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Money laundering and terrorism financing risks posed by alternative remittance in Australia

Research and public policy series no. 106

David Rees
ISBN 978 1 921532 54 2 ; ISSN 1836-2079
Canberra: Australian Institute of Criminology, April 2010

Abstract

The events of 11 September 2001 have heightened interest in ensuring that all sectors of the financial system are not misused either by criminal or terrorist groups. In addition to conventional banks, money and value can be transferred by alternative remittance providers who have, until recently, not been closely regulated. Regulators are concerned that the informal nature of these businesses may lead to their use by terrorist groups and other criminals. This brief considers the characteristics of alternative remittance businesses, the risks they pose and some of the current responses to these risks. This report is one of three in a suite on this issue by the AIC which also includes Alternative remittance systems in Australia: Perceptions of users and providers and Risks of money laundering and the financing of terrorism arising from alternative remittance systems.

Foreword | People and businesses wishing to transfer money between themselves can do so in a variety of ways. In addition to using simple cash transactions, most money transfers in Western societies take place using conventional banks and other financial institutions. Apart from ordinary banking, however, money and other forms of value can be transferred through the use of so-called 'remittance services' which have operated for hundreds of years in non-Western societies. Originating in southeast Asia and India, users of these systems transfer funds through the use of agents who enter into agreements with each other to receive money from people in one country (such as overseas workers) and to pay money to specified relatives or friends in other countries without having to rely on conventional banking arrangements. Funds can be moved quickly, cheaply and securely between locations that often don't have established banking networks or modern forms of electronic funds transfers available.

The events of 11 September 2001 led to increased interest in ensuring that all sectors of the financial system are not misused either by criminal or terrorist groups. This heightened awareness of how terrorist activities are financed, has led governments in developed countries to enact legislation designed to monitor large-scale and suspicious financial transactions which could be indicative of money laundering activities or raising funds to finance terrorist activities. In Australia, the Anti-money Laundering and Counter-terrorism Financing Act 2006 (Cth) requires not only banks and other financial services providers but also providers of alternative remittance services to report specified transactions to Australia's regulator, the Financial Transaction Reports and Analysis Centre (AUSTRAC). Those who provide remittance services are also required to register with AUSTRAC before designated remittance services can be provided.

Although remittance systems are legitimate and legal in many countries, concerns have arisen in recent years that they could be used to circumvent anti-money laundering and counter-terrorism financing controls that now operate across the global financial services sector. Particular risks arise from the irregular forms of record-keeping which are often employed and the possibility that the laws of those countries in which they operate may not be fully complied with.

In 2007, the Australian Institute of Criminology (AIC) commenced a number of research activities into how money laundering and the financing of terrorism occur, how the risk environment is changing and how best to regulate financial transactions so as minimise risks of abuse. One of the areas studied concerned alternative remittance transactions. The present report provides the results of a lengthy, multi-method study that sought to identify the characteristics of alternative remittance businesses in Australia, the risks they pose and some of the current responses to those risks.

Through consultation with providers and users of remittance services, as well as regulators and law enforcement agencies, the AIC has compiled a comprehensive body of information that will assist in tailoring the regulatory regime in Australia to the nature and extent of the risks of misuse that exist. It is important to achieve a balance between regulating the remittance sector in an attempt to reduce the flow of illicit funds and permitting its continued use as a legitimate, alternative to the conventional banking system—especially for those in less-developed countries. Remittance systems provide many ethnic communities with the ability to send money and/or goods back to their country of origin, usually to their families who remain there, who may be dependent on receipt of such transfers. Remittance systems are also used for a variety of other commercial and social reasons.

Although the study has found only limited evidence of misuse, risks do exist that governments need to understand and respond to. Those in the communities that make use of and provide remittance systems also need to be aware of the potential for abuse and be able to identify high-risk circumstances that should be guarded against and reported officially. This report provides detailed information drawn from those in the Somali, Samoan, Vietnamese, Indian and Filipino communities who have an intimate knowledge of how remittance systems operate. The analysis will assist policy makers in ensuring that this important form of financial service continues to be provided in a way that does not facilitate the laundering of the proceeds of crime or enable terrorist activities to be supported financially.

Adam Tomison
Director

Acknowledgements

The author wishes to thank the Australian Transaction Reports and Analysis Centre, the Australian Attorney-General's Department, the Australian Federal Police, the Australian Crime Commission, the NSW Crime Commission, the Commonwealth Director of Public Prosecutions, the NSW Police Force, Victoria Police, the Asia-Pacific Group on Money Laundering, the Australian Customs Service, Dr Michael Levi, Visiting Fellow at the Australian Institute of Criminology and Dr Nikos Passas of North-Eastern University for their assistance in the preparation of this research. The author is also grateful for the contribution of the anonymous referees who reviewed the paper.

The author also wishes to acknowledge the consultation work undertaken by the Cultural and Indigenous Research Centre Australia and Myriad Consultants Pty Ltd as part of this research.

The author acknowledges the valuable assistance of colleagues at the Australian Institute of Criminology, with particular thanks to Dr Russell G Smith, Dr Judy Putt, Dr Kim-Kwang Raymond Choo, Mr Steve Hlavenka, Ms Julie Walters, Ms Janine Chandler and Mr Rob McCusker.