extent to which adherence with FATF recommendations prevents systemic and reputational risks to Australia, the Australian economy, and Australia’s capacity to access international capital;
the regulatory impact, costs and benefits of extending AML/CTF reporting obligations to designated non-financial businesses and professions (DNFBPs or ‘gatekeeper professions’), often referred to as ‘Tranche two’ legislation;
DNFBPs take account of money laundering and terrorism financing risks, and
the existing professional obligations on DNFBPs are compatible with AML/CTF reporting obligations; and
any other related matter.
Conduct of the inquiry
The committee advertised the inquiry on its website and wrote to a number of organisations and individuals inviting them to make a submission by 27 August 2021.
The committee received 52 submissions, which are listed at Appendix 1. Two public hearings were held in Canberra on 9 and 10 November 2021. A list of witnesses who appeared before the committee is at Appendix 2.
The committee thanks all those who made submissions and gave evidence at the public hearings.
Background and context of the inquiry
Australia’s AML/CTF regime
Australia’s AML/CTF regime ‘is a cooperative effort between law enforcement, regulator, intelligence and policy agencies, as well as industry, international partners and the broader community’. The legislative framework that underpins the regime comprises:
the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act), which sets out the key obligations for regulated entities, establishes the powers of the Australian Transaction Reports and Analysis Centre (AUSTRAC) Chief Executive Officer (CEO) and the framework for sharing financial intelligence;
the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (AML/CTF Rules), which support the AML/CTF Act by providing detail underpinning the key obligations of the Act;
the Anti-Money Laundering and Counter-Terrorism Financing (Prescribed Foreign Countries) Regulations 2018 (AML/CTF Regulations), and
the Financial Transaction Reports Act 1988 (FTR Act), which was largely replaced by the AML/CTF Act but remains in force and imposes some regulatory requirements for ‘cash dealers’ and solicitors which are not regulated under the AML/CTF Act.
According to the Department of Home Affairs (the department), the AML/CTF regime:
provides a disincentive to crime by reducing its profitability;
reduces the pool of money available to finance future criminal activity;
aids in the detection and prosecution of crime;
protects the integrity of the financial system and reputation of Australian business; and
avoids economic and competitive distortions.
The AML/CTF regime is maintained by the following Commonwealth departments in collaboration with industry:
The Department of Home Affairs (has broad policy responsibility for AML/CTF and administers the AML/CTF Act and the AML/CTF Regulations. The regime is the mechanism by which Australia regulates businesses that provide services with a risk of exploitation for money laundering, terrorism financing, or other serious crime. The Department of Home Affairs and the Attorney-General’s Department share policy and administrative responsibility for the money laundering offences contained in Division 400 of the Criminal Code Act 1995 (the Criminal Code). The department also leads Australia’s engagement with the Financial Action Task Force (FATF) (further discussed from paragraph here below).
AUSTRAC has a dual role as Australia’s AML/CTF regulator and financial intelligence agency. AUSTRAC supervises the compliance of entities that provide designated services with their obligations under Australia’s AML/CTF regime, and collects and analyses reports of financial transactions and suspicious activity to generate financial intelligence. AUSTRAC also has administers the AML/CTF Rules, which are made by the AUSTRAC CEO.
The Australian Federal Police (AFP) is the key law enforcement agency responsible for investigating money laundering and terrorism financing which are offences under the Criminal Code. These offences are then prosecuted by the Commonwealth Director of Public Prosecutions (CDPP). Additionally, the AFP houses the multi-agency Criminal Assets Confiscation Taskforce and the Criminal Assets Litigation team, which are responsible for undertaking asset restraint and confiscation action under the Proceeds of Crime Act 2002.
The Australian Criminal Intelligence Commission (ACIC) is Australia’s national criminal intelligence agency, and is focused on understanding and combating serious and organised crime of national significance, including money laundering.
The department informed the committee that Australia’s approach to AML/CTF regulation seeks to balance the criminal justice outcomes with the regulatory impact on those businesses that are regulated. It explained:
To ensure balance, the regime has two key concepts built in:
Risk-based approach - The regime adopts a risk-based approach where principal obligations are set out in the AML/CTF Act, but businesses have some flexibility to develop procedures according to different risks, which they identify using their own AML/CTF programs. This ensures regulated entities’ systems and controls are proportionate, reduce regulatory burden and increase efficiency.
Designated services – Unlike most other AML/CTF regulation globally, the AML/CTF Act applies AML/CTF regulation to services that carry a risk of exploitation for money laundering or terrorism financing, without applying blanket regulation to entire sectors. The ‘designated services’ are listed in section 6 of the AML/CTF Act. The regulatory capture of businesses is therefore dependant on whether they provide any of the designated services.
At present, the AML/CTF regime applies to designated services provided by financial institutions (including banks, credit unions, and other authorised deposit-taking institutions), money remitters, digital currency exchanges, gambling service providers (including casinos and totalisator agency boards), and gold bullion dealers.
The five key obligations with which providers of designated services must comply under the AML/CTF Act are as follows:
Conducting customer due diligence: Regulated entities must identify and verify a customer’s identity before providing a designated service, and carry out ongoing due diligence over time. Enhanced customer due diligence obligations apply to high-risk customers.
Reporting: Regulated entities must report ‘suspicious matters’, cash transactions of AUD10,000 or more, and any instruction to transfer funds internationally to AUSTRAC.
Developing and maintaining an AML/CTF Program: Regulated entities must develop and maintain an AML/CTF program that identifies, mitigates and manages the money laundering and terrorism financing risks faced by that business.
Record keeping: Regulated entities must make and retain certain records for seven years and ensure they are available to law enforcement, if required.
Enrolment and registration with AUSTRAC: Regulated entities must enrol with AUSTRAC if they provide a designated service. In addition, remittance service providers and digital currency (cryptocurrency) exchange providers must enrol and register with AUSTRAC.
The department explained that under the FTR Act, cash dealers and solicitors must report to AUSTRAC significant cash transactions of $10,000 AUD or more. Cash dealers must also report suspect transaction reports (which are similar to suspicious matter reports under the AML/CTF Act).
Several reforms, including legislative changes, have occurred subsequent to enactment of the AML/CTF Act. Much of this reform has been underpinned by/developed in the context of:
reviews undertaken by the FATF to assess Australia’s compliance with FATF Recommendations; and
recommendations from the Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
Financial Action Task Force: Mutual Evaluation Reports and 3rd Enhanced Follow-Up Report
is the global money laundering and terrorist financing watchdog. The inter-governmental body sets international standards that aim to prevent these illegal activities and the harm they cause to society. As a policy-making body, the FATF works to generate the necessary political will to bring about national legislative and regulatory reforms in these areas.
The FATF Recommendations (which ‘set out a comprehensive and consistent framework of measures which countries should implement in order to combat money laundering and terrorist financing’) include standards for the regulation of DNFBPs such as real estate agents and jewellers. In summary, these are:
Customer Due Diligence (CDD) and record-keeping requirements;
internal control programmes against money laundering and terrorist financing;
obligations on foreign branches and majority-owned subsidiaries;
enhanced due diligence measures applicable to relationships and transactions with natural and legal persons and financial institutions from higher-risk countries;
reporting of suspicious transactions; and
tipping-off and confidentiality protections.
In April 2015, FATF published the Anti-money laundering and counter-terrorist financing measures – Australia: Mutual Evaluation Report (2015 MER). The 2015 MER analysed Australia’s compliance with the FATF Recommendations and the effectiveness of Australia’s AML/CTF regime. The 2015 MER made several findings and identified a number of ‘prioritised recommended actions for Australia’.
In November 2018, FATF published its 3rd Enhanced Follow-Up Report & Technical Compliance Re-Rating (3rd Enhanced Follow Up Report). The 3rd Enhanced Follow Up Report assessed:
Australia’s progress addressing technical compliance deficiencies identified in the 2015 MER; and
Australia’s progress implementing new requirements related to FATF Recommendations that changed since the 2015 MER.
The 3rd Enhanced Follow-Up Report concluded that some progress had been made in addressing technical compliance deficiencies identified in the 2015 MER. Australia was re-rated on seven recommendations and remained non-compliant (NC) or partially compliant (PC) on 14 recommendations. The 14 recommendations where Australia remained NC or PC were:
Assessing risks & applying a risk-based approach (Recommendation 1);
Customer due diligence (Recommendation 10);
Correspondent banking (Recommendation 13);
Wire transfers (Recommendation 16);
Reliance on third parties (Recommendation 17);
Internal controls and foreign branches and subsidiaries (Recommendation 18);
DNFBPs: customer due diligence (Recommendation 22);
DNFBPs: other measures (Recommendation 23);
Transparency and beneficial ownership of legal persons (Recommendation 24);
Transparency and beneficial ownership of legal arrangements (Recommendation 25);
Regulation and supervision of financial institutions (Recommendation 26);
Powers of supervisors (Recommendation 27);
Regulation and supervision of DNFBPs (Recommendation 28); and
Sanctions (Recommendation 35).
Since 2018, Australia has taken action on some FATF Recommendations where it was assessed as partially compliant or non-compliant. Significant action has been taken on customer due diligence, correspondent banking, and tipping off and confidentiality.
The phased series of reforms to Australia’s AML/CTF regime are commonly referred to as ‘tranches’. The AML/CTF Act is referred to as tranche 1. Further reforms, released in January 2021, to ‘increase the resilience of our financial system against criminal threats, while making it easier for businesses to understand and comply with their obligations’ are known as tranche (or Phase) 1.5. Tranche 2 is generally considered to be the AML/CTF regulatory obligations that would apply to DNFBPs.
Parliamentary Joint Committee on Law Enforcement
In September 2015, the Parliamentary Joint Committee on Law Enforcement (PJCLE) published its report into financial related crime. In that report, the PJCLE expressed its support for FATF’s finding in the 2015 MER that the government needs to examine whether DNFPBs ought to be included in the AML/CTF regime.
The PJCLE concluded that the ongoing AML/CTF Act review process then being undertaken by the Attorney-General’s Department (see from paragraph 1.23) was ‘a suitable mechanism for the consideration of the expansion of Australia’s AML/CTF arrangements’ to DNFPBs and recommended that the government consider these reforms in the context of that review.
Attorney-General’s Department statutory review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006
In April 2016, the Attorney-General’s Department published its report on a statutory review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AGD Review).
The AGD Review considered:
the operation of the AML/CTF scheme;
the extent to which the policy objectives of the AML/CTF regime were appropriate;
whether the provisions of the AML/CTF regime were appropriate for the achievement of those objectives; and
The AGD Review’s final report included 84 recommendations which, among others, recommended that the Attorney-General’s Department and AUSTRAC develop options for regulating DNFBPs and conduct a cost-benefit analysis of those regulatory options.
Structure of this report
Evidence to this inquiry largely focused on the impact and/or the benefits of extending the existing AML/CTF regime to DNFBPs that are not already subject to regulation of this nature. As such, this report largely focuses on this issue, but also canvasses other aspects of reform proposed in the course of the inquiry to improve the operation of Australia’s AML/CTF regime.
This report has four chapters:
This chapter (chapter 1) sets out the inquiry’s terms of reference, provides an overview of the conduct of the inquiry and introduces Australia’s AML/CTF regime.
Chapter 2 considers the key issue raised during this inquiry, that being the extension of the AML/CTF regime to DNFBPs.
Chapter 3 considers suggestions raised in evidence regarding improvements to the existing AML/CTF regime.
Chapter 4 provides the committee’s view and recommendations.