AML reforms and the gatekeepers preventing money laundering

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Amanda Wood:
There is actually a social purpose to this. It's not just about government or why don't the government do their own work. We can actually contribute through anti-money laundering requirements to identifying criminals and having those criminals prosecuted and taken off the street. And that's a really important social purpose that needs to be remembered, I think.

Jackie Blondell:
Welcome to Crime by Numbers: The money launderers. I’m Jacqueline Blondell. In the final episode of the series, we examine the role of the new gatekeepers in the fight against money laundering. These include accountants, lawyers, real estate agents and dealers in precious metals and gems. We show why their role is important and what obligations they now have.

The government body responsible for the anti-money laundering regime is AUSTRAC. The agency has dual regulatory and intelligence roles in enforcing the Anti-Money Laundering and Counter Terrorism Act of 2006. It will play a key role in embedding the new gatekeepers. Here’s CEO Brendan Thomas.

Brendan Thomas:
At the moment we regulate up to about 19,000 financial businesses, banks, money service providers, gambling companies, cryptocurrency companies, and we make sure that they've got in place proper controls to deal with money laundering and their money laundering risks.  Through that regulation, we get a heap of data from those bodies. We get a number of very specific reports on any cash dealing over $10,000.

We get reports on any movement of funds between Australia and another jurisdiction called international funds transfer reports. And really importantly, we get a thing called suspicious matter reports. So those businesses tell us when they see suspicion occurring in their business, when they think someone might be laundering money or doing something else illegal with finances, and they report that to us.

And so we use that reporting on the intelligence side of our business where we work with every police force in Australia as well as national security bodies and anti-corruption bodies to provide intelligence to them and work directly with them to try and catch not only money launderers, but people involved in a whole range of other serious crime, terrorism offences, child abuse offences, illegal firearms offences, even wildlife trafficking. We use financial intelligence for all kinds of criminal investigations. We regulate, and then we use the information we get from that regulation for intelligence and law enforcement.

Jackie Blondell:
In 1988, Australia was one of the first countries in the world to criminalise money laundering. But it has certainly lagged behind in adding new reporting entities to its primary legislation. For 20 years the main gatekeepers under the legislation were financial services such as banks and other lenders, casinos and other gambling services and bullion dealers. Digital crypto-currency exchanges were added in 2018.

But significant professionals were left out. Now under Tranche 2 of the reforms 70,000 to 80,000 extra reporters will be added to the mix. Here’s fraud investigator Geoff Peck, CEO of Forensic Integrity Services.

Geoff Peck:
Tranche 2 gatekeeper businesses have been talked about since 2006 when the first piece of legislation was passed in Australia. It's taken forever to get here, but we're here now. We are lagging behind the rest of the world. It's been in the UK for a long time, in New Zealand and other jurisdictions.

There's an intergovernmental organisation called the Financial Action Task Force that does evaluations of jurisdictions. They've been critical of Australia for not capturing these businesses. The time came where it just needed to happen. And of course, when you think about the offences that the government's worried about in terms of money laundering, tax evasion and defrauding government programs is very high on their list. 

So it's a further motivation for the government to get these laws in place because it helps them deal with the black economy, the grey economy, tax evasion, and fraud on the NDIS and the illicit tobacco etc.

Jackie Blondell:
Accountants and lawyers with more intimate client relationships might be able to spot these money trails that banks cannot easily see, says Amanda Wood, managing director, of Kroll's Investigations, Diligence and Compliance Practice. Wood knows what she’s talking about. She’s had more than 25 years in this space, including stints at AUSTRAC, APRA and Treasury.

Amanda Wood:
Financial institutions, particularly large banks, see a lot of transactions which touch on the activities of lawyers, accounts, and real estate agents. Many of those transactions will go through banks. But the thing that banks can't see that the tranche 2 entities can often see is the underlying customer, they'll have the conversations with the customer around the nature and purpose of transactions. 

Whereas banks don't have that sort of direct contact with the underlying customers of lawyers and accountants. So that missing piece in terms of understanding really what the nature and purpose of the transactions are, is really what's being plugged, I think, by these new reforms.

Jackie Blondell:
AUSTRAC’s Brendan Thomas says there’s two big requirements for the new gatekeepers.

Brendan Thomas:
One is to really understand who their customers are. So a big part of money laundering regulation asks businesses to be sure that they're dealing with who they think they're dealing with and to try and be clear who's benefiting from any kind of transaction that they're running. But then secondly, if they do see suspicion to report those suspicions to us.

Jackie Blondell:
There will be some reluctance on the part of these new gatekeepers, who may see this extra level of oversight as intrusive especially accountants and lawyers who are already heavily regulated. Brendan Thomas says AUSTRAC is aware of this.

Brendan Thomas:
Nobody really wants to be regulated. This is an extra level of effort for people that they didn't necessarily account for. Secondly, it's a new area for people to operate in, so we don't expect accountants and lawyers and real estate agents to be experts in money laundering and crime from day one. So we expect that people are on a learning journey with us on what this problem actually is that they're dealing with and what they need to do to be able to comply and to get it right.

What we do expect to see is honest efforts from business to try and comply with the law, to start to put in place the things that they need to have in place to comply with the law, and then really to start to report to us when they see matters of suspicion.

We really don't expect people to be perfect from day one. We expect people to make mistakes. And frankly, we expect people to try and launder money through these businesses and get away with it. I often say we've been regulating banks for 20 years. We get hundreds of thousands of reports from those banks. They have huge, sophisticated anti-money laundering operations, and people still successfully launder money through them. So we expect that to happen.

Jackie Blondell:
It’s disturbing, but unsurprising, that money launderers continue to invade banks despite their sophisticated, automated transaction monitoring systems. Amanada Wood believes Tranche 2 gatekeepers might have a different experience.

Amanda Wood:
For Tranche 2 entities, in my view, it's actually a little bit easier than it is for some of the tranche 1 entities at the moment because the nature of the transactions are larger and lumpier and less frequent or you're not signing up with a new lawyer or accountant every week. Whereas if you're thinking about something like a bank or a gaming entity, like a casino and other things, where you have a large number of customers, many of those customers are being interacted with in a digital environment, solely in a digital environment.

They might be opening new accounts and things online. That actually is quite a more challenging process than doing a more limited number of customers in a more face-to-face and in a less complex environment where you're not typically using things like digital forums to sign up new customers. So I think it is achievable. It is a new process, no doubt about it. And it requires some thought by all tranche 2 entities as to who are required to comply with these new requirements as to how they do it. But I think it can be embedded within existing processes largely. 

Jackie Blondell:
Complying with the regime is all about knowing just who you are dealing with, says Amanda Wood.

Amanda Wood:
Really, it's a process of understanding who your customers are, what type of transactions you'd expect to see in respect to those customers. And then where you see unusual activities or activities which might flag concerns about the nature or purpose of those transactions, then reporting entities need to report those through.

So it is a new process for tranche 2 entities. And really the things that are important to make sure that the process occurs properly is to ensure that staff are properly trained around what red flags might look like in the context of the specific type of entity. So if it's an accounting firm or a lawyer or real estate agent, for example, what is suspicious in the context of that business or what would be unusual that needs to be escalated for consideration around reporting obligations.

And the other part too is what other forms of monitoring might you need to do internally to try and identify transactions of concern. But typically when you're talking about tranche 2 entities, because you're talking about low volume types of transactions where you're interacting with the customer directly, a lot of the suspicious matter reporting will come directly from staff observing the actions or interactions that they have with customers.

Jackie Blondell:
Geoff Peck highlights why some of these so-called clients might be criminals hiding in plain sight.

Geoff Peck:
So knowing your customer is a key pillar of managing the risk of your services being used to launder money or finance terrorism or proliferation finances or weapons of mass destruction. And because money launderers hide behind anonymity, they don't like people knowing who they are and what their business is. So being able to identify who your customer is, you can then risk assess those customers.

You can identify whether they are at risk of being involved in these illegal activities. Now bear in mind that criminals like dealing with, historically, accountants and lawyers, because they assist them, set up complex structures that can hide their identity. There is this air of client confidentiality that criminals can rely upon, and part of knowing your customers is trying to chip away at that.

So you need to satisfy yourself that your customer is who they say they are. And for higher risk customers, you may need to also understand not only where their source of funds come from for a particular transaction, but you might need to know where their source of wealth generally comes from. So it'll require engaging in a conversation with your clients where you really do need to get to know them well and who they are, what they do.

Jackie Blondell:
This might be quite an undertaking, but Geoff Peck believes there’s a sound business reason for professionals to embrace the AML/CTF requirements.

Geoff Peck:
Hopefully they'll be able to serve their customer better. They're professional advisors, they're helping them with their businesses and personal affairs. The better you know your customer, I would have thought the better you can service those customers. And that's something the banks probably learnt over time when they were first forced to do this in the mid-2000s was suddenly they needed to know their customers better as well. And arguably they were able to sell them more services.

Jackie Blondell:
There’s a common misconception that signs of money laundering involve great wads of cash being fed into ATMs. Here’s Amanda Wood.

Amanda Wood:
There's kind of an old-fashioned view of money laundering. I mean, obviously cash transactions are more susceptible to money laundering because of the anonymity of cash. But when we're talking about money laundering more generally, money laundering can occur through any form of value transfer.

So if you're talking about tranche 2 entities, lawyers, accountants, real estate agents, et cetera, what you are really looking for are transactions which might be indicative that the person is trying to facilitate some kind of criminal activity, and that includes things like tax evasion, welfare fraud, fraud more generally would be reportable as a suspicious matter report.

So if you're talking about accountants, they might be involved in assisting their clients with their tax affairs or potentially also setting up offshore companies or other structures which might be used for money laundering purposes.

Jackie Blondell:
Brendan Thomas says there’s a host of resources available from AUSTRAC, explaining how the legislation works in practice and how the new reporters might comply with the law.

Brendan Thomas:
They get quite a lot of support from us. So we've been involved in a journey over the last year of designing what this regime looks like. The Parliament passed the legislation, but under that legislation, AUSTRAC has had to develop a series of rules. So that is how the legislation works in practice and a whole range of set of guidance. So that is guidance materials that we provide for industries.

And we've worked really closely with the industry associations for those industries coming under regulation from July, and they've helped us shape what those rules and what that guidance really looks like. So we've had a lot of engagement with industry today, with the professional associations for accountants and lawyers and real estate agents and representatives of dealers in precious metals and stones. They've really helped shape that.

And just recently we released a set of starter kits, which are how to guides for small business in complying with the law. And it really spells out in a lot of practical detail what those businesses need to have in place to be able to comply with the law. This is the first time any money laundering regulator in the world has provided this kind of support, particularly focused on small business.

So we're engaging directly with industry regularly, much more than we ever have. We've got a new call centre that's operating that people can call and ask questions from us for. We've got a whole range of seminars and webinars that we've run and that we will continue to run between now and the middle of the year.

We're kicking off a whole public awareness campaign to talk to the public about what we're doing and why we're doing this, what's the problem that we're trying to solve and why, and what might they expect in dealing with businesses under tranch 2, so that they can understand if they're coming to a business and they're being asked for a little bit more information to prove they are who they say they are, why they're actually they're doing that.

Jackie Blondell:
What about people who do try to comply and get it wrong?

Brendan Thomas:
We expect criminals to try and exploit gaps. But we really would like to see people making their best efforts to comply with the law, and we never have punished small businesses for getting things wrong when they're trying their best. We just don't do that. And people really don't need to worry about that.

But what we do worry about is if people just don't even try to comply with the law. So we'll work with business, we'll give people leeway when we first start, but we do expect to see people trying to comply with the law. And down the track if they aren't complying with the law, then we will start to take increased action against them.

Jackie Blondell:
Actions include civil penalty orders. That means substantial fines and even  criminal prosecution. If this sounds punitive, compare these obligations to the devasting effect of the crimes behind money laundering.

Amanda Wood:
No crime is victimless really. So if you think about money laundering itself, there's some form of criminal enterprise which has generated those funds that need to be laundered. Whether that's through drug dealing or whether that's through online exploitation of children or whether it's any type of criminal offence which generates proceeds of crime, there is typically a victim associated with that, whether that's regardless of the crime.

So the money laundering part of it might seem like it's sort of disconnected and doesn't have any sort of victim associated with it, but all of that money is generated by other criminal activities. So there's always some form of victim associated with that. And so really when we're thinking about AML processes, it's really important to focus on that. It's not just a compliance obligation that we need to sort of just work through.

There is actually a social purpose to this. It's not just about government or why don't the government do their own work. We can actually contribute through anti-money laundering requirements to identifying criminals and having those criminals prosecuted and taken off the street. And that's a really important social purpose that needs to be remembered, I think, at the heart of what we're doing from an AML perspective.

Jackie Blondell:
Assistance for new gatekeepers is available in the show notes including AUSTRAC’s guidance for small business, as well as links to CPA Australia’s resources. Thanks for listening. This has been Crime by Numbers: The Money Launderers.