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IntroductionAustralia's major financial institutions are already facing pressure to meet the new global standards as a condition of their participation in the international financial system. Continued vigilance against money laundering and terrorist financing is essential to Australia's good economic reputation and the international competitiveness of Australian business. (1) A report released in September 2007 titled The extent of money laundering in and through Australia in 2004 found that crime in Australia generates between AUD2.8 billion and AUD6.3 billion, with the most likely figure being in the vicinity of AUD4.5 billion. (2) According to the International Monetary Fund (IMF), the possible consequences of money laundering include: (3)
It is thus essential that Australia adopts the recommendations of the FATF if it is to maintain its position as a key player in the financial sector, both in the region and globally. What is money laundering?The legal definition of money laundering is set out in section 5 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 ( AML/CTF Act) which includes reference to Division 400 of the Criminal Code Act 1995.In practical terms, money laundering is the process whereby criminals attempt to hide and disguise the true origin and ownership of the proceeds of their criminal activities, thereby avoiding prosecution, conviction and confiscation of the criminal funds. The various stages to achieve this are termed placement, layering and integration. Placement is the first stage of money laundering in which illegal funds or assets are first brought into the financial system. When illegal funds are placed in the financial system, they become more liquid. For example, if cash is converted into a bank deposit, it becomes easier to transfer and manipulate. Money launderers 'place' the illegal funds using a variety of techniques, which include the deposit of cash into bank accounts and use of cash to purchase assets. In the second stage of money laundering - layering - the 'placed' funds are distanced from their illegal origin by moving, dispersing and disguising them. Money launderers use many different techniques to layer the funds, including using multiple banks and accounts, professionals who act as intermediaries and corporations and trusts. The funds may be shuttled through a web of many accounts, companies and countries in order to disguise their origins. The final stage of money laundering is integration. Once the funds are layered and distanced from their origins, they are re-introduced to the economy for criminals to use and control as apparently legitimate funds. At this stage the illegal money has achieved the guise of legitimacy and the laundered funds are made available for investment in legitimate or illegitimate businesses, or spent to promote the criminal's lifestyle. What is terrorism financing?The definition for the 'financing of terrorism' is set out in section 5 of the AML/CTF Act and includes reference to Division 103 of the Criminal Code Act 1995. In practical terms, the financing of terrorism includes the financing of terrorist acts and of terrorists and terrorist organisations. It involves a person providing or collecting funds where the person is reckless as to whether the funds will be used to facilitate or engage in a terrorist act. An example would be the provision of any kind of asset in any form, including but not limited to, bank accounts, traveller's cheques, bank cheques, money orders, shares, securities, drafts and letters of credit. Why are money laundering and terrorism financing of concern?Money launderingThe United Nations Office on Drugs and Crime (UNODC) (4) website highlights some of the financial and socio-economic concerns associated with money laundering. It points out that, especially where organised crime, drug trafficking and corruption are involved, the consequences of money laundering are bad for business, development, government and the rule of law. The UN also draws attention to the fact that criminals are now taking advantage of the globalisation of the world economy by transferring funds quickly across international borders. Rapid developments in financial information, technology and communication allow money to move anywhere in the world with speed and ease. This makes the task of combating money laundering more urgent than ever. Terrorism financingIn 2002, then Australian Attorney-General, Daryl Williams, made the following comments in the second reading speech to the House of Representatives on the Suppression of the Financing of Terrorism Bill:
Implications for reporting entitiesReporting entities that do not develop and implement robust AML/CTF control frameworks face increased risk of being used to facilitate money laundering and terrorism financing. This could result in both business and regulatory risks that may well result in costly financial and reputational damage. There are many international examples of the damage suffered by businesses that have failed to implement soundly based AML/CTF controls, particularly in the United States (US) (6) and the United Kingdom (UK). (7) Where reporting entities do not comply with the AML/CTF legislation, part 15 of the AML/CTF Act (Enforcement) illustrates the substantial financial penalties that may be imposed for a serious offence. For example, the maximum civil penalty for a body corporate is up to $11 million for a corporation and up to $2.2 million for an individual. Conversely, a reporting entity that develops and implements a robust AML/CTF control framework reinforces its defences against the threat of criminals successfully using the entity's products and delivery channels to facilitate their criminal activities. It also reduces regulatory risk. Appendix B provides the ML/TF Risk Principles Framework, which was developed and agreed to in March 2006 by a joint government-industry working group during the consultation period of the AML/CTF Bill. This framework is based upon and consistent with the Australian Risk Management Standard (AS/NZS 4360:2004). What is the international position on money laundering and terrorism financing?A number of prominent organisations are involved in efforts to combat money laundering and terrorism financing, in particular the United Nations and FATF. Appendix C provides a summary of initiatives undertaken by those two and a number of other key organisations. AML/CTF compliance officers may find that the information provided by these organisations is of considerable value in developing an appropriate AML/CTF control framework for their organisation. The AUSTRAC website also provides links to these and a number of other relevant Australian and international organisations.
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What is the Australian position on money laundering and terrorism financing?Appendix D provides a summary of the historical developments that have influenced Australia's current AML/CTF environment. The AML/CTF Act received Royal Assent on 12 December 2006. In response to industry concerns about the complexity of the changes required, particularly to existing information technology systems, the Government announced that there would be a staggered implementation over two years. Commencement dates for each provision of the AML/CTF Act are set out in section 2 of the Act. The parallel operation of both the FTR Act and the AML/CTF Act during this two-year period is governed by the Anti-Money Laundering and Counter-Terrorism Financing (Transitional Provisions and Consequential Amendments) Act 2006 (the Transitional Provisions Act). In practical terms, existing regulated entities included in tranche 1 of the AML/CTF reform program need to ensure that their AML/CTF compliance framework caters for the various obligations in force under the FTR Act and/or the AML/CTF Act at each particular point in time during the transition period. 'Cash dealers' not included in tranche 1 of the AML/CTF reform program must continue to comply with their obligations under the FTR Act. Figure 1.1 below summarises the critical dates for tranche 1 of the transition. (note: figure has been transcribed into text for accessibility purposes).
The Minister's Policy (Civil Penalty Orders) Principles 2006In further recognition of the complexity associated with some of the key changes, on 31 January 2007 the Minister for Justice and Customs issued the Policy (Civil Penalty Orders) Principles 2006 under section 213 of the AML/CTF Act (see Appendix E). The Principles set a period of 15 months following each provision's commencement date during which the AUSTRAC Chief Executive Officer (CEO) may only apply for a civil penalty order against a reporting entity for contravening the provision if the CEO is satisfied that the entity has failed to take reasonable steps to comply with the provision. For further assistance on the application of the Policy (Civil Penalty Orders) Principles 2006 refer to the AUSTRAC guidance note Application of the Policy (Civil Penalty Orders) Principles 2006 (see Appendix A). Key elements of the AML/CTF ActThe AML/CTF Act adopts a risk-based approach to AML/CTF compliance, setting out the principal obligations of businesses, but giving them the flexibility to develop procedures according to the different risks they identify using their own AML/CTF programs. The Act represents a balanced and fair approach to ensuring that any risk associated with money laundering or terrorism financing in Australia is identified, mitigated and managed. It balances the needs of law enforcement agencies with the day-to-day realities of businesses covered by the legislation. Designated services Obligations Under the AML/CTF Act, persons who provide designated services to a customer become reporting entities and incur the following key obligations.
Penalties AML/CTF RulesThe AML/CTF Rules set out specific requirements under the AML/CTF Act, but they also enable the broader principles of the AML/CTF Act, for example customer due diligence, to be applied flexibly. AUSTRAC develops the AML/CTF Rules in consultation with the Attorney-General's Department, other government agencies, industry and other stakeholders. The AML/CTF Rules are legally binding once made and registered. While the AML/CTF Act contains numerous references to the AML/CTF Rules, it does not follow that such rules will automatically be developed in all instances. AUSTRAC has identified and made public those AML/CTF Rules that are seen as necessary for reporting entities to comply with key obligations. Other AML/CTF Rules may be made as and when there is an identified need. The AML/CTF Rules are available at www.austrac.gov.au/aml_ctf_rules.html AML/CTF regulationsWhile the legislative framework allows for AML/CTF regulations, at the time of publication of this version of the Guide there are none in existence. AUSTRAC guidance notesAUSTRAC may issue guidance notes from time to time to assist reporting entities with their obligations under the AML/CTF Act and AML/CTF Rules. AUSTRAC guidance notes are not legally binding. A full list of guidance notes is provided in Appendix A. AUSTRAC policiesAUSTRAC policies provide reporting entities further insight into AUSTRAC's approach to its regulatory task. While not legally binding, they are designed to provide regulated entities with guidance on matters under the AML/CTF Act and FTR Act (AML/CTF legislation) by:
AUSTRAC Public Legal InterpretationsAUSTRAC Public Legal Interpretations are proposed to provide AUSTRAC's view on the legal meaning of various provisions of the legislation without providing legal advice on individual circumstances. AUSTRAC Public Legal Interpretations will commence to be issued in 2008. What are the Australian Government's legal and administrative roles?Appendix G provides a summary of the legal and administrative roles of the Australian Government's Attorney-General's Department and AUSTRAC in relation to AML/CTF. AML/CTF compliance officers may find this information of value in developing an appropriate AML/CTF control framework for their organisation. Frequently asked questions
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(1) C Ellison, Minister for Justice and Customs 2003, 'Australia endorses global anti-money laundering standards', media release, Parliament House, Canberra, 8 December. (2) AUSTRAC, J Walker, RMIT 2007, The extent of money laundering in and through Australia in 2004, Australian Institute of Criminology, www.aic.gov.au/crc/reports/200304-33.html, viewed 1 October 2007. (3) United Nations Office on Drugs and Crime 2002, Global Programme Against Money Laundering, www.unodc.org/unodc/en/money_laundering.html, viewed 28 February 2007. (4) United Nations Office on Drugs and Crime 2002, Global Programme Against Money Laundering, www.unodc.org/unodc/en/money_laundering.html, viewed 28 February 2007. (5) Suppression of the Financing of Terrorism Bill 2002, Second Reading Speech, 12 March 2002, (Hansard, p. 1043), per the Hon. Darryl Williams MP as he then was, at p. 1043. (6) A list of enforcement action taken by the Financial Crimes Enforcement Network (FinCEN) in the US can be found at www.fincen.gov/reg_enforcement.html. (7) A list of enforcement action taken by the Financial Service Authority in the UK can be found at www.fsa.gov.uk/pages/About/What/financial_crime/money_laundering/library/press/index.shtml.
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Regulatory Guide