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Tackling trade-based money laundering in Australia and the way forward

In 2005, FATF conducted its third review of Australia’s money laundering and terrorist financing regime (FATF 2005) and found that Australia did not comply with all of the 40 Recommendations and 9 Special Recommendations. Partially as a consequence of this, Australia introduced new legislation (the AML/CTF Act) and amendments have been made in subsequent years to address the concerns raised by FATF. Within FATF’s review, there was a perception that the previous legislative regime had been too prescriptive and cumbersome, resulting in ‘defensive reporting’, a practice that threatened to overload regulators with information of dubious relevance and accuracy (Ross & Hannan 2007: 139). It was also considered to be an inflexible response to new developments in money laundering techniques (Ross & Hannan 2007).

Therefore, the AML/CTF Act was introduced in late 2006. In keeping with most comparable regulatory regimes (such as those in the United States and in the United Kingdom), Australia’s current AML/CTF regime is risk based. The regime requires businesses supplying designated services to comply with the legislation but leaves it to the discretion of the affected parties as to how they meet some of these obligations. The focus in the legislation is on the nature of the service rather than on the nature of entity that supplies it. The reporting entity, rather than AUSTRAC, is given responsibility for both determining the level of risk represented by any customer and any transaction, and the appropriate response. Responsibilities, such as Customer Due Diligence, show a change in emphasis from a regulatory ‘tick and flick’ based regime to one that emphasises the responsibility of reporting entities to maintain ongoing knowledge of their customers. The presumption is that a risk-based regime allows financial bodies (which presumably have more practical experience in dealing with actual clients) to be given more latitude in determining what level of risk any particular client or transaction represents and how best to manage that risk (Ross & Hannan 2007).

Under the AML/CTF Act, a large range of entities are regulated. AUSTRAC has identified over 14,000 entities with obligations under the current legislation (AUSTRAC 2010a: 24). Although AUSTRAC is the AML/CTF regulator in Australia, it does not have any law enforcement or prosecutorial powers. As a result, it is an administrative-style Financial Intelligence Unit that supplies information to a wide variety of government bodies. The financial intelligence it provides is used by these partner agencies to investigate cases of alleged financial crime, which may then be referred for investigation by police and prosecution.

The AML/CTF Act covers industry services who also have obligations under the Financial Transaction Reports Act 1988 (Cth), including the prudentially regulated financial sector and a range of other designated businesses. The following is a list of the currently regulated sector under the AML/CTF Act (designated entities within each regulated sector appear in parentheses):

  • banking (banks, building societies, credit unions, finance corporations, friendly societies, housing societies, merchant banks, SWIFT);
  • alternative remittance (corporate remitters, remittance providers);
  • securities/derivatives (futures brokers, mortgage and finance providers, securities dealers);
  • managed funds/superannuation (investment companies, managed funds, Principle or Discretionary, traders, retailers, superannuation trusts, unit trusts);
  • gambling (casinos, gambling houses, on course bookmakers, pubs and clubs, sports bookmakers, TABs);
  • foreign exchange (foreign exchange providers, payment service providers, postal and courier service providers, travel agents, travellers cheques issuers); and
  • financial services (factorers, forfeiters, hire purchase companies, lease companies, pastoral houses, public authorities).

The Australian Government is currently examining the need to extend the application of the AML/CTF Act to specified services provided by a number of other business and professional sectors. As identified on the Attorney-General’s Department website (AGD 2010), the sectors that are likely to be regulated in this second tranche of legislative reforms in Australia include lawyers, accountants, real estate agents, dealers in precious metals and trust and company service providers. Until a decision is made concerning the second tranche of legislative reforms, it cannot be determined with accuracy which professionals and which of their services will be regulated and to what extent. However, among the professions identified, there has been no indication that the government would be extending the Act to traders.

The viability of transferring the anti-money laundering/counter-terrorism financing framework to trade

Geary has argued that ‘[t]ranslating money-laundering trends in banking to non-banking businesses does not really work’ (Geary 2009: 219). Although some (Delston & Walls 2009) have proposed that implementation of a regulatory AML/CTF program for trade may seem relatively straightforward, by building on an established scheme of monitoring and reporting of suspicious transactions by financial institutions and DNFBPs, it is expected to be a rather costly and complex exercise. McSkimming (2010: 51), for example, questioned whether a trader or trading company ‘would be in a position to observe a transaction in its entirety, and thus be in a position to meaningfully comply with a reporting obligation’. Further, he wrote:

Traders though, are not banks. By and large, they lack the sophisticated and entrenched institutional mechanisms for compliance that exist in financial institutions. They lack customer relationship management platforms; indeed, they often have little direct contact with customers at all. They are lightly regulated in many respects and are directed at a diverse range of industry sectors—from consumer transactions to bulk-material shipping. Given this, how authorities will regulate traders in order to monitor billions of transactions, encompassing millions of containers, in a cost-effective and efficient way is the great, uncontemplated challenge of TBML/TF enforcement (McSkimming 2010: 63).

Although there would likely be some benefits in extending the AML/CTF regime to trade, the costs and logistics of implementation raise major concerns, particularly as TBML remains an under-researched area with a lack of data. As McSkimming (2010: 49) argued, ‘[w]ith counter-TBML/TF efforts likely to be costly, the lack of data makes the case for increased law enforcement resources difficult to make’.

In addition, the budgetary impacts on regulatory agencies such as AUSTRAC need to be considered. The addition of potentially tens of thousands of new reporting entities are likely to require a substantial reworking of AUSTRAC’s supervisory and intelligence strategies and a large injection of additional funding (eg to accommodate cost and resource implications associated with the establishment of a dedicated business intelligence function and the need to upgrade or enhance technologies to accommodate additional information).

Applying the current AML/CTF framework to trade would also require a large volume of resources to ensure that regulations were followed and to analyse the information gathered if traders were made legally mandated reporting entities. This would conflict with government policy to minimise the impact of regulatory measures upon businesses (especially small businesses). As the Department of Finance and Deregulation (2010: np) stated on their website concerning ‘Best Practice Regulation Making’:

Regulations are essential for the proper functioning of society and the economy. The challenge for Government is to deliver effective and efficient regulation—regulation that is effective in addressing an identified problem and efficient in terms of delivering benefits while minimising the costs to the economy (emphasis added).

Applying FATF’s Best Practices guidelines in Australia

An alternative approach to address TBML/TF is to engage in capacity building and awareness raising, both within government agencies and with existing reporting entities who facilitate trade through the provision of financial or logistical services such as financial institutions, money service businesses, postal and courier service providers. This approach is also in line with the objective of FATF’s report on TBML:

[T]here are a number of practical steps that can be taken to improve the capacity of national authorities to address the threat of trade-based money laundering. Among these are the need for a stronger focus on training programs to better identify trade-based money laundering techniques, the need for more effective information sharing among competent authorities at the national level, and greater recourse to memoranda of understanding and mutual assistance agreements to strengthen international cooperation (FATF 2006: i).

FATF encourages member jurisdictions to provide training on TBML techniques to staff of various government authorities including trade, investigative, customs, tax, prosecutorial authorities, as well as Financial Intelligence Units and supervisors of financial institutions, and conduct outreach and awareness raising with the private sector concerning TBML issues. This includes dissemination of TBML typologies, red flag indicators and sanitised case studies as covered in the previous chapter.

Countries are also encouraged by FATF to facilitate joint meetings of relevant domestic authorities to discuss and share new and emerging TBML/TF trends and patterns. Part of this approach could include the routine comparison of existing information obtained through financial transaction reports with trade data obtained from ACBPS. FATF also recommends that jurisdictions conduct joint investigations or collaborate with foreign authorities and participate in the work of relevant regional and international organisations. Importantly, FATF urges jurisdictions to keep the following considerations in mind when implementing measures to combat TBML/TF:

  • competitive neutrality;
  • competition and economic efficiencies;
  • the desirability of ensuring that regulatory considerations are addressed in a way that does not impose unnecessary financial and administrative burdens on reporting entities; and
  • the risk that commercially sensitive information could be misused (for purposes other than combating TBML/TF).

Looking at the specific recommendations made in FATF’s Best Practices Paper, Australian agencies involved in overseeing AML/CTF obligations are most readily able to institute the recommendations that concern education and awareness. One of AUSTRAC’s policy goals is educating people about AML/CTF practices and the function of, and how to comply with, the AML/CTF Act. AUSTRAC’s (2010a) latest annual report demonstrated that it has engaged in numerous education and awareness raising initiatives, as well as holding forums, meeting with peak industry bodies and issuing circular notes. The agency produced 11 editions of its electronic newsletter AUSTRAC e-news (which provides updates on the AML/CTF environment in Australia and overseas), whose subscriptions grew from 831 in July 2009 to 2,658 in June 2010. They also established a Help Desk that fielded 17,680 calls and 5,487 emails, and other written enquiries (AUSTRAC 2010a). AUSTRAC also produced four e-learning modules on AML/CTF matters, which are publicly accessible on the AUSTRAC website. However, AUSTRAC’s education and awareness training at the moment is focused on regulated entities and targeted towards certain industries to encourage voluntary compliance with the AML/CTF Act (AUSTRAC 2010a, 2010b). The forms of education that AUSTRAC undertake, such as seminars, forums, e-learning and circulars could all be easily adapted to raise awareness of TBML.

Alongside educating regulated entities, AUSTRAC is also involved in education and training support for AUSTRAC’s partner agencies, which are classified into five categories—the Australian Tax Office, Australian Government law enforcement and regulatory agencies, Australian social justice agencies, state and territory law enforcement agencies, and state and territory revenue agencies. In 2009–10, AUSTRAC conducted 258 training sessions for 660 users of AUSTRAC’s online enquiry system, which saw an increase in usage by 135 percent in the same year (AUSTRAC 2010a: 3). AUSTRAC also held 57 presentations and awareness sessions on a range of topics, including money laundering typologies (AUSTRAC 2010a). It is not indicated in the annual report whether these sessions addressed TBML, but could be easily accommodated into future training sessions.

The other significant recommendations by the Best Practices Paper revolve around the collection and dissemination of trade data. In Australia, this information is collected by the Department of Foreign Affairs and Trade and ACBPS. As mentioned earlier in this report, the establishment of a TTU in Australia, similar to the one that exists in the United States and is recommended by FATF, looks unlikely to occur due to the set up and running costs and the added layers of administration. However, closer working relationships between Department of Foreign Affairs and Trade, ACBPS and AUSTRAC may help to create a greater understanding of (and possibly identify) potential TBML activities in Australia.

Challenges ahead

The most significant challenge is that TBML, like other types of money laundering, will continue to develop and new typologies will undoubtedly emerge. In a statement as apt today as when it was made, FATF observed that:

There are likely to be illicit financing methods being used that have not been detected by financial institutions or law enforcement, and so will not show up in the data gathered from criminal investigations or financial institution currency or transaction reporting. And there may be other illicit financing options that even the criminals have not yet discovered. In the absence of data or case studies identifying these methods, financial institutions and competent authorities must rely on creative intuition and a careful analysis of potential systemic weaknesses (FATF 2008b: 5).

This statement highlights several important points which are borne out by this research. First, the evolving, and often ingenious, nature of money laundering highlights the need to anticipate new developments and trends. Second, it emphasises the importance of information and analysis in informing and shaping an effective AML/CTF strategy.

These points indicate that, to be most effective, ongoing monitoring and assessment of TBML will be necessary to address potential new developments, such as the move from money laundering using international merchandise trade to services and from international trade to domestic trade. New trading forums such as virtual trading will also need to be considered. Several authors (Choo & Smith 2008; Irwin & Slay 2010; Lee 2009) have noted that trading in online gaming and social network environments, such as World of Warcraft and Second Life, can be used for money laundering purposes. At present there is little known about these areas but they may be likely areas for the next evolution of TBML.

Future research

TBML has been described in this report as an emerging arm of money laundering that needs to be addressed. It has also looked at how different agencies, particularly FATF and US ICE have sought to combat TBML. However, there is still much more to understand about the prevalence and typologies of TBML, which needs further research before any practical measures are considered. This is especially the case in Australia, where there is little indication, from public records at least, that TBML is occurring in this country.

This report has identified five suggestions for future research into TBML:

  • The investigation of the occurrence of TBML in Australia. Any research should take into account the possibility that some instances of money laundering may include TBML activities, (such as the case of Paul Anthony Miller) but are not recorded as such. Research may be pursued through the examination of publicly available records, or in conjunction with intelligence and law enforcement agencies.
  • There needs to be further research into the impact of international TBML on Australia and whether some trading partners (and other countries) increase or reduce the risk of TBML for this country.
  • There is a need to gain a much more detailed insight into how TBML operates. Specifically, what is the nature of trading relationships and infrastructures that facilitate TBML? Such research could help to identify the points of vulnerability from the TBML offender’s perspective, information which could then be exploited by law enforcement agencies in preventing TBML offences.
  • There has been a suggestion by some scholars (Delston & Walls 2009) that the Know Your Customer and Customer Due Diligence regulations present in current AML/CTF regulations could be transferred to traders. Although it would be difficult to make these actions compulsory for traders, research could usefully be conducted into whether voluntary measures to obtain greater knowledge about trading partners/customers/financiers within the trading industry (such as Know Your Customer and Customer Due Diligence) would have an effect upon detecting and preventing TBML.
  • The US’ TTUs have been cited as a possible way of combating TBML. Research to determine whether a TTU would be effective in the Australian context would be a valuable addition to the field; the Australian Institute of Criminology has an interest in pursuing such research with other relevant government agency partners.

Conclusion

Australia’s current AML/CTF laws were implemented gradually from 2006 to prevent money laundering and terrorism financing through the financial system. At present, the scope of reporting entities is limited to banks and other financial institutions, insurance companies, securities and investment companies, gambling services, bullion dealers and alternative remittance services. It has been proposed that regulation may extend to a second tranche of reporting entities (including lawyers, accountants, real estate agents, dealers in precious metals and trust and company service providers), although this has not occurred yet. However, even the second tranche of reporting entities is unlikely to incorporate businesses involved in international and domestic trade.

Extending the current AML/CTF regulatory regime to trading entities would impose a substantial burden on business and entail difficult administrative measures to monitor compliance—issues identified recently by Liao and Acharya (2011) in relation to TTUs established by the United States.

In its Best Practices Paper, FATF (2008a) has recommended that a non-restrictive and narrower approach be taken to tackling TBML, emphasising education and awareness building of TBML as a potential crime and enhanced gathering of information. With the Australian Government looking to minimise the regulatory burden upon business and trade, the agencies involved in AML/CTF measures in Australia, primarily AUSTRAC, have embraced these recommendations by FATF. One of AUSTRAC’s guiding policies is educating people about the risks of money laundering and terrorism financing (as well as how to combat this) and it is noted that future education and awareness-raising programs could usefully incorporate a discussion of TBML. However, it is argued that the formation of a regulatory framework to deal with TBML may be premature and that more research needs to be conducted to first ascertain with greater precision the nature, risks and prevalence of TBML in Australia.