This section provides an assessment of the level of risk of money laundering present in the non-financial business and professional sectors in Australia using information provided by industry and professional associations and the opinions expressed by their representatives who agreed to participate in roundtable discussions conducted by the AIC in February 2009 and follow-up correspondence with the roundtable participants. Any comments provided independently of the roundtable discussions, or those where the opinion expressed was different from that of the professional group view, are referenced to the individual participant with that person’s agreement for this to be presented in this report.
New South Wales statistics
The OLSC receives approximately 3,000 complaints each year, conducts approximately 300 investigations and handles around 2,000 consumer disputes (OLSC 2009a). The OLSC received 2,742 new complaints in 2006–07, finalised 3,042 complaints, opened 459 investigations and closed 536 investigations (OLSC 2007b). Of the 459 opened investigations, 277 were dismissed without a reasonable likelihood of a misconduct finding and 34 were dismissed because any finding of misconduct was at the lower end of culpability and the practitioner was generally competent and diligent. A further 59 other complaints were made more than three years after the incident in question and were not accepted. The OLSC issued 19 reprimands in 2006–07 for issues such as failures to communicate, delays in progressing a matter, competence and diligence issues, acting with conflicts of interest, minor misleading conduct, releasing funds without authority, bringing the administration of justice into disrepute, discourtesy and failing to prepare properly (OLSC 2007b). The OLSC issued 17 cautions and commenced six matters with the Legal Services Division of the Administrative Decisions Tribunal.
The Law Society and Bar Associations each conduct about 600 investigations per year (OLSC 2009a). In 2007–08, the Bar Association received 52 conduct complaints about barristers. Of these, 41 were referred to the Council of the Bar Association by the OLSC and the remaining 11 were made by the Council. The Council dealt with a total of 47 complaints in the same year. The Council dismissed 33 of these, referred seven others to the Tribunal, while the remaining seven were withdrawn (NSWBA 2008). To place these figures in context, there were 2,076 barristers with practising certificates in 2008.
None of the matters examined by the OLSC in 2006–07, or those examined by the Law Society or Bar Association in 2007–08 were the result of a money laundering or terrorism financing matter.
New South Wales disciplinary proceedings
Removal from the Supreme Court roll is the most severe sanction reserved for legal practitioners in New South Wales found guilty of professional misconduct. In most jurisdictions, the details of disciplinary action involving legal practitioners are publicly reported in a Register that records, among other things, the full name of the person against whom disciplinary action was taken and the particulars of that disciplinary action. Legal practitioners’ names in New South Wales were struck off the Supreme Court roll, predominantly for misappropriating funds from trust accounts, other trust account breaches and misappropriating funds from other sources. Other examples of professional misconduct included failing to meet the auditing requirements on funds held in trust, forgery and using false documents, misleading clients, other practitioners and the Law Society, failing to pay fees to other practitioners and over charging clients and failing to protect the interests of a client (OLSC 2009b).
The following cases outline the matters involving legal practitioners in New South Wales that resulted in both criminal and disciplinary proceedings (OLSC nd):
- Law Society of NSW v G  NSWADT 38—the practitioner misappropriated $171,759.87 by falsifying documents over a 12 month period and depositing the money into a personal account. The misappropriations were noticed by the practitioner’s employer via some irregularities in cheques the practitioner requested that he sign. After pleading guilty to the charges, the practitioner was sentenced and her name was struck from the roll.
- Prothonotary of the Supreme Court v A  NSWCA 29—the practitioner deposited trust monies into his personal account instead of a trust account. The practitioner pleaded guilty to misappropriating funds, obtaining money by deception, and obtaining money with false and misleading statements. The practitioner was sentenced to nine years’ imprisonment on pleading guilty to the charges and his name struck from the roll.
- R v A  NSWCCA 315—a client told a practitioner that he was dissatisfied with the interest paid on a bank deposit. The practitioner forged a second client’s signature to create a fraudulent loan agreement and used the client funds from the second client to pay off his creditors. The practitioner was found guilty of obtaining value by deception, declared bankrupt, had his name removed from the roll and was sentenced to four years’ imprisonment.
- Regina v H  NSWCCA 183—the practitioner misappropriated trust funds for his personal use and pleaded guilty to fraudulent misappropriation. The practitioner was sentenced to three years’ imprisonment, a recognisance to be of good behaviour for five years and ordered to reimburse the Fidelity Fund of the Law Society of New South Wales $120,000. The practitioner was also prohibited from applying for a practising certificate for five years, working as a paralegal, or having sole administration of trust funds.
There were no examples of legal practitioners in New South Wales who were involved in a criminal case involving money laundering matters at the time of writing. The New South Wales cases that involved criminal convictions, like those resulting in disciplinary outcomes only, were predominantly for fraud offences involving trust monies. The New South Wales disciplinary proceedings do not show evidence of legal practitioners unwittingly or complicitly assisting clients to launder funds, although cases of this nature might not be detected or reported officially. The common theme across these cases is one of the practitioner knowingly obtaining client funds for illicit personal gain.
Disciplinary proceedings from other Australian states
Between 2004 and 2009, only one legal practitioner in Western Australia was criminally prosecuted for fraud. Two others were suspended, while criminal investigations took place for fraud and trust account offences (Legal Practice Board of Western Australia nd).
- The Legal Practitioners Complaints Committee v S  WASAT 196—the practitioner borrowed $13m from finance companies to purchase earth moving and computer equipment and then spent the funds on lifestyle purchases. The practitioner pleaded guilty to 37 counts of fraud and was sentenced to six years’ imprisonment. The Legal Practitioners Complaints Committee argued that the convictions constituted unsatisfactory conduct. The practitioner was suspended from practice and later struck off.
- The Legal Practitioners Complaints Committee v A Practitioner  WASAT 277—the practitioner was appointed power of attorney for a client and failed to administer the client’s estate after they had passed away. The practitioner is alleged to have sold properties valued at around $2m and withdrawn $70,000 from the client’s cheque account for personal use [the practitioner was sentenced to seven and a half years imprisonment and ordered to pay compensation to the family involved (C Slater personal communciation 12 June 2009)].
- A third practitioner has been suspended pending the outcome of a criminal investigation into an alleged trust account fraud.
The cases from Queensland that involved legal practitioners found guilty of a criminal offence also involved matters where the solicitor defrauded or failed to fulfil a professional duty to a client. Seven legal practitioners were prosecuted for criminal offences in Queensland and struck off the roll between 2003 and 2009. The most common charge, as with other states, was the misappropriation of funds. Two matters involved fraud and others concerned falsifying documents, forgery and fabricating evidence (Legal Services Commission, Queensland nd).
The Western Australian and Queensland matters, like those in New South Wales, did not provide evidence of practitioners assisting clients to enter illicit funds into the financial system or to disguise the origins of those funds. Instead, the practitioners from these states predominantly obtained personal gain from client monies.
Money laundering allegations and charges
AUSTRAC’s Typology and case studies reports include case studies that were initiated or supported by transaction or suspicious matter reports submitted to AUSTRAC by its regulated entities. In compiling these reports, AUSTRAC draws on the combined knowledge of its financial intelligence analysts and partner agencies, to provide real-life examples of how services and channels are misused. To date, very few typology reports have involved legal practitioners, partly due to the fact that the legal sector is yet to be fully regulated for AML/CTF purposes. One example involved a solicitor who was alleged to have remitted funds and carried cash from Australia to Hong Kong in amounts below the $10,000 reporting threshold. The solicitor was reported to be working with another solicitor in Hong Kong who was alleged to have established front companies in the British Virgin Islands and accounts in Hong Kong in order to receive the funds remitted by the solicitor. Some of the funds transferred out of the country in the structured transactions were returned to Australia by the Hong Kong solicitor or sent to other countries (AUSTRAC 2007).
This case highlights the ability of the legal practitioner in Hong Kong to create business structures that have been used to receive funds and remit them back to Australia. The typology does not clarify whether the legal practitioner’s role in this scenario was dependent on the practitioner’s occupation or whether this is incidental to the funds transfers.
Australian legal professionals have also advised AUSTRAC of receiving unusual requests from prospective clients, particularly targeted at passing funds through solicitors’ trust accounts. Examples of these requests include:
- a foreign company requesting legal services involving debt recovery, with the legal firm receiving substantial payments into its trust account from purported debtors (both in Australia and overseas) with little debt recovery work actually being required to be undertaken by the firm
- a foreign investor transferring large amounts into a firm’s trust account, ostensibly for property and other investments, but then halting the investment and asking for the money to be paid to multiple recipients according to the direction of a third party (AUSTRAC 2011: 28).
Although not examples of money laundering, a number of legal practitioners have been investigated for serious tax evasion that arguably could have entailed attempts to disguise the proceeds of unlawful activity (namely tax evasion). In most jurisdictions, conviction of a tax offence must be reported to the professional regulator, together with an explanation as to why, notwithstanding the conviction, the practitioner should continue to be regarded as a fit and proper to hold a practising certificate. Failure to disclose such a conviction would be a matter deemed to be professional misconduct.
One legal practitioner has been linked to a tax evasion case investigated in Operation Wickenby. The practitioner was found guilty of conspiring to dishonestly cause a risk of loss to the Commonwealth in 2010. Gregory outlined a mechanism to enable a client who had been convicted of tax evasion and a bankruptcy offence to evade paying tax to the Australian Government by claiming income as payment for legal fees. The court found that that he received a fee of $22,000 for his role in the scheme. In March 2003, he was found to have sent an email to the Swiss-based accounting firm that the court held was a calculated deception to enable his client to evade his tax. He consented to a pecuniary penalty order for the fee he received and $1,000 in legal fees, and was sentenced to two years’ imprisonment to be released on recognisance after serving 12 months (R v G 2010 [VSC 121]; see also ACC 2011: 41).
The ATO has also taken a keen interest for a number of years in pursuing members of the bar who have failed to lodge income tax returns (sometimes for their entire career) and who had accumulated substantial tax debts prior to declaring themselves bankrupt (Braithwaite 2005). For example, one famous Sydney barrister accumulated tax debts of $3.1m, was declared bankrupt, but continued to practise at the bar. Another barrister who practised at the criminal bar accumulated $835,000 worth of unpaid taxes and penalties and was convicted in 1996 of failing to file tax returns over a period of 17 years. At his trial, he admitted that he had paid no tax during all his years at the bar (Barry cited in Braithwaite 2005).
The problem of barristers failing to pay income tax was addressed by the ATO’s ‘Legal Profession Project’ that used various forms of negotiation, publicity and self-regulation to encourage legal practitioners to comply with their income tax obligations (Braithwaite 2005). In one case, proceedings were taken against a senior NSW barrister for the recovery of $955,672.92 in unpaid income tax for the years ended 30 June 1992 to 30 June 1999. Before lodging these returns, the barrister in question had not lodged any income tax return since 1955 and had declared himself bankrupt, prior to which it was alleged he had transferred property to his wife and a family trust in order to avoid paying his creditors, including the ATO. Proceedings were taken to have these transactions set aside, with the High Court ruling in favour of the trustee in bankruptcy (see The Trustees of the Property of JDC, A Bankrupt v C  HCA 6, High Court of Australia, 7 March 2006).
Opinions of sector representatives
Almost all of the representatives from the legal sector who participated in the roundtable stated that they were unaware of legal practitioners being involved in laundering money for their own gain or on behalf of their clients. The participants considered the AUSTRAC typology report and a situation described by the NSW Legal Services Commissioner as isolated case studies and in their view, statistically insignificant. Those who held the view that legal practitioners were not involved in money laundering pointed to the absence of any money laundering criminal cases involving legal practitioners. Some participants considered that any future increase in the volume of prosecutions of legal practitioners for money laundering would be indicative of a problem within the profession that the profession could deal with, although there was no consensus on how to gauge the level of existing or future sector-wide money laundering risks. The sector’s
professional associations had rarely seen evidence of practitioners involved in criminal activities and almost never seen cases of money laundering. When legal practitioners were involved criminal matters, these invariably involved fraud without money laundering being present.
Some participants, however, differed from the majority view and suggested that there could be a small proportion of legal practitioners involved in money laundering activities, either complicitly or unwittingly, but that evidence of this was difficult to locate. The absence of evidence could be due to lack of involvement in money laundering, failure to detect such instances, failure to report them officially, or failure of the authorities to investigate and prosecute allegations. Further research is needed to examine this in more depth.
Opinions concerning disciplinary action
Breaches of ethical codes of practice could provide an indication of the involvement of practitioners in money laundering, although this would be dependent on complaints having been made from other members of the profession or the public. As outlined in the Professional Regulation in Australia at Present section, above, , the disciplinary data examined as part of the present research provided no instances of action having been taken in connection with money laundering. Participants suggested several reasons for this.
- Disciplinary action, overall, was rare; one jurisdiction had had only one solicitor’s name having been removed from the register in the last decade for a theft from a trust account. The most common types of matters brought to disciplinary bodies were in connection with consumer matters such as invoicing and fees, and occasionally where solicitors conspired with their clients to hide assets in adversarial cases such as those involving family law.
- The way professional conduct matters are recorded and categorised makes it difficult to identify specific types of behaviours, such as those relating to money laundering.
- Participants indicated that because there were no money laundering typologies that specifically related to the legal sector, it was difficult to identify and categorise relevant matters arising from disciplinary proceedings.
The absence of any significant numbers of legal sector-specific typologies for Australia and the absence of reported criminal cases of money laundering involving the legal profession make it difficult for legal practitioners to identify suspicious transactions. The existing regulatory system is able to identify fraud and may therefore be able to identify money laundering if it occurs as a type of fraudulent behaviour but the participants were not aware of this particular type of fraudulent behaviour occurring.
Opinions concerning higher risk activities
In response to a question about possible areas of risk, certain activities were postulated by some roundtable participants as potentially involving higher risks of money laundering than other professional activities, although not all of the participants agreed that all of these activities would entail higher levels of risk and no participants were able to identify actual examples of money laundering having occurred in connection with these activities. The types of legal work identified as potentially carrying higher risks included:
- transactions involving trust accounts;
- cash transactions;
- high-volume work, such as small criminal matters with a quick turnover;
- creating complex business arrangements and structures, and giving advice on these types of structures; and
- matters finalised over long periods of time, such as where the beneficiaries of an estate were unaware of the funds available.
Risks associated with trust accounts
Receiving cash or property that is to be deposited into a trust account was viewed by some roundtable participants as particular area of risk if a client intended to launder money through them. Others took the view that the legislation and professional rules governing the keeping of trust accounts would minimise risks of abuse for money laundering purposes. The use of trust accounts is an important protective mechanism for clients’ money generally. It is not the trust account per se that presents a risk but the possible use by a client intending to launder money.
Of course, not all legal practitioners operate trust accounts. Barristers do not have trust accounts and participants estimated that approximately 40 percent of sole practitioners working as solicitors also did not have the need to operate trust accounts and refused to do so in order to avoid the regulatory burdens associated with auditing such accounts. The volume of complaints stemming from trust accounts led some practices to elect not to have them unless the nature of their practice required otherwise.
One participant commented that the trust account rules effectively allowed legal practitioners to act as a private banker by receiving funds from clients and paying funds out when and as instructed by their clients. The professional bodies indicated that, although this practice is legal, it is not advisable. Other practices, such as transferring funds into a general practice account when concerns arose over the payment of costs, were not uncommon and although permitted by some retainer contracts, it is the source of complaints (C Slater personal communication 12 June 2009).
Trust accounts have been used to facilitate tax evasion and welfare fraud on behalf of clients, although these were rare occurrences. In rare instances, trust accounts have been used in connection with fraud perpetrated against clients, such as where client funds have been taken without authorisation. Participants were unaware of trust accounts having been used to hide the proceeds of crime for clients.
Further risks arise owing to inconsistencies in the regulation of trust accounts in different jurisdictions. Some states, such as Victoria, have more robust regulation than others and it was agreed that a uniform standard was needed throughout Australia concerning the regulation of trust accounts, although opinions differed as to the appropriate standard to be applied. The Law Council supports uniform legislation dealing with trust accounts as part of the reforms being undertaken by COAG (AGD 2012) and does not believe that uniformity will result in any reduction in standards, nor does it believe that the existing trust account regulatory framework is deficient in establishing a robust set of controls over trust accounts.
Some practitioners felt that more people were retaining funds in cash than other instruments in the current economic climate. In Australia at present, legal practitioners are required under the provisions of the Financial Transaction Reports Act 1988 (Cth) to report cash transactions of $10,000 and above; an obligation that is well known in the profession and the community generally. In Queensland, it was reported that annual audits of solicitors’ trust accounts indicated that there are usually between five and 10 cash transactions over $10,000 annually. WA practitioners knew of instances of clients holding large sums in cash due to a mistrust of banks. One client, for example, had $1m in cash. The single largest cash deposit received by a practitioner was approximately $70,000 for a conveyance matter. The solicitor who received the cash was advised to go with the client to the bank to deposit the funds.
Most transactions involving legal practitioners, however, were electronic and therefore already within the scope of ADIs, such as banks. It was considered that ADIs would have adequate risk-management practices already in place to be able to identify suspect transactions involving legal practitioners. The only funds that would not go through an ADI into a trust account would be those received by the legal practitioner in cash.
Participants did not consider the use of cash to be necessarily indicative of something untoward. Clients who paid legal fees in cash, especially for small criminal matters, were not uncommon and sole practitioners often accepted cash payments as normal practice. Roundtable participants did, however, consider that cash transactions may pose some risks to legal practitioners. Risks mainly related to the theft of physical currency and dealing with the proceeds of crime.
Risks relating to cash are, however, checked by existing legislative requirements on solicitors to make cash transaction reports. Under the Financial Transaction Reports Act 1988 (Cth), solicitors must report to AUSTRAC significant cash transactions entered into by or on behalf of the solicitor. A ‘significant cash transaction’ is a transaction involving the physical transfer of $10,000 or more in cash. It is a criminal offence for a solicitor to engage in multiple non-reportable cash transactions for the purpose of avoiding these reporting requirements.
Changing business climate
Some participants, other than the Law Council, suggested that changes in the nature of legal practice in recent years has increased the risks of becoming involved in illegal behaviour. The changes identified by these participants included the following:
- Legal practice is now much more competitive in business terms. This means that some legal practitioners may be less discerning when deciding whether or not to take on new clients. This allows those seeking illicit services from practitioners to ‘shop around’ for assistance among a range of practitioners with varying standards. According to the participant, the Solicitors Regulation Authority in the United Kingdom views small practices with financial problems as being at high risk of compromise by money launderers, especially during difficult economic times, and that similar risks would be present in Australia (P Oliver personal communication 5 June 2009). Often, clients seeking illicit services from practitioners would ensure that everything looked legitimate and that generous fees were agreed to.
- In the past, clients were personally known to legal practitioners and this helped to reduce risks of abuse. In recent times and particularly with the advent of online services, face-to-face contact may be reduced and it may be less likely that practitioners know their clients personally. In recent times, when online advertising is used, clients can also be located interstate or overseas that again makes face-to-face contact difficult. It is no longer reasonable to ponder why a client might have travelled a long distance to select a particular practice whereas once this might have led to some questions being asked about the client (C Cawley personal communication 12 June 2009).
- The emergence of combined practice models, such as migration agents working alongside legal practitioners, can raise risks where funds are provided (eg using anonymous remittance services) from overseas sources that cannot be verified or investigated. Clients who move between departments of a large firm may pose additional risks, for example, migration clients also engaging in property transactions.
- Some participants stated that the clients of criminal practices and criminal/mixed practices, may be high risk by definition. There was some disagreement with this statement as others noted that criminal practices and client fees were excluded from AML/CTF regimes overseas (C Slater personal communication 12 June 2009).
- Some participants also suggested that clients who want to be seen to be doing everything right or who are willing to pay more than usual may present a higher risk.
Higher risk practices
One of the statutory industry regulator representatives noted that suburban practitioners between the ages of 40 and 45 years were the subject of the largest number of complaints concerning professional conduct, although these were most often about consumer matters rather than criminal conduct such as fraud.
The high degree of fluidity in small practices was also believed to pose certain risks. The fluidity of small practices, such as partnerships and firms frequently dissolving and reforming, means that historical information about the practice and its clients may not be retained. The frequently changing nature of some practices might also create record-keeping problems that will be of a particular concern if AML/CTF record keeping requirements for legal practitioners were to be implemented. In the past, solicitors tended to retain files indefinitely as the client and their family members were likely to return and it was useful to have records extending back many years. At any rate, professional rules require legal practitioners to maintain client records for a minimum of seven years, or until such time as the practitioner gives them to the client or another person authorised by the client to receive them, or the client instructs the practitioner to deal with them in some other manner (eg see Rule 8 of The Law Society of New South Wales Professional Conduct and Practice Rules Legal Profession Act 1987). Small practices with limited resources for record keeping and storage now seek permission from clients to destroy records or return them to the client once a matter has been completed. Clients must give permission to transfer files in an open matter to another practice (C Cawley personal communication 12 June 2009).
Opinions concerning future AML/CTF regulation in Australia
Differing views were expressed by roundtable participants concerning the possible extension of Australia’s AML/CTF requirements to legal practitioners. Most of the industry representatives who participated in roundtable discussions expressed concern over the ability of legal practitioners to identify suspicious transactions in view of the lack of clarity concerning the meaning of ‘suspicious’. The ability of small-sized firms to identify reportable transactions was also viewed as being problematic. Identification procedures required under the current AML/CTF regime were viewed by some as not posing any great difficulties for the profession, although not aligning well with business practices adopted in the profession. Identifying and reporting suspicious transactions was viewed as posing considerable more difficulty for all legal practitioners than adopting client identification procedures (S Mark personal communication 5 June 2009). Nonetheless, those participating took the view that existing criminal laws and regulatory measures provided an acceptable response to the small risk that legal practitioners might unwittingly become involved in money laundering or financing of terrorism in Australia. These views were, however, those of the individuals who agreed to participate in the roundtables. The results of the AICs survey of a sample of legal practitioners from the Eastern Australian jurisdictions is reported separately (Choo et al. forthcoming).
A number of participants suggested that any suspicious matter reporting obligation for legal practitioners would conflict with existing professional obligations such as LPP and the nature of the relationship between the legal practitioner and the client. The NSW Legal Services Commissioner noted that legal practitioners already have ethical obligations to report the probable commission or concealment of serious offences. All ethical obligations should be respected in any anti-money laundering (AML) obligations introduced for legal practitioners.
A number of participants expressed concern over compliance costs if all of the existing obligations were applied to legal practitioners. Some participants suggested that legal practitioners may accept costs associated with client identification, record-keeping and reporting obligations, provided LPP is protected.
A number of participants also noted that AML measures could be built into general risk management strategies for legal practitioners. The Law Council of Australia has recently released an AML Guide for legal practitioners, which suggests a number of strategies to minimise possible risks of money laundering, such as having policies on cash handling and procedures for a number of specified matters (eg dealing with unexplained changes in the client’s instructions). Working with AUSTRAC, the Law Council has also widely circulated AUSTRAC information on practitioners’ existing obligations and will publish further AUSTRAC information on money laundering red flags that may assist the profession in identifying and mitigating the risks involved. One participant noted that an effective AML risk management strategy is for a practitioner to ask at least one more question in these types of situations than they would normally ask.
The disciplinary processes of the accounting professional associations (ICAA, CPA Australia and NIA) are not geared towards identifying conduct that may constitute money laundering and accordingly, these Associations were unable to provide statistical information on the extent of money laundering within the profession. All that could be provided was data on the number and outcomes of disciplinary matters dealt with by each Association, which gives some indication of professional misconduct generally—although not specifically with respect to money laundering. Information was similarly not available concerning cases of alleged financing of terrorism in which accountants might have been involved. The ICAAs Professional Conduct Team investigated 259 formal complaints against members in 2007–08 and 27 members appeared before the Professional Conduct Tribunal. The allegations investigated by the Professional Conduct Team involved failing to meet standards of professional care or skill, insolvency, criminal convictions, adverse findings by a court, statutory, regulatory or professional body, breach of the Charter, bylaws or professional standards and conduct bringing discredit on the organisation, member, or on the profession.
The Tribunal imposed the following sanctions:
- three members were excluded from membership;
- two members had their membership cancelled for up to five years;
- two members had their Certificate of Public Practice cancelled and/or declared ineligible to hold a Certificate of Public Practice;
- three members were fined;
- nine members received a reprimand and six members received severe reprimands;
- two members were subjected to an additional quality review of their practice;
- one member was required to attend specified training and development; and
- one member did not receive a sanction (ICA 2008).
CPA Australia investigated 163 externally initiated complaints in 2008, as well as additional matters carried over from previous years. A total of 696 complaints were investigated by CPA Australia between 2005 and 2008 (CPA Australia, ICAA, NIA personal communication 4 June 2009).
The NIA received 42 complaints against members in 2008, of which 11 went to the NIA’s Disciplinary Tribunal. The Disciplinary Tribunal forfeited the memberships of five of the NIA’s members from these matters. The 42 complaints included 34 professional conduct issues, three Quality Review Audit issues and three failures to obtain a public practice certificate. One matter was referred to the NIA from a self-managed superannuation funds auditor at the ATO and another from disciplinary action taken from another body (CPA Australia, ICAA, NIA personal communication 4 June 2009).
Anecdotal case studies
On 18 May 2004, a CPA pleaded guilty to a structuring offence by conducting transactions so as to avoid reporting requirements (under s 31 of the Financial Transaction Reports Act 1988 (Cth)) and was given a sentence of one month’s imprisonment, fully suspended immediately with a $2,000 recognisance to be of good behaviour for two years. The Queensland Disciplinary Committee of CPA Australia then investigated the matter and on 20 December 2006 imposed a penalty of a severe reprimand and publication of his name and required payment of $324 towards CPA Australia’s costs (CPA Australia 2006). This is the only example of a CPA Australia member’s involvement in a money laundering matter.
In another case, a Sydney accountant, her husband and 10 clients were charged in February 2009 with offences relating to tax evasion and money laundering involving $5.2m. The accountant was charged with conspiring to defraud the Commonwealth, conspiring to deal with instruments of crime and obtaining financial advantage by deception. The charges stemmed from allegations that the accountant had designed, facilitated and implemented tax evasion schemes for Australian clients through Vanuatu. She was alleged to have facilitated her clients’ receipt of tax deductions for payments made to businesses in Vanuatu for services that were not provided ($10m fraud scheme dates back to 1995: AFP. ABC News 10 February 2009. http://www.abc.net.au/news/2009-02-10/10m-fraud-scheme-dates-back-to-199...). The accountant’s clients and husband were charged with money laundering, defrauding the Commonwealth and obtaining financial advantage by deception (Twelve charged over $10m tax evasion, News.com.au 10 February 2009. http://www.news.com.au/breaking-news/twelve-charged-over-10m-tax-evasion...).
In R v AJLH [District Court of New South Wales 28/11/1001]; Rv GMJ [District Court of New South Wales 28/11/1002], an accountant pleaded guilty to an offence of obtaining financial gain by deception against the Commissioner of Taxation in 2009. Another accountant pleaded guilty to this charge, a charge of defrauding the Commonwealth and a charge of money laundering under s 400.4(1) of the Criminal Code.
The defendants were involved in a personal and company tax avoidance scheme promoted by a senior partner in an accounting firm in Vanuatu, that involved a Sydney accounting firm. The participants in the scheme were clients of the company that operated businesses in Australia. The company prepared the financial reports and tax statements for the ATO each year.
The companies sent funds to bank accounts in New Zealand held by companies owned by the Vanuatu company with the promoter as signatory on the accounts. The funds were usually transferred from one company account to another in New Zealand and back to the scheme participant’s personal account for transfer back to their business’ account as a shareholder’s loan repayment, or retained in the participant’s personal account. Each participant paid the Vanuatu company a fee for the transfers and paid it to open and maintain a nominee company in Vanuatu. The participants received false invoices for services rendered and the transfers were written off as deductions in the participant business’ tax return. The accounting firm then prepared financial statements including the false expenses, incorporated them into the participants’ tax return, had the participant authorise the return and then lodged them with the ATO.
The scheme also allowed participants to reduce their personal income tax by disguising the transfer back to their Australian account as a loan from a foreign lender. The accounting firm recorded transfers made back to the business, where participants did not retain the money in their personal accounts, as shareholder loan repayments that are not considered income. As with the business tax returns, the accountant submitted personal returns to the scheme’s participants for review before lodging them with the ATO.
The accounting firm ceased to exist in 2006. The ICAA has not commenced any disciplinary action in line with its policy to await the outcome of legal proceedings (CPA Australia, ICAA, NIA personal communication 4 June 2009).
Another accountant based in Vanuatu was charged with tax offences in August 2008. He was accused of promoting a tax avoidance scheme in which 60 Australian companies transferred their assets through a network of firms in both Australia and Vanuatu but he was not charged with money laundering. It must also be noted that the accountant was based in Vanuatu and not Australia (Wilson 2008).
These cases, particularly those involving the accounting firm, illustrate the ability of accountants to participate in complex schemes with the intention of hiding funds or their origin. The case highlights also that facilitating or making complex arrangements in order to help clients avoid paying tax fits the legal need not necessarily remain confined to tax offences and can constitute money laundering offences.
The second AUSTRAC typology outlines an alternate scenario where the accounting firm is immediately involving in receiving, moving and disguising illicit funds generated by an earlier crime. In this scenario, the laundering and the predicate offence are not occurring simultaneously as is the case with the tax avoidance examples.
AUSTRAC’s typology reports have occasionally included examples of money laundering involving Australian accountancy professionals.
In one case, a Colombia-based organisation was alleged to have imported cocaine into Australia and remitted the funds generated to the United States to be laundered through the black market peso exchange. Those involved are purported to have purchased a debt owed to the syndicate with funds generated in Australia. The syndicate allegedly laundered the proceeds (with the assistance of an accountant/financial advisor) through a foreign exchange company that also remitted the funds overseas (AUSTRAC 2008). The precise role of the accountant/financial advisor was not clear.
Another example involved an accounting practice that allegedly channelled approximately $1m from the sale of amphetamines in Australia. The firm was reported to have received funds in 15 bank accounts, which included trust accounts and accounts of businesses created specifically for that purpose. The accountants involved were alleged to have then provided the money to an associate who was a frequent gambler. That associate was instructed to pay 95 percent of the funds he had received into a foreign bank account (AUSTRAC 2007).
Opinions of sector representatives
The professional accounting bodies held the view that accountants may be used in money laundering operations, although there is little evidence showing widespread intentional involvement in illegality. The professional bodies also held the view that the criminal nature of money laundering means that law enforcement agencies, such as the police, would uncover and investigate money laundering as they are resourced and empowered to do so.
The professional accounting bodies do not have the powers of courts, regulatory bodies, or tribunals and do not perform criminal investigation roles. Most investigations into the conduct of accountants are instigated by the complaints mechanisms of the professional bodies and the organisations may initiate investigations in response to media reports and referrals from regulatory authorities (CPA Australia, ICAA, NIA personal communication 26 August 2009).
The ICAA will generally not instigate an investigation while criminal or regulatory proceedings are underway in order to avoid being in contempt of any court proceedings. By contrast, CPA Australia and NIA may initiate disciplinary proceedings before an outcome from a criminal or civil case has been determined by the courts. The disciplinary matters initiated by CPA Australia and NIA in these circumstances will not be finalised (CPA Australia, ICAA, NIA personal communication 26 August 2009).
The exchange of information between professional bodies and law enforcement bodies is sporadic. CPA Australia, for example, will inform law enforcement agencies of any suspected illegal activity. The organisation does not have formal channels to receive information from law enforcement and often finds out about criminal activities involving members from the media and press releases. CPA Australia will conduct an investigation based on this information once it receives it. The NIA may also recommend to individuals wishing to make a complaint about a member to contact law enforcement agencies or the ATO.
The accounting professional bodies view non-members as a key risk for illicit activity because they are not subject to the professional bodies’ codes of ethics or complaints mechanisms. The professional bodies are not able to pinpoint the number of people offering accounting services to the public who are not members of an organisation and therefore not subject to monitoring and disciplinary processes by the professional organisations. One participant estimated that approximately half of the registered tax agents were members of a professional body. The estimate suggested around 12,000 tax agents who were likely to be outside of the accounting professional bodies (P Drum personal communication 12 June 2009). The professional organisations noted that some service providers, such as tax agents, were subject to some regulation for specific services even if they were not members of a professional body.
Voluntary membership also limits the effectiveness of any sanctions that may arise from a disciplinary proceeding. The professional organisations cannot prevent individuals from practising after rescinding membership as they do not issue practising certificates or similar when they enter the profession. Disciplinary actions by a regulator, such as ASIC for auditors, can remove a licence or registration. This will prevent an accountant from offering the specifically licensed service (CPA Australia, ICAA, NIA personal communication 26 August 2009).
The accounting professional organisations stressed that their disciplinary processes are for non-compliance with the organisations’ professional requirements and not specifically for identifying criminal activities. The sanctions available do not include the ability to require members to pay civil damages to clients or other parties.
Professional disciplinary mechanisms and examples of money laundering
Most industry representatives had not seen any examples of disciplinary cases of accountants involved in money laundering. Since its establishment in 2002, the AAT had not had any examples of members being involved in money laundering or fraud in its disciplinary proceedings. Most of AAT’s disciplinary proceedings were for client relationship issues. The same was true of CPA Australia, NIA and ICAA, where many complaints involved disagreements with clients in respect of matters such as fees. Some organisations also received complaints about their members from the ATO.
Industry organisations had not received calls for advice from members, or calls to report matters that might have been connected to money laundering. There were no reported examples of members subjected to the disciplinary process who unwittingly engaged in money laundering or facilitating other crimes. CPA Australia has supplied the disciplinary report for a member convicted of a structuring offence (CPA Australia, personal communication 4 June 2009).
The members of professional bodies who have been involved in corporate fraud have personally benefited from that involvement.
Existing ethical standards and money laundering
The professional organisations cited their Code of Ethics for Professional Accountants and other standards issued by the Accounting Professional and Ethical Standards Board as existing means to prevent their members from becoming involved in illicit activities. The professional bodies considered the jointly agreed quality standards to have addressed most of the AML/CTF regulatory areas. The combination of quality standards and ethical codes were presumed to indicate to the practitioner if any accounting work posed higher risks and any members breaching of those standards are subject to the disciplinary mechanisms of each professional body. Participants also identified other methods by which risks of involvement in money laundering are able to be managed:
- Accounting practitioners will outline the risks associated with a client if they hand the work over to another accountant. The process of outlining the risks would ideally identify any risks that client poses of becoming involved in illegitimate activities, although the process of outlining the potential risks associated with clients is constrained to an extent by the possibility of a defamation suit against the originating accountant.
- Members of the professional bodies, including employees in a firm, are able to speak to external ethics advisors at professional organisations and mechanisms exist that allow anyone to make a conduct compliant against a practitioner [CPA Australia notes that all complaints are investigated (CPA Australia, ICAA, NIA personal communication 4 June 2009)].
- Conduct requirements for some areas, such as public accountants who handle funds in trust, extend to auditing obligations for those activities.
Roundtable participants nominated a range of aspects of accountancy practices that might pose risks of money laundering, although the group did not come to a consensus on which areas of practice might constitute higher than average risks. These were:
- Voluntary membership of the professional associations and absence of monitoring mechanisms for those who were not members—some industry representatives identified tax agents and BAS agents as service providers within the broader profession who had a portion of businesses who were not members of a professional organisation. Of particular concern were people offering accounting services who were not members of an organisation and did not have licensing requirements. Bookkeepers fell into this category.
- Setting up companies and business structures are associated with higher risks—participants held the view that reporting suspicious requests to create companies and other business structures, based on the idea of logical purpose, was problematic. Accountants may offer advice on parsimonious structures or other arrangements. Clients, however, often pursue business arrangements that appear illogical for reasons far removed from involvement in illegal activities. The reasons might be as simple as a belief that complex arrangements, or incorporation, are the most beneficial for tax or asset protection
- or advice from colleagues in their industry or friends. Australian law does not discourage this. Australian law does not require a reason to establish a company.
- Some representatives viewed trust accounts, or accepting money, as risk areas of practising. Accountants commonly use trust accounts as clearing accounts rather than for holding client funds in trust. Most accountants would have a trust account, although few practising public accountants have the capacity to transfer cash. The industry representatives were not aware of any clients who transact in cash or use alternative remittance services.
- APESB has trust account requirements incorporated into accounting standards codes. These begin with requiring any client funds held indefinitely to be held in a trust account. APESB discussed increasing their trust accounts requirements to include more specific guidelines on client money standards. Practitioners outside of the professional organisation structure are not subject to any requirements for trust account management.
- Clients and transactions involving high-risk jurisdictions are also pose potential money laundering risks to the accounting profession.
Real estate agents
Allegations and cases
A cannabis crop was found on a property and after the arrest of an individual, was subject to forfeiture under the Proceeds of Crime Act 2002 (Cth). The offender was alleged to have purchased and registered the block using a false name. The real estate agent and solicitor who had conducted the conveyancing are alleged to have not verified the identity of the purchaser of the property (AUSTRAC 2008).
Mortgage provider allegations
K was an agent for a mortgage provider in Melbourne and was implicated in money laundering for organised drug syndicates in Melbourne through mortgages held by his wife’s company. Police alleged that the company, run by K, loaned $100,000 to collaborators, which was used to purchase a racehorse. Police have alleged that no repayments have been made on the mortgages. K has not been charged (Hughes 2007; Hughes & Ferguson 2008) and these allegations remain unproven.
Proceeds of crime proceedings
A joint investigation with police in Western Australia resulted in the seizure of 20 ounces (560 grams) of heroin, $396,000 in cash, gems to the value of $300,000, motor vehicles valued at $55,000 and real estate valued at $800,000 (Walker 2007).
Disciplinary proceedings outcomes
Examples of Victorian real estate agent disciplinary proceedings have included:
- A director of a real estate agency, was charged with 40 offences of fraudulent conversion of trust fund monies and two counts of deficiencies in a real estate trust account. He was sentenced to imprisonment for six months, suspended for 12 months, ordered to complete 125 hours of community service and ordered to pay $75,293 in compensation. The real estate business was closed by Consumer Affairs before he was convicted (Consumer Affairs Victoria 2008).
- The Victorian Civil and Administrative Tribunal found a real estate agent guilty of breaching his fiduciary duty to the vendor of a property he sold in 2005. He had sold the property for less than market value to his flatmate and misidentified the purchaser of the property to the vendor. He was ordered to pay $2,000 into the Victorian Property Fund and was suspended from holding a real estate agent’s licence for two years (Consumer Affairs Victoria 2006a). The Victoria Supreme Court dismissed his appeal (Consumer Affairs Victoria 2006b).
The available examples of NSW Office of Fair Trading disciplinary outcomes have predominantly been for licensing breaches. These have included trading without a licence or with an expired licence and lending a licence to another agency. Other matters involved not being a fit and proper person, trust account offences, underestimating the selling price of a property, failing to lodge audit reports, criminal convictions and failing to lodge statutory declarations (NSW OFT 2009).
The two Victorian disciplinary cases reflect real estate agents fraudulently for personal gain, or the gain of an associate (rather than illustrating the use of real estate) to store, hide, or transfer illicit funds. Similarly, the disciplinary procedures in New South Wales also focus on the fit and proper character requirements and fraud perpetrated by agents for gain, rather than matters that exemplify the use of real estate agents to launder money.
ASIC has brought charges against several property developers on the basis of running a company while disqualified:
- A property developer in Western Australia was an undischarged bankrupt (ASIC 2007a).
- A property developer also operating a private lending business had been convicted of fraud (ASIC 2008c).
MFAA suspended or expelled five members between January 2008 and April 2009 for the following activities (MFAA nd):
- submitting loan applications on behalf of individuals without meeting the applicants, breaching the MFAA’s Code of Practice;
- receiving a ban from ASIC from operating in any part of the financial services sector;
- signing documents on behalf of an employer without their consent;
- advising a client that support documents for a loan could be drafted before the loan was submitted to the lender; and
- submitting loan applications without meeting the applicants, including signing 100 point check declarations.
The disciplinary proceedings (focused on license breaches, fraud and failure to meet the fit and proper person tests) can be interpreted in two ways. The first interpretation suggests that disciplinary matters against real estate agents do not support the suggestion that the AUSTRAC typology outlined above is a common occurrence. The alternative interpretation (that existing disciplinary mechanisms are not sufficient to uncover risks of money laundering in the sector) relies on an assumed level of money laundering taking place.
Opinions of sector representatives
Representatives from the real estate industry held mixed views on the possible extension of AML/CTF regulatory obligations to the industry. Some participants considered any additional regulatory requirements would increase the perceived legitimacy of the industry. Others saw using know your customer requirements to identify buyers and sellers as a potential mitigation strategy for risks of non-payment or fraud.
Those that saw some benefit to the profession’s inclusion in the AML/CTF system also held the view that education and consultation were vital.
Criminal activity in the real estate industry
Industry representatives were not aware of any examples of money laundering that had involved the real estate industry in Australia and viewed the possibility of organised syndicates doing so as an unlikely possibility. There were some examples of fraud in the industry, although representatives were clear on the distinction between a predicate offence and laundering money using real estate. Fraud that involves real estate encompasses more than a single industry participant. There were two examples of Queensland property valuers implicated in frauds in a 10 year period. The valuers, however, were not prosecuted.
This perspective is at odds with the findings of Walker’s (2007) analysis of money laundering in and through Australia in 2004 in which it was found, inter alia, that ‘criminals in Australia tend to invest in real estate, gambling and luxury goods’ (Walker 2007: vi). Walker (2007) estimated that $651mn, or 23.2 percent of the total proceeds of crime was spent on real estate investment. He concluded that:
On average, real estate investment appears to be the most frequently cited destination for the proceeds of crime in Australia, according to the collective wisdom of our Australian law enforcement respondents. Roughly a fifth is invested directly into further criminal activities, while gambling and the purchase of luxury goods
come next. Only an eighth of the proceeds of crime are invested in legitimate business. This observation gives credence to the FATF’s recognition of the real estate sector as being vulnerable to exploitation by launderers (Walker 2007: 59).
In the Netherlands, an intensive study of the money laundering risks evident in the real estate sector was undertaken by Unger & Ferwerda (2011) who identified 17 characteristics of transactions most likely to be indicative of money laundering. Of 11,895 real estate objects (properties) examined, 150 seemed unusual. Major risks arose in connection with ‘objects owned by foreigners, newly established companies and objects with unusual price fluctuations’ (Unger & Ferwerda 2011: 151).
In Australia, the Royal Commission into the Building and Construction Industry found examples of fraud and money laundering in the building industry in New South Wales where subcontractors were involved in money laundering to pay their contractors. The participants considered the illiquidity of real estate to make it an unlikely asset to be involved in the financing of terrorism.
Real estate agents rely on other participants in the sale of real property to provide information such as certificates of title, mortgage and contractual documents. Participants indicated that reliance on third parties for information in property sales created certain risks of fraud, although reported instances of fraud in conveyancing transactions are rare (Law Council of Australia personal communication 24 July 2011). The majority view of the industry was that money laundering using real estate requires the complicit involvement of the participants in the transactions in order to take place. The further belief was that extending AML/CTF to real estate would do little to reduce complicit involvement.
Identifying money laundering using existing regulatory systems
The industry representatives viewed the current mechanisms sufficient to identify money laundering. The ability of the industry to identify money laundering would increase with education and particularly with examples of it occurring in the sector.
The participants indicated that existing regulation requires the funds handled by real estate agents to pass through trust accounts and the regulation of these accounts was cited by industry representatives as sufficient to prevent money laundering. The Australian Capital Territory Office of Fair Trading has required real estate agents to audit their trust accounts for the previous 10 years. The audits are completed by accountants, although additional audits are also done at random. Victoria’s system for trust account auditing mirrors that of the Australian Capital Territory. Auditing results are reported to Consumer Affairs Victoria who also undertakes random audits. Industry representatives perceived the role of estate agents as fixed in the transaction phases of buying property and bound by the regulatory controls on handling funds in this phase.
The MFAA, mostly comprised of small businesses, introduced a mandatory AML/CTF compliance program for members and considered brokers with an understanding of AML/CTF compliance to be more attractive to mortgage providers. Members of the MFAA do not have a reporting obligation and the organisation noted that there was no mechanism for filing reports should members identify a suspect client.
Deregistration is one of the more severe sanctions that can be imposed on real estate agents. There were few examples of this taking place. Serious criminal convictions, punishable with more than three months’ imprisonment, result in expulsion from some organisations such as the API. The API expelled a member who was involved in a bribery and corruption case. Most examples of expulsion from the API have been for misconduct and not for fraud.
Members of some industry organisations were expelled more readily than others. The information leading to the MFAA’s decision to expel of a member, for example, was often insufficient for a prosecution.
Participants indicated that property valuers were less likely to be the cause of a formal complaint than other participants in the industry. Unprofessional valuers, or those engaging in misconduct, were avoided by other actors in the industry instead of becoming the subject of complaint.
The mortgage and finance industry adopted a similar approach to keeping individuals who engage in questionable practices out of the industry. A manager or mortgage broker responsible for a high number of loans defaulting will be fired and disaccredited with lenders or insurers, whereas prosecuting the individual involved can be expensive, time consuming and comes with reputation risks. Participants held the view that know your customer requirements may help mortgage brokers to pick up illegitimate customers, brokers, or deals ahead of patterns of defaulting loans.
Industry risks identified by participants
The industry representatives indicated some areas of real estate transactions and the industry may be more vulnerable to untoward behaviour.
- Licensing system problems—Licensing is a barrier to entry into some occupations in the real estate industry and forms the basis for some sanctions for illegal or inappropriate behaviour such as deregistration. Difficulties in the licensing systems for real estate agents may impact on the ability to impose sanctions on real estate agents and other industry participants involved in money laundering.
The real estate industry representatives considered the licensing standards for real estate agents to vary considerably between Australian states. Participants considered the Victorian licensing system to be more stringent than those of New South Wales or Queensland, signified by the annual publication of the names of those found guilty of malpractice by the Commissioner of Consumer Affairs in Victoria and suggested that the standards of NSW licensing system caused difficulties for mutual recognition between states.
- Property valuing—Participants saw the possibility of property valuers engaging in fraud and some difficulty in detecting frauds, stemming from the subjective nature of performing a valuation for a property. Multiple property valuers are likely to arrive at different prices on a property. The industry representatives suggested that market fluctuations, such as those in early 2009, might make gauging illegitimate decreases in the value of a property very difficult to identify.
All Queensland real estate contracts recommend seeking a second valuation before finalising a sale. Participants agreed that few people follow this recommendation as it opens the possibility of a different quote that may reduce the financial return on the sale. The practise of adhering to a single, favourable valuation for a property reveals the impact market fluctuations and individual valuers might have on the price of property. The further implication is that transactions or aspects of a sale that look fraudulent (such as two valuations conducted in a short time frame resulting in different prices) are not uncommon and can occur for legitimate reasons.
Participants agreed that the nature of property sales required the participation of numerous people in order to launder to launder money by seriously overvaluing a property.
- Obtaining financing for properties—The real estate agents reported often asking buyers how a transaction will be financed. Knowing whether the financing is done through a bank, credit union, or through other means, is useful to the vendor. The information allows the real estate agent and vendor to assess the likelihood of the sale falling through and the timeframes involved among other things. Most of the information about financing, however, is revealed when the contracts for the sale are exchanged and the transactions are managed by the legal practitioners involved. Participants from the real estate sector agreed that legal practitioners are the parties best able to verify where the financing for a sale comes from.
- Illegitimate clients have the opportunity to apply for financing from many different lenders if they are unable to secure a loan from one. There is no system for exchanging information or preventing multiple applications if subsequent requests for finance are denied. For each loan, however, mortgage insurance documentation would exist. The mortgage insurers are able to identify multiple applications for financing. This is regulated at the state and territory level.
- The impact of market fluctuations—Movements in the Australian real estate market in 2009 meant that legitimate falls of 20 percent or more in the
- value of some properties were not uncommon. Falls in value of this size might have indicated something untoward in other times. Outliers in pricing, presumably in an area or for a type of property, are also not uncommon.
The industry representatives expected that the anticipated substantial price falls would also lead to more instances of fraud linked to real estate agents. Participants expected fraud and questionable deals to rise as both agents and clients attempt to supplement their income levels and maintain existing lifestyles. The expectation within the industry was for an increase in predicate offences involving agents and clients but not an increase in money laundering. Conversely, industry representatives also anticipate that any reduction in work volumes would allow agents more time to examine transactions more closely.
- Title transfer, point of sale and conveyancing—The title transfer phase of a sale was where industry representatives saw an opportunity for money laundering as this is where the transaction actually occurs. The separation of real estate agent services and conveyancing services in most states means that real estate agents are not preparing the contracts for the sale. The role of the real estate agent, in most states, is as the initial point of contact and negotiator of the sale. The conveyancers (usually legal practitioners) and the financial institutions manage the actual transaction. The extent of the involvement of an estate agent in the transaction would be handling the deposit that is usually less than 10 percent of the funds. Real estate agents, as noted above, are regulated for handling funds with auditing requirements.
Almost all of the industry representatives viewed conveyancing as the area best placed to conduct due diligence and to some extent, was already likely to be associated with some identification checks.
Participants illustrated that moving any customer identification requirements within the industry to conveyancers is not without problems. Individuals are able to conduct their own conveyancing and one participant reported having never had his identity verified when selling a property.
The existing due diligence requirements of the banking sector mean that the identity and income of the loan applicant have been assessed. Purchases made without financing, however, are not subjected to this scrutiny at a previous point in the real estate transaction.
- Purchasing with cash—Property transactions, including the portion of funds handled by real estate agents, are unlikely to be made with cash. Real estate agents are unlikely to be insured for handling cash in this way. Real estate agents, however, are also unlikely to decline cash transactions if the possibility arises.
Property auctions are an area where cash is not uncommonly used. Cash payments allow the successful bidder to make a deposit on the day. Other types of clients do not always buy through the banking system. Making purchases with cash is not illegal, as some participants pointed out, nor is it illegal for a business to accept cash. Large cash deposits, or purchases, will be reported to AUSTRAC where the vendor or agents enters these into the banking system, although beneficial owners are not always able to be identified.
- Electronic title transfer, electronic conveyancing, listing—Participants considered the National Electronic Conveyancing System, internet listings and online transactions as sources of heightened risks of money laundering within the industry.
The electronic conveyancing system is likely to expedite the process of property sales by automating the authentication of property titles, facilitating property checks with local government and revenue authorities and minimising face-to-face contact between those involved in transactions. Arguably, this could make money laundering using real estate transactions more attractive to some criminals. Roundtable participants suggested that a control mechanism at the point of transfer might mitigate these risks.
Dealers in precious metals and precious stones
There have been occasional cases of criminal conduct taking place in connection with the precious metals and stones industry, although reported cases generally involved allegation of fraud for personal gain or tax avoidance rather than money laundering.
A solicitor in Melbourne, executed a sizeable fraud purporting to offer an investment scheme with tax incentives to wealthy clients. The funds raised for the venture were deposited into the trust account of the law firm of which he was a partner and were moved into another account.
The solicitor held a second trust account and used this account to siphon the funds from his firm. He had not notified the Law Institute of Victoria of the second account, held at a bank branch. The bank also failed to notify the Law Institute of the existence of the second trust account despite legal obligations to do so at the time.
Investigations into the trust accounts and other files, after the solicitor’s murder, revealed that he had collected funds from other clients using false mortgages.
After moving the funds from the firm’s account, into his second trust account, he then sent the funds offshore for investment using wire transfers. The bank allowed him to make deposits using third party cheques into the second accounts because it was a trust account. Some of the money was sent to Thailand to purchase sapphires and other funds were reported to have been invested in a sapphire mine in Laos. The solicitor was alleged to have stolen A$42m in total from prospective investors in the tax minimisation investment. The thefts from the firm trust account were discovered after his murder in Cambodia (Conroy 2000; Owen-Brown, Pedersen & Heywood 2000).
DPP (C’th) v G  VSCA 107 (27 July 2001)
The defendant pleaded guilty to conspiring to defraud the Commonwealth in 2000. For a period of 13 years, he performed money laundering services for members of the orthodox Jewish community in Australia evading paying tax in Australia. He collected the funds (mostly in cash) and deposited them in an account opened in the name of a charity. The funds were then remitted to Israel. The funds were reported to have come from the sale of diamonds illegally imported into Australia. He collected funds in cash and the beneficial owner avoided paying sales tax as well as personal income tax on the profits of sales. A Melbourne diamond dealer with charged with tax fraud along with the defendant. The case identified a Sydney diamond dealer, using his services, who was not charged (Barry 2000).
This case outlines a scheme reportedly used to hide proceeds allegedly generated from illegal importation of high-value items and tax avoidance. The case does not point to specific components of the precious metals and stones industry that tie it to illicit transactions as the allegedly implicated diamond trader’s occupation (and the type of goods imported) are not crucial to the offences. The other case differs somewhat as the solicitor had engaged in ‘parking’, a practice outlined below, to move or hide value that presumably was the intention of the suspect outlined in the AUSTRAC typology.
A money laundering investigation alleged that the primary suspect had purchased silver valued at $180,000. The purchases were made with cash and in amounts less than $10,000. The offender’s alleged structuring activities also extended to employing third parties to make purchases on his behalf (AUSTRAC 2008).
Additional typologies for the precious metals and stones industry
- Parking—the practice of parking is using precious stones and valuable pieces of jewellery to store value. Parking value in precious stones is attractive due to their small size, the ease with which individual items can be transported and the ease with which most items can be redeemed for cash. Large cut and polished diamonds, large and rare coloured gemstones, some pieces of jewellery and some rough coloured gemstones,
- such as opals, are suitable for parking value.
- Parking value in diamonds may also be profitable in itself, although this requires the purchaser to obtain stones at less than wholesale prices. Parking value only, without the goal of making a profit, is stable even if the purchaser pays a normal rate for the items.
- Moving funds overseas—the small size and ease of transport makes moving value across borders using stones very easy. Any pieces with the appropriate certification documents are easily resold and all of the transactions will appear legitimate.
- The following example shows the values that might be involved and the cost of transporting value internationally using a diamond. A diamond worth about US$429,000, certified by the Gemmological Institute of America, is about 13.5mm in diameter and is easily set into a simple piece of jewellery. The jewellery item can be worn out of Australia and the resale value of the piece would probably be 95 percent of the initial outlay.
Crime risk factors for the precious metals and stones industry
- Most high-grade diamonds come with a recognised grading certificate. The grading certificate means that the value of the stone can be easily determined by anyone with a small amount of knowledge. The recognised grading certificate reduces the risk of losing value for anyone parking value, or moving value, using diamonds. The prices of jewellery vary more considerably than those of diamonds and, as such, pose a higher risk of losing value for a purchaser wishing to on sell.
- Individual diamonds can be rendered very difficult to track. Any identifying marks, or distinguishing features such as some cuts, can be easily removed or redone to render the stone anonymous.
- Coloured stones are used less frequently to move value. They are less readily available in Australia than diamonds with the exceptions of opals, pearls and sapphires. The sale prices for coloured gemstones will also fluctuate far more than those for diamonds with a certificate.
- Opals are less appealing than other stones as a means of moving value. Opals are susceptible to cracking and finding an onward buyer can be difficult.
- Pearls are very tightly controlled and wholesalers very selective about the markets receiving pearl products.
- The different grades of sapphires might offer an increased opportunity to hide value. The grades of sapphires, unlike diamonds, are more difficult to recognise. High-grade sapphires can be easily passed off as a lower value item.
Other industry-based risks factors for illicit behaviour include the high degree of liquidity of stones, particularly in some Asian markets, where precious stones are very easily converted to cash. The lack of transparency in the industry can make spotting illicit activities very difficult even for industry participants.
Opinions of sector representatives
Criminal activities within the sector
Industry participants recognised that criminal conduct occurred in the precious metals and stones industry although the participants considered it be usually fraud for personal gain or tax avoidance and not money laundering. Participants suggested that buyers in the 1960s–1980s avoided paying tax in their home countries by depositing money into Australian bank accounts from Bangkok and collecting the funds when they entered Australia. The suggestion was that this practise no longer takes place as buyers ceased coming to Australia frequently.
The specific examples of criminal activity discussed by the industry representatives focused on activities related to retailing precious metals and stones. The examples included an auction house in Western Australia where all of the items for an auction were stolen in the day of the event (including everything in the safe) and a pawnbroker in Queensland behaving dishonestly. The exception was the case referred to above although industry representatives pointed out that he was not a gemstone trader.
The other forms of criminal activity within the sector discussed by participants focused on smuggling activities. The presence of some items that could not have been sourced legally in Australia suggested to industry representatives that the items were smuggled into Australia. Industry representatives believed these items to have been sourced from India and South America but stressed that establishing evidence of criminal activities within the industry would be difficult as all the information available within the industry is anecdotal.
There are examples of large volumes of diamonds being smuggled such as one case, in 1972, when $250,000 worth of diamonds left Australia. Industry representatives suggested that although cases of theft such as this give the impression that money is easily laundered in the industry, it would be difficult for an industry participant to move into criminal activities once well-known and established in the industry.
Participants believed that the incentives to undertake criminal activities dropped with the introduction of the GST, as the 33 percent wholesale tax (payable prior to the GST) provided a degree of motivation to engage in illicit activities.
Sector specific risks identified by industry representatives
Industry representatives highlighted that the principal vulnerability of the precious metals and stones industry was the high value of the goods involved and the ease with which they could be transported. Coloured stones, diamonds and precious metals are not synonymous in value and participants outlined different risks associated with each. The prices of jewellery items were considered to vary more considerably than those of diamonds, which might make jewellery more susceptible to risks of losing value for a purchaser wishing to on-sell.
Most coloured gemstones are far less valuable than diamonds. Transactions of more than $10,000 would involve a large volume of most coloured gemstones but might constitute a single diamond sale. Participants stated that items worth $10,000 or more constituted around 95 percent of all overseas transactions made by those participating in the diamond business. The lesser value of coloured gemstones was considered to make them more transportable, presumably because of the decreased risk and participants reported that individuals rarely transported diamonds, because of their very high values, unless the individual is smuggling them.
Industry representatives highlighted that very high-value items are very recognisable and easily tracked, reducing the ability to use these items to engage in illicit transactions, although this is not necessarily the case with all stones. Identifying marks, or distinguishing features such as some cuts, can be easily removed or redone to render the stone anonymous. Most high-grade diamonds come with a recognised grading certificate that allows those with a small amount of knowledge to determine the value of the stone. The recognised grading certificate was considered to reduce the risk of losing value for anyone parking value, or moving value, by purchasing or selling diamonds.
Participants suggested that coloured stones would be less attractive than diamonds to those aiming to store or move funds as they are less readily available in Australia than diamonds, with the exceptions of opals, pearls and sapphires. The sale prices for coloured gemstones were argued to have greater fluctuations than those for diamonds, with a certificate also serving to reduce the appeal of coloured stones to hold or move value. The features of some coloured stones were considered by some participants to further reduce their appeal in this respect. The susceptibility of opals to cracking and the difficulties of finding an onward buyer, and the tightly controlled markets for pearls, were the specific examples given.
The different grades of sapphires were suggested to offer an increased opportunity to hide value. The grades of sapphires, unlike diamonds, are more difficult to identify that might allow high-grade sapphires to be passed off as a lower value item.
Source countries and business practises
Industry participants highlighted some common business practises within the sector and features of the sector that may increase the risks of illicit transactions or difficulties associated with identifying them.
- The industry sources products from other countries that operate under different cultural practises for business transactions. The examples given by participants included transacting in
- Indonesia, which may mean working within a culture of facilitation payments to get things done, and the likelihood that suppliers in some countries will not have formal identification documents that encourages the industry to rely on trust to an extent.
- The precious metals and stones industry has a culture of anonymity. Anonymity becomes an issue because of social norms. The example given by the industry participants is that of a customer purchasing a gift for a mistress where social convention might require an anonymous transaction. The culture of anonymity is also driven by the security concerns associated with purchasing high-value items. Participants suggested that the lack of transparency in the industry can make spotting illicit activities very difficult even for those in the industry.
- Stones have a high degree of liquidity, particularly in some Asian markets where precious stones are very easily converted to cash.
Industry representatives suggested that the close relationships between industry participants may offer some insulation against criminal activities. The close relations make following transactions very easy unless a buyer specifically deals directly and privately with a supplier who chooses to keep the identity of that buyer secret. The closeness of the industry also produces a wariness of unknown participants that are also not known to colleagues.
Deregulation of related activities
The industry representatives viewed the deregulation of some aspects of the industry as a risk for criminal activities. The example cited was the deregulation of auctioneers by Australian states and territories. Valuers and auctioneers who are not members of an industry body are completely unregulated and unsupervised. Approximately one-third of valuers in Australia are not members of the National Council of Jewellery Valuers.
There is a divergence in the amount of regulation required by different states and territories and the Australian Government. The industry representatives believe the pawnbroker industry in New South Wales to be unregulated and subject to random checks only. Queensland was cited as a state conducting regular monitoring.
Representatives cited the example of an auction business going into receivership as an outcome of deregulation of auctioneers. The business did not have a trust account and as a result no one was paid after it became insolvent.
Transactions and payment methods
Industry representatives stated that approximately 50–60 percent of all transactions within the precious metals and stones industry were completed using cash cheques, as the transactions were for small amounts and larger transactions were usually done with credit cards. Cash was also considered the standard method of payment when purchasing stones, with participants indicating that buyers will normally take $15,000–20,000 to Asia on buying trips; however, they stated that the volume of coloured gem and opal buyers that use cash entering Australia had substantially fallen.
The industry saw internet sales and companies only advertising on the internet as a substantial risk as the vendors are unknown. Internet sales were believed to account for a high volume of gem sales and although the amount of money exchanged in each sale was considered to be small, this avenue was argued to offer the potential to move large sums of value.
Internet diamond sales mark a key change in the industry that participants argued would heighten the risks of illicit activities occurring. The industry in the past was closed and trading was conducted only between wholesalers and retailers. Internet sales have made wholesale diamonds available more widely.
Tracing precious stones
The Kimberley Process was established to cut the flow of ‘blood diamonds’ and industry representatives believe its introduction reduced the percentage of illicit diamonds from 4.5 percent to one percent. The requirements of the Kimberley Process may also help to trace diamonds. The tracking aspects make selling stolen or uncertified diamonds difficult as fewer people are happy to deal with these stones although some still circumvent any system. The coloured gemstone industry is considering adopting a fair trade system replicating the Kimberley Process.
Gold, of all of the products in industry, was argued to be the only one that could be easily used for money laundering. Tracing gold, once it has been smelted, is much more difficult than tracing stones although the mine of origin can possibly be deducted.
Trust and company service providers
Sarin Gas Attack
The organisation responsible for sarin gas attacks in Tokyo in 1995, established two companies in Australia. One was used to import electrical equipment into Australia. The organisation established another company and used it to purchase chemicals. Members of the group used the first company to purchase a station in Western Australia to conduct tests in Australia. The property was sold after the subway attacks and the new owners notified the police after finding the chemicals. The police found sarin residue on the sheep station (House of Representatives 2008a).
An offender allegedly used stolen and fraudulent identities to open accounts and other instruments to move the funds generated by goods and services tax fraud. The offender registered companies and obtained the services of virtual and serviced offices, and moved money between his companies by falsifying trade documents. He also allegedly used international accounting firms to perpetrate the fraud (APG 2008).
The AUSTRAC typology illustrates the potential use of companies to move illicit funds with trade-based money laundering mechanisms. The offender might not have been able to create the companies used if required to demonstrate a legitimate purpose for establishing those entities. The typology does not clarify if an application of existing AML/CTF legislation would have prevented or flagged those companies to anyone involved in providing services to the offender, although it is likely that the bank would have reported the transaction as being suspicious. The scenario also does not indicate whether the offender used a service provider to create the companies of if he did so himself.
The sarin gas matter illustrates the group’s use of a company to disguise its importation and purchasing activities. This example, like the AUSTRAC typology, does not point to a clear means of preventing the companies from purchasing the components of explosives, although adequate customer identification might have resulted in identifying the group’s members at the point of company creation if they used a service provider.
Disciplinary proceedings outcomes
The following examples are of matters involving company secretaries pursued by ASIC:
A woman pleaded guilty to offences of obtaining financial advantage by deception and making false information available to company auditors, an offence under the Corporations Act. ASIC commenced an investigation into the company after allegations were made that the company mislead auditors, creditors, officers and shareholders about the financial performance of the company (ASIC 2008d).
A company director pleaded guilty to charges of making misleading statements (an offence under the Crimes Act 1900 (NSW)) and of failing to discharge his duties as an officer of a company (an offence under the Corporations Act). He was charged after an ASIC investigation (ASIC 2007b).
The ITSA Bankruptcy Regulation Branch received 378 complaints in 2007–08. The complaints concerned:
- decisions about claiming or disposing of assets (24%);
- lack of information or responsiveness when information is sought (16%);
- fees and costs (13%);
- delays in the administration or lack of action (8%);
- inappropriate conduct or conflict of interest (8%); and
- income and contribution liability assessments (5%).
Of the 378 complaints made, the Branch found that 41 were justified (ITSA 2008).
In 2008, the Branch’s inspection program found errors of inadequate communication, inadequate investigation of possible assets or income, incorrect meeting procedures, failing to maintain proper financial records, not dealing properly with creditors’ claims, incorrectly calculating or realising interest charges, delays, insufficient record keeping and overcharging (ITSA 2008).
The disciplinary proceedings for occupations providing trust and company services, like those of the other industries considered in the scope of this report, focus on licensing breaches, frauds and failures to meet fit and proper person standards, rather than indicating involvement in money laundering.
Opinions of sector representatives
The views of trust and company service provider participants on the risks of illicit transactions taking place and their perceptions of prevention strategies were tied to their specific business sectors.
Insolvency practitioners suggested that misconduct within their sector was more likely to be ineptitude than intentional fraud and pointed to the absence of any reported examples of involvement in money laundering. Representatives from the insolvency profession argued that the tight regulation and oversight by ASIC would render the profession unattractive to those wishing to launder money. Participants considered tax evasion to be a more prevalent issue for members of the Tax Institute of Australia and for self-managed superannuation funds where people may gain more favourable tax provisions by lying about their age.
Members of the Committee of Business Incorporators Australia (CBIA) reported conducting most of their business over the phone or internet. CBIA members outlined that the process involves collecting a lot of personal data about their clients such as place of birth and address and business address details to satisfy ASIC requirements. It also involves creating industry representatives from the business incorporators sector and reported that businesses providing this service would predominantly deal with clients after they have already have had contact with other gatekeepers such as accountants and legal practitioners.
The CBIA views any exclusion of ASIC from proposed customer identification requirements as one that will create inconsistencies in any identification and verification system. ASIC’s intention to make online incorporation available to the public in 2011 will amplify the problem. The CBIA does not see incorporation as a money laundering activity in itself and requires another activity such as opening a bank account (J White personal communication 29 May 2009).
Some of the general risks identified by industry participants included:
- the disparate legislation and regulation between jurisdictions that may lead to problems of mutual recognition and duplication. Industry representatives suggested that one solution to this problem would be for ASIC to assume responsibility for overseeing business establishment instead of leaving this to states and territories;
- there are risks arising from the ability of a single auditor to make a decision about a client’s accounts and level of compliance; and
- businesses with high cash inputs may be more likely to accept less than legitimate business offers in times of financial constraint due to a lack of other opportunities. Those monitoring their finances might be less inclined to report discrepancies in that environment.