Both money laundering and financing of terrorism represent an area of continuing concern for governments, law enforcement agencies and financial institutions worldwide because of the large sums of money involved and the impact this has on government resources and communities. Although the actual amount of the proceeds of crime available for laundering will never be known with accuracy, the latest estimate of the amount of money laundered through the global financial system is ‘equivalent to 2.7 percent of global GDP (2.15–4%) or US$1.6 trillion in 2009’ (UNODC 2011: 7). In its Organised Crime in Australia report, the Australian Crime Commission stated that ‘[c]ontemporary estimates suggest that the level of money laundering in and through Australia is at least A$10 billion a year’ (ACC 2011: 46).
Australia has developed a complex array of responses to the problems of organised and financial crime that include the AML/CTF regulatory regime. In particular, whole-of-government initiatives focused on coordinating operational efforts of Commonwealth law enforcement and regulatory agencies responsible for addressing and combating organised crime provide a sophisticated response to money laundering and financing of terrorism as outlined by AUSTRAC (2011: 5):
Money laundering is one of the three critical organised crime risks to the Australian community identified in the classified 2010 Organised crime threat assessment and articulated in the unclassified and published Organised crime in Australia 2011. Both of these reports were developed by the Australian Crime Commission, the Commonwealth agency established to combat serious and organised crime. Money laundering is considered a critical risk because it enables serious and organised criminal activity, it can undermine our financial system and economy and it can corrupt individuals and businesses. Based on the 2010 Organised crime threat assessment, combating money laundering is a priority under the Commonwealth Organised Crime Strategic Framework. The Framework provides a united strategic direction for all agencies with responsibility for combating organised crime and sets the objectives for the Commonwealth Organised Crime Response Plan. The plan, released in November 2010, coordinates and unites the operational efforts of Commonwealth law enforcement and regulatory agencies responsible for addressing/combating organised crime.
Those seeking to launder funds or to engage in acts of terrorism may increasingly turn their attention to the professional and non-financial business sectors as banking and other financial institutions work towards full compliance with AML/CTF regimes. The Federal Financial Institutions Examination Council suggest that non-financial professional service providers, such as legal practitioners and accountants who act as advisors for their clients,
…allow for ongoing business transactions with multiple clients. Generally, a bank has no direct relationship with or knowledge of the beneficial owners of these accounts, who may be a constantly changing group of individuals and legal entities (FFIEC 2007: 283).
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 attached to them due to their high social standing. A former Chief Executive Officer of the Australian Crime Commission noted that:
a growing number of organised crime groups [have been] using professional facilitators and service providers, including financial advisers and accountants...this enables them to carry out criminal activity in areas where they lack the necessary skills or knowledge, such as complex financial crimes (Jacobs 2009: 3).
Increased regulation of financial institutions has reportedly led those wishing to launder funds to seek out sophisticated advice from the professions to set up of money laundering schemes (He 2006).
Internationally, FATF (2012) has sought to coordinate global efforts to minimise risks of money laundering and terrorism financing by promoting its Forty Recommendations that ask countries to incorporate these principles into their criminal justice systems, law enforcement procedures and financial regulatory systems. FATF has considered occupations that hold legitimate roles in accessing financial services and businesses that facilitate access to creating companies and other legal structures to hold an increased vulnerability to those seeking to enter illicit funds into financial systems (FATF 2004). FATF (2012) has described businesses and professions that perform these roles as gatekeepers to financial systems and argued that their potential involvement in illicit transactions stems from the increased scrutiny placed on financial services. As financial services become more difficult to use undetected for illicit purposes, the attraction of services to navigate funds into the financial system or through alternative channels arguably increases.
In 2003, FATF expanded its Forty Recommendations on Money Laundering and Nine Special Recommendations on Terrorist Financing (the Recommendations) to include DNFBPs. The Australian Government would need to examine the desirability of extending the application of the AML/CTF Act to specified services provided by a number of business and professional sectors not currently regulated. The sectors that could be subject to regulation include legal practitioners, accountants, real estate agents, dealers in precious metals, and trust and company service providers. The question that has arisen is whether it is necessary and desirable to extend the AML/CTF Act to specified services provided by these business and professional sectors. The determination of this issue 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 minimising financial crime and assisting in the investigation and prosecution of those alleged to have acted illegally.
Definition of non-financial businesses and professions
The FATF’s suggested definition of DNFBPs encompasses casinos, real estate agents, dealers in precious metals, dealers in precious stones, legal practitioners, notaries and other lawyers, accountants, and trust and company service providers.
Real estate agents, dealers in precious metals and stones, and trust and company service providers are not traditionally considered ‘professions’ in the same way as service providers such as accounting, medical, and legal practitioners are, as they lack the educational barriers to entry of traditional professions and do not have the same level of internal regulation regarding professional conduct. This report, for simplicity, describes all of the DNFBPs included in its scope as ‘professions’, even where this description might not be entirely appropriate.
As casinos are currently reporting entities under the existing AML/CTF Act, they are not addressed further in this report.
Legal practitioners and accountants
The FATF Recommendations (2012) define lawyers, notaries, other independent legal professionals and accountants who are subject to regulation as including ‘sole practitioners, partners or employed professionals within professional firms’, but excluding ‘internal’ professionals that are employees of other types of businesses, nor to professionals working for government agencies, who may already be subject to AML/CTF measures (FATF 2012: 113). Recommendation 22(d) of the current FATF Recommendations of 2012 requires lawyers, notaries, other independent legal professionals and accountants to apply customer due diligence (CDD) and record-keeping requirements when they prepare for or carry out transactions for their clients concerning the following activities:
- buying and selling of real estate;
- managing of client money, securities or other assets;
- management of bank, savings or securities accounts;
- organisation of contributions for the creation, operation or management of companies;
- creation, operation or management of legal persons or arrangements; and
- buying and selling of business entities (FATF 2012: 20).
The legal practitioners in Australia considered in the scope of this report are solicitors, barristers and public notaries. The report refers to these occupations within the broader legal profession as ‘legal practitioners’. The structure of the profession in Australia means that solicitors and public notaries are primarily the practitioners that supply the services identified by the FATF to clients.
Australian public notaries predominantly prepare and certify documents for use overseas. The common functions of notaries that are of particular interest are authenticating documents and certifying copies, witnessing signatures and authenticating identity, preparing and witnessing Powers of Attorney, witnessing documents and authenticating transactions for businesses, and preparing and certifying wills, deeds, and contracts and other documents for deceased estates. Each of these activities could be relevant to typologies of ML/TF, as well as financially motivated predicate offences.
The accounting professionals included in the scope of this report are public practitioners providing services to individuals and legal persons, and tax agents, providing limited services for tax matters to the public. The disciplinary mechanisms and disciplinary outcomes of public practitioners are the focus of the reports’ discussion of accounting professionals. This is the area of the industry deriving the majority of its income from business taxation and personal taxation and accounting services (FATF 2005c).
Real estate agents
Agents representing property vendors are the core group from the real estate industry considered in this report. Property valuers, mortgage brokers and buyers’ agents have also been included because of their contributing roles in the sale of property and the potential for that role to be implicated in money laundering.
Dealers in precious metals and stones
The precious metals and stones industry has four key components—mining companies, refineries (turning rough diamonds into polished diamonds), manufacturers and retailers. All four components of the industry are involved in buying or selling precious metals and stones, although this report focuses on retail and wholesale participants in the industry.
Retail participants include new and secondhand dealers in jewellery, precious stones and precious metals. Retailers include jewellers and auctioneers as well as pawnbrokers, secondhand dealers and antique dealers when buying or selling precious metals and stones. Pawnbrokers are differentiated from secondhand dealers in state and territory legislation by lending money to the public on the security of pawned goods.
As bullion dealers are currently reporting entities under the AML/CTF Act, they are not discussed in the scope of this report.
Trust and company service providers
The FATF definition of trust and company service providers refers to persons or businesses that provide any of the following services to third parties:
- acting as a formation agent of legal persons;
- acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;
- providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement;
- acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another form of legal arrangement;
- acting as (or arranging for another person to act as) a nominee shareholder for another person (FATF 2012: 114).
The service providers operating in Australia that are not included in other categories of DNFBPs considered in the scope of this report are company formation agents, company secretary service providers and company director service providers, post office box and locked bag providers, office space lessors, businesses providing registered addresses and public trustees.
Auditors and liquidators, and insolvency practitioners are also discussed as trust and company service providers. Despite the substantial overlap with the legal and accounting professions for membership and education requirements, service providers in these fields do not completely fit into either professional group.
Scope of the current project
This report is intended to inform policymakers concerning industry perspectives of the potential threats and vulnerabilities of non-financial businesses and professions to ML/TF. The AIC assessed the risk of unwitting and complicit money laundering or terrorism financing activities that may be engaged in or facilitated by various DNFBPs. This assessment sought to determine vulnerabilities of DNFBPs in Australia by assessing the current regulations applied to each sector, the barriers to entry, any customer identification requirements for providing services, auditing requirements and the disciplinary mechanisms established by legislation. The input of industry bodies and other professional organisations into monitoring the professions was also considered as part of the vulnerability framework.
The level of risk was assessed by examining previous examples of ML/TF in each of the professional groups that have been publicly reported. It is important to note that such activities might involve businesses in two ways. The clients and customers of businesses might engage in illegal activities, and use the business as a money laundering or terrorism financing facilitator, or the businesses might engage in these acts directly. Case studies and the outcome of disciplinary proceedings for each sector are presented where such information was available. The limited evidence available in the public domain is supplemented by a presentation of the opinions of representatives from each sector who were consulted by the AIC.
This assessment also sought to provide information on the size and characteristics of the DNFBPs in Australia. For legal practitioners and accountants, particularly, the income information provides some insight into the relative importance of services identified by participants and FATF as high risk. The extension of AML/CTF controls to DNFBPs in the United States, the United Kingdom, Belgium, France, Germany, Hong Kong, Singapore, Republic of China, Taiwan (Taiwan) and Canada are documented in the report.
The study also examined whether the existing regulatory controls and other controls in place for each sector were able to discover any evidence of ML/TF, should it exist. To this end, the disciplinary outcomes, cases and views of industry representatives addressing fraud and theft were also considered, as were reports of disciplinary proceedings and the nature of matters drawing individuals to the attention of disciplinary bodies.
Additional relevant information is also presented in other AIC reports, published separately. These report the results of a comparative review of AML/CTF regimes in selected countries worldwide (Walters et al 2011) and a survey of a sample of legal practices in eastern Australian jurisdictions to ascertain their perceptions of the AML/CTF regime (Choo et al. forthcoming).
Methodology and research design
The report is based on publicly available information, the results of consultations undertaken with industry representatives and additional follow-up information from industry organisations to identify the relevant legislation, case law, disciplinary outcomes, typologies and vulnerabilities for each sector. The AIC’s position external to the law enforcement community restricted the analysis to publicly available information and qualitative data. This is subject to a number of limitations discussed below.
Regulatory and other legal instruments
The legislation and supporting regulations for each sector were documented by first examining any relevant federal instruments and then reviewing the relevant state and territory-based instruments. Owing to the complexity involved in each state and territory’s regulatory framework, it was decided to use the case study of New South Wales to illustrate the ways in which professional regulation is undertaken in each of the relevant sectors.
Cases and statistics
Case law databases were examined for any relevant criminal cases, with New South Wales being again used as a model. The information from New South Wales was supplemented by cases and data from other states, where the industry participants drew attention to relevant cases or to readily available and comprehensive information.
Publicly available information on disciplinary cases from all relevant regulatory bodies and industry organisations was examined to show the extent to which members of the DNFBPs had been involved in ML/TF.
The following sources were examined:
- media releases from the Australian Federal Police (AFP) and from ASIC;
- AUSTRAC’s typologies and case studies report series;
- Office of the Legal Services Commissioner (OLSC) NSW annual report series and website;
- New South Wales Office of Fair Trading website information;
- Consumer Affairs Victoria annual report series;
- Institute of Chartered Accountants in Australia annual report series and website;
- CPA Australia website;
- New South Wales Bar Association annual report series and website;
- Mortgage and Finance Association of Australia website;
- industry-based commentary websites and publications; and
- media news reports of relevant cases.
Of particular importance were the typologies and case studies reports published by AUSTRAC (2012–07). These were examined for each relevant sector and sanitised case studies and scenarios based on intelligence, investigations and pending cases were extracted. It should be noted that these typology examples do not necessarily involve cases in which allegations have been proved and suspects convicted of relevant offences. Rather, AUSTRAC and other agencies use typologies to inform businesses about the methods that may be used to launder money or to finance terrorism (AUSTRAC 2010).
Opinions of industry participants
Representatives from industry organisations and regulatory bodies were invited to participate in one of five industry-specific roundtable discussions. The roundtables attracted 42 participants from prominent industry organisations and those representing different roles within each DNFBP area. All participants were briefed about the project and the role of the AIC and were given a list of key topics to be covered. The participants were also given industry-specific money laundering case studies, predominantly sourced from overseas jurisdictions, as background information. These case studies are reproduced in Appendix 1.
The AIC received additional information after the roundtables on disciplinary proceedings from CPA Australia, OLSC NSW, Legal Practice Board of Western Australia, Legal Services Commission (Queensland), the National Council of Jewellery Valuers and the Mortgage and Finance Association of Australia. The Australian Antique & Art Dealers Association informally provided information on the regulation of antique dealers.
Some of the industry representatives provided additional information, or additional opinions on the subject matter, in response to receiving a draft outline of the report. The additional information has been incorporated into the report. Any additional opinions offered by members of the professions have been flagged as such and were included into the risk assessment.
The 11 industry stakeholders present at the legal profession roundtable represented the:
- Law Council of Australia;
- Law Society of New South Wales;
- OLSC NSW;
- Legal Services Commissioner of Victoria;
- Law Institute of Victoria;
- ACT Law Society;
- Legal Services Commission, Queensland;
- Queensland Law Society;
- Law Society of Western Australia; and
- Law Society of South Australia.
The accounting profession roundtable was held with seven participants from the Institute of Chartered Accountants in Australia, the National Institute of Accountants Australia, Accounting Professional and Ethical Standards Board, the National Association of Accounting Technicians and CPA Australia.
Eight representatives from the Australian Property Institute, Real Estate Institute of Australia, Valuers Registration Board (Queensland), ACT Office of Fair Trading, Real Estate and Business Agents Supervisory Board and Settlement Agents Supervisory Board, Mortgage and Finance Association of Australia and the Australian Property Council participated in the real estate sector roundtable.
The precious metals and stones roundtable was attended by eight representatives from the Diamond Guild Australia, Auctioneers and Valuers Association of Australia, National Council of Jewellery Valuers, Gemmological Association of Australia, International Coloured Gemstone Association and the Minerals Council of Australia.
The eight industry representatives attending the trust and company service providers and insolvency practitioners roundtable were from the Institute of Internal Auditors Australia, Association of Superannuation Funds Limited, Insolvency Practitioners Association, Tax Institute of Australia, Financial Planning Association of Australia and the Committee of Business Incorporators Australia.
The range of participants, representing differing viewpoints and interests, at each roundtable offered a range of responses and opinions on the risks in each sector. The views of those participants, reported in the section Assessments of risk in the non-financial business and professional sectors in Australia have been included to reflect the diversity of opinions offered during the consultations and do not reflect the view of a single organisation.
Limitations of the research
The roundtables grouped industry participants from each of the broad sectors identified by FATF. Some services and transactions can involve participants from more than one of the business sectors or none at all. Real estate sales and purchases illustrate this point. A legal practitioner might undertake conveyancing for a transaction facilitated by a real estate agent where the buyer has used a mortgage broker to identify the loan ultimately used to finance the purchase. Alternatively, the buying and selling parties may conduct the transaction without involving any of these service providers or only some of them.
In this particular example, the real estate industry participants discussed conveyancing issues at length during the sector roundtable event as those participants considered it a key topic within their industry. The legal practitioners’ event, conversely, involved little discussion of conveyancing risks and instead focused on issues such as trust funds and self-regulation. The resultant conveyancing discussions in this report, based on the data collection outcomes, are presented with others from the real estate sector for this reason.
Service providers such as auditors, liquidators and insolvency practitioners were considered along with trust and company service providers. There was substantial overlap between the services offered by trust and company service providers and other professions such as legal and accounting services. Membership of a law society or accounting professional body is a prerequisite for membership of the Insolvency Practitioners Association of Australia. Legal and accounting practitioners, as well as dedicated company formation agents, may facilitate customers wishing to create legal structures. The roundtable discussion held for trust and company service providers included these services with the intention of facilitating a more in-depth discussion. This report’s analysis of these services is contained within the sections discussing trust and company service providers.
The data used in this report were sourced from publicly available information and from industry associations and participants. The AIC’s mandate as a research agency precluded the authors from accessing information gathered by law enforcement agencies as this intelligence may be sensitive, untested and part of continuing investigations. Operational sensitivities therefore place considerable limitations on the findings of this report.
Industry supplied evidence
The publicly available details of disciplinary cases from professional organisations were quite restricted in most cases and usually did not contain information on how breaches were committed. This was a serious limitation where illegal activities involved fraud or transactions amounting to money laundering. Some representatives, such as those from the legal profession in some states, provided additional information ameliorating this problem to an extent. Many of the disciplinary case reports from the relevant regulators of the professional also lacked the detail needed to identify examples of activities that might be classified as money laundering in other matters.
Case reports of money laundering offences are key pieces of evidence necessary to establish the nature and extent of money laundering in the sectors in question. Often charges of this nature are heard in the lower courts whose decisions are not extensively reported. The authors examined money laundering cases that had progressed beyond lower courts to be documented in law reports or published in other forums such as legal databases. Without access to the decisions of lower courts, the authors could not undertake an assessment of the circumstances of all of the proven money laundering cases in Australia.
Almost all aspects of all of the DNFBPs have some state-based regulatory requirements. There are differences in the approaches taken by each state. Even in the case of the legal profession where many of the requirements to practise are the same, the states still vary with respect to aspects relevant to money laundering, such as financial auditing practices that are able to detect a range of financial irregularities that may be indicative of money laundering. In other businesses, such as pawnbrokers, the variation between state-based requirements is considerable. In order to provide some level of detail and comparability between sectors, the current research focused on the legislation and regulations applicable in New South Wales only. Any conclusions based on information derived only from New South Wales need to be treated with the limitations of this source in mind.
The well-documented difficulties associated with identifying transactions used to finance terrorism (see Smith, McCusker & Walters 2010) are also reflected in the scope of this project. The project has focused on money laundering threats and vulnerabilities rather than also separately considering the financing of terrorism because of the following factors:
- the paucity of cases of terrorism financing in Australia and other jurisdictions, particularly those beyond examples involving businesses in the financial sectors in the United States and United Kingdom;
- the absence of other evidence, outside of case law, of terrorism financing taking place in Australia; and
- the difficulty of identifying any proxy measures for terrorism financing transactions outside of direct evidence.
Uneven input from industries
This report contains more detailed discussions of the risks and vulnerabilities of legal practitioners and accounting professionals than those of the other DNFBPs. The uneven focus on these two professions is the result of several factors. Legal practitioners and accounting professionals, and to a lesser extent participants in the real estate industry, form more cohesive groups than businesses described as trust and company service providers or dealers in precious metals and stones. Gathering input from trust and company service providers, and dealers in precious metals and stones, as groups was more problematic than from the other sectors in part because of the looser association between businesses. This reflects the wider range of services provided by business in these two ‘industries’ than in the other three sectors.
Legal practitioners and accounting professionals, and also to a lesser extent real estate industry participants, are also each subject to more regulation and self-regulation than the other two industries. The existing requirements for legal practitioners, accounting professionals and real estate participants are complex and because they have been regulated for extensive periods of time, more information was available for examination.
The research conducted for this study involved extensive review of publicly available evidence both from within Australia and internationally. In order to ensure that the information accurately reflected what was known by those working in each sector, preliminary drafts of the report were circulated for comment and feedback from all relevant stakeholders. This iterative process of review and revision took some considerable time and delayed finalisation of the final draft report, but it was important to ensure that the views of relevant stakeholders and Australian Government agencies were considered and integrated in the final report. Finally, efforts were made to ensure that the final publication incorporated relevant research and policy developments that occurred between the commencement of the study in 2009 and its final publication in 2012. The information contained in this report reflects resources available at 1 December 2012, unless otherwise stated.
Plan of report
An overview of the size and where available, the income sources of DNFBPs in Australia, is provided in the next section entitled Designated non-financial businesses and professions in Australia. The report presents a regulatory overview of each of the types of service providers in Australia in the section entitled ‘professional regulation in Australia at present’. The overview contains:
- the requirements businesses must meet to provide a specific service;
- the registration and licensing systems;
- the auditing mechanisms; and
- the oversight and disciplinary mechanisms.
The self-regulatory mechanisms used in each sector are outlined in conjunction with the legislative requirements.
The key AML/CTF legislation and regulation applicable to the DNFBPs in the United States, United Kingdom, Belgium, France, Germany, Hong Kong, Singapore, Republic of China, Taiwan (Taiwan) and Canada are outlined in the section entitled The characteristics and regulation of non-financial businesses and professions overseas. The relevant case law shaping the application of AML/CTF measures in these countries is also documented. Any available information on the characteristics of the DNFBPs is also provided for these countries in this section.
The section entitled, Assessments of risk in the non-financial business and professional sectors in Australia presents the opinions and limited direct evidence of ML/TF by DNFBPs in Australia. These are framed within the more general risks of crimes in the professions that have been presented in the preceding section entitled Crime risks in the non-financial business and professional sectors in Australia. Dishonesty in the professions, as well as the specific predicate offences of tax fraud, mortgage fraud and financing fraud, are also examined in these sections.
These two sections also present the evidence available of ML/TF in the DNFBP sectors in Australia. The evidence discussed includes cases of ML/TF that involve participants in these industries and charges that are still pending. The matters of interest in any disciplinary proceedings initiated by external bodies and from industry associations are presented. The cases and proceedings are supplemented by the opinions of key representatives from each profession on the risk areas for money laundering.
The key vulnerabilities and threats to each DNFBP are summarised in the final concluding section as are suggestions for future research.