FINANCIAL SERVICES SECTOR

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.

This paper deals with the financial services industry and financial institutions. It is intended to provide a basis for discussion with the financial services sector 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 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 that exposed the links between money laundering, major tax evasion, fraud and organised crime. The two 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; and

· 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 financing of terrorism asset freezing 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 financial institutions 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

6) Addressing Anti-Money Laundering issues in correspondent banking relationships

7) Use of Financial Intermediaries and Other Third Parties

8) Regulation of Overseas Subsidiaries or Branch Networks

9) Record-Keeping and Information Accessibility

Financial Services Sector

Since Australia’s anti-money laundering regime was first introduced over twenty years ago banking methods and systems have changed significantly. Less than two decades ago, banking services were offered through manual passbooks at branches that were generally only open Monday to Friday. Currently less than 10% of transactions are carried out in bank branches, with the bulk of transactions conducted electronically through ATMs, EFTPOS, telephone and on-line banking. The industry has followed the needs of its customers so that now:

· more than 90 percent of transactions are conducted outside bank branches;

· there are almost 20,000 ATMs and more than 440,000 EFTPOS terminals; and

· wealth and portfolio management constitutes a significant part of the financial services sector.

Australia is not alone in these trends as worldwide financial services compete to achieve greater efficiencies in the provision of services.

The financial services industry commonly deals with large amounts of data. While the industry has traditionally developed systems with a product or ‘line of business’ focus, this approach is changing to a customer relationship focus with integrated delivery of products and services.

Because of its key role in handling financial transactions, the financial services sector is vulnerable to money laundering and other financial crimes. There are a number of ways in which the banking and trading facilities of a financial institution may be exploited to launder money or otherwise avoid the reporting requirements of the FTR Act. These should generally be treated as reportable suspicious transactions, but may also serve to indicate the vulnerabilities inherent to operations as diverse as retail banking and personal insurance.

The financial services sector has a good record of cooperation with Australian law enforcement agencies to stop money laundering and related crime. In deciding that Australia should take steps to implement the revised Forty Recommendations, the Government is mindful of two considerations:

1) the need to ensure that regulation does not interfere with legitimate commercial activity; and

2) the need to safeguard both Australian business and the Australian community from the impacts of crime.

To meet both of these goals, there is a need to match existing commercial practice and to regulatory objectives. The involvement of the financial services sector in implementing the revised Forty Recommendations is critical to ensuring that reforms to Australia’s anti-money laundering measures are both effective and sensitive to commercial realities.

Issues

Implications for the Financial Sector

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 industry consideration are identified under four main themes:

Coverage - Which businesses and financial instruments are subject to anti-money laundering reporting requirements.

Detecting Suspicious Activity - The concept of ongoing Customer Due Diligence and the measures needed to support it.

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.

The focus of attention for financial services businesses will differ depending on the activities they are engaged in. Nearly all businesses in the financial services sector will need to consider their anti-money laundering reporting obligations. Businesses that provide services and sell products to retail customers will need to consider the implications of the more thorough-going measures intended to more effectively detect suspicious activity. Businesses engaged in handling the flow of funds through the financial system will have to consider how the monitoring and tracking obligations will affect their information handling and reporting to the regulator. Much of what needs to be done is in the hands of individual businesses and regulatory oversight is intended to allow them to tailor their approach to their circumstances and to the needs of their customers. The purpose of compliance measures is to ensure that implementation is effective and consistent across the industry.

1. Coverage

1.1 Activities-Based Definition

The revised Forty Recommendations widen the scope of anti-money laundering reporting obligations, both in the range of activities covered and the financial instruments that are to be reported on.

Coverage of the financial services sector will be determined by an activities-based definition rather than the listing approach characterising the ‘cash dealer’ definition used in the existing FTR Act.

A person who provides, deals in or handles a ‘financial product’ will be subject to anti-money laundering reporting requirements. ‘Financial product’ will be broadly defined and closely parallel the definition in the Corporations Act, although some of the more specific exemptions relating to financial services regulation for investor protection and market integrity purposes which do not accord with anti-money laundering objectives will not apply.

Applying anti-money laundering reporting obligations to persons providing, dealing in or handling a ‘financial product’ will achieve the same coverage as FATF’s definition of ‘financial institution’, and is better suited to the Australian financial services regulatory environment. The FATF definition of ‘financial institutions’ which refers to types of activities is set out in Annex 2 for reference purposes.

Issue 1.1

In general, financial services businesses will be subject to anti-money laundering reporting obligations.

1.2 Cash & Beyond

The provisions of the FTR Act had their genesis in the reporting of ‘cash transactions’ and suspect transactions not limited to cash transactions. While the FTR Act has since extended to require reporting of international funds transfer instructions, the revised FATF Recommendations apply to the broad range of financial instruments referred to in the definition of financial institution activities noted in Annex 2.

Reporting obligations will apply to ‘financial products’. This will mean that reporting systems will have to be capable of providing reports on a range of financial products not limited to cash transactions.

Issue 1.2

Reporting systems will have to be adapted so that they can report across a range of financial products not limited to cash transactions.

2. Detecting Suspicious Activity

2.1 Customer Due Diligence

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

Revised FATF 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; 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.

Under the revised Forty Recommendations, customer due diligence obligations apply to all business relationships as well as occasional customers, however FATF note that there may be circumstances where the risk of money laundering or terrorist financing is lower such that CDD may be applied on a risk sensitive basis depending on the type of customer, business relationship or transaction. In comparison with the existing FTR Act, the scope of the revised customer due diligence requirements is notable for its extension to non-cash banking products, non-account customers and previously non-FTR Act banking products and facilities.

2.2 Ongoing Customer Due Diligence

Under the current FTR Act, customer due diligence is limited to obtaining and verifying a customer’s identity, date of birth and residence on opening an account. The cash dealer is then obliged to maintain records of identification and account information. However, once a customer’s details are verified, there is no further obligation to monitor the accuracy or validity of those details.

A one-off check is an inadequate means of detecting suspicious activity. As a result, a key recommendation of FATF is for ongoing scrutiny of customer identification data, financial activity and account behaviour. This 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.

Issue 2.1

Ongoing Customer Due Diligence will expand the extent of customer scrutiny and introduce additional ongoing monitoring and record maintenance requirements.

2.3 Specific Higher Level Customer Due Diligence

In addition to the enhanced customer due diligence obligations described above, there will also be situations where financial sector businesses 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. These include business relationships involving politically exposed persons and business relationships or transactions with countries that do not adequately apply the FATF standards.

2.3.1 Politically Exposed Persons (PEPs)

FATF have identified Politically Exposed Persons 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 of 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.

In the case of PEPs, the requirements of FATF Recommendation 6 will mean that a financial institution should

· have adequate risk assessment systems that will identify a customer as a PEP;

· have a customer acceptance policy requiring senior management approval for establishing a business relationship with a PEP;

· take reasonable measures to establish the source of the PEP’s wealth or funds; and

· conduct higher levels of ongoing scrutiny whilst monitoring the PEP’s business relationship and financial activity.

Consideration should be given to the respective roles of financial institutions and the anti-money laundering regulator in identifying PEPs and implementing suitable scrutiny measures.

Issue 2.2

It will be necessary to have methods for determining whether a customer is a Politically Exposed Person and for applying a higher level of scrutiny to that person.

2.3.2 Non Complying Countries

The new FATF standards have identified a need for greater vigilance with regard to business conducted with countries that do not adequately apply the FATF anti-money laundering standards. Recommendation 21 requires that financial institutions should pay particular attention to transactions and business relationships involving such countries.

For business conducted with non complying countries, financial institutions should be alert to transactions or business relationships which have no apparent economic, commercial or visibly lawful ends. Their background and purpose should be queried and the financial institution’s findings should be established in writing to be made available to the anti-money laundering regulator.

Issue 2.3

Consideration should be given to the respective roles of financial sector businesses and the anti-money laundering regulator in identifying countries of concern and implementing suitable systems for scrutinising transactions with such countries.

2.4 Correspondent Banking

FATF has identified cross-border correspondent banking relationships as a key area of money laundering and terrorist financing vulnerability. To address this issue, FATF Recommendation 7 requires that financial institutions exercise greater scrutiny on foreign counterparts before entering correspondent banking relationships. In addition, Recommendation 18 requires that financial institutions should not enter into, or continue, correspondent banking relationships with shell banks and should also guard against establishing relations with respondent foreign financial institutions that permit their accounts to be used by shell banks.

Consideration should be given to measures to ensure that Australian financial institutions undertake satisfactory customer due diligence on ‘over the horizon’ relationships. To meet the new international standard, financial institutions will not only have to satisfy themselves that they are suitably diligent with their ‘customer’ bank but also that their customer bank is performing effective due diligence on its own customers.

Financial institutions in countries such as the US have sought to implement the new standard by way of questionnaires to overseas financial sector counterparts seeking information on CDD measures. Options for use of a similar methodology in the Australian context would be worth considering in more detail.

Issue 2.4

Consideration should be given to measures to ensure effective customer due diligence for correspondent banking customers.

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 financial activity and to reconstruct individual transactions. This is very much dependent upon the record management practices of the institutions handling the transactions.

While financial institutions have implemented record keeping measures meeting the requirements of the FTR Act, the new FATF standards will require collection and retention of additional customer due diligence information relevant to ongoing due diligence 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 opening the account or establishing the business relationship;

· the anticipated level and nature of the activity to be undertaken;

· the relationships between account signatories and underlying beneficial owners; and

· the expected source and origin of the funds to be used in the relationship; details of occupation/employment (for personal bank current accounts), and sources of wealth or income and customer net worth (particularly for private banking relationships).

Format requirements for records will be developed in consultation with 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 allow for ready access to 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 transfer activity plays 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 financial institutions depending on the role they are performing in processing the payment instruction through the messaging chain.

Originating Institutions, ie. the financial institution initiating the 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, or those who process the routing of the signal or otherwise facilitate the payment in accordance with correspondent banking arrangements, will need to:

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

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

Beneficiary Institutions, or the financial institution receiving the signal and paying the beneficiary of the payment instruction, will need to:

1) have risk based procedures in place to ensure that payment instructions with insufficient originating customer information are identified and reported to the FIU; and

2) consider terminating business relations with other financial 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 financial sector businesses (particularly those involved with payments systems) of including all necessary information when processing wire / fund transfers. This should include consideration of any systems modifications.

4. Oversight and Compliance

4.1 Risk-based 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 financial sector businesses the flexibility to design anti-money laundering programs reflecting their commercial 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.

Risk-based strategies are intended to map a financial institution's internal control environment in order to isolate areas and activities that may be vulnerable to money laundering and terrorist financing. Risk management processes can then focus on directing the compliance efforts of core business units, 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 a business to consider 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 particular to a product or sector such as monetary instruments or funds transfers to or from countries with inadequate anti-money laundering regulation.

Under a risk-based industry partnership approach to anti-money laundering regulation, industry 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, 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 assessment procedures have the potential to reduce effort and cost. The risk-based approach allows businesses to tailor their policies and procedures to the potential risk of money laundering in particular customer transactions. Risk-based regulation minimises the regulatory burden on both industry and consumers while maintaining effective controls. It is an approach supported by the FATF and increasingly adopted by other countries.

The roles of participants in a risk-based industry partnership regulatory model for the financial sector in Australia would be as follows:

Partnership Approach to Anti-Money Laundering Regulation in the Financial Services Sector – Roles of Participants

Financial Sector Businesses

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 Financial Services 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 for the financial sector 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 financial sector industry representatives 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 partnership approach as well as the respective roles that financial sector businesses and the anti-money laundering regulator might play in identifying areas of risk.

4.2 Anti-Money Laundering Programs

An important element of the new standards will be the requirement to have in place systematic and institution-wide anti-money laundering programs to facilitate a whole-of-organisation anti-money laundering culture. The benefit of this approach is that separate parts of an institution will better appreciate the practical implications of customer due diligence and record keeping issues and how these may impact on their duties. Whether they work in the shopfront environment or in marketing and development, staff would be aware of anti-money laundering compliance issues affecting their particular duties as well as the organisation as a whole.

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, as outlined above.

Issue 4.2

Financial sector businesses will need to develop anti-money laundering programs fostering an institution-wide understanding of anti-money laundering. Consideration should be given to how industry representative bodies may assist their membership in developing such programs and monitoring their effectiveness.

4.3 Suspicious Activity Reporting

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

Provisions in section 16 and 17 of the existing FTR Act already cover the reporting of suspicious transactions. Consistent with the broader focus of the revised Forty Recommendations, consideration should be given to expanding the reporting base under any new Australian anti-money laundering legislation to include suspicious activity not confined to financial transactions.

4.4 Use of Intermediaries and Other Third Parties

It is common practice for financial institutions to use intermediaries or other third parties to introduce or process new business. Often acting as a broker, the intermediary may provide product advice or facilitate customer applications. Recommendation 9 of the revised Forty Recommendations allows financial institutions to make use of intermediaries and third parties to perform the initial elements of customer due diligence. To ensure that customer due diligence remains effective, however, financial institutions 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 financial institution 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 financial sector businesses, 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

Financial sector businesses 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.

4.5 Anti-Money Laundering for Overseas-Based Branches or Subsidiaries

In order to maintain integrity, an anti-money laundering system should apply a consistent standard across the various areas of its application. Likewise, a financial institution’s anti-money laundering program should be consistently applied across its operations including those outside its home jurisdiction.

FATF Recommendation 22 provides that financial institutions should wherever possible apply the same anti-money laundering principles to domestic operations and to overseas branches and majority owned subsidiaries, especially where those branches or subsidiaries operate in countries that do not or insufficiently apply the FATF standards.

Consideration should be given to the practical implications of this Recommendation. As a starting point, internationally active financial institutions should consider the changes that might be required to ensure that the operations of overseas branches and subsidiaries meet the new Australian anti-money laundering standards. Likewise, consideration must be given to the position of local financial institutions that are branches or subsidiaries of overseas based parent companies and whose parent company may operate under a different or incompatible anti-money laundering standard.

Incompatibilities between the Australian standard and those of relevant overseas jurisdictions will need to be identified and discussed.

Issue 4.4

Consideration should be given to measures to ensure that overseas branches and majority owned subsidiaries of financial sector businesses apply the same anti-money laundering principles as their domestic operations especially where those branches or subsidiaries operate in countries that do not or insufficiently apply the FATF standards.

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 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

Financial Institutions

“Financial institutions” means any person or entity who conducts as a business one or more of the following activities or operations for or on behalf of a customer:

· Acceptance of deposits and other repayable funds from the public.[2]

· Lending.[3]

· Financial leasing.[4]

· The transfer of money or value.[5]

· Issuing and managing means of payment (e.g. credit and debit cards, cheques, traveller’s cheques, money orders and bankers’ drafts, electronic money).

· Financial guarantees and commitments.

· Trading in:

o money market instruments (cheques, bills, CDs, derivatives etc.);

o foreign exchange;

o exchange, interest rate and index instruments;

o transferable securities;

o commodity futures trading.

· Participation in securities issues and the provision of financial services related to such issues.

· Individual and collective portfolio management.

· Safekeeping and administration of cash or liquid securities on behalf of other persons.

· Otherwise investing, administering or managing funds or money on behalf of other persons.

· Underwriting and placement of life insurance and other investment related insurance.[6]

· Money and currency changing.

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; and

· 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.

Annex 4

Issues

1. Coverage

Issue 1.1