DEALERS IN PRECIOUS METALS & STONES

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.

This issues paper is intended to provide a basis for discussion with dealers in precious metals and stones 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.

· 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 smaller, transportable high value items like jewellery, that are then collected and deposited 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 financial products, precious metals or stones like gold or diamonds, 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, 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 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, 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 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.

Precious Metals and Stones – Potential for Money Laundering

In extending coverage of the Forty Recommendations to dealers in precious metals and stones, FATF noted that “the gold trade and the diamond industry are two sectors that appear to show considerable vulnerability to being exploited for money laundering and – to an unknown extent – for terrorist financing as well.” International evidence suggests that trading in diamonds, for example, is often used as a smokescreen for the laundering of proceeds generated by other criminal activity, especially illegal narcotics trafficking and various types of fraud. Laundering activity may involve retail foreign exchange transactions, forged or fraudulent invoicing, mingling of legitimate and illicit proceeds in trading accounts, and international funds transfers among these accounts.

Drug traffickers around the world are increasingly turning to the gem trade in a bid to launder their cash. For example, diamonds have in recent years become a favoured item replacing more traditional methods of money laundering. The gem trade appeals to money launderers as increasing anti-money laundering regulation of the financial sector has meant that it is one of the few remaining industries where large cash transactions can be carried out anonymously. The other great benefit is that gems, especially diamonds, are very easy to transport.

Implications for Dealers in Precious Metals and Stones

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 dealers are identified under four main themes:

Coverage - Which business activities will be 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 and Tracking - Measures designed to allow investigators and enforcement agencies ready access to information.

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

1. Coverage

1.1 Definition of a Dealer in Precious Metals or Stones

An activities-based approach will assist in defining dealers in precious metals or stones. A ‘dealer’ would be any person engaged in the business of purchasing or selling, whether as a manufacturer, refiner, wholesaler or retailer of:

· precious metals; or

· precious stones; or

· jewellery composed of precious metals or precious stones.

Accordingly, core obligations for reporting of suspicious activity and record-keeping will remain in place for bullion sellers. Existing customer due diligence requirements will, however, need to be reviewed and expanded.

Issue 1.1

Dealers in precious metals and stones will be subject to anti-money laundering requirements.

1.2 Threshold for Coverage

The definition of a dealer in precious metals or stones is broad to stop circumvention of the reporting obligations. However, it is recognised that this industry sector includes many artisans and small traders. The possibility of such businesses being exploited by money launderers is low where the dollar value of transactions is small. Consideration could be given to exempting small precious metals or stones dealers from coverage by anti-money laundering reporting requirements.

Issue 1.2

Comment is sought on the option of excluding artisans and small traders from anti-money laundering reporting requirements and what if any threshold might apply.

2. Detecting Suspicious Activity

2.1 Ongoing Customer Due Diligence

A key recommendation of FATF is for ongoing scrutiny of customer identification information, transaction activity and behaviour. Customer due diligence, reporting and record keeping requirements are already familiar to Australian cash dealers, including bullion sellers. Bullion sellers are required to verify the identity of customers on opening an account or entering into a bullion transaction. They are also required to report any suspicious transactions, and to keep transaction records. The changes recommended by FATF will involve monitoring customer activity in addition to updating customer information records.

Implementation of customer due diligence measures for dealers in precious metals and stones 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.

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. Dealers in precious metals and stones 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. The implications of extending these reporting obligations to all dealers in precious metals and stones need to be explored in consultation with industry participants.

3. Record Keeping

In tracing 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 dealer.

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 3

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

4. Oversight and Compliance

4.1 Risk-based Industry 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 customer transaction. Instead, it encourages directing resources and effort towards customers and transactions with a higher potential for money laundering.

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 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 firms and customers while maintaining effective controls. It is an approach supported by the FATF and increasingly adopted by other countries.

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

Partnership Approach to AML Regulation for Dealers in Precious Metals and Stones – Roles of Participants

Dealers in Precious Metals and Stones

Partner 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 Industry AML Code for Dealers in Precious Metals and Stones

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 dealers 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 role of industry trade associations in assisting dealers in precious metals and stones with implementation and compliance issues.

4.2 Anti-Money Laundering Programs

An important element of the new standards will be the requirement to have in place an anti-money laundering program to facilitate anti-money laundering culture among all staff of professional firms. 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 customers.

Issue 4.2

Each business will need to develop an anti-money laundering program which fosters an understanding of anti-money laundering requirements throughout the business. Consideration should be given to the role of trade associations in assisting their membership to develop such programs and in 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.

The FATF has recommended applying a threshold approach to dealers in precious metals and stones. This is set at US Dollars 15,000 (approximately $A20,000). Australia does not currently apply a threshold to the reporting of suspicious transactions by cash dealers such as bullion sellers. However, a $A10,000 threshold does apply to the identification of parties to bullion transactions and the reporting of significant cash transactions.

Further consideration will need to be given to the implications of a threshold approach in consultation with dealers in precious metals and stones. Any lessening of the current Australian legislated standard could lead to money laundering risks. There may therefore be advantages in taking a ‘whole system’ approach to the application of anti-money laundering obligations across the precious metals and stones sector. This might include consideration of exemptions from anti-money laundering reporting obligations for low risk transactions such as retail trading in low value jewellery and gold or silver.

Issue 4.3

The views of dealers in precious metals and stones are sought on the scope for risk-based reporting based on particular patterns of suspicious activity rather than the application of a monetary threshold.

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 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

1. Coverage

Issue 1.1

Dealers in precious metals and stones will be subject to anti-money laundering requirements.

Issue 1.2

Comment is sought on to the option of excluding artisans and small traders from anti-money laundering reporting requirements and what if any threshold might apply.

2. Detecting Suspicious Activity

Issue 2

3. Record-Keeping and Tracking

Issue 3

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

4. Oversight and Compliance

Issue 4.1

Consideration should be given to the role of industry trade associations in assisting dealers in precious metals and stones with implementation and compliance issues.

Issue 4.2

Issue 4.3

[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.