LEGAL PRACTITIONERS – ACCOUNTANTS –
COMPANY AND TRUST SERVICE PROVIDERS

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 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.

The purpose of this Issues Paper is to provide a basis for discussion with legal practitioners, accountants and company and trust service providers on regulatory issues to give effect to Australia’s anti-money laundering obligations.

This paper deals with the professional advisory services which could be used to solicit advice on structuring arrangements that might be used by money launderers. Specifically, this paper is addressed to legal practitioners, accountants and providers of corporate and trust formation and support services. These professional advisers have been specifically nominated under international standards. Other professional service providers who may be giving closely related advice such as financial planners and tax advisers are addressed by the Issues Paper on the Financial Services Sector. It is recognised that advisory services businesses may provide a range of advice which will cut across the boundaries of accounting, company and trust formations, tax and financial planning. In general, all such services will be subject to reporting obligations. This Paper will confine itself to considering issues from the perspective of legal practitioners, accountants and company and trust service providers.

This Paper refers to “client” rather than “customer” as the more appropriate term to refer to users of professional advisory services. However, in the context of the international standards referred to in this Paper the word “customer” is used and should be understood as interchangeable with “client”.

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. Another device used at the layering stage is to use corporate and trust vehicles to disguise the true beneficial ownership of the tainted property

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 mounting 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. These 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, the FATF completed a major review of the Forty Recommendations. The revised Forty Recommendations are designed to combat increasingly sophisticated money laundering techniques, such as the use of corporate and trust entities to disguise the true ownership and control of illegal proceeds, and the increased use of professionals to advise and assist in money laundering.

The revised Forty Recommendations now apply not only to money laundering but also to terrorist financing. When combined with the Eight Special Recommendations, they provide an enhanced, comprehensive and consistent framework of measures for combating money laundering and terrorist financing.

The Recommendations cover the measures that countries should have in place within their criminal justice and regulatory systems; the preventive measures to be taken by financial institutions and certain other businesses and professions; and measures to facilitate international cooperation.

Australia

Anti-Money Laundering Legislation

Australian anti-money laundering legislation developed as a direct response to two Royal Commissions in the 1980s exposing 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. While initially focusing largely on suspect transactions and large cash transactions, Australia’s anti-money laundering legislation was later extended to include the reporting and monitoring of certain international transactions.

Australia’s primary anti-money laundering legislation, the Financial Transaction Reports Act 1988 (FTR Act[1]), 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. It applies to a wide range of businesses within the financial services industry, including banks, building societies, credit unions, the insurance industry, the travel industry and the gambling industry.

The FTR Act imposes the following main obligations:

· it requires cash dealers to report suspect transactions;

· it requires reporting of certain domestic currency transactions, and currency transfers to and from Australia, of $10,000 or more;

· it requires reporting of international funds transfer instructions;

· it creates an offence of opening or operating a bank account or similar account with a cash dealer in a false name;

· it requires cash dealers to verify the identities of account holders or signatories, and to block withdrawals by unverified signatories to accounts exceeding certain credit balance or deposit limits.

To ensure that Australia’s anti-money laundering program is effective, the FTR Act specifies penalties for non-compliance with its reporting requirements or for provision of false or incomplete information. The reporting and identification requirements, backed by penalties for offences, provide a strong deterrent to money launderers and facilitators of money laundering.

Reform Framework

The reforms discussed in this paper will require significant changes to Australia’s anti-money laundering system including the FTR Act. The money laundering offences, proceeds of crime measures and the financing of terrorism counter measures will remain in their current form.

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 covers those elements of the Forty Recommendations carried over from its earlier form, the revisions to the Forty Recommendations have introduced substantial changes to the international anti-money laundering standard, reflecting global developments in value transfer technology, and the associated increase in the risks and complexity of money laundering. Australia’s anti-money laundering regulatory regime needs to adapt to the changing international security and commercial environment. The revised Forty Recommendations provide the starting point for reforming Australia’s anti-money laundering regulation.

The key changes to the Forty Recommendations have important implications for the financial services sector. These obligations relevant to legal practitioners, accountants and company and trust service providers include:

1) Expanded Coverage of Anti-Money laundering System

2) Use of a Risk-based Approach

3) Maintaining Anti-Money Laundering Programs

4) Customer Due Diligence

5) Suspicious Activity Reporting

LEGAL PRACTITIONERS, ACCOUNTANTS,
COMPANY & TRUST SERVICE PROVIDERS

As anti-money laundering regulation has developed around the world money launderers have looked to create increasingly complex arrangements to conceal their tracks. To create complex arrangements often requires the services of lawyers, accountants and other professionals who can advise on creating corporate and trust schemes. In some jurisdictions, particularly those which have encouraged their status as tax havens the involvement of lawyers and accountants in developing arrangements which facilitate money laundering is seen as a major issue by the international community.

Law enforcement analysis around the world has identified that highly sophisticated methods are being used to launder funds and that professional advisers, such as lawyers and accountants are being increasingly targeted to assist in this process. Criminals may mislead professional advisers by instructing them in relation to a number of legitimate transactions before they attempt to launder dirty funds.

While it is not suggested that legal practitioners, accountants, company and trust service providers in Australia are setting out to advise on arrangements for illegal purposes, there is scope for money launderers to misuse arrangements which the advice helps create. Anti-money laundering reforms in the sector of professional advisers aim to identify and capture scenarios where bona fide advice or services are being appropriated by money launderers in the absence of knowing complicity on the part of the professional adviser. To be effective there needs to be a distinction between the role played by financial sector institutions and advisers whose main function is to hold and/or transfer money, and professional advisers who market their knowledge and skills and who only handle client money when it is necessary to facilitate the services they are providing.

In this context these professional advisers are often referred to as “Gatekeepers”. Gatekeepers are those professionals (especially lawyers and accountants) whose specialised expertise needs to be accessed by money launderers in order to create certain complex laundering schemes designed to minimise the possibilities of detection. The view of FATF is because of the types of services they provide (rather than any criminal intentions) these professional advisers can be the gateway through which the launderer passes to achieve his or her goals. Of course not all of the services provided by such professionals are relevant in this context. Those most useful to would be money launderers are considered to be:

· Creation of corporate vehicles such as managed investment schemes or trusts or other complex legal arrangements. Such constructions may serve to confuse the links between the proceeds of a crime and the perpetrator.

· Advice on purchase or sale of real property. Property transfers and mortgage arrangements serve as either the cover for transfers of illegal funds (layering stage) or else they represent the final investment of these proceeds after their having passed through the laundering process (integration stage).

· Performing financial transactions. Sometimes professional advisers may carry out various financial operations on behalf of the client (for example, cash deposits or withdrawals on accounts, retail foreign exchange operations, issuing and cashing cheques, purchase and sale of stock, sending and receiving international funds transfers, etc).

· Managing assets in property or managed investment schemes. Disguised criminal activity through beneficial ownership arrangements can be facilitated by service providers who act as office bearers, partners and nominee shareholders as well as providing infrastructure services such as a registered office and business address.

· Gaining introductions to financial institutions.

Implications for Professional Advisory Services

The reforms will build upon existing measures to produce a regulatory regime that will more effectively detect suspicious transactions and allow timely monitoring and tracking of transactions. The issues for consideration by professional advisers are identified under four main themes:

Coverage - Which professional advisory services will be subject to anti-money laundering reporting requirements.

Detecting Suspicious Persons and Transactional Activity - The concept of Customer Due Diligence (CDD) as it relates to the acceptance of clients and ongoing due diligence and reporting to detect suspicious transactional activity.

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

Oversight & Compliance – Measures designed to allow the system to operate effectively and consistently.

1. Coverage

1.1 Advice about Specific Subject Matters

An activities based definition will be linked to specific professional advisers who will be subject to CDD and reporting obligations.

Where a legal practitioner or accountant is instructed in the planning or execution of financial transactions for their client concerning:

a. buying and selling of real property;

b. buying and selling of business entities;

c. managing of client money, financial products or other assets;

d. opening or management of accounts with a financial institution; or

e. creation, operation or management of corporations, trusts, partnerships or similar structures.

In relation to the specific designation of professional advisers, “legal practitioner” is a regulated term under State and Territory legislation. The definition will encompass legal practitioners who are admitted as barristers and solicitors.

The term “accountant” is an unregulated generic one covering a range of professional activities. The term accountant will refer to persons who provide professional advice in relation to accounting services, including audit services.

Those persons providing professional advice will be reporting entities whose reporting obligation is restricted to transactions by their direct client, in particular those which indicate suspicious activity. For auditors, this means they will be obliged to report a suspicious transaction they detect which has been carried out by the company they are auditing. The reporting obligation will not extend to compliance by the audited company with its obligation to report suspicious transactions by its clients. This latter issue falls into the broader scope of matters which may be the subject of auditors’ comments which will not be regulated by anti-money laundering legislation.

The term “Company and Trust Service Provider” covers a range of ancillary business service activities which are:

1) acting as a formation agent of legal entities, including corporations, trusts and partnerships;

2) acting as, or arranging for another person to act as, an officer of a corporation, or a partner of a partnership;

3) providing a registered office, business address or accommodation for a legal entity, such as a corporation, trust or partnership

4) acting as, or arranging for another person to act as, a trustee of an express trust

5) acting as, or arranging for another person to act as, a nominee shareholder for another person.

The obligations will fall upon the practice as a whole regardless of how it is structured.

Issue 1.1

Legal practitioners, accountants, company and trust service providers will be subject to anti-money laundering reporting obligations where they are instructed in, provide advice on, prepare or carry out a range of activities that involve financial transactions.

1.2 Cash & Beyond

Under the current FTR Act, reporting for legal practitioners is restricted to significant cash transactions by solicitors. The revised FATF Recommendations apply to the broad range of financial transactions instruments. Reporting and CDD obligations will be triggered by engagement in ‘financial transactions’ within the scope of the activities discussed above. This will mean that reporting systems will have to be capable of providing reports on a range of scenarios and activities rather than just cash transactions.

Issue 1.2

Reporting will be required across a range of client and transactional activity not just significant cash transactions.

2. Detecting Suspicious Activity

The FATF recommendations envisage two elements for detecting suspicious activity. The first focuses on the person by verifying the identity of the potential client and whether the interaction with them as a client fits in with the transactional activity on which they are seeking advice. Secondly, once a client is accepted the ongoing monitoring of their activity is intended to detect if they are engaging in suspicious transactional activity.

Solicitors are already required to make reports on significant cash transactions under the FTR Act. The FATF changes will involve monitoring customer activity in addition to updating customer information records. The elements and implications of the new customer due diligence standard are discussed in more detail below.

2.1 Ongoing Customer Due Diligence

Customer Due Diligence (CDD) is the cornerstone of any effective anti-money laundering program. Accurate information on customer identity and activity is essential in the detection, prevention and prosecution of money laundering, terrorist financing and associated criminal activity.

Revised Recommendation 5 sets out the principal actions for identifying and verifying the identity of customers, including any beneficial owners, and for conducting ongoing due diligence. These are:

· Identifying and verifying the identity of customers when establishing business relations, using reliable and independent source documents, data or information.

· Identifying and verifying the identity of customers conducting occasional transactions, either above a designated threshold; or where the transaction involves a wire or funds transfer.

· 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 beneficial owners, including reasonable measures to verify their identity.

· Obtaining information on the purpose and intended nature of any business relationship.

· 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.

CDD obligations apply to all client relationships, including occasional clients. These are not “one off” obligations. A key recommendation of FATF is for ongoing scrutiny of client identification data, financial activity and account behaviour. Ongoing CDD means that clients engaging in money laundering may be detected after acceptance. Professional advisers are required to manage the ongoing CDD process taking into account the risk of tipping off a client which is discussed further below.

Where the professional adviser is unable to verify client identity (including beneficial owners) and the purpose and intended nature of the business relationship, the FATF recommendations require that the adviser should not agree to act and terminate the business relationship. Further, if after consideration of all the available information, the adviser believes that they or their client may become involved in an arrangement which they know or suspect facilitates by whatever means the acquisition, retention, use or control of tainted property by or on behalf of another person or there is the possibility of offences taking place then a suspicious transaction report should be made to the anti-money laundering regulatory agency.

In general CDD obligations should not involve extra costs or resources for professional advisers as the concept of CDD is compatible with the provision of professional advice, where a close understanding of the client needs is necessary.

The development of client acceptance procedures that take account of the need to be vigilant about money laundering issues would be one mechanism to minimise the possibility of having to make suspicious transaction reports.

Issue 2.1

Ongoing Customer Due Diligence includes verification of the nature and the purpose of the business relationship and will require ongoing monitoring and record maintenance.

2.2 Ongoing Transactional Due Diligence

The second core anti-money laundering obligation is reporting of suspicious transactional activity. This provides the vital evidence on which law enforcement agencies rely in detecting and preventing money laundering.

FATF Recommendations 13-16 outline the basics of a sound suspicious activity reporting system.

Suspicious activity reporting relies on the professional adviser having sufficient knowledge of the client to be able to judge when a financial transaction is suspicious. For example, professional advisers need to be able to detect unusual patterns in instructions and inconsistency of purpose and objective.

In practice this would mean that where a professional adviser develops a concern about a prospective financial arrangement then the adviser should learn sufficient information about the client and the source or final destination of any funds involved in the arrangement, including as necessary seeking information from the advisers, if any, on the other side. The adviser should then consider whether a suspicious transaction report should be made.

Issue 2.2

Professional advisers will have an ongoing obligation to monitor suspicious transactional activity including keeping records and making suspicious transaction reports.

2.3 Professional Responsibilities

Where a professional adviser acts in good faith in forming a suspicion of illegal activity and making a suspicious transaction report, as in the FTR Act, the professional adviser will be immune from any action, suit or proceeding.

It is, however, recognised that in these circumstances an adviser will need to manage various professional responsibilities.

Relevant professional bodies need to consider how their members should manage any professional ethics in this scenario as follows:

· FATF Requirement 14 prohibits professional advisers from disclosing the fact that a suspicious transaction report is being reported to the anti-money laundering regulatory agency;

· In such cases it might be appropriate for the adviser to advise their client in relation to the offence of money laundering. Advice that seeks to dissuade a client from engaging in illegal activity does not amount to tipping off.

· If this situation arises and especially if a professional adviser deems it necessary to report suspicious transaction activity, then relevant professional standards may require the adviser to no longer act for the client. Once again this needs to be managed in a manner that takes into account the risk of tipping off the client.

· Legal practitioners need to consider the possible application of client legal privilege.

Issue 2.3

Provision will be made for immunity from actions by aggrieved clients. For cases where professional advisers form a suspicion of illegal activity and are required to make suspicious transaction reports, professional bodies need to consider giving guidance on how the client should be managed.

2.4 Client Legal Privilege

The issue of the compatibility of monitoring client activity for suspicious activity and then reporting it to a government agency with obligations relating to client confidentiality is likely to be of concern to legal practitioners in terms of client legal privilege.

The rationale for the doctrine of client legal privilege is to enhance the administration of justice by promoting free consultation and disclosure between clients and lawyers. If the legal practitioner’s knowledge or suspicion arises from a confidential communication received by the solicitor for the dominant purpose of giving or receiving legal advice or for use in existing or anticipated legal proceedings, it is likely that such a communication is subject to client legal privilege.

Legal practitioners are not required to report suspicious activity if the relevant information is subject to client legal privilege. Communications that relate to business or financial advice rather than legal advice will not be the subject of client legal privilege. Communications from the client which facilitate the commission of a crime, fraud, civil offence or improper purpose will also not be subject to client legal privilege [2].

Issue 2.4

Compliance with anti-money laundering reporting obligations is compatible with client legal privilege as communications facilitating an improper purpose will not be the subject of client legal privilege.

3. Record-Keeping and Tracking

3.1 Record Keeping

In tracking down money trails, it is essential that law enforcement agencies be able to recreate patterns of suspicious activity and to reconstruct individual transactions. This is very much dependent upon the record management practices of the professional adviser.

The new FATF standards will require the collection and retention of additional CDD information relevant to ongoing CDD measures. Such information might include account files, transaction information and business correspondence. Other types of information might reasonably include:

· The purpose of and reason for instructing the professional adviser.

· The anticipated level and nature of the activity to be undertaken.

· The relationships between those providing instructions and underlying beneficial owners.

· The expected source and origin of the funds to be used in the relationship; details of occupation/employment, and sources of wealth or income and client net worth.

Format requirements for records will be developed in consultation with industry with the objective of having consistent industry-wide data formats. Such changes would be phased in and only apply to new data after the date of introduction of the changes.

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 allow for ready access to information.

4. Oversight & Compliance

4.1 Risk-based Partnership Approach

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 client transaction. Instead, it encourages directing resources and effort towards clients and transactions with a higher potential for money laundering.

In practice, a risk-based approach will require a professional adviser to consider the money laundering risk of each client. Clients 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 particular to a service such as advice on corporate arrangements.

The Government is keen to explore the options for a risk-based industry partnership approach to anti-money laundering regulation. Under this approach, professional bodies would have primary responsibility for developing guidance to assist their membership to implement appropriate detection systems and for monitoring effectiveness. Rather than legislating customer due diligence models for each sector, professional 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 assessment procedures have the potential to reduce effort and cost. The risk-based approach allows professional advisers to tailor their policies and procedures to the potential risk of money laundering in particular client transactions. Risk-based regulation minimises the regulatory burden on both firms and clients while maintaining effective controls. It is an approach supported by the FATF and increasingly adopted by other countries.

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

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

Issue 4.1

Consideration should be given to the practical implications of a risk-based approach and how professional bodies may assist their membership in developing money laundering systems and procedures suited to professional practices.

4.2 Anti-Money Laundering Programs

An important element of the new standards will be the requirement for professional advisers to have in place an anti-money laundering program to facilitate anti-money laundering culture among all the staff in the professional firms. Industry associations and professional bodies will therefore have an expanded role in designing anti-money laundering programs for their sector. These bodies need to provide leadership and guidance so that such programs are realistic in terms of their members’ practice scope and requirement and business needs.

In practical terms, the new standards mean that anti-money laundering programs should include:

· Internal anti-money laundering policies, procedures, operational controls and compliance management systems;

· Staff training programs;

· Procedures for screening staff; and

· Procedures for independent audits of the above.

Certain elements listed above may already constitute standard industry practice. There will also be an expanded role for industry associations and representatives in designing anti-money laundering programs for their sector.

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 commercial environment and knowledge of their clients.

Issue 4.2

Industry associations and professional bodies would need to provide guidance to members in developing internal firm anti-money laundering programs.

Consultation

The Government is committed to broad consultation on reforms to Australia’s anti-money laundering system. The views of the financial sector 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 professional 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 secrecy laws do not inhibit the implementation of the Recommendations (Recommendation 4),

· introduce legislative requirements for financial institutions and designated non financial businesses and professions to:

undertake comprehensive, ongoing customer due diligence and record keeping (Recommendations 5, 6, 8–11),
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),
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

1. Coverage

Issue 1.1

Issue 1.2

Reporting will be required across a range of client and transactional activity not just significant cash transactions.

2. Detecting Suspicious Activity

Issue 2.1

Ongoing Customer Due Diligence includes verification of the nature and the purpose of the business relationship and will require ongoing monitoring and record maintenance.

Issue 2.2

Professional Advisers will have an ongoing obligation to monitor suspicious transactional activity including keeping records and making suspicious transaction reports.

Issue 2.3

Issue 2.4

3. Record-Keeping & Tracking

Issue 3.1

Consistent record-keeping format requirements will be developed in consultation with industry and regulatory users to allow for ready access to information.

4. Oversight & Compliance

Issue 4.1

Issue 4.2

Industry associations and professional bodies would need to provide guidance to members in developing internal firm anti-money laundering programs.

Annex 3

Current Legislation

Financial Reporting

The Financial Transaction Reports Act 1988 (FTR Act) was enacted primarily to erect barriers in Australia’s wider financial and gambling sectors designed to discourage financially motivated criminals and to provide financial intelligence to revenue and law enforcement agencies. The Act was to designed to be a major component of Australia’s anti-money laundering (anti-money laundering) program, which places obligations on financial institutions and other financial intermediaries.

The FTR Act has seven main components:

1) to require cash dealers to report suspect transactions;

2) to require the reporting of certain domestic currency transactions of $10,000 or more;

3) to require the reporting of certain currency transfers to and from Australia of $10,000 or more;

4) to require the reporting of international funds transfer instructions;

5) to create an offence of opening or operating a bank account or similar account, with a cash dealer, in a false name;

6) to impose obligations on cash dealers in relation to the verification of the identities of persons seeking to open accounts or seeking to become signatories to existing accounts, and the blocking of withdrawals by unverified signatories to accounts which exceeded certain credit balance or deposit limits; and

7) to establish AUSTRAC to collect, retain, compile, analyse and disseminate information relating to cash transaction reports, and to perform other functions under the legislation in consultation with the Commissioner of Taxation.

To ensure that Australia’s anti-money laundering program is effective, the FTR Act specifies penalties for non-compliance with its reporting requirements or for provision of false or incomplete information to or by a cash dealer. It also has penalties for facilitating or assisting in those activities.

The FTR Act was directed at the financial underpinning of major criminal activity, including tax evasion. As such, the FTR Act applies to a wider range of entities within the financial services industry – including, amongst others, banks, building societies, credit unions, the insurance industry, the travel industry and the gambling industry.

Cash dealers as defined in the FTR Act include:

· banks, building societies and credit unions referred to as ‘financial institutions’

· financial corporations;

· insurance companies and insurance intermediaries;

· securities dealers and futures brokers;

· cash carriers;

· managers and trustees of unit trusts;

· firms that deal in travellers cheques, money orders and the like;

· persons who collect, hold, exchange or remit currency on behalf of other persons;

· currency and bullion dealers;

· casinos and gambling houses;

· totalisators

The reporting and identification requirements, backed by penalties for offences, provide a strong deterrent to money launderers and facilitators of money laundering. These provisions increase the level of risk associated with abuse of the Australian financial system by tax evaders and organised crime groups. They also add to their costs of doing business and in particular in laundering their illicit profits.

The legislation also sets a standard which must be met by cash dealers. Failure to meet the standard places the cash dealer at risk of being used in the process of money laundering and thus subject to consequential penalties when detected. Penalties include pecuniary penalties and imprisonment.

Money Laundering Offence

The money laundering offence is set out in the Criminal Code. Part 10.2 of the Criminal Code Act 1995 (Criminal Code) sections 400.3-400.8 set out offences for dealing with money or other property that is either the proceeds of crime or may become an instrument of crime.

These six sections form a sliding scale of offences depending on the value of the money or property involved. Section 400.3 deals with situations where the value of the money or property is $1 million or more. At the other end of the scale, the value need only be ‘any value’ (ie. more than zero) for section 400.8 to apply.

Within each section, there are three 'levels' of offence. The levels are determined according to the fault element involved. The most serious level applies if the accused believed the money or property was proceeds or intended it to be used as an instrument. The middle level applies where a person is reckless of this fact. The lowest level is where the accused is negligent of this fact. Thus overall the appropriate offence provision depends on the value of the money or property involved plus the fault element applying. The penalties are also in a sliding scale, with the fault element being the most important determinant. The apparent appropriate offence may be varied if the accused can demonstrate that they had a mistaken but reasonable belief about that value of the property or money.

Section 400.9 creates an offence of receiving, possessing, concealing, disposing or bringing into or taking out of Australia any money or other property that may reasonably be suspected by the accused of being proceeds of indictable offences, including foreign indictable offences or State indictable offences where they attract certain Commonwealth constitutional power. Subsection 400.9(2) indicates instances in which the ‘reasonable suspicion’ requirement will be satisfied include holding bank accounts in false names, or where the accused says they were acting on another's behalf but has not (or cannot) provide information enabling that other person to be identified and located.

The above money laundering offences obviously arise in relation to other criminal offences, such as drug importation or fraud. Section 400.13 provides that the prosecution does not have to prove what the particular related offence was or who was committed the offence in order to gain a money laundering conviction.

Proceeds of Crime

The Proceeds of Crime Act 2002 replaced the 1987 Act and strengthened the ability of law enforcement agencies to target organised criminals who seek to distance themselves from their criminal operations but not from the profits.

Courts are able to freeze and confiscate assets where the Director of Public Prosecutions (DPP) can prove on ‘the balance of probabilities’ that a person has engaged in serious criminal activity in the previous six years, or that the property is the proceeds of a particular offence punishable by at least 12 months’ imprisonment. It is not necessary to obtain a conviction.

The proceeds of crime legislation allows the assets and other property possibly connected with certain forms of unlawful activity of persons who are suspected of such activity to be frozen by court order. This allows law enforcement agencies to investigate the alleged activity whilst minimising the possibility of evidence and assets being disposed of due to the suspects being alerted to the investigation. As the scope of assets that may be frozen in the initial period is very wide, the relevant legislation provides that some property may be unfrozen for living and (sometimes) legal expenses and that innocent third parties may have their property excluded from such orders under certain circumstances.

The information-gathering powers give enforcement agencies the power to compel persons to provide evidence, monitor financial records, as well as the usual search and seizure powers. Forfeiture to the State can be divided into two main schemes: one where conviction is required for assets and other property to be forfeited, and the other where a conviction is not required. In the former case, forfeiture can either be automatic on conviction of certain offences (generally more serious offences) or upon a court order for other offences.

Financing of Terrorism

The Suppression of the Financing of Terrorism Act 2002 (SFT Act) reforms a number of pieces of implementing legislation in a single package. The SFT Act is aimed at restricting the financial resources that are available to support the activities of terrorist organisations. It explicitly makes the financing of terrorism a criminal offence and substantially increases the penalties that apply where a person deals with suspected terrorist assets that have been frozen. The SFT Act also enhanced the collection and use of financial intelligence by requiring cash dealers to report suspected terrorist financing transactions to the Australian Transaction Reports and Analysis Centre (AUSTRAC) and streamlined restrictions on the sharing of information regarding such transactions with the relevant foreign authorities. These measures addressed commitments Australia has under the United Nations Security Council Resolution 1373(1) and the International Convention for the Suppression of the Financing of Terrorism.

A key component of this implementation was Part 4 of the Charter of the United Nations Act 1945, meeting Australia’s obligation under the United Nations Security Council Resolution 1373 (2001) to freeze the assets of persons who commit, attempt to commit, participate in or facilitate the commission of terrorist acts; of entities owned or controlled directly or indirectly by such persons; and of persons and entities acting on behalf of, or at the direction of such persons and entities.

Listing of an organisation under this Act makes it a criminal offence for persons who hold assets that are owned or controlled by such an organisation to use or deal with those assets. It is also a criminal offence for persons to make assets available to a listed organisation. The penalty for these offences is five years imprisonment.

[1] Other relevant legislation includes: Criminal Code Part 10.2; Proceeds of Crime Act 2002 (transitioning from 1987 Act); Suppression of the Financing of Terrorism Act 2002; Charter of the United Nations Act 1945; Charter of the United Nations (Terrorism and Dealings with Assets) Regulations 2002 and the Banking Foreign Exchange Regulations. See also Annex 3.