Introduction

The purpose of this and related papers is firstly to raise public awareness of the Government’s decision to reform Australia’s anti-money laundering AML system in line with new international standards. The second purpose is to outline proposals for implementation and to seek comment on these proposals.

The reforms will cover a range of business activities, in some cases extending anti-money laundering measures to activities not covered by existing legislation. As the reforms raise different issues for different industry sectors, separate issues papers will be prepared for particular industries and released progressively from January 2004.

This paper deals with the gambling industry. It is intended to provide a basis for discussion with the gambling industry on regulatory options to give effect to Australia’s anti-money laundering obligations.

Background

What is Money Laundering?

The goal of most criminal acts is to generate a profit. To enjoy their ill-gotten gains, criminals commonly seek to disguise the illegal source of those profits. Money laundering is the processing of criminal profits to disguise their illegal origin.

Successful money laundering enables criminals to:

· remove or distance themselves from the criminal activity generating the profits, making prosecution more difficult;

· distance profits from the criminal activity to prevent them being confiscated if the criminal is caught;

· enjoy the benefits of the profits without drawing attention to themselves; and

· reinvest the profits in future criminal activity or in legitimate business.

The most obvious reason for anti-money laundering measures is to stop criminals from enjoying the personal benefits of their profits and prevent them reinvesting their funds in future criminal activities. Anti-money laundering measures provide a vital basis for detecting and investigating criminal activities by establishing an audit trail and evidentiary links between criminal acts and major organisers.

There are three stages to laundering money. In the initial or placement stage the money launderer introduces illegal profits into the financial system. This might be done by splitting large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of financial instruments, such as cheques or money orders, that are then collected and deposited into accounts at other locations.

After the funds have entered the financial system, the launderer may engage in a series of conversions or movements to distance them from their source. In this layering stage, the funds might be channelled through the purchase of investment instruments, or by wiring money through a series of accounts at various banks. The launderer might also seek to disguise the transfers as payments for goods or services, thus giving them a legitimate appearance.

Having successfully processed criminal proceeds through the first two phases, the money launderer then moves them to the third or integration stage in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds in real estate, luxury assets, or business ventures.

International

In response to increasing international concern about money laundering, the Financial Action Task Force on Money Laundering (FATF) was established in 1989. FATF is an inter-governmental body now comprising 33 member countries and organisations which sets international standards and develops and promotes policies to combat money laundering and terrorist financing.

In 1990, FATF issued a set of Forty Recommendations to guide the fight against money laundering. The Forty Recommendations set out the framework for anti-money laundering efforts and provide a set of counter-measures covering the criminal justice system and law enforcement, the financial system and its regulation, and measures to enhance international cooperation.

In October 2001, FATF expanded its mandate to deal with the issue of the financing of terrorism, and took the important step of creating the Eight Special Recommendations on Terrorist Financing. The Special Recommendations contain a set of measures aimed at combating the funding of terrorist acts and terrorist organisations, and are complementary to the Forty Recommendations.

In June 2003, FATF completed a major review of the Forty Recommendations. The revised Forty Recommendations are designed to combat increasingly sophisticated money laundering techniques, including the increased use of professionals to advise and assist in money laundering. The Australian Government participated in the review process and has endorsed the revised Forty Recommendations. A summary of the revised Recommendations is at Annex 1.

The Forty Recommendations are the acknowledged international anti-money laundering standard. In their revised form they apply not only to money laundering activity but also to terrorist financing. When combined with the Eight Special Recommendations on Terrorist Financing, they provide an enhanced, comprehensive and consistent framework of measures for combating money laundering and terrorist financing.

Australia

Australian Anti-Money Laundering Legislation

Australian anti-money laundering legislation developed as a direct response to two Royal Commissions in the 1980s that exposed the links between money laundering, major tax evasion, fraud and organised crime. The Costigan and Stewart Royal Commissions identified the need for legislative strategies to address these issues.

Australia’s primary anti-money laundering legislation, the Financial Transactions Reports Act 1988 (FTR Act), was enacted to erect barriers in Australia’s wider financial and gambling sectors to discourage financially motivated criminals and to provide financial intelligence to revenue and law enforcement agencies. While initially focusing largely on suspect transactions and large cash transactions, the FTR Act was later extended to include reporting and monitoring of certain international transactions.

Obligations under the FTR Act extend beyond the financial sector to a range of business activities that may be vulnerable to money laundering. For example, the FTR Act applies to all gambling houses, casinos, bookmakers and totalisator betting services. Gambling service providers are required under the FTR Act to:

· obtain the required information and verify signatories to account facilities provided for clients;

· keep records of account and identification related information for seven years after the account is closed;

· report significant cash transactions of $A10,000 or more;

· report any suspicious transactions; and

· report any international funds transfer instructions.

Reform Framework

The FTR Act was originally developed for a financial system in which most transactions were face to face and took place over the counter at branches of financial institutions. However, cashless, non face-to-face electronic transactions are increasingly replacing traditional cash-based transactions, and the range of financial services available to consumers outside the traditional banking sector has expanded greatly. Money laundering risks will continue to increase with these commercial and technological developments.

While the FTR Act reflects the elements of the earlier Forty Recommendations, the recent revisions to the Recommendations have introduced substantial changes to the international anti-money laundering standard. For example, to stop money launderers from seeking to avoid preventive measures by targeting unregulated businesses and professions, the revised Recommendations extend key anti-money laundering obligations to key non-financial sector businesses and professions. At the same time, the Recommendations enhance customer due diligence, reporting and record-keeping requirements to improve transparency and guard against abuse of legitimate business activities to launder money and fund terrorism.

Australia’s anti-money laundering system must adapt to the changing international security and commercial environment. The revised Forty Recommendations provide the starting point for reforming Australia’s anti-money laundering system. As commercial practices, technologies and payment systems evolve, so too do techniques for laundering money and evading detection. To avoid becoming a ‘soft touch’ for money launderers and terrorist financiers, Australia’s anti-money laundering system must evolve to meet these new threats. Continuing vigilance against money laundering and terrorist financing is vital to Australia’s good economic reputation and our national security.

Implications for the Gambling Industry

Reforms to Australia’s anti-money laundering system will build upon existing measures to produce a regulatory system that will more effectively detect suspicious transactions and allow timely monitoring and tracking of transactions. Issues for consideration by the gambling industry are identified under four main themes:

Coverage - Business activities that will be subject to anti-money laundering reporting requirements, and consideration of transaction thresholds.

Customer Due Diligence – Revised standards for ongoing customer due diligence and the measures needed to support it.

Record-Keeping and Tracking – Measures to allow investigators and enforcement agencies ready access to information.

Oversight and Compliance - Measures to allow the system to operate effectively and consistently.

1. Coverage

1.1 Application to the Gambling Industry

As noted above, the revised Forty Recommendations now apply specifically to casinos among other key non-financial sector businesses and professions. In some respects the revised Recommendations reflect practices that have long been regarded as standard under Australia’s anti-money laundering system. For example, Australia’s FTR Act has from its inception applied customer identification, record-keeping and reporting obligations to casinos and other gambling service providers.

The revised Forty Recommendations will however extend the application and scope of Australia’s anti-money laundering obligations. While the FTR Act requires customer due diligence only for account-holders, the revised Recommendations extend due diligence obligations to all customers, whether regular or occasional, engaging in transactions above an identified monetary threshold. They also recommend additional due diligence and reporting procedures for particular categories of customer. These new obligations will require careful consideration in the Australian context.

While the revised Forty Recommendations refer specifically to casinos, any reforms to Australia’s anti-money laundering system should apply equally to a range of gambling service providers. Australia recognised the wider money laundering risks associated with gambling when it took steps to regulate a range of gambling activities under the FTR Act. Those risks have not changed. Continued broad coverage will reduce the risk of money launderers attempting to exploit regulatory loopholes. It will also ensure consistent application of anti-money laundering measures across the gambling sector.

Issue 1.1

Anti-money laundering obligations will continue to apply to a range of Australian gambling service providers, but will require review in line with the revised FATF Forty Recommendations.

1.2 The Threshold Approach

FATF has recommended applying a threshold approach to anti-money laundering obligations for particular industry sectors. For casinos, the recommended threshold is $US/Euro 3000, or approximately $A4000-5000.

Applying this approach to the gambling industry in Australia would require:

· procedures to verify the identity of all customers engaging in financial transactions equal to or above the recommended threshold; and

· procedures for retaining transaction and customer identification records to enable ready access by regulatory bodies for a set period.

Under FATF’s recommended approach, customer identification and record-keeping obligations would apply to all customers engaging in financial transactions of approximately $A5,000 or above, not just account holders. More robust customer identification procedures would also apply to reporting of suspicious transactions.

The threshold approach raises several key issues. If applied uniformly to all gambling patrons, account holders would be identified when their transactions exceed the threshold, rather than when opening an account. The same approach would apply to occasional customers. Current customer identification and record-keeping requirements would therefore need to be reviewed.

Reporting obligations would also require review. The current system of significant cash transaction reporting for amounts above $A10,000 may need to be reconsidered in the light of any new customer due diligence threshold. Consideration could be given to a single applicable threshold for due diligence, record-keeping and reporting purposes while retaining a general requirement for reporting of suspicious activity.

While having regard to FATF’s recommended threshold, it is important that any threshold adopted in Australia reflect Australian conditions. A low transaction threshold could create a significant compliance burden not justified by the actual money laundering risk. On the other hand, setting the threshold too high could encourage money laundering.

Practice in other countries suggests that, to avoid structuring of transactions, a threshold approach should apply not only to single transactions but also to multiple transactions by a single customer. US casinos, for example, are required to report multiple transactions above a prescribed monetary threshold as single transactions where they are made by or on behalf of the same person during any one gaming day. These requirements apply regardless of whether the customer is an occasional or regular customer.

Definitional issues will also need to be worked through in consultation with the gambling industry. For example, while the threshold approach is intended to apply only to ‘financial transactions’, experience in other countries suggests that transactions should include:

· dealings at any gambling table, cage, or money exchange service;

· any transactions crediting or debiting a customer a certain number of award points; and

· bets placed electronically.

Issue 1.2

Comment is sought from the gambling industry on the practical implications of applying a threshold approach to anti-money laundering obligations including the level at which any threshold should be set to balance the interests of law enforcement, customers and gambling service providers.

2. Customer Due Diligence

2.1 General Principles

Customer due diligence is the cornerstone of any effective anti-money laundering program. Accurate information on a customer’s identity and transaction activity is essential in establishing a valid basis for the detection, prevention and prosecution of money laundering, terrorist financing and associated criminal activity.

FATF Recommendation 5 sets out the following customer due diligence measures:

· identifying and verifying the identity of customers when establishing business relations, or when conducting transactions for occasional customers, using reliable and independent source documents, data or information;

· re-verifying identity where there is a suspicion of money laundering or terrorist financing or there are doubts about previously obtained customer identification data;

· identifying any other beneficiaries, including reasonable measures to verify their identity;

· obtaining information on the purpose and intended nature of any business relationship; and

· conducting ongoing due diligence and scrutiny of transaction activity throughout the business relationship to ensure that the activity is consistent with the business’s knowledge of the customer and their business and risk profile, including where necessary the source of funds.

While the core customer due diligence requirements are intended to apply to all businesses covered by anti-money laundering obligations, FATF recommend that they be applied on a risk sensitive basis depending on the type of customer, business relationship or transaction. For higher risk categories, enhanced due diligence may be required. Where there are low risks, countries may decide that reduced or simplified measures should apply.

2.2 Regular Customers

Under the FTR Act, Australian gambling houses, casinos, bookmakers and totalisator betting services are required to verify the identity of customers when opening an account facility. This can be done either through the identification reference system, or, for identifying cash dealers, the 100 point verification procedure. Generally speaking, an account holder’s identity is verified only once, except where a change of account name is requested or other circumstances suggest that a customer’s identity should be re-verified.

Regular customers who are not account holders but who enjoy members privileges such as card access or access to awards points schemes may also be subject to some level of customer due diligence. The level of scrutiny applied to customer identification for such customers may vary between gambling service providers. Existing identification procedures for regular customers who are not account holders may need to be reviewed in light of FATF’s recommended approach to customer due diligence.

FATF recommends that customer identification be based on reliable and independent source documents, data or information. While current FTR Act requirements for account holders provide a standard for customer identification using either the identification reference system or 100 point verification procedure, consideration will need to be given to:

· applying a single identification standard and procedures meeting the FATF requirements to all regular customers not just account holders; and

· the documentary evidence that may be acceptable for identification purposes.

FATF’s recommended approach also requires consideration of enhanced due diligence procedures for regular customers. The key changes to current customer due diligence practices for the gambling industry would include:

· In addition to initial verification, a customer’s identity would need to be re-verified where there is a suspicion of money laundering or there are doubts about previously obtained customer identification data;

· Where necessary, the operator may need to make further enquiries about any beneficiary arrangements, for example where a customer asks for money to be transferred to another person’s account;

· To enable rapid identification of suspicious activity, due diligence procedures would require monitoring of transaction activity throughout the business relationship.

While the enhanced customer due diligence requirements are directly relevant to account holders, they may also be applicable to regular customers who access other services (such as a members card with points system attached) under which transaction activity can be monitored. The gambling industry may wish to consider what modifications to existing due diligence procedures for regular customers may be required to meet the recommended enhanced due diligence standards.

Consideration should also be given to the point at which both initial verification of customer identity and procedures for ongoing monitoring of transaction activity should be applied. While FATF have recommended a transaction-based threshold approach commencing at approximately $A5000, other options could include:

· A general requirement to identify and monitor the transaction activity of all regular customers including account holders;

· A requirement to identify and monitor the transaction activity of all regular customers including account holders commencing at the point where a single customer transaction (or eligible multiple transactions) exceeds a set threshold;

· A requirement that all customers be identified at the point where a single customer transaction (or eligible multiple transactions) exceeds a set threshold, with ongoing monitoring of transaction activity occurring as required.

Issue 2.1

Comment is sought from the gambling industry on the scope for and implications of a requirement for enhanced customer due diligence procedures for regular customers.

2.3 Occasional Customers

While gambling houses, casinos, bookmakers and totalisator betting services are currently required to verify the identity of customers when opening an account facility, customer identification is not currently mandatory under the FTR Act for customers who are not account holders. However, occasional customers may be identified for other purposes.

As criminals may seek to launder money on an opportunistic basis, it is reasonable that occasional gamblers also be subject to some level of due diligence. Options for extending customer due diligence procedures to occasional gambling customers will, however, require careful consideration. The need for timely and accurate information on possible money laundering activity must be balanced against the need to minimise the compliance burden on the gambling industry and the impact on legitimate gambling patrons.

Occasional customers may already be subject to identification checks where, for example, they:

· seek a payout of winnings by cheque or are required by State or Territory law to accept payment by cheque;

· seek to transfer winnings to an account or other beneficiary;

· are subject to surveillance for possible fraudulent gambling activity; or

· are members of a casino tour/accommodation package.

The standard for customer identification in such instances may vary between gambling service providers and between States and Territories. Such procedures may, however, provide a useful starting point for consideration of appropriate due diligence measures to address anti-money laundering activity. Where possible, customer due diligence measures should form part of a ‘whole system’ approach complementing existing business practice.

In seeking to apply customer due diligence procedures to the standard recommended by FATF for anti-money laundering purposes, consideration would need to be given to:

· the point at which initial verification of customer identity should be applied;

· the documentary evidence that may be acceptable for identification purposes; and

· any procedures for ongoing monitoring of that customer’s transaction activity.

As noted above, one option for customer identification would be to require that all customers be identified at the point where a single customer transaction (or eligible multiple transactions) exceeds a set threshold. Verification of a customer’s identity would be required where the customer has not already been identified by other means, and

· enters into a single transaction exceeding a set threshold;

· enters into multiple transactions exceeding the threshold within a set period; or

· doubts arise about the veracity of the customer identification data already provided.

Ongoing monitoring of a customer’s subsequent transaction activity would occur as required, particularly where suspicious activity is identified or doubts arise as to the customer’s true identity.

Unlike regular customers, occasional gambling patrons would not normally expect to provide proof of their identity. Variations from standard verification procedures could be considered for occasional customers. Occasional customers could, for example, be asked to provide photographic identification such as a driver’s licence, with other forms of identification used as corroboration. For customers from other countries, a valid passport may provide sufficient proof of identity. Refusal to provide proof of identity, or the provision of clearly inadequate or misleading information, may constitute grounds for lodgement of a suspicious transaction report (see below).

Difficulties may arise in assessing whether an occasional customer has transacted more than the required threshold amount in a set period. A casino patron, for example, may transact money at different casino cages, gaming tables or slot machines during their time at the casino. Likewise, a gambling patron may routinely frequent a number of TAB branches or pub or club based outlets in order to place bets. In some cases, gambling service providers will be able to monitor a customer’s transactions through normal monitoring activity. Other options could include automated tracking of all customer transactions or a requirement that staff seek information from customers about their previous transaction activity.

Issue 2.2

Comment is sought from the gambling industry on appropriate customer due diligence measures for occasional customers.

2.4 Specific Higher Level Customer Due Diligence

In addition to the enhanced customer due diligence obligations described above, there may be occasions where gambling service providers will be required to exercise a higher level of customer due diligence, and have in place adequate operational and risk management mechanisms to manage these situations. In particular, procedures may be required to address the money laundering risks associated with politically exposed persons and countries that do not adequately apply FATF anti-money laundering standards.

2.4.1 Politically Exposed Persons

FATF have identified politically exposed persons (PEPs) as a particular money laundering risk meriting specific consideration. The term refers to individuals from a foreign country with prominent public functions such as Heads of State or Government, senior politicians and important party officials, senior government officials, judicial or military officials, and senior executives of state owned corporations. It is important to note that this measure is intended to apply to persons from a foreign country not Australian citizens or resident non-citizens.

FATF recommend that, in addition to performing normal due diligence measures, all businesses and professions subject to anti-money laundering obligations should:

· have appropriate risk management systems to identify PEPs;

· obtain senior management approval for establishing business relationships with PEPs;

· take reasonable measures to establish the source of their wealth or funds; and

· conduct enhanced ongoing monitoring of the PEP’s financial activity.

Australian gambling service providers should consider options for performing additional customer diligence for PEPs who are, or seek to become, customers. Casinos, for example, may wish to consider screening procedures for participants in junket tours to identify any PEPs who may require enhanced due diligence. TABs or bookmakers might consider appropriate customer acceptance policies for higher risk overseas patrons. Determining whether a customer is a PEP will not necessarily be simple. Due diligence measures should be conducted on a risk-sensitive basis which could be set out in an industry code.

Issue 2.3

Consideration should be given to measures for determining whether a customer is a politically exposed person and for applying higher level due diligence to such persons.

2.4.2 Non Complying Countries

The revised Recommendations identify a need for greater vigilance with regard to business conducted with countries that do not adequately apply FATF anti-money laundering standards. Recommendation 21 requires that particular attention be paid to transactions and business relationships involving such countries.

Australian financial institutions receive advice from time-to-time from AUSTRAC, Australia’s anti-money laundering regulator, to update them on countries that may require enhanced scrutiny of transactions. This approach could be extended to gambling service providers.

Gambling service providers should consider measures to enhance scrutiny of transactions and business relationships with institutions or customers from identified countries. Such procedures would aim to identify business relationships or transactions with such countries having no apparent economic, commercial or visibly lawful ends, and appropriate measures for reporting such activity to the anti-money laundering regulator.

Gambling service providers offering wire/funds transfer services to customers may also need to consider procedures for additional scrutiny of transfers involving non complying countries. The new FATF standards for wire/funds transfers are described in more detail under section 3.2 below.

Issue 2.4

Consideration should be given to the respective roles of gambling service providers and the anti-money laundering regulator in identifying countries of concern and implementing systems to enable additional scrutiny of transactions with such countries.

3. Record Keeping and Tracking

3.1 Record Keeping

In tracing money trails, it is essential that law enforcement agencies be able to reconstruct individual transactions and patterns of transactions that may lead to a prosecution for money laundering or terrorist financing. Record keeping procedures should also ensure that evidence of customer identity is readily available to regulators in the event of criminal activity. This is very much dependent on the record management practices of the operators handling the transactions.

Under the FTR Act, gambling service providers are required to keep customer identification and transaction records for seven years after a transaction occurs or seven years after the last transaction with a customer. The enhanced customer due diligence measures described above will require gambling service providers to collect and retain a broader range of information including:

· eligible transaction information, including money received from and paid to a customer, whether foreign currency was used, and the type of transaction;

· customer identification information including the customer’s name, address, country of residence, and the documentation used to verify their identity, such as a passport, driver’s licence or other identifier; and

· details of the relationship between the customer and any underlying beneficiaries where applicable.

Format requirements for records will be developed in consultation with the industry with the objective of having consistent industry-wide data formats. While the current FTR Act requires document retention for seven years, consideration will be given to reducing the period to five years from the close of the business relationship, consistent with the record retention provisions of the Proceeds of Crime Act 2002.

Issue 3.1

Consistent record-keeping format requirements will be developed in consultation with industry and regulatory users to facilitate ready access to transaction and customer identification information.

3.2 Wire/Funds Transfers

Since the events of 11 September 2001, there has been a greater understanding and awareness of the role that wire or funds transfers can play not only in money laundering but also in terrorist financing. To address the risks associated with such transfers, FATF Special Recommendation VII requires that wire or funds transfers must contain complete ordering customer information, and that this information must be maintained through the signal chain or routing of the instruction through the messaging system.

The new requirements will place particular obligations on gambling service providers who offer money transfer services. Gambling service providers may for example have a relationship with domestic or foreign financial or gambling institutions allowing the transfer of a common customer’s funds. Gambling providers may also have a customer relationship allowing the transfer of funds into and out of a customer’s accounts, and may also provide wire transfer services for occasional customers.

Under the FTR Act, gambling service providers are required to report international funds transfer instructions. A provider sending or receiving an international funds transfer must prepare a report within 14 days and provide it to AUSTRAC. Reporting obligations extend to all transactions whether on behalf of an individual, the provider itself or on behalf of another gambling operator except in specifically exempt circumstances (for example those nominated by the AUSTRAC Director).

The new FATF requirements extend to any type of wire/funds transfer whether the transaction is within Australia or involves another country. Gambling service providers undertaking money transfers will have specific obligations depending on their role in processing the payment instruction through the messaging chain.

Originating Institutions, ie. providers initiating an ordering customer’s transfer request, will need to:

1) obtain complete originator information including the customer’s name, address and account number (if applicable);

2) verify the customer’s name, address and account number; and

3) maintain records of the transaction in accordance with the record keeping requirements mentioned above.

Intermediary Institutions, ie. those processing the routing of the signal or otherwise facilitating the payment, will need to:

1) ensure that all originator information remains with the funds transfer message; or

2) maintain a record of originator information received from the initiating financial institution.

Beneficiary Institutions, ie. those receiving the signal and paying the beneficiary of the payment instruction, will need to:

1) implement risk-based procedures to ensure that payment instructions with insufficient originating customer information are identified and reported to the anti-money laundering regulator; and

2) consider terminating business relations with any institutions who repeatedly fail to include the required originating customer information.

Record keeping obligations for wire/funds transfers will also require review to ensure that details can be made available within three days of a request by the anti-money laundering regulator or other nominated agency.

Issue 3.2

Consideration should be given to the implications for gambling service providers of new standards for processing wire/funds transfers. This should include consideration of any necessary systems modifications.

4. Oversight and Compliance

4.1 Anti-Money Laundering Programs

There is no formal requirement under the FTR Act for gambling service providers to have anti-money laundering programs, although some industry players may already have such programs in place. The revised FATF Recommendations propose that all businesses and professions subject to potential money laundering risks should establish an anti-money laundering program.

Anti-money laundering programs would aim to facilitate a whole-of-organisation anti-money laundering culture enabling all staff to better understand money laundering risks and their role in recognising and reporting suspicious activity. The elements of a comprehensive anti-money laundering program would include:

· the development of internal policies, procedures and controls, including appropriate management arrangements;

· adequate screening procedures to ensure high standards when hiring employees;

· an ongoing employee training program; and

· an independent audit function to test the system.

The type and extent of measures adopted should reflect the risk of money laundering and the size of the business. For example, larger gambling service providers might consider engaging an independent anti-money laundering compliance officer to monitor effectiveness and report to senior managers. Consideration could also be given to expanding the role of industry representative bodies in designing anti-money laundering programs for their sector.

Issue 4.1

Consideration should be given to making anti-money laundering programs mandatory for all gambling service providers to foster an institution-wide understanding of anti-money laundering.

4.2 Suspicious Activity Reporting

Under the FTR Act, gambling houses, casinos, bookmakers and totalisator betting services are required to report suspicious transactions that may be relevant to the investigation of a money laundering or other criminal offence. Reporting of suspicious transaction activity provides the vital evidence on which law enforcement agencies rely in detecting and preventing money laundering. Suspicious activity reporting relies on the reporting business having sufficient knowledge of the customer to be able to judge when a transaction is suspicious. It also provides legal protections for providers of information.

Broadly speaking, the revised FATF Recommendations continue to emphasise the importance of timely reporting of suspicious activity. However, the enhanced customer due diligence obligations recommended by FATF will have implications for the scope of suspicious activity reporting.

As noted in section 1.2 above, it is not intended that a transaction threshold apply to reporting of suspicious activity; rather, gambling service providers would continue to have an obligation to report any activity suspected to relate to money laundering to the anti-money laundering regulator, regardless of the amount involved. Suspicious activity would continue to be broadly defined, and would encompass identified higher risk transactions involving PEPs or non complying countries, as well as patterns of gambling activity designed to minimise risk and maximise the payout. These would include known money laundering techniques such as betting different sides of the same game or sporting event to ensure the launderer of a payout.

Consideration could be given to incorporating best practice guidelines on identification of suspicious transaction activity in a gambling industry code. Anti-money laundering programs could also include procedures to enhance the identification of suspicious transaction activity making use of industry-specific typologies information and any trends identified by the anti-money laundering regulator. Incorporating best practice guidelines in an industry code and in anti-money laundering programs would help to ensure that reporting reflects actual money laundering risks and trends specific to the gambling industry.

Issue 4.2

Consideration should be given to enhancing the effectiveness of suspicious transaction activity reporting through use of an industry code or anti-money laundering programs.

4.3 Use of Intermediaries and Other Third Parties

It is common practice for the gambling industry to use intermediaries or other third parties to process new business. Those gambling service providers that offer remote customer access or internet based services will often use intermediaries to facilitate customer applications. Recommendation 9 of the revised Forty Recommendations allows for the use of intermediaries and third parties to perform the initial elements of customer due diligence. However, to ensure that customer due diligence remains effective, gambling service providers relying on a third party will need to:

· obtain customer identification details from the third party immediately; and

· ensure that copies of customer identification documents will be made available from the third party without delay.

The gambling service provider should also satisfy itself that the third party is subject to supervision or regulation and has adequate customer due diligence systems in line with FATF Recommendations 5 and 10.

While Recommendation 9 does not cover agent relationships, it does extend to other types of intermediaries who may process business or perform customer due diligence for gambling service providers, such as Acceptable Referees.

Under the provisions of section 21 of the FTR Act, customer identification may be performed by Acceptable Referees, whose written reference is taken to confirm the identity of the applicant customer. While the Acceptable Referee verification method has many benefits, it is unclear whether, in its current form, Acceptable Referee verification would satisfy the requirements of FATF Recommendation 9.

Issue 4.3

Gambling service providers will need to satisfy themselves that third parties who process business or perform customer due diligence on their behalf are subject to supervision or regulation and have adequate customer due diligence systems.

4.4 Addressing New Money Laundering Risks

The revised FATF Recommendations provide that special attention should be paid to any money laundering threats arising from new or developing technologies that might favour anonymity, and the development of measures to prevent their use in money laundering. In particular, the Recommendations encourage development of policies and procedures to address the specific risks associated with non face-to-face business relationships or transactions.

New technologies allowing non-face-to-face transactions, such as online or telephone betting, may pose significant money laundering risks. To make an online bet, for example, a patron must register and establish an account with a gambling service provider. The account must contain a credit balance prior to betting which can take place by transfer from a credit card, cheque, money order, or direct bank transfer. When the customer places a bet the account is debited and when the customer wins a bet the account is credited.

Existing customer due diligence procedures are not well adapted to such online betting facilities. While physical identity documentation such as a driver’s licence or passport can be readily used to identify casino customers, this is not so easily done when the customer registers by telephone or online. New techniques must be developed to ensure that measures for customer identification, monitoring and reporting of suspicious transaction activity keep pace with the risks of online wagering activity.

A gambling industry code could include a generic set of policies and procedures for gambling operators engaged in non-face-to-face business relationships. Such policies and procedures could include, for example, online customer due diligence requirements including measures for monitoring the number of accounts held by a customer and their transaction activity. Gambling service providers may already have such procedures in place.

Issue 4.4

Consideration should be given to measures to address the specific risks associated with non face-to-face business relationships or transactions, including incorporating such measures in a gambling industry code.

4.5 Risk-based Industry Partnership Approach

The Government is keen to explore the options for a risk-based industry partnership approach to anti-money laundering regulation. Implementing new anti-money laundering standards by direct regulation is unlikely to meet the needs of either the Australian community or of business. A centralised regulatory system would not give businesses the flexibility to design anti-money laundering programs reflecting their business environment and knowledge of their customers. Direct regulation would not be adequately responsive to developments in products and services or to emerging trends in money laundering and terrorist financing.

A major theme of the revised FATF Recommendations is the place given to anti-money laundering strategies conducted and based upon risk assessment. The risk-based approach recognises that it is impractical to apply an equal level of vigilance to every customer transaction. Instead, it encourages directing resources and effort towards customers and transactions with a higher potential for money laundering.

FATF’s recommended threshold approach to the application of anti-money laundering obligations reflects one approach to risk management. It recognises that the money laundering risk associated with low value transactions would not justify full customer due diligence or reporting. However, a threshold approach need not preclude the application of risk-based procedures and strategies by individual gambling service providers to improve the targeting of customer due diligence and reporting procedures.

Risk-based strategies should enable mapping of a gambling service provider’s internal control environment to isolate areas and activities that may be vulnerable to money laundering. Risk management processes can then focus on directing compliance efforts, including effective monitoring systems to identify, evaluate and mitigate money laundering risks through ongoing scrutiny and review.

In practice, a risk-based approach will require consideration of the money laundering risk of each customer. Customers deemed a higher money laundering risk would need to provide additional information to that normally required. Likewise, compliance reporting may well be more strategically targeted based on the assessment of risk for particular activities such as funds transfers to or from countries with inadequate anti-money laundering regulation.

Under a risk-based industry partnership approach, industry bodies would have a greater role in developing guidance to assist their membership to implement appropriate detection systems and in monitoring their effectiveness. Rather than legislating customer due diligence models for each sector, industry bodies would design appropriate procedures for their industry. The anti-money laundering regulator would be responsible for setting principles and guidelines and approving anti-money laundering programs.

Risk-based procedures are essential to this approach. Rather than checking every transaction, risk management procedures have the potential to reduce effort and cost. The risk-based approach would allow gambling service providers to tailor policies and procedures to the money laundering risks associated with particular transactions. Risk-based regulation minimises the regulatory burden on both industry and customers while maintaining effective controls. It is an approach supported by the FATF and increasingly adopted by other countries.

A risk-based industry partnership regulatory model for the gambling industry in Australia could look like this:

Partnership Approach to Anti-Money Laundering Regulation for the Gambling Industry

Gambling Service Providers

Partner Industry Representative Bodies

AML Regulatory Agency

Implement Transaction Reporting system

Develop internal AML procedures/guidelines

Ensure staff AML training

Customer identity verification

Ongoing customer due diligence

Reviewing customer information

Matching information to AML trends and typologies notified by regulator

Suspicious customer recognition

Suspicious Transaction Report handling

Develop Gambling Industry AML Code

Guide membership in developing and implementing internal
AML guidelines

Monitor membership and report to regulator on any non-compliance issues

Oversee compliance with AML Code/Systems

Provide industry guidance on developing codes and business procedures guidelines

Public education on AML/CFT requirements

Transaction reporting collection and database maintenance

Review Suspicious Transaction Reports and refer for investigation by law enforcement agencies

Analysis of Transaction Report data to generate financial intelligence

Feedback to industry on money laundering and terrorist financing trends and typologies

The regulatory model outlined above is consistent with the Government’s approach to other areas of industry regulation.

· It would provide flexibility while ensuring a flow of information to the anti-money laundering regulator necessary to detect and prevent money laundering activity; and

· It would also provide an ongoing role for industry representatives in ensuring that anti-money laundering systems and procedures remain effective and user-friendly.

Issue 4.5

Consideration should be given to implementing a risk-based industry partnership model for the gambling industry, with specific roles for gambling service providers, industry representative bodies and the anti-money laundering regulator in identifying and managing areas of risk.

Consultation

The Government is committed to broad consultation on reforms to Australia’s anti-money laundering system. The views of the gambling industry are vital to designing practical anti-money laundering policies and procedures that will meet the needs of the Australian community while remaining cost-effective.

As a first step, your comments on the issues outlined in this paper are welcomed. Comments may be provided by Email to aml.reform@ag.gov.au or by mail or facsimile to the addresses provided above.

Should you require further information, the Attorney-General’s Department has established a website providing further details on the FATF Forty Recommendations and the Government’s approach to implementation in Australia. The website address is http://www.ag.gov.au/aml

The Government will provide further opportunities for consultation. Consultative forums with industry bodies and a formal Ministerial Advisory Group will provide advice to the Government on implementation issues. Comments on this and other industry-specific issues papers will provide a focus for discussion.

Annex 1

Summary of the Revised FATF Forty Recommendations

The revised Forty Recommendations require countries to:

· criminalise money laundering and provide for the confiscation of the proceeds of crime (Recommendations 1–3);

· ensure financial institution secrecy laws do not inhibit the implementation of the Recommendations (Recommendation 4);

· introduce legislative requirements for financial institutions to:

undertake comprehensive, ongoing customer due diligence and record keeping (Recommendations 5, 6, 8–11);
scrutinise foreign counterparts before entering correspondent banking relationships (Recommendation 7);
report suspicious transactions (Recommendations 13-14);
develop programs against money laundering and terrorist financing (Recommendation 15); and
pay special attention to business relationships or transactions with persons from countries which do not comply with the Recommendations (Recommendations 21-22).

· extend the requirements for customer due diligence, record keeping, suspicious transaction reporting and anti-money laundering/CTF programs to designated non financial businesses and professions—casinos, real estate agents, dealers in precious metals, dealers in precious stones, accountants, lawyers and trust and company service providers (Recommendations 12, 16);

· impose sanctions for non compliance with the Forty Recommendations by financial institutions or other covered businesses or professions (Recommendation 17);

· prohibit the establishment of, or dealing with, shell banks (Recommendation 18);

· consider further measures beyond the Forty Recommendations to combat money laundering and terrorist financing (Recommendations 19-20);

· ensure that financial institutions and the designated non financial businesses and professions are subject to adequate regulation and supervision, and are effectively implementing the Recommendations (Recommendations 23–25);

· establish a financial intelligence unit (FIU), and invest the FIU, law enforcement and industry supervisors with the necessary powers to ensure compliance with the Recommendations and combat money laundering and terrorist financing (Recommendations 26–32);

· prevent the unlawful use of legal persons and arrangements by money launderers, by ensuring that timely information is available to competent authorities (Recommendations 33–34); and

· put in place frameworks for international cooperation in combating money laundering and terrorist financing (Recommendations 35–40).

Annex 2

Issues