From the March edition of In The Black. More on the mutual evaluation report on money laundering at FATF.
Australia needs to clean up its act on the money laundering front. accountants are being drafted in to assist the cause.
t’s not the kind of report card anybody wants, especially when what’s being assessed in the ease of laundering money through a country’s financial system. But the verdict handed out last October by the organisation charged with monitoring global money laundering, the Financial Action Task Force (FATF), was a resounding ‘could do better’ for Australia’s efforts to clamp down on the shadowy practice.
As one of the world’s leading industrialised nations, Australia makes all the right noises about monitoring crime. But our record isn’t as clean as government press releases make out.
The FATF found that out of 40 recommendations against money laundering, Australia was compliant on only 12 points. We were not compliant on nine, only partially compliant on 10 and largely compliant on another nine.
It’s not that Australia isn’t clamping down on laundering. It’s that the issue hadn’t been addressed properly for more than 15 years. Money laundering is considered criminal behaviour under the revised Division 400 of the Criminal Code Act 1995, which came into effect in January 2003. But as the FATF pointed out, little has been done since the introduction of the Proceeds of Crime Act in 1987.
The FATF said the reason for its harsh assessment was the low number of money laundering prosecutions at a Commonwealth level: 10 summarily and three on indictment since 2003, with five convictions. It said this indicates the regime ‘is not being effectively implemented’.
According to the report, criminals use the mainstream retail banking, larger financial services companies and gaming providers for laundering. Launderers use false identities and false name bank accounts. Forged documents are used to structure and transact funds. While international funds transfers are popular in moving money offshore, smaller or informal service providers such as alternative remittance dealers are also used. Other money laundering vehicles include legitimate businesses mixing dirty money with clean. The use of professional launderers was also recognised.
Jackie Johnson is associate professor of accounting and finance at the University of Western Australia. ‘The only surprise for me is that Australia has been so slow in implementing the 40 recommendations,’ she says.
She says Australia was almost put on the list of non-cooperative countries and territories. It would put us in the same league as Myanmar and Nigeria (Nauru, after abolishing 40 shell banks, was taken off the list last year).
Money laundering means crime. It’s about the rich avoiding their taxes, and petty criminals and drug dealers washing their dirty cash into the financial system. And it’s about terrorist financing.
In the aftermath of the 9/11 attacks on the World Trade Centre in New York, the US government introduced the Patriot Act, marking a war on money laundering.
On 13 December last year the Australian federal government published its long-awaited exposure draft of the Anti-Money Laundering and Counter Terrorism Bill 2005 for comment. For accountants and many other professionals it means more work.
It was Al Capone’s accountant Meyer Lansky who first financially engineered the laundering of cash. After his gangster boss was convicted of tax evasion in October 1931, he resolved to make his financial affairs legitimate. He found ways of laundering money through bank accounts, and through the offshore banking world using loan- back deals. His techniques were so effective they are still used by modern day launderers.
According to the International Monetary Fund (IMF), US$2.5 trillion in laundered money is swirling around the world, about 10 per cent of global GDP. Australian government estimates suggest about A$2–3bn is laundered locally.
John Walker, a criminologist who specialises in crime trend analysis, advises AUSTRAC (Australia’s anti-money laundering regulator) and the UN Office on Drugs and Crime. In 1995 he estimated that $3.5bn – more than 20 times less than the IMF estimate in percentage terms – was laundered in Australia. Early last year Walker delivered his revised report to AUSTRAC and Senator Christopher Ellison, minister for justice and customs, who has yet to release the results.
The IMF figures have been discredited, says Walker, as being produced solely to give the press a concrete figure. But because of the difficulty of identifying laundered money, he concedes the Australian figure could be much higher.
There is a gaping back door into the Australian financial system through correspondent banks, although legislation will close this option. And transfer pricing through trade remains a massive but difficult problem to police.
Lansky used Cuba (before the revolution), Haiti and the Bahamas to wash money. But the developed world is also implicated. Most US companies are incorporated in Delaware, because there they pay no tax and do not have to disclose beneficial ownership. The UK could intervene in the Channel > > Islands, where beneficial ownership does not have to be disclosed, but hasn’t in living memory.
Johnson says one of the big holes being patched in the exposure draft is the correspondent banking system. Now no local Australian banks can do business with any bank that has a correspondent relationship with any offshore shell bank. As Johnson says: ‘The correspondent banking system has been the back door into the local system. Once you are in you can go anywhere.’
In October 2002 two US academics reported on the loss of US federal tax revenues from the over-and-under invoicing of imports and exports. They identified a tax loss of US$53.1bn at a tax rate of 34 per cent.
Australian exports were estimated to have sifted US$1.8bn through over invoicing of exports and another US$1.6bn through under-invoicing on imports. In Australian currency, that’s about A$4.5bn potentially laundered.
These invoices were for everyday products such as buckets, toilet tissue, ceramics, tyres and vehicle components. Australia lawnmower blades were singled out at having been exported to the US at the inflated price of US$2326.75 a unit.
It shows how easy it is to move money around the globe. Osama Bin Laden, for example, is thought to have transferred money using honey exports.
Walker says transfer pricing is connected to faceless companies for which owners cannot be identified. Even when this system is tightened up, Walker says that identity fraud can obscure true ownership. He says while directors may be identified, no one knows if they are using false identities.
Steve Ingram, a partner at PriceWaterhouseCoopers and a former Australian Federal Police officer, says he expects a spate of identity theft to facilitate laundering. ‘People may break into the home to steal documents and become you,’ he warns.
The government’s December exposure draft was aimed at those who try to get cash into the financial system. ‘They are trying to find a paper trail to something that is essentially anonymous. If you are very effective and stop cash getting into the financial system, typically [criminals] will find other ways to get into it, and go to other less regulated places,’ Johnson says.
The Hawala ethnic banking system is one route for illicit funds. Many local operatives don’t realise that they have to be registered with AUSTRAC or report on suspicious transactions. Johnson says most of these businesses are legitimate and are used by ethnic communities to transfer money back to villages, in Vietnam for instance, where there may not be a bank nearby.
Yet the transfer of money is complex and may not actually involve cash changing hands. It may involve the trading of goods with three or more parties across several countries. Many Hawala bankers operate out of small shops such as Asian grocery stores.
‘The thing is that they want to operate outside the regulated system and don’t want to become part of it,’ Johnson says.
Neil Jenson, director of AUSTRAC, says his organisation has been educating remittance dealers on their obligations. ‘They were just not aware that they had to report to us,’ he says. ‘Our reporting has gone in the past three years from about 200,000 reports to in excess of 1.2 million a year.’
In the new Terrorism Act 2005 remitters will be required to provide all details such as name and addresses by the end of the year, and it is an offence not to be registered.
AUSTRAC’s Jensen says that the organisation is now identifying more suspicious transactions than ever before. He says: ‘It may be that our systems and processes now are much better so we are identifying more than we were previously.’ He says government agencies are starting to better understand how to use the data. AUSTRAC is applying its expert systems to 70,000 transaction reports a year – more than a billion bits of information in its database. A few years ago it had 60 staff and consultants. Now it employs 150.
AUSTRAC will be educating the industry about how to report. Jensen says that if there are any doubts about whether to report a transaction, ‘It’s probably better to give us a call and seek advice’.
Note: An Estimate of 2001 lost US Federal Income Tax Revenues Due to Over-invoiced Imports and Under-Invoiced Exports. Simon J. Pak, Associate Professor of Finance, Penn State University and John S Zdanowicz, Professor of Finance, Chapman Graduate School of Business, Director, Jerome Bain Real Estate Institute, Florida International University.
Government walks the talk
The first tranche of the government’s Anti-money Laundering and Counter Terrorism Financing Bill 2006 is aimed at the financial services sector – attempting to bring Australian banks and financial institutions into line with the standards set out by the international agency, the Financial Action Task Force.
Despite government rhetoric about adopting a risk-based approach, a first reading of the bill and related rules and guidelines suggests the government has sought to minimise its own risk by taking a prescriptive approach. That said, the government has made it clear that all aspects of the draft bill are open for discussion. And it’s walking the talk, with open consultation and a number of industry working parties established under the AML/CTF advisory group putting in many hours to work through the detail of the bill and rules. These will provide considered recommendations to the attorney-general’s department on the impact of the bill and approaches to achieve desired outcomes with minimal compliance burden.
Compliance with the anti-money laundering regime is triggered when a business provides a designated service. There are 64 designated services listed, including operating banking accounts, making loans, factoring receivables, dealing with securities, derivatives, foreign exchange contracts on behalf of others, being a trustee for a superannuation fund and providing financial advice as a financial adviser.
The bill adopts a functional approach rather than a sectoral approach to ensure all businesses that provide such services are covered. However, this approach may capture a number of ordinary business-to-business transactions that were not intended to be covered, such as related business loans. CPA Australia is participating in the working groups to advise the government of such consequences, with the aim of removing them from the regime.
Financial planners are caught in the first tranche of the legislation. Among the proposed requirements are the need for all clients to be given a risk classification; reporting of suspicious matters; and extending existing compliance programs to meet the stringent requirements outlined in the bill. It will be an offence to not have an appropriate compliance program and not to comply with it.
For accountants, the real crux will come with the release of the second tranche of legislation, which specifically targets services provided by accountants, lawyers and real estate agents, and other non-financial-sector professionals. Activities expected to be covered in this round include buying and selling real estate and/or business entities; managing clients’ money, securities and assets; organisation of contributions for the creation, operation or management of companies; and trust and company service providers. There is no firm timetable for the introduction of the second tranche of the bill at this stage.
It is essential that the compliance obligations and processes created for large financial institutions are not automatically transferred to accountants and other professions in small practices. CPA Australia is participating in the consultations with government in an effort to ensure that a practical and applicable system is established. A number of member forums were held in February to gauge likely compliance costs, and an online survey of members was undertaken to access the degree to which members are likely to be captured in the first tranche of the legislation.