Government flip-flops again on money-laundering, counter-terror finance laws

by Nathan Lynch | Oct 17, 2018 | Finance & Tax, Government

Ten years, no action. Laws designed to protect Australians from criminal abuse – no action. No action because of weak government and strong lobbying from real estate, lawyers and accountants. Nathan Lynch examines the consequences, such as housing affordability.

THE AUSTRALIAN government has again reneged on its international commitment to pass new money laundering laws to protect the legal, accounting, real estate and high-value goods sectors from organised crime and terrorism financing. The government had aimed to pass laws to cover these sectors by 2018, following a highly critical report from the international Financial Action Task Force (FATF).

The report said Australia had fallen well behind in its international obligations to protect the country’s economy from criminal abuse. New Zealand took evasive action following the Panama Papers and will have introduced its “Phase 2” AML/CFT laws by the end of the year. Australia has been promising to introduce comprehensive “Tranche 2” laws, with support from both of the major political parties, since 2006.

The never-ending money laundering review

The Australian Criminal Intelligence Commission (ACIC) estimates organised crime costs the Australian community A$36 billion each year. It said in a declassified report last year that professional facilitators were increasingly being used to launder the proceeds of crime.

“The most common professions exploited by organised crime include lawyers, accountants, financial and tax advisers, registered migration agents, stockbrokers, real estate agents and customs brokers,” the report said.

AML experts have warned that failing to crack down on illicit funds flows, including “hot money” from China, has added significantly to Australia’s housing affordability problem.

The government had committed to passing a raft of money laundering laws by the end of this year. Documents released by the Department of Home Affairs under an FOI request show that it will instead pass “phase 1.5” laws as a transitional step toward implementing the full suite of proposals from the 2016 statutory review.

The “phase 1.5” legislation is expected to be introduced to parliament in the next sittings, which run through to October 25. The reforms have been drafted jointly by Home Affairs, the Attorney-General’s Department (AGD) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) following extensive consultation with industry.

A statutory review of Australia’s AML/CTF regime identified 84 areas where urgent reform was needed.

At the time, the government committed to tackling the legislative changes in two phases. The first phase would cover the more immediate or simpler reforms; the second phase would cover the more complex reforms that would require more consultation. This second phase included the “streamlining and simplification” of the regime and was considered to be a precursor to the “Tranche 2” laws to capture lawyers, accountants and real estate agents.

In response to an article on Thomson Reuters Regulatory Intelligence, the Department of Home Affairs confirmed that the legislation will be tabled in parliament “subject to the parliamentary schedule”.

“The government is currently preparing a bill to amend the Anti‑Money Laundering and Counter-Terrorism Financing Act 2006,” a spokesman said. “The bill will implement further recommendations of the 2016 statutory review of Australia’s AML/CTF regime.”

Transitional reforms

The reforms in the next tranche of legislation are expected to include amendments to the “tipping-off” rules and other secrecy provisions to allow more sharing of information between the government and private sector. These reforms are regarded as critical in the fight against serious organised crime.

At present, if a bank closes the accounts of a terrorist financier it generally issues a bank cheque. The bank can see where these funds are deposited but is not able to tell the recipient bank for fear of breaching the criminal “tipping off” laws.

The laws will also “consolidate and simplify Australia’s existing reporting requirements for the cross‑border movement of cash and other items”, the spokesman said.

This will help law enforcement agents at airports and other borders to identify cash smuggling and the muling of other financial instruments. Organised criminals know about these loopholes and have been exploiting them for years. For instance, incoming and outgoing travellers must actively declare cash of A$10,000 or more. If it is in another form, such as a traveller’s cheque, they only have to declare it in response to a request from law enforcement.

The law reforms will expand the ability of reporting entities to rely on customer identification procedures performed by a third party in certain circumstances.

In addition, they will clarify aspects of Australia’s money laundering offences. These issues are understood to have arisen during the recent litigation against Tabcorp and Commonwealth Bank.

The phase 1.5 laws will also “align correspondent banking requirements with international best practice”, the spokesman said.

Rachel Waldren

Rachel Waldren, partner at Murray Waldren Consulting, said the proposed reforms were a step in the right direction but AML practitioners would be disappointed by the absence of DNFBPs from the reforms.

“Although it isn’t quite the ‘tranche 2’ that industry was expecting, there are some significant steps that have been outlined. It will be interesting to see how they play out in practice,” she said.

“The government appears to be putting a number of steps in place in advance of extending the legislation to new sectors.”

Tranche warfare

The full suite of “phase 2” reforms have now been pushed back to 2019 or even 2020. This phase will include an extensive simplification, streamlining and enhancement of the AML/CTF regime. The long-awaited “Tranche 2” legislation will not be passed before these reforms are completed.

The internal report from the Department of Home Affairs, which was released under a Freedom of Information (FoI) request, said the “tranche 1.5” laws had originally

scheduled to be tabled in parliament during the autumn sittings.

“The proposed legislative reform package will address matters which were initially to be included in phase 1 but, because of the complexity, deferred. The reforms will include the holistic revision of Part 11 — Secrecy and access [of the AML/CTF Act], which governs the use and dissemination of AUSTRAC financial intelligence; opportunities to strengthen and streamline the registration of remittance providers; enhance the operation of customer due diligence obligations (reliance); and enhance and simplify the cross-border reporting regime,” the FOI report stated.

Loose ends

The Attorney General’s Department (AGD) published a “project plan” in late 2016, which aimed to have all the major amendments to the AML/CTF Act implemented by the end of 2018.

That project plan is no longer available on the AGD website (but Wayback Machine provided the copy below). A review of the page’s archive history shows that it was deleted some time between March and June this year — well after the creation of the Home Affairs agency.

Neal Jeans

Neil Jeans, a financial crime consultant with Initialism, said there had been significant delays in addressing the findings of the FATF mutual evaluation and the statutory review.

Despite these delays, Jeans said the staggered approach made sense from a regulatory perspective. Once the “legislative housekeeping” has taken place, extending the AML/CTF regime to gatekeeper professions would be a relatively simple process, he said.

“The ‘phase 1.5’ laws are really designed to address the technical changes required by the FATF and the statutory review before the introduction of tranche 2. Once that has happened it’s a lot easier to simply add new designated activities to the Act to capture the DNFBPs,” he said.

Jeans said Australia had a hard deadline for the reforms as the FATF would be doing a follow-up evaluation on Australia in mid-2020.

“The government can’t afford to let things slip any further if it’s serious about addressing the weaknesses in Australia’s AML/CTF regime and meeting its international commitments,” he said.

“If Australia hasn’t moved on DNFBPs by then, there could be real consequences.”

Waldren said the delays and messaging to the industry suggested that Tranche 2 may be pushed back beyond the FATF visit in 2020.

“The lack of urgency suggests to me that this may not be before the FATF review,” she said.

Closing the gaps 

Anti-money laundering industry experts have warned that failing to crack down on illicit funds flows has created a number of distortions in the domestic economy. This has added significantly to Australia’s housing affordability problem.

The latest delays to the AML regime are also likely to become a problem for Australian businesses. New Zealand companies faced extra scrutiny and additional costs when doing business overseas after extensive money laundering through their foreign trusts was exposed. A classified study found the foreign trusts regime was bringing in between NZ$30 million and NZ$40 million to gatekeeper professions each year. The research found that the costs to businesses, including the need to undergo enhanced due diligence when transacting abroad, greatly exceeded that revenue.

After that research, the New Zealand government took evasive action last year to close down these loopholes. The law has already been extended to lawyers and accountants. Real estate agents will face regulation from January 1, 2019. The UK, Canada, Singapore, Hong Kong and Malaysia have all passed laws to capture DNFBPs.

DNFBPs around the world

Parking criminal funds 

The unregulated nature of Australian real estate has made it attractive to park criminal funds but there is no reliable data on the extent to which this is happening. As such, the government lacks a clear idea of the impact the “tranche 2” laws will have on a softening property market.

The statutory review of Australia’s AML/CTF regime identified 84 areas where urgent reform was needed. At the time, the government committed to tackling the legislative changes in two phases.

The first phase would cover the more immediate or simpler reforms; the second phase would cover the more complex reforms that would require more consultation. This second phase included the “streamlining and simplification” of the regime and was considered to be a precursor to the “tranche 2” laws to capture lawyers, accountants and real estate agents.

A Home Affairs spokesman said: “The government is considering options to extend AML/CTF regulation to ‘tranche 2’ entities, such as lawyers, accountants and real estate agents.”

Banking on change

The banking sector has been pushing the government to move ahead with AML/CTF laws for DNFBPs as a matter of priority. The sector has argued that the failure to extend the regime to gatekeepers has undermined the regime’s effectiveness and placed an undue burden on banks.

Aidan O’Shaughnessy

Aidan O’Shaughnessy, head of policy at the Australian Banking Association, told a parliamentary review that the government needed to focus on implementing all of the 84 recommendations from the statutory review.

“If you want to launder money, and there is an A$36 billion cost to the economy each year, you need to look at the professional facilitators,” he said.

O’Shaughnessy said this failure to act was causing real harm in the Australian community.

“It is vital that Australia closes the gaps in our AML/CTF regime. These gaps were identified by the FATF. Banks are just some of the 14,000 AUSTRAC reporting entities that play a role in detecting, deterring and disrupting financial crime and threats that affect Australia’s financial system. The ABA and members will continue to work with AUSTRAC, the AGD and other stakeholders to enhance and protect the integrity of Australia’s financial system,” he said.

“If phase 1.5 and phase 2 … [aren’t] implemented, the gate is wide open.”


Nathan Lynch

Nathan Lynch is the Asia-Pacific Bureau Chief, Financial Crime and Risk at Thomson Reuters.




Australia on watch-list as China billions pour into property

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Nathan Lynch is a writer and international speaker who has spent two decades investigating the hidden world of dark money that fuels organised crime, corruption and violent extremism around the globe. He is certified by the US Department of Justice's elite CCIPS Cybercrime Laboratory and is a program expert with the Financial Services Volunteer Corps, which provides support to developing countries to help them combat the scourges of money laundering and other serious financial crimes. Nathan has trained police, government officials and bankers across Asia and the Middle East on the techniques the world's criminals use to conceal and clean their dirty money.

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