Money laundering is the process by which criminals, particularly those involved in serious and organised crime, seek to convert illegally derived funds into assets that appear to be legitimate. Criminals use a range of sometimes complex procedures and transactions to disguise the proceeds of what they have done so that their funds cannot be traced and confiscated by the authorities. Such complex financial processes can also be used to disguise the origins of funds used to finance terrorist activities. In this case, often legitimately derived funds are used for illegal terrorist purposes.
Both types of activity have created concern for governments across the globe and led to the development of a sophisticated regulatory regime designed to deter and to prevent these illegal activities and to obtain financial intelligence for use by law enforcement and counter-terrorism agencies. Under Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act), at 30 June 2012, some 8,444 entities were enrolled with the Australian Transaction Reports and Analysis Centre (AUSTRAC) on the Reporting Entities Roll and the financial intelligence gathered is used by AUSTRAC and its partner agencies to examine cases of alleged financial crime, which may then be referred for investigation by police and where appropriate, referral for prosecution. In 2011–12, AUSTRAC provided financial intelligence to 19 Australian Government agencies and 20 state and territory government agencies that conducted two million searches of its data holdings (AUSTRAC 2012a).
As financial institutions and other regulated businesses work towards full compliance with the AML/CTF Act, it is suspected that criminals may increasingly look to the professional sectors in order to facilitate the laundering of illicit funds and the financing of terrorist activities. Professionals, such as legal practitioners and accountants, are potentially attractive to criminals because of their capacity to create corporate vehicles, their expert knowledge and the lack of suspicion that is generally directed towards them due to their high social standing. It is for these reasons that FATF recommendations require members to extend AML/CTF regulation to ‘designated non-financial businesses and professions’ (DNFBPs). It has been internationally recognised that legal practitioners, accountants, real estate agents, dealers in precious metals and stones, and trust and company service providers pose a ML/TF risk because of the nature of the services that they provide.
To be FATF compliant, Australia would need to extend the application of the AML/CTF Act to include these services. Whether it is desirable to do so largely depends on the level of risk of involvement in money laundering and financing of terrorism found to be present, and whether the costs of regulating them outweigh the likely benefits to be derived in terms of deterring financial crime, assisting in the investigation and prosecution of those alleged to have acted illegally, and in generating financial intelligence for law enforcement and other government agencies. Consideration also needs to be given to the need for Australia to be compliant with FATFs recommendations.
The present study
The Australian Institute of Criminology (AIC) undertook research in order to determine how industry views the level of risk that exists in the business and professional sectors representing legal practitioners, accounting professionals, real estate businesses, dealers in precious metals and precious stones and trust and company service providers, that are the business and professional sectors included within the Financial Action Task Force (FATF) on Money Laundering recommendations. The research considered different types of participants in each sector separately because of the considerable variation in roles, regulation and threats. In addition, the AIC undertook a survey of a sample of practitioners within the legal sector to determine attitudes towards the proposed legislative reforms and perceptions of the level of risk of money laundering and financing of terrorism faced by the legal profession. Of course, it could be argued that those industry groups yet to be regulated could have sought to understate the level of risk that they perceived within their sectors so as to reduce the possibility of additional government regulation occurring. Nonetheless, it was apparent to AIC researchers that the industry representatives who agreed to participate in the study acted with integrity in discussing their views openly with the AIC.
The present report provides a review of public source information and the results of consultations with representatives of professional associations in Australia. It reviews the current regulatory environment in order to determine the likelihood of those working in the professional groups and businesses being implicated in money laundering or the financing of terrorism. The regulatory requirements examined included mechanisms for registration or licensing, client/customer identification and requirements governing financial transactions. These existing controls were not created to respond to risks of money laundering and the financing of terrorism (ML/TF) and some may be unsuited to detecting risks of this nature within the sectors examined. In addition, unwitting involvement by professional advisers may be difficult to detect.
An overview of the extent of regulation of these non-financial businesses and professions in selected countries in the European Union, North America and Asia was also undertaken. The United Kingdom was found to have the most extensive incorporation of DNFBPs into its anti-money laundering/counter-terrorism financing (AML/CTF) regulatory regime, followed by selected European Union and Asian countries. The experience of other nations indicated that regulating businesses using the AML/CTF regime did not completely ameliorate the risks of money laundering and terrorism financing taking place in those sectors.
Official crime data on money laundering and terrorism financing in these sectors from police, prosecution agencies, the courts and internal professional disciplinary sources was also reviewed. The AIC sought the views of industry representatives concerning the areas of their business that may be exposed to risks of money laundering and terrorism financing, including both intentional involvement of professionals and their clients/customers in illegal activities, as well as inadvertent complicity in money laundering and financing of terrorism activities.
On the basis of the sources examined, there was little evidence of intentional money laundering taking place in any of the business and professional groups in question. The research revealed that some professionals might demonstrate crime risks connected with some types of transactions, although these predominantly involved either fraud perpetrated by individual professionals for the purposes of personal gain, or licensing breaches in relation to occupations that required practitioners to pass specified character assessments. Evidence of unwitting involvement in money laundering through facilitation of business processes and procedures was more difficult to detect, although the individuals consulted during the research were confident that these risks were low. Arguably, the industry representatives consulted by the AIC could simply have been unaware of instances of unwitting involvement in money laundering taking place within their sector.
The current professional regulation of legal practitioners embodies a number of aspects of AML/CTF regulation required under international obligations, and, indeed, legal practitioners are currently subject to considerably greater regulation than the other business and professional groups who may be subject to AML/CTF regulation in Australia. Existing professional rules governing the practice of legal practitioners in Australia do not explicitly require any formal identification requirements for new clients or beneficial owners of funds held in trust, although legislation and rules governing professional practice, as well as principles of sound business conduct, mean that client identification is invariably undertaken by legal practitioners in Australia. Trust account transactions were identified by the industry representatives consulted as potentially involving a high risk of involvement in money laundering activities. An example of a legal practitioner based in Australia being directly involved in money laundering was an investigation reported as one of AUSTRACs typologies in which a solicitor had engaged in structuring transactions. Legal disciplinary procedures have identified cases in which solicitors have been involved in moving or hiding funds illicitly for personal gain.
Accountants are not statutorily regulated as a single profession, although most of the services provided by accountants are subject to some form of statutory controls. Current regulations governing tax agents and the use of Business Activity Statements (BAS) do not include specific customer identification requirements or obligations to report suspicious financial activities. Accountants who offer services subject to AML/CTF regulation must comply with the AML/CTF obligations when providing those services to their customers, as is the case with any service provider. The types of services with existing AML/CTF requirements that are most likely to be offered by an accountant are also those that require the accountant to obtain an Australian Financial Services Licence. Some services, such as establishing business structures, are however, unregulated with respect to the services provided by accountants. Accountants are, however, subject to the ethical rules and codes of practice of the accounting professional bodies which include disciplinary regulation. The professional bodies describe this as a co-regulatory environment. Membership of a professional organisation is, however, voluntary and this results in some accountants being able to practice outside these regulatory controls.
A number of AUSTRAC typology and case study reports involved accountants being implicated in money laundering activities. In one case, an Australian accountant had been convicted of structuring offences. Two other notable money laundering cases have involved four Australia-based accountants and an Australian based in Vanuatu, but these have yet to be concluded in the courts. These charges have not been proved, although they potentially point to offshore structures as high-risk transactions for accountants. These charges and another involving terrorism financing charges, resulted from law enforcement efforts rather than professional disciplinary controls. One accountant has now been convicted of financing of terrorism, although a non-custodial sentence was imposed. Professional disciplinary measures are intended to deal with complaints and breaches of the accounting professional bodies’ standards and do not involve investigations of a criminal nature.
Real estate agents
Real estate agents, like legal and accounting professionals, do not have any statutory customer identification requirements to comply with, and this represents a key vulnerability of the sector. Industry representatives identified customer identification as a risk for real estate transactions, although it was stressed that the risk was linked to the type of transaction involved. The AUSTRAC typology relevant to this sector suggested that purchasing property in a false name, or using cash, was a concern for real estate transactions. The disciplinary mechanisms for real estate agents are able to identify failures to meet auditing and other financial regulatory requirements, but are less well-suited to identifying other forms of money laundering or financing of terrorism.
Dealers in precious metals and stones
Pawnbrokers and secondhand dealers (in New South Wales) are subject to regulation that mirrors AML/CTF international obligations in relation to customer identification, but with the exception of suspicious transaction reporting requirements. Jewellers, valuers and wholesale dealers in precious stones do not have statutory registration or licensing requirements, although members of the valuers’ industry body are subject to some self-regulation. No instances were discovered of dealers in precious metals and stones, or transactions involving unregulated metals and stones, being linked to money laundering or the financing of terrorism. Industry representatives pointed to the risks of diamonds, particularly, as a convenient and liquid means of storing and transporting value across international borders, but they were unable to provide actual cases where this had occurred.
Trust and company service providers
Trust and company service providers include a diverse group of businesses subject to very different levels of regulatory control. Providers of office space, registered address providers and businesses offering post office boxes are unregulated with respect to the core AML/CTF obligations.
Company formation agents are required to undertake some customer identification steps in connection with documents submitted to the Australian Securities and Investments Commission (ASIC). Auditors and liquidators are registered with ASIC and the Companies Auditors and Liquidators Disciplinary Board is able to deal with complaints against members of these groups. Insolvency and Trustee Service Australia performs the same role with respect to bankruptcy trustees. Corporate trustee companies have customer identification and record-keeping obligations and are supervised by the Attorney-General of each state and territory, who is able to conduct audits.
Two instances were found where companies were used to facilitate terrorist activities, although not the financing of terrorism, and to launder the proceeds of crime. The role of company service providers in each case was, however, unclear. Some industry representatives considered that the disparity in regulation between states/territories presented a risk factor for illicit transactions.
Generally, the evidence of intentional money laundering and financing of terrorism provided by the business and professional groups that participated in this research was very limited. There were few examples of money laundering and even fewer of financing of terrorism that the industry groups consulted were able to identify as having involved the members of their businesses and professions. It was not possible to assess the level of risk among those professionals who operate outside current legislative and professional regulatory controls (such as individuals who practice illegally) and it is among these groups that levels of risk may well be higher. In addition, it is possible that the representatives of the businesses and professional associations consulted might simply have been unaware of the criminal activities undertaken by some individuals within their associations. Further exploratory research using qualitative research methods would be needed to provide a thorough risk assessment relating to these individuals.
The risk-based approach of AML/CTF regulation would likely see different regulatory burdens between the broad span of businesses included in the FATF’s definition of DNFPBs in response to the different types and degrees of risks. Australia’s risk-based approach allows reporting entities to tailor their compliance programs and expenditure to the level of risk they determine to be applicable to their individual circumstances, with the outcome being that low-risk entities might be likely to have relatively low levels of compliance costs.
The present study has made use of the data obtainable from public sources, industry participants and industry bodies, case law and international publications. Further studies of this kind would benefit from access to de-identified information from the law enforcement community, as well as archived disciplinary cases from all of the industry bodies involved in co-regulatory environments. Reliance on public-source material carries with it a number of limitations including the inability to examine confidential intelligence information held by law enforcement and intelligence agencies as well as the fact that the documented cases on the public record are only those that have been detected, proved and publicised. Arguably, other instances of undetected and unreported matters involving professionals may exist but may not be identifiable. The information presented in this report relates to that examined by the AIC and does not necessarily reflect the policy position of the Australian government or other stakeholders.