AUSTRALIAN GRADUATE SCHOOL OF POLICING

Expert Commentary –

Australia’s AML/CTF Regime

Dr Hugh McDermott

Senior Lecturer in Law Enforcement,

Director – AML/CTF, Fraud & Financial Crime Programs

Australian Graduate School of Policing and Security

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Overview of Presentation

Research

Effectiveness of the current AML-CTF Regime

The FATF

New and Emerging Services and Risks

Industry Monitoring and Supervision

Enforcement

Community and Corporate Education

Summary of Key Conclusion

Questions & Conclusions

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Absence of research

There is no substantive body of research in Australia regarding:

• The estimated value of acquisitive crime

• The estimated value of money laundered

• The estimated value of financing of terrorism

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I make the following observations:

•It is very hard to determine what has been achieved, because of the

significant absence of key data;

•The absence of research into the possible achievements making it

difficult for any concrete conclusions to be drawn about the cost-benefit

outcomes of AML/CTF regimes; and

•The statistics about money laundering and terrorism financing are

unconvincing and subject to challenge.

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Effectiveness of the current AML/CTF Regime

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KPMG observed that:

“regulatory visits are still striking fear into the hearts of AML professionals

across the globe.”

The reasons for that impact were not clear from their survey data.

Two possible causes were put forward by KMPG:

1. overly strict regulations that organizations cannot realistically comply

with or

2. institutions failing to learn from past mistakes.

See KPMG 2014 report ‘Global Anti Money Laundering Survey 2014’ page 38.

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The FATF

If Australia was indeed serious about tackling acquisitive crime then it

would implement all of the FATF International Standards

recommendations as it is setting out to do, with particular focus on

Tranche II.

Some of these things are well overdue as they were also present in

the 2003 Revised Recommendations.

Ultimately, the current uncreative approach works against the

principles behind the FATF Standards failing to tackle the underlying

acquisitive crimes.

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There are solutions that include the following examples:

•controlling remittances by non-financiers through mandatory limits on

what may be transmitted in or out of Australia, in line with the true

purpose of remittances as a means of assistance the unbanked and

those suffering from poverty and financial exclusion.

•Implementing Tranche II, which was promised to be in place by

December 2007

•Making ASIC a reporting entity with all of the obligations that are

imposed on reporting entities under the AML/CTF Act

•Bringing other gatekeepers such as customs agents, sellers of high

value luxury items such as aeroplanes, boats and cars into the AML/CTF

regime. At present financial institutions are the first and last significant

defence in AML/CTF other than intelligence gathered by law

enforcement. Law enforcement intelligence is often gathered through

AUSTRAC from reporting entities.

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• Making government procurement departments and agencies reporting

entities under the AML/CTF legislation, perhaps with special

provisions regarding their due diligence processes.

• Engaging financial planners as full reporting entities under the

AML/CTF Act given the volume of information they possess about

their clients.

• Placing obligations on customers of designated services such as

keeping all of their details current with their financial institutions.

• Including in criminal penalties the seizure of all funds that have

passed through accounts used for money laundering including those

account holders who have secretly acted for others.

• Improving the movement and use of intelligence between reporting

entities and also between Commonwealth, State and Territory law

enforcement and reporting entities.

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Industry monitoring and supervision

• Does the supervisory framework support an effective, risk-based AML/CTF regime and compliance with the AML/CTF framework?

There are:

• Some 13,657 reporting entities regulated by AUSTRAC according to the 2012-13 AUSTRAC annual report

• 84 million transaction reports (an increase from 59 million in the preceding year)

• 5,200 remitters assessed and registered (mostly smaller affiliates of major networks)

• 1,142 compliance assessments conducted [9% of the total population]

• 317 enhanced assessments of reporting entities [2% of the total population]

• 825 behavioural reviews of reporting entities [6.5% of the total population]

• 1,187 remedial requirements issued [based on three requirements per reporting entity this is 3% of the total population].

Page 34 of the AUSTRAC Annual Report for 2012-13

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Enforcement

• How effective and proportionate is the enforcement regime,

particularly in promoting compliance?

Since 2006 when the legislation was passed, according to the

AUSTRAC website, there has been:

• 13 enforceable undertakings and six of these relate to the same

corporate group

• three remedial directions

• two acts of removal of remitters from the register

• seven written notices published requiring the appointment of an

external auditor under section 162(2) and six of these relate to the

same corporate group.

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New and emerging services and risks

“While the nature and extent of money laundering through digitalcurrencies and virtual worlds are unknown, it is important to recognisetheir potential for criminal exploitation, particularly in response totighter regulation of established or traditional financial channels. …….AUSTRAC’s conclusion in 2012 was that ‘the overall utility of digitalcurrencies for criminals at this point [2012] may currently be limited toniche crimes in the cyber environment and individual or smaller scaleillicit activity.”

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Does the AML/CTF regime provide a framework to respond to new

and emerging services and risks?

No it does not, because key players/gatekeepers and key obligations

are missing.

The list of the ‘Missing’ has three parts:

• those that have been listed by the FATF as part of the global

AML/CTF regime for years but not picked up in the Australian regime;

• new and emerging services and risks;

• express requirements that a reporting entity properly supervises

offshore service providers as well as complies with its duties of

confidentiality and privacy in all countries where it houses its

customers’ data.

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Community and corporate education is missing

• Where is our public education on our personal and business roles in addressing and reducing acquisitive crime?

• Where do we get down into the communities and talk about money laundering?

• Where do we engage our communities in processes that are for their benefit?

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Summary of Key Conclusions

• The current objects of the AML/CTF Act do not express thefundamental purpose of the Act, which should be to reduce acquisitivecrime involving Australia through measures to identify, mitigate andmanage money laundering and terrorism financing risk.

• As the objects stand they are an inaccurate reflection of what shouldbe the core object of the Act. Instead the objects are solely focused oncomplying with Australia’s international obligations.

• Consistent with all other countries there is very little data thatmeasures the effectiveness of the AML/CTF regime. Given the capitaland operating cost to governments and reporting entities (and theircustomers), there needs to be data to assess the effectiveness of theregulatory burden placed on reporting entities.

• The FATF’s focus on testing “effective in practice”, rather than justtechnical compliance, should also provide impetus to driving changesto the AML/CTF regime based on data.

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• The current regime does not work effectively outside the largereporters who are better resourced to understand this regime andrealise the regulatory compulsion to work towards effective outcomesthan smaller reporting entities are. Even within the large reporters,effective outcomes are probably aspirational rather than achieved.

• Customers of reporting entities need to be engaged in the AML/CTFframework through legal obligations imposed on them to providerequired information and declarations regarding their identity and whobenefits from the account or relationship with a reporting entity.Customers benefit from the community value of the AML/CTFframework but are not engaged in the absence of legal obligations todo certain things. Public education is required.

• Independent reviews are an unreasonable cost burden for small andmedium sized businesses and ineffective in helping these businessesbetter understand or manage their ML/TF risks. They should bereplaced with a more appropriate process that balances the risk of thereporting entity to the AML/CTF regime with their capacity to managea highly complex set of legislative requirements.

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• The 2014 CDD rules need further work to improve their clarityand ensure that the industry is clear about what they shouldbe doing to meet the beneficial ownership requirements andthe PEP requirements.

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Conclusions and

Questions