Real Estate Dealers

Introduction

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

The reforms will cover a range of business activities, in some cases extending AML 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 real estate industry and in particular real estate dealers. It is intended to provide a basis for discussion with the real estate industry on regulatory options to give effect to Australia’s AML 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 AML measures is to stop criminals from enjoying the personal benefits of their profits and prevent them reinvesting their funds in future criminal activities. AML 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 AML 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.

Australia

Anti-Money Laundering Legislation

Australian AML legislation developed as a direct response to two Royal Commissions in the 1980s that exposed the links between money laundering, major tax evasion, fraud and organised crime. The Costigan and Stewart Royal Commissions identified the need for legislative strategies to address these issues. While initially focusing largely on suspect transactions and large cash transactions, Australia’s AML legislation was later extended to include the reporting and monitoring of certain international transactions.

Australia’s primary AML 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 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, recent 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 AML system needs to adapt to the changing international security and commercial environment. The revised Forty Recommendations provide the starting point for reforming Australia’s AML system.

The Revised Forty Recommendations

The Forty Recommendations are the acknowledged international anti-money laundering standard. Following an extensive review, FATF recently revised the Forty Recommendations to ensure that they continue to provide a comprehensive framework for dealing with money laundering and terrorist financing risks. The Australian Government participated in the review process and has endorsed the revised Forty Recommendations.

To stop money launderers from seeking to avoid preventive measures by targeting unregulated businesses and professions, the revised Recommendations extend key AML obligations to certain non-financial businesses and professions. These include real estate agents, casinos, dealers in precious metals and stones, trust and company service providers, lawyers, notaries, other independent legal professionals and accountants. At the same time, enhancements to customer due diligence, reporting and record-keeping requirements seek to improve transparency and guard against abuse of the financial system to launder money and fund terrorism.

It is important that Australia take steps to implement the new international standard. As commercial practices, technologies and payment systems evolve, so too do techniques for laundering money and evading detection. To avoid becoming a ‘soft touch’ for money launderers and terrorist financiers, Australia’s AML system must evolve to meet these new threats. Continuing vigilance against money laundering and terrorist financing is vital to Australia’s good economic reputation and our national security.

The Government is committed to ensuring that new regulatory arrangements are sensitive to industry needs and provide an ongoing role for industry representatives. While the revised Forty Recommendations provide the template, the Government will decide in consultation with industry the best means of applying the Forty Recommendations to Australian conditions.

Why Real Estate?

In extending coverage of the revised Forty Recommendations to the real estate sector, FATF noted the potential for real estate transactions to provide a vehicle or screen for money laundering activity. For example, a recent FATF study of money laundering techniques and trends found that “Investment of illicit capital in real estate is a classic and proven method of laundering dirty money… Laundering may be effected either by way of chain transactions in real estate to cloak the illicit source of funds, or by investment in tourist or recreational real estate complexes which lend an appearance of legality.”

The real estate sector has a good record of cooperation with Australian law enforcement agencies to stop 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, it is essential that any regulatory model complement existing commercial practice and regulatory requirements. The views of the real estate sector will be vital in ensuring that regulatory systems to combat money laundering are both effective and sensitive to commercial realities.

Implications for the Real Estate Sector

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

Coverage - Which business activities will be subject to anti-money laundering reporting requirements.

Customer Due Diligence - Requirements for identifying customers and monitoring their transactions.

Suspicious Transaction Reporting - Obligations for reporting any suspicious activity to the AML regulator.

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

1. Coverage

Under the revised Forty Recommendations, AML obligations apply to real estate agents when they are involved in transactions for a client concerning the buying and selling of real estate. This provides scope for excluding certain categories of real estate business (such as leasing arrangements) from consideration as part of AML programs. But it may be preferable to commence from a broad view of real estate activity to determine the scope for risk-based procedures extending across the real estate sector.

Issue 1

Comment is sought from the real estate sector on the scope and application of anti-money laundering requirements.

2. Customer Due Diligence

2.1 Customer Due Diligence Measures

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

FATF Recommendation 5 sets out the fundamental measures for identifying and verifying the identity of customers, including any beneficial owners, and for conducting ongoing due diligence. These include:

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

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

· identifying any 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.

Implementation of customer due diligence measures for real estate dealers will require consideration of appropriate identification and verification systems. While the general rule is that customers must be subject to a full range of customer due diligence measures, variations may be possible. Where the risk of money laundering or terrorist financing is lower, where information on the identity of customers or beneficial owners is already publicly available, or where adequate checks and controls exist elsewhere, it may be reasonable to allow simplified or reduced due diligence measures.

2.2 Ongoing Due Diligence

Expanded customer due diligence measures will require consideration of options for re-verifying identity where doubts arise during the business relationship about a customer’s identity. Real estate dealers will also need to be in a position to establish any beneficial ownership arrangements involving corporate customers. To enable rapid identification of suspicious activity, due diligence procedures should also incorporate measures for monitoring transaction activity throughout the business relationship.

Issue 2

Customer due diligence will require ongoing monitoring and record maintenance for the purpose of anti-money laundering reporting. Comment is sought from the real estate sector on the scope for simplified or reduced due diligence measures for low risk customers including those whose identity is readily verifiable from other sources.

3. Suspicious Transaction Reporting

The second core AML obligation, 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.

While certain patterns will be common, indicators of suspicious transaction activity in the real estate industry may differ from those in other industry sectors. For example, use of large cash amounts or monetary instruments in different names or unusual combinations to settle real estate transactions may be a valuable indicator of money laundering. Real estate dealers are well placed both to identify such activity and to ensure that the design of AML programs reflects actual money laundering risks and trends rather than a ‘one size fits all’ approach.

Issue 3

Comment is sought from the real estate sector on the scope for risk-based suspicious activity reporting based on particular patterns of activity.

4. Record Keeping

The third plank of an effective AML system is the requirement to keep customer identity and transaction records. Sound record keeping provides the basis for law enforcement agencies to reconstruct individual transactions and patterns of transactions that may lead to a prosecution for money laundering or terrorist financing. It also ensures that evidence of customer identity is readily available to regulators in the event of criminal activity. FATF Recommendation 10 outlines the core record-keeping requirements.

The new FATF standards will require the collection and retention of additional customer due diligence information relevant to ongoing due diligence measures. Such information might include transaction information and business correspondence. This information will need to be kept in a consistent format to allow ready access by regulatory agencies.

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 4

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

A Possible Regulatory Model

Implementing new AML 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 AML 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.

Risk-based Industry Partnership Approach

The Government is keen to explore the options for a risk-based industry partnership approach to AML regulation. Under this approach, industry bodies would have primary responsibility for developing guidance to assist businesses in their industry 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 AML regulator would be responsible for setting principles and guidelines and approving AML programs.

A major theme of the revised FATF Recommendations is the place given to anti-money laundering strategies conducted and based upon risk assessment. Risk-based procedures are essential to this approach. 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 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.

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

Partnership Approach to AML Regulation in the Real Estate Sector – Roles of Participants

Real Estate Agents

Partner Real Estate Industry Representatives

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 Real Estate 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 real estate sector while ensuring a flow of information to the AML regulator necessary to detect and prevent money laundering activity; and

· it would also provide an ongoing role for real estate industry representatives in ensuring that AML systems and procedures remain effective and user-friendly.

Issue 5

Comment is sought on the applicability of a risk-based industry partnership approach to anti-money laundering regulation for the real estate sector.

Consultation

The Government is committed to broad consultation on reforms to Australia’s AML system. The views of the real estate sector are vital to designing practical AML 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 of key issues.

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/counter-terrorist financing programs to designated non-financial businesses and professions - casinos, real estate agents, dealers in precious metals, dealers in precious stones, accountants, lawyers, and trust and company service providers (Recommendations 12, 16);

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

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

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

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

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

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

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

Annex 2

Issues

Coverage