Anti-money laundering: CPA Australia has a number of concerns about the second tranche of anti-money laundering/counter-terrorism financing legislation, writes Gavan Ord.
Australian accountants will soon be drafted into the fight against terrorism and organised crime. The government will not be asking you to take up arms, but rather to be a source of information on suspicious movements of money, which may be linked to the proceeds of crime or to funding terrorist activities.
Given that money laundering and terrorism financing do not recognise national borders, the international community has developed international standards to fight these crimes. The body that sets these international standards is the Financial Action Task Force (FATF), of which Australia and 31 other countries, including the US, the UK, Japan and China are members.
These international standards are known as the 40+9 FATF Recommendations. Over 170 jurisdictions, including Australia, have endorsed them.
In endorsing the FATF recommendations, the then Australian minister for justice and customs, Chris Ellison, stated in a press release of 9 December 2003: 'Continued vigilance against money laundering and terrorist financing is essential to Australia's good economic reputation and the international competitiveness of Australian business.'
Failure to successfully implement the FATF recommendations will be problematic for Australia's financial services sector, as the international financial services sector is obliged to take into account the adequacy of anti-money laundering/counter-terrorism financing (AML/CTF) compliance when dealing with foreign counterparts and jurisdictions. This can put at risk international business relationships and the reputation of the Australian financial market in general.
The Australian government's response to this endorsement has been to introduce AML/CTF laws that will affect financial services businesses, gambling services, real estate agents, dealers in precious metals and stones, lawyers, accountants and trust and company service providers.
Due to the lack of exposure that accountants and other non-financial businesses have with the current anti-money laundering laws (the Financial Transactions Reporting Act 1988) as highlighted by CPA Australia and other organisations, the government announced in October 2005 that it would proceed with AML/CTF laws in two tranches.
The first tranche is targeted at the providers of financial services, including financial planners, dealers in bullion and providers of gambling services.
The legislation implementing the first tranche, the Anti-Money Laundering/Counter-Terrorism Act 2006, received royal assent on 12 December 2006 and is currently being implemented.
By 12 December 2007, those entities offering designated services under the Act (referred to as reporting entities), are required to have an AML/CTF program in place and begin reporting from 12 December 2008.
In July 2007, the government released draft legislative provisions to implement the second tranche of AML/CTF legislation. These draft legislative provisions propose amendments to the AML/CTF Act that would bring the law into line with all the FATF recommendations.
Under these changes, 26 new 'designated services' will be introduced into the Act, extending the AML/CTF obligations to specified transactions conducted by real estate agents, specified transactions conducted by dealers in precious metals and stones, and specified legal, accounting and trust and company services.
Entities are required to identify whether or not they offer 'designated services' and are therefore 'reporting entities' themselves. For accountants in practice, the likelihood of offering a service that fits the description of at least one of the 26 proposed 'designated services' is very high. Therefore, such accountants must assume they will become reporting entities once the second tranche becomes law.
The obligations of reporting entities will be:
identification and verification: reporting entities must verify a customer's identity before providing a customer with a designated service
reporting: reporting entities must report suspicious matters and make an annual report on their compliance with the AML/CTF laws to the Australian Transactions and Reports Analysis Centre (AUSTRAC)
developing and maintaining an AML/CTF program: reporting entities must have and comply with AML/CTF programs. Such programs should assist reporting entities to identify, assess, mitigate and manage money laundering or terrorist financing risks. It is an offence to provide a 'designated service' without adopting and maintaining an AML/CTF program
record keeping: reporting entities must make and retain certain records (and other documents given by customers) for seven years. It must be noted that if the second tranche is legislated, in most cases public accountants will only be required to collect and verify information on the identity of new clients (their full name and either the customer's date of birth or their residential address) before offering a service. These identification procedures are similar to the 100-point identification checks that banks currently use.
CPA Australia's concerns with the proposed second tranche
CPA Australia recently made a detailed submission to the Attorney-General's Department on the proposed second tranche. Two key concerns are raised in the submission.
The first is that the second tranche is so broadly drafted that the law will capture services that do not reasonably represent any money laundering or terrorism financing risk.
CPA Australia is also concerned that the compliance burden that the AML/CTF regime imposes under both tranches can be reduced without compromising the objects of the law.
Unless the scope of the legislation is limited, significant numbers of businesses will unnecessarily be caught within the law. This is an avoidable burden not only for those businesses but also on the regulator (AUSTRAC), which will receive a significant increase in meaningless information. Too much information is just as dangerous as too little.
In our submission, we proposed a number of amendments that would narrow the scope of the legislation without compromising the objectives of the Act. Such proposals included:
qualifying the term 'in the course of carrying on a business' for each designated service so that it only applies to entities in the business of providing that designated service. Currently, if you are in business and you provide a service that is a 'designated service', then you are a reporting entity, even if you provide that service on a one-off or incidental basis
a service might be caught under different 'designated services'. These services might give rise to different obligations for reporting entities. Therefore, CPA Australia is seeking clarification on which 'designated service' should take precedence
'tailored advice' needs to be more precisely defined so that it only applies to situations where the advice is sought from the client and relates to services that have a reasonable risk exposure to money laundering
'making arrangements or preparations' also needs to be more precisely defined so that it only applies where a formal engagement has been initiated
the catch-all 'designated services provisions' need to be removed, otherwise a significant number of businesses that offer only services that pose a low risk of money laundering will be caught. There is no need for such catch-all provisions, as the government has the authority to amend by regulation any designated service (rather than by amending the Act). So if services that should be caught are not, then a 'designated service' can be amended to include them.
In CPA Australia's submission, we also raised the need to reduce the compliance burden imposed by the Act in both the first and second tranche.
It is important that an effective regulatory balance be achieved in order to avoid overburdening business, particularly business with a low risk of facilitating money laundering/terrorism financing risk. This cannot be achieved without some form of exemption for small business.
We believe removing the annual reporting requirement for small business (while retaining the requirement to report suspicious transactions as they arise) strikes the right balance between tackling money laundering and red tape.
We also recommended that AUSTRAC and other law enforcement agencies share with reporting entities information and examples of the type of suspicious transactions they want reported. This initiative will reduce compliance burden on reporting entities.
With heavy penalties for non-reporting, and no guidance on what is 'suspicious', the inclination for many reporting entities will be to over-report. This adds to compliance costs and provides AUSTRAC with a great deal of unnecessary information. Giving guidance on what may be suspicious will help reporting entities appropriately assess transactions, and report only those that may be of some value to AUSTRAC.
As we work closely with the government on its draft legislation, we will be keeping members informed about the latest developments in relation to the second tranche. Once it becomes law, members will be provided with information and tools to help them meet their compliance obligations.
Gavan Ord is business policy adviser for CPA Australia.
