AML going south? Money laundering and “non-financial businesses and professions” in Australia
24 Aug 2017

In July 2017 Guy Boyd, head of financial crime at one of Australia’s biggest banks, fired a broadside at the Australian government over the state of the national anti-money laundering regime. Boyd claimed that as a result of lack of political will in government to regulate effectively, Australia is becoming a destination of choice for money launderers.

Boyd is not alone in his opinions about the weakness of Australia’s AML efforts. The international Financial Action Task Force (FATF) undertook an evaluation in 2015 in which Australia was found to be fully compliant with just 12 of 40 core recommendations for AML and counter-terrorism financing regulation and enforcement. In a recent report comparing Australia, Canada, the US and UK on ten key AML areas connected to real estate, Transparency International found that Australia had “severe deficiencies” in all ten, making it the worst of the four countries and out of step with international commitments to prevent corruption and money-laundering.

At the core of the issue is the failure to include designated non-financial businesses and professions (DNFBPs) such as lawyers, real estate agents and accountants under key AML legislation. Australia passed the Anti-Money Laundering and Counter-Terrorism Financing Act (AML/CTF Act) in 2006 to regulate financial service providers (including banks) and casinos to manage AML/CTF risks. It was expected that a second tranche would follow to regulate DNFBPs similarly, and legislation to that effect was drafted in August 2007. More than a decade later, however, it has yet to make it into law.

“Until recently, bringing in DNFBPs under the AML/CTF regime hasn’t been a political or regulatory priority in Australia,” says Neil Jeans of Initialism, a Melbourne-based company offering financial crime risk management solutions. “We are, however, starting to see a change partially due to international initiatives on tax evasion, as well as incidents like the Panama Papers, which have highlighted the vulnerabilities of the DNFBP sectors and the vital role they play as gatekeepers to the financial system.”

The lack of regulation for DNFBPs puts Australia’s AML practices at odds with many other jurisdictions including the UK, Canada, Singapore and Hong Kong. On August 3rd 2017, New Zealand also passed laws to regulate DNFBPs.

Australia’s failure to regulate DNFBPs has led to Australia being put under an “enhanced follow-up” process by the FATF, and is obliged to report on an annual basis on progress towards correcting the issues identified by the 2015 review. Lack of regulation has also created significant difficulties for monitoring and law enforcement agencies.

“Suspicious matters in relation to DNFBPs have increased in prominence over the last five years,” says a spokesperson for the Australian Transaction Reports and Analysis Centre (AUSTRAC), the agency responsible for monitoring and identifying financial crime in Australia. “This could be attributed to the heightened profile of some of these sectors related to significant domestic and international matters, for example Project Wickenby and Panama Papers.” (Project Wickenby was an Australian government taskforce aimed at preventing off-shore tax evasion.)

In an internal report from 2016 released under the Freedom of Information Act, AUSTRAC writes that the limited coverage of legal professionals under AML regulation has created a “key intelligence gap” which “hamper[s] proactive detection of money laundering or unusual activity involving legal professionals. It also hinders investigations where legal professionals are involved.”

The lack of AML obligations for legal professionals limits the ability of law enforcement to identify complicated money laundering and tax evasion cases, and makes it harder to differentiate between legitimate legal advice and advice given by lawyers who are knowingly complicit in money laundering. According to AUSTRAC, legal practitioners and their clients have avoided prosecution in the past due to the complexity of finding evidence to prove their complicity in laundering funds. Although similar internal reports for other DNFBPs are not available, AUSTRAC’s public statements suggest that similar concerns exist in the case of accountants and real estate agents.

AUSTRAC notes that the ongoing absence of AML regulation may lead to an increasing exploitation of professionals for money laundering purposes, especially as tighter controls in both other sectors and other jurisdictions   force organised crime actors to seek out new strategies. According to the spokesperson for AUSTRAC, “Serious and organised crime groups are [becoming] more complex and pervasive, and seek to harness professional expertise to enable them to profit from their criminal activities.”

In particular, the internal AUSTRAC report observes that the Australian housing market is becoming a more appealing target: “AUSTRAC is already starting to see a marked increase in the amounts invested into property by foreign entities … As conveyancing work grows, legal professionals may be at increased risk of being exploited for money laundering.”

AUSTRAC’s concerns about the vulnerability of Australia’s real estate sector to money laundering are shared by experts. FATF repeatedly noted in its 2015 evaluation that Australian real estate is attractive to money launderers. In particular, it observed that “large amounts are suspected to be laundered out of China into the Australian real estate market. China and other countries within the Asia-Pacific region were also seen as likely sources of corruption proceeds that are laundered in Australia.”

Large flows of foreign investment into the Australian property market, particularly from Asia, are seen to have contributed to sky high prices in Sydney and Melbourne, where housing affordability has become a major social and political issue. 26% of foreign buyers of Australian real estate came from China alone in 2015-16, pouring AU$23.8 billion into the property market. While much of this is legitimate investment, concealed within it are flows of black money. An internal report which was accidentally released by the Bank of China in 2011 found that $123 billion had been moved out of the country by corrupt officials, with Australia as a major destination. Numerous court cases have documented purchases of multi-million dollar properties in Australian cities by Chinese investors using illicit . In a 2016 interview with SBS News, Charles Pittar, CEO of Chinese international property investment website, claimed that 70% of his clients in Australia paid in cash. Another property developer gave a more modest estimate of 15-20%, but added “the rest could pay cash if they need to.”

It hardly needs to be said that cash purchases of high value real estate should be cause for concern for AML authorities. The Australian government’s review of the AML/CFT Act 2006 recounts a case in which structured cash payments totaling hundreds of thousands of dollars were used by a key suspect to purchase a property. Law enforcement was able to draw on AUSTRAC data in their investigation, which ultimately led to the disruption of a large scale cocaine importing operation, involving more than a dozen arrests and the seizure of firearms, luxury cars and over AU$13.5 million in cash.

Despite the success of this particular case, the review finds that lack of regulation of professionals involved in real estate purchases in Australia lowers the risk of detection for international money launderers and organised crime. The review concludes that the extension of AML obligations to DNFBP professionals would remove a regulatory “blind spot” and enable AUSTRAC and law enforcement to do their jobs more effectively.

The FATF supports the expansion of AML regulation to DNFBP professionals. The enforcement agencies support it. The banks support it. Even the government’s own review supports it. So why, ten years after the first tranche of legislation was implemented, is there a lack of political will to make it happen?

Part of the answer can be seen in the responses to the government’s multifarious reviews, enquiries and industry consultation processes. The proposal to extend regulation to the professions has met with strong opposition from influential DNFBP advocates and industry bodies, such as the Australian Law Council.

The Law Council argues that legal practitioners are already adequately regulated to mitigate the risks of money laundering. Lawyers are obligated not to participate in criminal activities, including money laundering, and to advise their clients to do the same. Lawyers who become aware that their client is engaging in money laundering are already obligated not to facilitate it, which in the Council’s opinion is sufficient to address money laundering risks.

The attitude of other professional bodies, including accountants, real estate agents and company service providers is similar: they are quick to state support for the prevention of money laundering in principle, but they are opposed to what they view as onerous and unnecessary regulatory burdens being imposed on them. Like the Law Council, many argue that they are already undertaking adequate measures to detect and prevent money laundering.

“DNFBPs undoubtedly already undertake some of the controls required by the AML/CTF Act, particularly customer due diligence,” says Neil Jeans. “However, these are for business or commercial reasons, not specifically to detect or prevent money laundering.” Re-framing some of these existing activities in the context of AML regulation could help to reduce the impact on DNFBPs if and when they are regulated, Neil says.

The argument that DNFBPs are already doing enough is one which FATF experts also encountered in the process of their 2015 evaluation. The experts, however, were unimpressed, writing in their report that “the sector representatives were unable to demonstrate to or convince the assessors how existing professional standards were sufficient to mitigate ML/TF risks over and above their personal business interests, or had enabled them to be an effective contributor in combating system-wide ML/TF risks.” The FATF recommended educating professionals and enforcing their implementation of AML obligations as a Priority Action.

“I truly believe that DNFBPs will be part of the AML/CTF regime in the next few years,” Neil says. According to Neil, despite ongoing resistance, opponents to DNFBP regulation are starting to recognise that they are fighting a losing battle. Rather than flatly rejecting any regulation and risk having it imposed upon them without their input, they are increasingly adjusting their strategies to limiting the impact of AML regulation on their businesses.

For its part the government is keen to cooperate with DNFBPs, including establishing an AML/CTF Industry Consultation Council to engage with industry bodies on reforms to AML/CTF regulation. The Attorney General’s Department has laid out a roadmap for recommended changes to the AML/CTF Act which are intended to be fully implemented by 2019, just ahead of the next FATF review.

It’s notable, however, that the roadmap doesn’t actually contain a concrete plan of action to regulate the DNFBPs. Instead its recommendations boil down to (yet another) report based on a cost-benefit analysis, conducted concurrently with (yet another) industry consultation process. The roadmap also contains the pointed caveat that “while this document outlines the intended approach to implementation, final decisions on policy outcomes, legislation and timing remain a matter for the Government.” In other words, whether or not any of the planned outcomes actually see the light of day will come down to political will—the key ingredient which has been identified as missing for all these years.

Revelations in August 2017 of widespread violations of AML/CTF obligations by the Commonwealth Bank, one of the five biggest banks in Australia, have thrown a wild card into the mix. It remains to be seen whether the fallout will galvanise political will for more effective and comprehensive AML/CTF regulation across the board, including for DNFBPs, or if on the other hand it will pull the focus of political leaders towards problems specific to Australia’s banking sector and away from the broader picture of money laundering in Australia. Early signs suggest the latter may be the more likely outcome.

Australian DNFBPs are unlikely to be able to avoid AML regulation forever. However, with politicians distracted and the industry bodies continuing to lobby to divert, postpone and minimise the impact of any measures which might be taken, those waiting to see concrete action in the near future probably shouldn’t hold their breath.

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