2.1
As set out in chapter 1, a consistent criticism of Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime is its failure to regulate designated non-financial businesses and professions (DNFBPs). DNFBPs, also known as ‘professional facilitators’ or ‘gatekeeper professions’, are defined by the Financial Action Task Force (FATF) as casinos, real estate agents, dealers in precious metals, dealers in precious stones, lawyers, notaries, other independent legal professionals and accountants, and trust and company service providers.
2.2
At present, Australia’s AML/CTF regime applies to casinos, bullion dealers, and solicitors that only attract reporting obligations in relation to cash transactions of over $10,000 under the Financial Transaction Reports Act 1988 (FTR Act) (‘tranche 1’ entities). Beyond this, real estate agents, trust and company service providers, accountants and legal professionals (‘tranche 2’ entities), while subject to regulatory, professional licencing and/or registration requirements specific to their fields, are not subject to specific regulatory requirements under the AML/CTF regime.
2.3
The extension of Australia’s AML/CTF regime to tranche 2 entities received extensive support from inquiry participants from outside of these sectors, and a range of views from within. This chapter considers issues raised in evidence about the implications of Australia’s continuing noncompliance with FATF Recommendations relating to DNFBPs, and the possibilities of further reform in this area. In particular, this chapter considers:
Australia’s record against the FATF Recommendations with respect to DNFBPs;
concerns of the DNFBP sectors about potential reform; and
The threat environment
2.4
Despite the existence of Australia’s present AML/CTF regime, evidence to this inquiry identified that Australia remains an attractive destination for transnational serious organised crime (TSOC) due, in part, to Australia’s ‘insatiable appetite’ for illicit drugs. The Australian Federal Police (AFP) told the committee that ‘[m]oney laundering poses a serious, significant and growing threat to Australia’s national security’. Mr Ian McCartney, Deputy Commissioner, Investigations told the committee that:
Criminals engaged in money laundering continue to exploit vulnerabilities in a framework to advance broader organised crime ventures by developing new ways to obfuscate the movement of funds and property. The AFP is currently focused money-laundering organisations, which are highly organised, sophisticated crime groups that operate independently of but service traditional organised crime groups, including drug traffickers.
2.5
The Australian Criminal Intelligence Commission (ACIC) estimated that Australians spent $8.9 billion on methylamphetamine, cocaine, MDMA and heroin in the 12 months leading to August 2021. In total, it estimates that TSOC costs Australia up to an estimated $47.4 billion each year. It submitted:
Australia’s stable financial markets and valuable real estate market make the country an attractive destination for domestic and transnational criminal groups and individuals looking to invest or launder the proceeds of crime. Australia also continues to sustain very profitable crime markets, such as the illicit drug market, and as a result there is a need to launder the significant proceeds that these crimes generate. Tens of billions of dollars obtained through serious and organised crime are likely laundered in Australia each year.
2.6
The AFP told the committee that it had restrained criminal assets totalling $470 million since 1 July 2019. Of that amount, 56 per cent, or $266 million was real estate.
Financial Action Task Force recommendations
2.7
The committee was told that as a founding member of FATF, ‘Australia has participated in the development and ratification of the DNFPB international standards by the FATF since 2003’. The FATF’s 2005 Mutual Evaluation Report (MER) found Australia was non-compliant or only partially compliant with recommendations pertinent to DNFBPs, namely recommendations 22, 23 and more generally 28. The 2015 MER similarly found that Australia was largely non-compliant or only partially compliant with recommendations relevant to DNFBPs. In the FATF’s 3rd Enhanced Follow-up Report & Technical Compliance Re-Rating (3rd Enhanced Follow Up Report), Australia was assessed as remaining largely non-compliant with recommendations related to DNFBPs. As such, Australia remained in enhanced follow-up.
2.8
Waterstone Anti-Money Laundering suggested that the FATF Recommendations in relation to tranche 2 entities would impose a lower regulatory burden than that currently imposed on financial institutions, limited to customer due diligence (CDD), which is similar to Know Your Customer (KYC) requirements, record keeping and suspicious transaction reporting.
2.9
A number of inquiry participants warned that Australia’s lack of compliance with the FATF Recommendations with respect to DNFPBs is having ongoing detrimental impacts to Australia’s international reputation, increasing Australia’s attractiveness as a destination for money laundering and hampering the ability of law enforcement to respond. This sentiment was summarised by Mr Paddy Oliver, Director, AML Experts, who stated that ongoing non-compliance with the recommendations ‘places Australia at risk in the international sphere and also places Australian society at risk at domestic level from ongoing serious organised crime’. Both concerns are discussed in the following sections.
Impact of non-compliance on Australia’s international reputation
2.10
Reflecting specifically on the impact of non-compliance on Australia’s international reputation, Mr Anthony Quinn, Founder and Director, Arctic Intelligence, gave evidence that ‘Australia is simply not meeting its international commitments’. Mr Quinn noted that Australia is ‘one of five out of 200 FATF member countries that have failed to expand the laws to lawyers, accountants, real estate agents, high-value dealers, and trust and company service providers’. Mr Neil Jeans, Principal of Initialism, added that two of the remaining five states, namely China and the United States, have commenced their respective legislative processes to implement these reforms in those jurisdictions. That leaves Australia, Mr Jeans stated, in a cohort with Madagascar and Haiti.
2.11
While agreeing that Australia has been found by FATF to be non-compliant with respect to DNFBPs, the Department of Home Affairs (the department) provided a slightly different perspective on this matter. It gave evidence that in February 2021, the FATF had found that ‘regulatory coverage of tranche 2 was uneven, with a large number of jurisdictions not regulating or only partly regulating some of those sectors’.
2.12
Mr Quinn agreed that actions by the Prime Minister to reaffirm full support for the FATF in signing up to the G20 Rome Leaders’ Declaration ‘is very inconsistent with actual practice’. He explained:
I think, basically, you're either agreeing to comply with the FATF standards or you're not. It's black and white. They're very prescriptive around what they expect countries to do, and they measure them about whether they're partially or fully or not compliant.
Increased risk of ‘grey-listing’
2.13
AML Experts also explained that ongoing non-compliance or partial compliance risks Australia ‘being placed by FATF under “increased monitoring” to address strategic differences in their regimes to counter money laundering, terrorist financing and proliferation financing’. Mr Jeans, Principal, Initialism, said that there is a degree of time urgency to this matter, stating that in 2022, it is anticipated that FATF will conduct a review of Australia’s progress against the 2015 MER findings. He noted that this follow-up was due to occur in late 2019 but had been delayed.
2.14
The committee was told that ongoing non-compliance could risk Australia’s ‘grey-listing’ by FATF, the effect of which would be to place Australia on a list with other states under increased monitoring. To explain the impacts of grey-listing, Mr Jeans referred to the example of Turkey:
Turkey is also a full member of the FATF. It's one of only two members of the full members of the FATF that have been put on the grey list—the other one being Iceland, which was removed because the government there moved very quickly to be removed from the grey list, because they understood the economic impacts of being put on the grey list.
What the grey list says is that other countries should have regard to the weaknesses in a particular country's regime and make sure those risks are appropriately mitigated. They don't necessarily recommend enhanced due diligence on everything, but what we see by definition is that this could have impacts on the financial institutions being able to operate internationally, because they would be required to be subject to more scrutiny on a transaction-by-transaction basis. It could also see impact in relation to access to capital markets. So this has a real world economy potential impact.
2.15
Dr Doron Goldbarsht explained the consequences of grey-listing in greater detail:
Pending the adoption of appropriate laws and policies, FATF demands that countries scrupulously apply Recommendation 19, which holds that ‘[f]inancial institutions should be required to apply enhanced due diligence measures to business relationships and transactions with natural and legal persons, and financial institutions, from countries for which this is called for by FATF’. These enhanced due diligence measures should be proportionate to the risk. Countries should, for example:
refuse to allow the establishment of subsidiaries, branches or representative offices of financial institutions from (or in) the country concerned, or otherwise take into account the fact that the relevant financial institution is from a country that does not have adequate AML/CTF systems;
limit business relationships or financial transactions with the country, or persons within it;
prohibit financial institutions from relying on third parties located in the country concerned to conduct elements of the CDD process; and
require increased supervisory examination and/or external audit requirements for branches and subsidiaries of financial institutions based in the country concerned.
Any country that is subjected to such countermeasures suffers a blow to its international reputation and all banking operations within the country could be scrutinised for suspicious activity. While this does not, strictly speaking, amount to sanctions, it creates substantial difficulties for the country in question [references omitted].
2.16
Mr Jeans stated that grey-listing would impact the ability of Australia to do business in other FATF member states including Singapore, Hong Kong, Indonesia, China, Japan and New Zealand. He further stated that an additional consequence of grey-listing would be that the European Union would also consider whether Australia should be added to its grey-list.
2.17
The Australian Banking Association (ABA) explained that, as a result of FATF rating Australia as non-compliant in certain areas, when seeking out international credit, Australian banks ‘provide further information to overseas investors so that those overseas investors are satisfied that Australia's banking system is secure, robust, well capitalised and takes its obligations seriously’. The ABA advised that:
Having the FATF rating on certain recommendations change from non-compliant to compliant would certainly be more efficient for banks as they seek funds overseas. But right now, we're meeting those obligations through our own efforts to work with our investors in overseas markets to show how we comply with both the letter of the law and the objectives of the money laundering legislation.
2.18
Arctic Intelligence described the likelihood of sanctions by FATF as a result of inaction on enablers as ‘likely’, and added:
unless Tranche 2 is enacted in Australia soon, it seems very likely that Australia is at risk of being placed on the grey-list by the FATF and potentially the EU grey-list, which would have implications on our economy.
2.19
Mr Jeans advised that it is difficult to state the likelihood of Australia being grey-listed due to the political nature of the process, but he surmised that the prolonged nature of Australia’s non-compliance ‘would undoubtedly increase’ the risk.
2.20
Dr Goldbarsht suggested that it is unlikely that FATF would grey-list Australia. However, he asserted that expansion of Australia’s AML/CTF regime accordingly would ‘promote public confidence in the Australian financial system and fulfil Australia’s domestic and international AML/CTF responsibilities’. Mr Chevis told the committee that in his view it is highly unlikely that Australia would be grey-listed, given the countries that have been placed on the grey list in the past. He also questioned the extent of the impact of such an action should it be taken by FATF.
2.21
The Australian National University Law Reform and Social Justice Research Hub (ANU LRSJ Research Hub) concluded that:
On balance, while the specific extent to which Australia would be affected by grey-listing is dependent on a number of variables, it is in Australia’s best interests to avoid the prospect of grey-listing, to protect its economic and reputational interests.
Impact on Australia’s ability to assist partner states
2.22
Dr John Coyne of the Australian Strategic Policy Institute (ASPI) explained to the committee that the absence of information provided by DNFBPs impacted Australia’s ability to share intelligence with global partners. He stated:
There can be no doubt that there's goodwill in terms of police-to-police cooperation with our wider allies and partners—and, by that, I mean everyone from the Thai police to those of the UAE—and that police-to- police relations for the exchange of information and intelligence are strong and robust. The relationships in terms of our more formal agreements with AML are robust wherever they are in place, and there are many countries where they're not in place… Earlier, I mentioned that transnational serious organised crime is amorphous. It tends to seek out where the vulnerabilities are, and it's incredibly difficult to address AML/CTF in a global regime if we are the weak link in that. I think that's the broader issue, and there is some frustration and some confusion within the AML community globally about why we won't implement tranche 2.
2.23
The importance of international cooperation to combat money laundering was emphasised by the AFP, which told the committee:
The major facilitators of organised crime impacting on Australia don't actually live in Australia; they live offshore. So, while it is important to target individuals here, there's a huge focus on working with international partners in terms of people offshore.
2.24
On notice, the AFP added:
Given the increasingly globalised nature of financial systems and the speed with which funds can be laundered through multiple countries, relationships with international partners remain critical in the AFP’s efforts to target money laundering and the confiscation of illicit wealth.
2.25
The ANU LRSJ Research Hub considered the lack of AML/CTF regulation from the perspective of Australia’s reputation when engaging with Pacific partner states. Ms Holly Ashburner, Law Student, told the committee:
it's not a great look for us to be offering conditional aid to our friends in the Pacific islands and promoting norms of good governance and things like that when we enable the laundering of illegal money from those countries through our financial markets.
Impact of non-compliance on law enforcement capabilities
2.26
The ACIC described that serious and organised crime groups and criminals ‘almost certainly use a range of professional facilitators’ to set up the structures needed to launder their profits. It explained:
Professional facilitators with their skills, connections, expertise, access and knowledge of systems, markets, legislation and structures are particularly vulnerable to exploitation by TSOC groups. Some of these professional facilitators are coerced into providing services for TSOC groups, whilst others are actively complicit. They are critical enablers for TSOC, to drive profit and apply strategies to generate an appearance of legitimacy—in the process potentially undermining regulatory frameworks and efforts.
2.27
The ACIC added that the ‘nature of the TSOC business model means that they will continue to look to recruit from pockets of professional expertise to grow their operations and conceal their offending and wealth’.
2.28
Dr Goldbarsht shared this view with respect to legal professionals. He outlined the particular aspects of the legal profession that make it attractive to criminals seeking to launder proceeds of crime:
The reliance of criminals on legal professionals, it is suggested, is due to the stringent AML/CTF controls imposed on financial institutions, making it more difficult to launder criminal proceeds and heightening the risk of detection, together with the use of increasingly complex laundering methods. In addition, criminals seek out the involvement of legal professionals in their money laundering activities – sometimes because a legal professional is required to complete certain transactions, and sometimes to access specialised legal and notarial skills and services that could assist in laundering the proceeds of crime. Furthermore, the perception among the launderers is that legal professional privilege or professional secrecy will delay, hamper or effectively prevent investigation or prosecution against them if they engage the services of legal professionals [references omitted].
2.29
The committee was told that the absence of AML/CTF regulation on these professions has created a gap in Australia’s law enforcement capabilities, or that tranche 2 reforms would bolster these agencies’ capabilities. Mr Scott Weber, President of the Police Federation of Australia (PFA) stated that members of the PFA want these reforms now because ‘we are playing catch-up’, describing the FATF Recommendations as ‘world standard’.
2.30
Mr Jeans said that the tranche 2 reforms ‘will close the gap that allows criminals to exploit the legitimate services provided by legal[,] accountancy and real estate professions to launder the proceeds of criminal activity’.
2.31
The ACIC expressed support for the extension of the AML/CTF regime to DNFBPs. It stated:
The ACIC's coercive powers and human source networks are used to infiltrate syndicates and compel those professional facilitators identified through intelligence investigations to provide information. We work with our partners to create an environment that is hostile to the professional facilitation of money laundering in Australia. Given this, and what we assessed to be the threat from an intelligence perspective, the ACIC support the AML/CTF regime being expanded to cover appropriate designated non-financial businesses and professions.
2.32
Mr Matt Rippon, Deputy Chief Executive Officer, Intelligence Operations, at the ACIC, added:
as a senior member of the intelligence community, a member of the ACIC and someone with a law enforcement background, I am—and our CEO is—very happy to receive any additional intelligence, information or powers that would help us to better shape the picture of serious and organised crime in this country, particularly around professional facilitators.
…
We see a benefit from the expansion in tranche 2, because we potentially will get a wider view of some of the other activities of professional facilitators.
2.33
The AFP expressed a similar position, stating that tranche 2 reforms would be ‘another piece of additional information we provide to operational agencies in terms of the jigsaw we build in tackling organised crime’. The AFP submitted:
…these professions receive and hold information and insights which could greatly benefit law enforcement investigations and outcomes targeting TSOC. In contrast to international counterparts, the lack of regulation of DNFBPs in Australia means not only that activities carried out by or through these professions remain largely invisible, but there is an inability to create a complete picture of Australia's money-laundering and terrorism financing risks. Data collected from these sectors would enable a comprehensive approach to risk assessments ensuring any trends and vulnerabilities are appropriately identified and addressed, thus enabling law enforcement to effectively protect the community.
2.34
The PFA gave evidence that extending these reporting mechanisms to DNFBPs would assist in providing insight into information gaps and would expose instances of non-compliance. Mr Weber stated:
In the reporting mechanisms, especially from organisations that are playing by the rules, we would say, 'Hang on a minute, this is a statistical data coming back. An organisation of this size, a law firm or real estate agent of this size with this much turnover, technically they should be reporting maybe five or 10 incidents a year.' We would then look at other organisations that are of that similar size, that sort of organisation and find they have never reported anything at all. Why is that? It could draw our attention to that. We would look at our other databases and our other resources.
2.35
The Australian Taxation Office (ATO) outlined the strong working relationship, including the sharing of information, between it and Australian Transaction Reports and Analysis Centre (AUSTRAC) through the Serious Financial Crime Taskforce and the Fintel Alliance. The ATO explained that, while it has operational success with the range of data it has already, it could act on further intelligence received should tranche 2 reforms be implemented.
2.36
While AUSTRAC agreed that tranche 2 would result in a wider pool of intelligence sources, it told the committee that there would not necessarily be an automatic increase in the number of investigations. AUSTRAC stated that in relation to money laundering through real estate transactions, there is some visibility presently through reporting from banks and other financial services. However, Mr Soros stated that imposing reporting requirements on the real estate sector itself could create ‘the possibility that you may enrich that holding’, which could then be shared with law enforcement.
2.37
The department emphasised that the quality of reporting is important. Part of the analysis that it is undertaken is considering how to improve the quality of reports so that AUSTRAC is not ‘drowning in reports that are not useful’. AUSTRAC agreed, stating:
Some of the international anecdotal experience from bringing on those new sectors, is that the quality of the reporting is not great, and it creates a volume that is challenging for an FIU or regulator to get through when the quality isn't great. So that's part of the design challenge of what that might look like.
Reservations about the FATF Recommendations
2.38
A few submitters expressed reservations about the FATF Recommendations themselves, and urged caution about their application in Australia.
2.39
Mr John Chevis pointed out that while the FATF recommendations heavily influenced the Australian AML/CTF framework, those recommendations have not ‘changed very much in respect to anti-money laundering since about 1990 and they haven’t been subject to any sort of evidence based process to determine how effective they are in actually addressing the underlying crimes’.
2.40
Professor Louis de Koker told the committee that the FATF standards are continuously revised but ‘the revision discussions are not necessarily informed by high-quality empirical data’. Professor de Koker explained:
Much of the evidence that informs changes to the standard tends to be anecdotal and case-based and discussions are often influenced by opinion-based views held by officials of its members … After 31 years of implementation we need to understand the value of the system; whether it is realistic to expect businesses to become better at AML/CFT [sic] compliance; the true contribution made by AML/CFT [sic] to crime combating; and how that contribution can realistically be improved without undue economic costs or impacts on civil liberties.
2.41
Professor Jason Sharman suggested that ‘Australian and international experience gives no reason to think that feeding more information into the AML system in this manner will increase effectiveness; it may actually reduce it’. Professor Sharman added:
The endless fascination with Tranche 2, something of a holy grail for the (small) Australian AML community over the last 15 years, indicates the triumph of optimism over international experience. For example, the UK has incorporated lawyers and real estate agents into its AML reporting system; almost no one thinks that this has been a success. Both professions make a relatively small number of low-quality reports. Both those submitting and receiving reports regard them as a waste of time. This is not because there is no money being laundered, to the contrary the British real estate and legal professions are used to launder vast quantities of money. But including these areas within the AML reporting regime has done nothing to change this. Similarly, even though there are almost certainly substantial amounts of money laundered via Australian real estate and lawyers, including these sectors in the AML reporting regime would increase expense and inconvenience for consumers without generating any off-setting benefit in terms of criminal justice.
Concerns of the DNFPB sectors
2.42
Evidence to the inquiry suggested that there is resistance to reform from within DNFPB sectors: ranging from cautious support to robust opposition. In general terms, these sectors’ positions as expressed to the committee can be summarised as follows:
The Law Council of Australia (the Law Council) asserted the particular context in which lawyers operate, including the stringent regulatory requirements already imposed on practitioners and practices, as well as the unique requirements of providing legal services that, in its view, are incompatible with tranche 2 reforms. On this basis, the Law Council objected to the application of tranche 2 reforms to the legal sector, but expressed an openness to work with government to find a sensible and proportionate way forward.
Representatives of accounting bodies, including the Institute of Public Accountants (IPA), CPA Australia and Chartered Accountants Australia and New Zealand (CA ANZ) recognised the need for tranche 2 reforms and considered that it is a matter of when not if the reforms will be implemented. These organisations’ emphasis was on ensuring that the design process and implementation includes broad scale consultation and consideration, in a holistic sense, of the existing regulatory obligations to which these entities are subjected.
The Real Estate Institute of Australia (REIA) expressed ‘an absolute willingness to collaborate and better utilise existing data…[and] to working with government to enhance Australia’s AML and CTF capabilities’; however, in its view, there is already ‘a broad range of existing regulatory touchpoints within real estate transactions which might be leveraged’. The REIA raised concerns that ‘the tranche 2 reforms are not fit for purpose and represent an undue burden for small real estate agency businesses across Australia’, but, it affirmed its commitment to ‘play [its] part in stamping out illegal activities such as money laundering’.
2.43
The following discussion delves into the main concerns from within these sectors in further detail, including:
lack of evidence to support the need for regulation;
potential duplication of existing regulatory obligations;
the impact of the additional regulatory burden on small businesses; and
the abrogation of legal professional privilege.
Lack of evidence to support the need for regulation
2.44
The Law Council argued that there is insufficient evidence of the need for tranche 2 regulations and urged the committee to ‘distinguish parables or ideas of theoretical risk, from, actual, evidenced, risk based assessments’. It stated:
And where you consider there is a risk, ask, does the weight of evidence show that it is high? Is it moderate? Is it low?...There is no evidence, much less credible evidence which supports a conclusion that the Australian legal profession is a high or moderate-risk sector. The risk based assessment is simply not made out. Of course, we have bad actors, but with our many levels of regulations governing all aspects of legal practice, we find them and “weed them out”. You know about the bad ones, precisely because they are found and brought to account. So it should be.
2.45
The Law Council questioned whether any of the evidence put before the committee supported the proposition that lawyers posed a risk of the nature requiring AML/CTF regulation. Dr Jacoba Brasch QC, the then-President of the Law Council, stated:
What I say is that, when regard is had to the AUSTRAC submission—so Home Affairs, the ACIC and the AFP submission—it's hard to identify the evidence that supports that lawyers are a high risk.
2.46
Asked whether AUSTRAC was fabricating the risk, Dr Brasch explained:
I'm not saying they're making stuff up, but I'm saying there's a difference between an assertion and actual risk-based evidence or particulars, as the lawyers would call them, that we're not furnished with.
2.47
The broader claim that there is a lack of evidence that the legal profession, or accountants and real estate agents pose risks of the nature in question, was disputed by a number of witnesses.
2.48
The department told the committee that the legal profession had been listed explicitly ‘because of a range of international typologies and collective international experience’ which has demonstrated that ‘the services they provide are vulnerable to abuse for money laundering’. A similar explanation was provided for the inclusion of real estate agents.
2.49
The ACIC stated that it is currently conducting a number of intelligence operations that involve professional facilitators involved in the laundering of the proceeds of crime. It stated:
The embedding of the capabilities of lawyers, accountants, real estate agents, offshore service providers, liquidators, stockbrokers, bankers and even luxury car dealers have been revealed in our investigations as a component in the criminal business model.
2.50
Mr Rippon, Deputy Chief Executive Officer, Intelligence Operations at the ACIC noted the difficulty of assessing ‘the true breadth and extent of the problem, noting the efforts that TSOC groups will go to in order to conceal their networks and legitimise their activities’. However, Mr Rippon stated that it is the ACIC’s assessment that ‘their involvement will be enduring, given the very nature of the TSOC threat impacting Australia’.
2.51
On notice, the ACIC informed the committee that it had identified:
…at least 185 individuals who are facilitating the activities of 16 current and/or former Australian Priority Organisation Targets (APOTs); the most significant targets impacting Australia. Of these 185 facilitators, approximately one quarter are lawyers, financial advisors, accountants or real estate agents who have been identified as assisting at least 10 of the 16 APOTs.
2.52
The AFP told the committee:
In terms of some of the bigger organised crime groups we tackle with our investigations and the asset confiscation work, you will see lawyers, accountants, realtors—that's not uncommon. It is, I think it's fair to say, a small minority of these important professions that make a significant contribution to our business sector and economy. It's no state secret that even in Ironside—and the AFP has been open with it—unsurprisingly, when you are dealing with organised crime, including transnational, serious and organised crime, you will see these gatekeeper professions involved. The very prized legitimate services they provide in the ordinary course of Australian society and business are very attractive to organised crime, including company and trust structures and other methods that try and hide that connectivity of assets to organised crime.
2.53
Dr Coyne stated that there is:
clear quantitative and qualitative evidence to indicate that there are elements of those who would be covered by tranche 2 that are directly involved in money laundering and transnational serious organised crime…I would say right from the start the top accountants, the legal profession and real estate, and I think that something needs to be done.
2.54
Transparency International Australia (TIA) suggested that there is evidence that certain businesses are being established specifically to assist organised crime groups to establish the structures required to launder money. It explained:
…the point I want to touch on relates to the fact that effectively what we are seeing is the proliferation of professional service firms whose business model is actually to assist foreign individuals or entities to secure a nominee director, whom in some cases they advertise as having an Australian-sounding name, and to assist with the registration of companies in Australia that can then be used as a vehicle for money laundering. Similarly, there are also some law firms that promote their services as providing a back door to ASX listing.
Duplication of existing regulatory obligations and practices
2.55
Evidence to the committee from within DNFBP sectors indicated that the professions and industries engaged that are involved in this debate are already subject to stringent regulatory obligations, some of which mirror the requirements set out in the FATF Recommendations. The views put forward by, or on behalf of, the legal profession, accountants and real estates are set out in the following sections.
Legal professionals
2.56
The Law Council remarked that ‘it has been judicially observed that the professional activities of Australian lawyers are regulated and controlled more than any other profession or vocation’. In its view, the risks of involvement by lawyers in money-laundering activities are offset by ‘the comprehensive and, importantly, effective, legal profession regulatory regime’ which sits alongside existing provisions that criminalise money laundering activities under the Criminal Code Act 1995 (Criminal Code).
2.57
These requirements are set out in each of the state and territory legislative frameworks that legislate the profession including:
(a)
The Legal Profession Uniform Law (the Uniform Law) - which created a common legal services market across NSW and Victoria (with Western Australia expected to join in 2022), encompassing almost three quarters of Australia’s lawyers, and uniformly regulates the legal profession across these participating jurisdictions.
(b)
Legal Profession Model Laws jurisdictions: currently being the Australian Capital Territory, the Northern Territory, Queensland, Tasmania and Western Australia (noting that it is soon to join the Uniform Law) who enacted Legal Profession Acts based on a National Model Bill. This Model Bill was developed by the Standing Committee of Attorneys-General in 2006, following thorough consideration of the necessary checks and balances (including fraud risks) required by the updated regulatory framework.
(c)
The Legal Practitioners Act 1981 in South Australia.
2.58
This legislative framework, the Law Council informed the committee:
governs matters such as practising certificates and related conditions on practice, practice management, including trust accounts, continuing professional development requirements, complaints handling processes, cost arrangements with clients and professional discipline.
2.59
Regulation with respect to trust accounts is ‘procedurally detailed and rigorous, [and is] subject to regular independent external examination and audit’.
2.60
The Law Council explained that this regulatory framework is supplemented by professional conduct rules which ‘set out the core standards of professional ethics to be observed’. These rules contain obligations to only accept lawful client instructions, avoid compromises to their integrity and to comply with the law and identify that lawyers owe a paramount duty to the administration of justice. The Law Council added:
Pertinently, lawyers are currently required to consider the true purpose of their client’s activities and the extent to which they may be furthering or obscuring any illegal or criminal purpose. Lawyers also cannot act for a client they suspect of engaging in unlawful activities, and there are exceptions to the confidentiality where appropriate [references omitted].
2.61
Dr Goldbarsht explained that the paramount duty precludes Australian legal professionals from engaging in conduct (in the course of practice or otherwise) that:
demonstrates that they are not a fit and proper person to practise law, or which is likely to a material degree to be prejudicial to, or diminish public confidence in, the administration of justice, or bring the profession into disrepute.
2.62
Dr Goldbarsht added:
The duty to the court and to the administration of justice is paramount and prevails to the extent of inconsistency with any other duty, even if the client gives instructions to the contrary. Therefore, when a lawyer becomes aware that a client is engaging in unlawful conduct, the lawyer must counsel the client against such conduct without participating in the conduct. When the client insists on taking a step that is, in the legal professional’s opinion, dishonourable, the legal professional can stop acting for the client [references omitted].
2.63
The Law Council had a similar view, reflecting on the requirement for lawyers to only act on a client’s lawful and proper instructions, and only providing lawful advice and without furthering unlawful purposes. Mr Steven Stevens, Chair of the Professional Ethics Committee at the Law Council asserted that under the professional conduct rules, lawyers are in effect required to fulfil aspects of the AML/CTF regime relating to KYC, CDD and source of funds rules. He explained:
You can't take on a client without making an effort to identify and verify the identity of the person and to identify what you're being asked to do and that it's a lawful matter and the background to it. Those requirements are inherent in an obligation to follow the rules and only act in a lawful manner. So those requirements are and have been there for a long time, even prior to the introduction of the financial action task force recommendations back in the 1990s, and they're replicated in the American Bar Association rules et cetera around the common-law world. We have to do that whether it's stated in specific rules or otherwise. It is inherent in our conduct rules at the moment that you need to do those things.
2.64
Both the Law Council and Dr Goldbarsht advised that such a breach ‘can constitute unsatisfactory professional conduct or professional misconduct and may give rise to disciplinary action’.
2.65
The Law Council posited, therefore:
‘[t]he legal profession regulatory regime accordingly has effective controls to manage risk and sanction those individuals who fail to comply with their duties. That is to say- if the objective of the AML regime is to make lawyers effective ‘gatekeepers’ to preventing illegal activity, the legal profession regulatory regime already addresses this risk (in addition to educational and admission requirements, addressed below) by providing for those who fail in their obligations to be removed from the available pool of ‘gatekeepers’.
2.66
In addition to professional conduct regulation, the Law Council submitted that the risk posed by legal professionals can be mitigated through senior management controls, admission standards, education and continuing professional development (CPD) and the operation of Professional Indemnity Insurance.
2.67
The Law Council also pointed out that legal professionals are subject to stringent record keeping and CDD requirements. It stated:
The customer due diligence systems already in place within legal profession regulation are comprehensive and effective, and act in a way that is compatible with the role and other obligations of lawyers. Any extension of the AML regime to lawyers is unnecessary and would largely duplicate an existing regulatory burden.
2.68
However, as Dr Goldbarsht pointed out, the AML/CTF Act ‘stipulates what a reporting entity must do if it reasonably suspects that a matter falls within the wide circumstances outlined in the Act’. Such requirements generally do not apply to legal professionals (save for the operation of the FTR Act) who are not reporting entities.
Accountants
2.69
CPA Australia, CA ANZ and IPA told the committee that their members must comply with professional and ethical standards set by the Accounting Professional and Ethical Standards Board (APESB). In particular, IPA advised that the Accounting Professional and Ethical Standards (APES) requirements are contained in APES 110 Code of Ethics for Professional Accountants (including Independence Standards) and APES 320 Quality Control for Firms which, it said, are well established and practised by its members.
2.70
CPA Australia, CA ANZ and IPA told the committee that, as members of the International Federation of Accountants (IFAC), they are required to comply with and report against its Statements of Membership Obligations (SMO).
2.71
CPA Australia submitted:
Under APES 110, a self-interest or intimidation threat to compliance with the principles of integrity and professional behaviour is created when a member (providing services to the public) becomes aware of non-compliance or suspected non-compliance with laws and regulations (“NOCLAR”).
APES 110 requires that a member must respond to NOCLAR or a suspected NOCLAR, which may include disclosing the matter to an appropriate authority even where there is no legal or regulatory requirement to do so. Specific examples of laws and regulations which NOCLAR addresses include those that deal with:
• Fraud, corruption and bribery.
• Money laundering, terrorist financing and proceeds of crime.
2.72
CPA Australia, CA ANZ and IPA observed that, in addition to the APES, their members are subject to admission/education standards, CPD requirements, the Professional Standards Scheme pursuant to professional standards legislation and self-regulation mechanisms.
2.73
CPA Australia supported obligations to undertake CDD, describing it as best practice. It noted that similar guidelines have recently been issued by the ATO and the Tax Practitioner’s Board, the effect of which is ‘that tax practitioners are now performing these checks’. Mrs Keddi Waller, Head of Public Practice and Small and Medium Enterprise, CPA Australia added:
Furthermore, professional accountants have additional obligations under their code of ethics which require that they must respond when they become aware of noncompliance or suspected noncompliance with laws and regulations. This includes money laundering, terrorism financing and proceeds of crime.
2.74
IPA submitted that although the tranche 2 reforms would add to accountants’ regulatory burden, ‘the underlying requirements relating to customer identification and verification procedures would appear to be consistent with existing [APES]’.
2.75
Mrs Waller concluded that there is an overlap between some AML/CTF requirements and obligations and existing professional requirements imposed on the members of the accounting profession by their respective professional bodies. She noted, however, that these obligations ‘only apply to qualified accountants, as opposed to those who may call themselves accountants but who are not members of a professional accounting body’.
2.76
CA ANZ submitted that any future legislative reform of this nature must consider the success of existing mechanisms in the detection and prosecution of money laundering and terrorism financing. It asserted that not doing so could result in onerous red tape and may not improve the adequacy of Australia’s AML/CTF regime. It also asserted that duplication of existing compliance obligations ‘would exacerbate the compliance burden and red tape costs’ on small business within DNFPB sectors, the consequences of which could be higher costs to the consumer or cause certain providers to cease providing services that may trigger the regulatory burden.
2.77
CA ANZ stated that consultation with a broad range of stakeholders, including raising awareness with consumers, will ‘contribute to a more effective and efficient regime’. It emphasised that the design process must recognise the inherent differences between accountants and financial institutions, including in terms of interaction with clients and existing regulatory obligations. CPA Australia articulated a similar view with respect to the benefits of consultation. Mrs Waller explained:
If you engage with the profession—and we use that as a conduit to the members who will be implementing this at the coalface, understanding assisting systems and processes of how that can come into a day-to-day setting—you will get the best outcome because you'll be able to leverage what's already there, understand how it's going to unfold and ensure it's going to hit that policy intent.
2.78
Ms Vicki Stylianou, Group Executive, Advocacy and Policy, IPA agreed with this view and re-emphasised the importance of mapping and stocktaking where tranche 2 is already picked up by existing requirements.
2.79
CA ANZ highlighted that an unintended consequence of duplication of regulatory obligations may be ‘higher costs to small businesses and consumers for accounting services as small practices seek to pass on their increased costs’.
Real estate agents
2.80
The REIA explained that licensing of real estate agents is managed by state and territory jurisdictions, a process which in some instances involves police checks. Similarly, the committee was told that real estate agents are subject to codes of conduct that are managed by real estate institutes at the state level.
2.81
The REIA stated that identity verification processes are undertaken for both vendors and purchasers, and noted that ‘most agency businesses already use a large amount of technology in collecting all of this information’. Therefore, the REIA stated, ‘there would be very easy economies of scale in using the technology through collaboration with the Federal Police, for example, and we welcome the opportunity to play a role in it’.
2.82
In addition, the REIA commented on the potential for duplicated regulatory requirements across multiple industries involved in one transaction. For example, it noted that the same data may be collected by banks, accountants, solicitors and conveyancers, and suggested that a proper analysis of these intersections be made to better utilise the data rather than impose costly duplicated regulatory burdens. It explained:
there are a range of existing data sources that could offer valuable information for the Federal Government to meet its reporting and compliance responsibilities that have direct interfaces with real estate transactions.
This includes but is not limited to: the banking sector, conveyancers, Office(s) of State Revenue or equivalent, the Australian Taxation Office (ATO) and the Foreign Investment Review Board (FIRB).
…
With these other solutions available, there is no requirement to harm real estate agencies with the large costs of “Tranche Two” legislation.
2.83
The REIA added that ‘the role of the real estate agent is not to transfer money, so the idea that they’re somehow complicit in criminal activity is an incorrect assumption’. Mrs Anna Neelagama, Chief Executive Officer of the REIA explained the limitations on the ability of real estate agents to intercept suspicious activity within a real estate transaction:
We don't have access to bank accounts, for example. The legal transfer of a property is undertaken by state based registries. What we're trying to communicate here is simply that real estate agents do not offer any new visibility data within a real estate customer journey, when you think about the sale of a house, that could provide any additional surveillance to detect criminal activities.
2.84
The ANU LRSJ Research Hub contended, however, that collecting data of this nature from real estate agents and requiring the industry to conduct certain checks ‘would increase the speed at which [AUSTRAC] can identify and disrupt the chain of money laundering’.
2.85
AUSTRAC added that ‘there would absolutely be some intelligence value’ that would arise out of suspicious matter reports from the real estate sector. Mr Brad Brown, National Manager, Education, Capability and Communications, stated:
…there's certainly information that AUSTRAC has generated in terms of strategic analysis in relation to the various different methods to which real estate can be exposed to money laundering, in that respect. So I think the nature of the engagement of a realtor versus the nature of the engagement of a banker in terms of the provisions of the loan is obviously different. That's where the value of different insight provides intelligence.
2.86
While AUSTRAC agreed that where multiple reporting bodies are involved in the same transaction there may be some scope for consolidation, it identified that different players to the same transaction ‘might see different bits of suspicion’. Mr Soros explained:
If somebody rocked up with a suitcase full of money to buy property and handed it to the real estate agent, that might be something the real estate agent sees, but it might not be something that the solicitor or the bank sees. For the suspicious matter reporting element, I think there is absolutely still value in looking at all of the people in that transaction. Even though it is one transaction, there are different elements that different business will see, and that's where there is still value in that intelligence.
Increased regulatory burden for small business
2.87
The Australian Small Business and Family Enterprise Ombudsman emphasised that any expansion to Australia’s AML/CTF regime to DNFPBs should not dampen competition between small business through overregulation. The potential impact of tranche 2 reforms on small business was a major concern for inquiry participants, particularly in relation to:
the potential increased cost burden; and
experiences in international jurisdictions.
Potential increased cost burdens
2.88
CA ANZ informed the committee that feedback from small and sole practitioners based in New Zealand pointed to excessive compliance costs following the implementation of similar reforms in that jurisdiction. For example, the committee heard that the complexity of the CDD requirements has led some to outsource their compliance processes, which can cost anywhere from $50 to $500 per client.
2.89
The CA ANZ’s experience in New Zealand, where the regime is ‘activity based’ (that is, based on whether or not you undertake a captured activity as an accountant, rather than just being an accountant) is that:
some of those smaller firms that might have only undertaken one or two captured activities a year have moved away from doing that work so that they are not part of the regime, as opposed to those who perhaps do a significant amount and are therefore fully within it. I wouldn't say it has affected the viability, but we have seen some firms cease some of the services that they've provided in order to be able to continue to service their clients at that lower cost, where they are in that smaller end.
2.90
The REIA emphasised that ‘sophisticated international compliance activity is a specialist skill set’. Mr Adrian Kelly, President of the REIA stated:
Expanding the act to include real estate agents in tranche 2 reporting would require small businesses of all sizes to potentially hire an AML/CTF compliance officer, conduct biannual compliance through hiring a risk firm, assess and document potential AML/CTF risks to the agency itself, create an AML/CTF compliance program for the agency, verify all clients, verify the identities of all purchases, submit reports on certain types of transactions, monitor the accounts of customers for potential money laundering, investigate suspicious funds, report suspicious activity and submit annual reports to the government.
We estimate that these activity streams will be a significant financial burden to real estate agencies of all sizes across Australia. If the anticipated activities for tranche 2 reporting are required, the costs to the sector could easily reach the billions. There is also the risk that costs will be passed on to ordinary Australian mum-and-dad sellers or investors and in turn will need to be absorbed by homebuyers and potentially tenants. Given the ongoing public policy debate around housing affordability, the introduction of these extra costs should be of significant concern.
2.91
The REIA estimated that the potential cost burden for small business as a consequence of the reforms would be in the region of $50,000 per agency per year. It estimated that based on the experience of agencies in New Zealand, the compliance burden could include, amongst other things, the need to hire a dedicated AML/CTF compliance officer in small firms, and suggested that the costs may outweigh any benefits of increased regulation. The REIA asserted that ‘a cost-benefit analysis led by the Commonwealth would be needed to better quantify the costs to real estate agency businesses versus the projected benefits of additional reform’.
2.92
The Law Council observed that the Australian legal profession predominantly comprises small and micro practices. It estimated that the set up and annual compliance costs for legal practices should the reforms be implemented would be approximately $119,000 for small firms, $523,000 for medium firms and $748,000 for large firms. The basis for this figure, the committee was told, was a survey undertaken by the Queensland Law Society in 2017.
2.93
The Law Council added:
Relevant to these figures is that the gross revenue of small firms is in many cases between $300,000 and $600,000 a year and an additional compliance burden of around $120,000 is not sustainable for communities which cannot support significant and sustained rises in legal fees.
2.94
In evidence before the committee, the Law Council referred to the experience of firms in New Zealand where similar reforms were implemented in 2018. In that jurisdiction, the Law Council asserted that implementation costs for medium businesses were in the realm of $200,000 to $300,000 per practice.
2.95
On the basis of these figures, the Law Council concluded:
The above data demonstrates that the annual cost of AML/CTF compliance for the legal profession will prove to be a significant burden on the Australian economy and of such a scale that it is unlikely that these costs can be absorbed by the legal profession. This will necessarily see legal costs rise and/or law practices that become unprofitable because of AML/CTF regulatory compliance will close. It could be anticipated that regional/rural businesses in Australia, especially smaller organisations, will be affected more than others and many will close [references omitted].
2.96
Dr Brasch argued that in New Zealand and the United Kingdom, some firms, including small businesses, closed following the implementation of AML/CTF regulation on the legal profession. This, she stated, causes a ‘fundamental access-to-justice problem’.
2.97
While conceding that these reforms ‘will impose costs’ on professions captured by them, Mr Oliver of AML Experts asserted that these costs would be ‘not as much as some have argued’. In particular, the financial burden claimed by the Law Council was disputed by Mr Jeans, Mr Oliver and Mr Quinn. Instead of an annual cost of $119,000 for small businesses, these witnesses asserted that the cost would be approximately $10,000. They also argued that information relied upon by the Law Council gathered in a 2017 survey by the Queensland Law Society is not reflective of modern resources:
Mr Quinn: We've estimated that to be $10,000. The Law Society estimates are over 10 times higher than that. I think some of that is a symptom of when that survey was conducted, because things have moved on significantly. Costs of risk assessments and AML programs, KYC, employment screening, training—all of those things that are requirements are very cost effective. I think the costs here are significantly overinflated in our experience—what we're charging as a technology provider, what we know of our peers that charge their customers for doing all of these services.
Mr Jeans: That would include a degree of consulting services to help the organisation understand what AML/CTF compliance means, to train their staff, to adjust their systems and controls, to put in new procedures in the areas where they would be needed.
Mr Oliver: There's also the fact that a well-run professional firm should have good client intake, should have good risk management, should have good policies and procedures, should have good training. Now, the cost then probably is reduced. A firm which is not so well run will have to do uplift, but that's no bad thing.
2.98
Mr Quinn emphasised that technology has decreased the cost of conducting KYC and CDD checks, suggesting that it is possible for KYC providers to undertake such checks for less than $3 per client. On notice, Arctic Intelligence added that technological improvements have also assisted in enterprise money laundering and terrorism financing risk assessments, AML training, pre- and post-employment screening, independent reviews, transaction monitoring and regulatory reporting.
2.99
Mr Jeans identified that the figure of $10,000 was based upon his work with firms in New Zealand during the implementation of similar reforms there. He explained:
Having worked with law firms and with law firms in real estate and accountancy up and down New Zealand for over a year, the average cost to the law firm was $10,000—that includes small and medium sized law firms—to put in place a program, to put in place a risk assessment, and to adjust the systems and controls they already have to meet the obligations.
Experiences in international jurisdictions
2.100
Mr Oliver noted that jurisdictions where DNFBP reforms have been implemented, including Ireland, the United Kingdom and New Zealand ‘are full of small firms’. While he conceded that these reforms have had an impact, DNFBPs continue to exist and operate.
2.101
The ABA supported examining the experiences of these jurisdictions and others, including the European Union and Singapore, to inform how reforms might be implemented without imposing too great a regulatory burden on small businesses. In evidence to the committee, Mr Aidan O’Shaughnessy, Executive Director of Policy at the ABA explained:
If I look at the other jurisdictions Australia is best to compared to, like the United Kingdom, the European Union and our trading partners in Singapore, they have implemented tranche 2. We can learn from all of those jurisdictions, New Zealand included, on how they have used technology to actually make it a much simpler implementation and not a very expensive one so that the benefits of implementing it now using technology far outweigh the costs…It was always a concern that it would be a regulatory impost, and a significant one, on these professions, but I think, given the advancement of technologies, used not just by banks today but across the economy, the cost is significantly lower and the benefit remains.
2.102
The ANU LRSJ Research Hub noted that a key criticism of the UK system is that it is ‘overly onerous and a broadbrush approach that wasn't specific to the type and size of industry’. Mr Oliver asserted that this criticism related to the absence of a risk-based approach, rather than the reforms themselves. He asserted that the system Australia would implementing would be risk-based.
2.103
IPA, which maintains an office in the United Kingdom, stated that a risk-based approach is necessary. Ms Vicki Stylianou, Group Executive, Advocacy and Policy stated that:
a proportionate, risk based approach is essential and that an overly complex system, such as in the UK has resulted in significant compliance costs in order to meet the AML/CTF obligations.
2.104
CPA Australia shared the IPA’s view, emphasising:
the importance of undertaking an analysis of the AML/CTF risks compared to the cost of compliance for businesses that would be captured, including if applicable any industry contribution levy.
2.105
The ANU LRSJ Research Hub agreed that ‘reporting requirements need to be proportionate to the size of the business, the complexity of the financial transactions that are going through that business, and the way that business operates’. The Research Hub pointed out that such an approach is in line with the current regulatory regime under tranche 1, noting that 80 per cent of these industries comprises small businesses. Ms Ashburner explained:
Australia's flexible approach to implementing the AML/CTF regime has meant that AUSTRAC has been able to tailor the requirements to suit the type of business. It means that in cases where there are complex financial transactions taking place, such as in the big banks, AUSTRAC will be more harsh in enforcing the regulatory requirements. But in terms of dealing with small businesses—and we submit that we would like to see this approach continue—AUSTRAC has approached businesses, asked them about the way that their business operates in the financial environment and provided public information about what money laundering looks like in different industries. It has focused on a collaborative approach rather than one that imposes a suite of legislation on these businesses.
2.106
The ANU LRSJ Research Hub added that another major criticism of the UK reforms is a lack of collaboration and coordination between government and industry, and a lack of guidance on implementation from government for small business. In its submission, the Research Hub pointed to recent failures in AML/CTF compliance by major banking institutions and stated, ‘[i]f industry giants, like Westpac and NAB, are struggling to comply effectively, smaller businesses will require assistance to abide by their obligations under the Act’.
2.107
The IPA suggested a role for government in assisting professional organisations to support small and medium enterprise to comply with any new obligations in the implementation process. Ms Stylianou referred to the system of ‘assisted compliance’ in the United Kingdom which, she explained, works in different ways. She stated:
They've looked, for example, at whether certain sectors need to have exemptions. They've assisted them with their understanding, education and awareness, and they've assisted them with how different parts of the regime apply to different sectors, but I think the problem with the UK, from my understanding, is that it's so overly complex.
2.108
The ABA shared this view, suggesting that:
the provision of more advice and guidance by AUSTRAC for its regulated population would provide greater certainty on how reporting entities can best comply with AML obligations. An expansion of AUSTRAC guidance would also assist in reducing regulatory costs for new and existing reporting entities.
Cost mitigation mechanisms
2.109
A number of inquiry participants identified opportunities for mitigating the costs imposed on small business under tranche 2 reforms. Mr Jeans, whose view was shared by Arctic Intelligence, told the committee that services provided by DNFPBs that fall within the FATF Recommendations are limited. He explained:
They are conveyancing, the establishment and maintenance of companies, and managing the financial affairs of companies, so there's a very narrow set of legal accountancy services that should be caught by this piece of legislation. That undoubtedly results in a narrowing of the impact, simply by definition.
2.110
AML Experts suggested that this could be further limited by confining the regulated population to those DNFBPs that provide services aligned to FATF Recommendation 22, not the proposed DNFBPs outlined in the tranche 2 discussion paper circa 2008.
2.111
TIA conceded that there is no doubt that the learning curve for small businesses would be steep if tranche 2 reforms are implemented. It emphasised that training would need to be delivered to small business operators ‘so that they have the skills and capacity to understand what suspicious transactions look like and have a better understanding about what meaningful due diligence looks like’.
2.112
Ms Serena Lillywhite, Chief Executive Officer of TIA, argued that small-business operators would be able to meet their KYC responsibilities more effectively if there was a single database that collated reliable and accurate information from multiple sources. Ms Lillywhite concluded that:
if there were one centralised, accurate, reliable database that had information that joined the dots around issues around politically exposed persons and sanctions lists—that linked to sanctions lists held by DFAT, the World Bank and others—this would greatly assist small business operators to address that issue to be better placed to know their customer and to have confidence in the system.
2.113
Mr Russell Wilson also noted that:
the existence of such a database would diminish the compliance costs of the other institutions which are regulated by AUSTRAC and that they could then just simply rely on that database for the purposes of performing their KYC checks et cetera. Obviously there are issues associated with resourcing the creation of that database and risks associated with being the sole source of truth.
2.114
Both TIA and the Uniting Church in Australia Synod of Victoria and Tasmania cautioned against the use of commercial databases, however. The latter explained that such a database should either be developed with government, or alternatively, a system of certification should be developed for commercially-owned platforms.
2.115
The ANU LRSJ Research Hub added that there is potentially scope for a central reporting mechanism to lessen the burden of multiple reporting requirements. It explained that, at present, there are statutory requirements that guide the sharing of information between government departments and agencies, so that any information provided to the ATO, for example, may not be passed on to AUSTRAC. Ms Ashburner used the example of MyGov, which at present merges Medicare, the ATO and several other services in one portal to demonstrate that:
there is certainly space for the ATO, AUSTRAC and ACIC to collaborate in a way that reporting with regards to 'know your customer' upon which tranche 2 builds, can be sent directly to these three departments by sharing information through a shared portal of some sort. What I am trying to say is that it is not overly burdensome to request that this information that has already been collected is shared with AUSTRAC in addition to the ATO, for example.
Conflict with legal professional privilege
2.116
Particular attention was paid to the potential impact of any extension of AML/CTF regulation to legal professionals and the operation of legal professional privilege (also known as ‘client legal privilege’ under the Evidence Act 1995). The privilege, which rests with the client and not with the legal practitioner, protects ‘confidential communications between a lawyers and client made for the dominant purpose of the lawyer providing legal advice or professional legal services or for use in current or anticipated litigation’.
2.117
The Law Council described legal professional privilege as a cornerstone of legal practice and ‘the oldest of the privileges for confidential communications known to the common law’. Referring to words of the Federal and High Courts, the Law Council stated that:
If the privilege did not exist at all, everyone would be thrown upon their own legal resources. Deprived of all professional assistance, an individual would not venture to consult any skilful persons or would only tell their counsel half their case.
2.118
Some submitters highlighted that section 242 of the AML/CTF Act expressly provides that the law relating to legal professional privilege is not affected by the Act. The Law Council contended that the AML/CTF regime ‘cannot adapt to the complexity of privilege in practice’. It explained:
Section 242 of the Act states that the law relating to legal professional privilege is not affected by the Act. However, this is not expressed in terms of being an exception from reporting obligations. Moreover, it is important that the protection is not limited to information obtained in the course of litigation, leaving information gained by a legal practitioner in relation to non-litigation advice work unprotected. In practice maintaining such a distinction is problematic, for example, in the case of barristers often some initial advice on a matter will be a prelude to litigation.
2.119
The Law Council cautioned that even if section 242 was amended, the operative provisions of the AML/CTF Act would ‘act to diminish the unique relationship between a lawyer and a client’.
2.120
The Law Council identified further aspects of legal professional privilege that, in its view, point to the incompatibility between the privilege and the AML/CTF regime, namely the fluid nature of client/lawyer relationship, and the fact that in some circumstances, legal professional privilege may apply to a client’s identity.
2.121
The Law Council further argued that the AML/CTF regime may also impinge upon the duty of confidentiality, which protects communications shared within the lawyer/client relationship that may not fall under the scope of legal professional privilege. The Law Council conceded, however, that the duty of confidentiality is subject to exceptions.
2.122
The Law Council contended that:
Should the AML/CTF regime ever require legal practitioners to report suspicious matters that may fall outside client legal privilege but within the realms of confidentiality, this would disturb the relationship of trust, integrity and honesty that underpins that relationship. This in turn risks encroaching on the public interest and the manner in which justice is administered more broadly.
2.123
It added that the provisions may result in action against a practitioner where they are found to have breached their obligations to their client in reporting a matter, or failed to report a matter where the AML/CTF regime required them to.
2.124
The Law Council added that it may be difficult to discern the line between legal professional privilege and client confidentiality in certain circumstances, which may create problems should legal professional privilege be carved out but client confidentiality is not.
2.125
The Law Council referred to recent litigation in Canada relating to the imposition of AML/CTF regulation on the legal profession. It stated:
In Canada the threat to client legal privilege, the damage that would result to the lawyer client relationship and the inconsistency with ethical obligations were considered matters of fundamental justice sufficient to warrant the exemption of the legal profession from AML/CTF regulation. In that case, the Canadian Supreme Court held there were more proportionate and less drastic measures available to pursue the legitimate objective of preventing money laundering and terrorist financing. The Supreme Court concluded the provisions in issue failed the proportionality test and could not be demonstrably justified in a free and democratic society [references omitted].
2.126
The Victorian Legal Services Board and Commissioner agreed that there is a tension between the AML/CTF reporting framework and the duties of confidentiality and legal professional privilege:
these tensions have been reconciled elsewhere in common law jurisdictions (e.g. New Zealand and the United Kingdom) and consider that they can and should be reconciled in the Australian context.
(a)
although a lawyer's duty to hold their clients' information in confidence, and the protection afforded to clients by legal professional privilege, are of fundamental importance, neither that duty nor the protection are absolute. Lawyers may already disclose clients' confidential information in various circumstances—including if disclosure is permitted or compelled by law—and legal professional privilege does not attach to communications involved in the facilitation of fraud or crime.
(b)
the duty of confidentiality is not a lawyer's sole fundamental duty. Lawyers are also subject to other fundamental ethical duties, including the duty to avoid any compromise to their integrity and professional independence. They also must not engage in conduct, in the course of practice or otherwise, which is likely to a material degree to: be prejudicial to, or diminish, public confidence in the administration of justice; or bring the profession into disrepute. In our view, lawyers who allow themselves to be used – even unwittingly - by criminal enterprises to launder money are not upholding the duty to avoid being professionally compromised, and are engaging in conduct that significantly undermines the public's trust and confidence in the integrity of the profession and the rule of law.
2.128
Mr Oliver suggested that the Law Council’s concerns about the strength of protections in section 242 of the AML/CTF Act is ‘open for debate’. He explained:
Interestingly, New Zealand did put an extra amendment into their law, when they changed it, to bolster that. So legal professional privilege will not go away. Client confidentiality is a broader concept. All client discussions with lawyers should be confidential; however, there are exceptions. One of the main exceptions is if it's allowed by law or demanded by law. That's in section 9.2.2 of the Australian Solicitors' Conduct Rules. So that can be dealt with as well. Those issues, although they are complex, they can be overcome. In the UK and Ireland it did take quite a lot of thought about how those issues could be overcome, but they have been. They are now not an issue, both in the UK and in Ireland. It does help that lawyers end up with more training in relation to their ethical obligations. Training is a major piece in that area.
2.129
Responding to the Canadian Supreme Court’s decision to overturn aspects of that country’s regulation of the legal profession based on its impact on legal professional privilege, Mr Oliver gave evidence that in order to avoid a repeat of that issue in Australia, the proposed reforms would have to be adapted to the domestic context. The ANU LRSJ Research Hub shared Mr Oliver’s views, and added that the Canadian example ‘highlights the importance of consultation and careful drafting when expanding the regime to include the legal profession’. It added:
In that case, the Canadian Supreme Court found legislation that imposed similar regulations to those proposed in this inquiry were inconsistent with client-legal privilege, recognising a “principle of fundamental justice that the state cannot impose duties on lawyers that undermine their duty of commitment to their clients’ causes”. It is therefore important to remain alive to these principles when drafting the Tranche II legislation [references omitted].
2.130
Waterstone AML also noted that ‘the FATF Recommendations specifically allow legal professionals not to report suspicious matters where doing so would conflict with their professional obligations’. According to AML Experts such an approach was adopted in New Zealand, as amendments to New Zealand’s AML/CTF laws included safeguards for lawyers with respect to legal professional privilege.
2.131
The department stated that the Canadian example highlights the importance of tailoring the regulatory regime to the domestic context, noting that while the Canadian provisions have been struck down, a similar outcome has not been observed in the United Kingdom or New Zealand.