3.1
A number of inquiry participants identified that in order to successfully implement tranche 2 reforms, reform to the existing anti-money laundering and counter terrorism financing (AML/CTF) regime is necessary. Some of the challenges that inquiry participants identified relate to:
the complexity of Australia’s current AML/CTF framework;
the lack of a publicly accessible, centralised beneficial ownership register;
a risk-based approach that allows businesses to scale their AML/CTF obligations based on the designated services they offer and their money laundering and terrorism financing risk profile;
civil and criminal penalties under the AML/CTF regime;
gaps in the protections for whistleblowers who may report money laundering; and
uncertainty about the capability of Australian Transaction Reports and Analysis Centre (AUSTRAC) to effectively manage additional regulated entities.
3.2
Each are discussed in the following sections.
Complexity of Australia’s AML/CTF framework
3.3
The structure and content of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (AML/CTF Act) and the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (AML/CTF Rules) remain largely unchanged from when they were enacted in December 2006. They also ‘remain complex to decipher, and present challenges for many of the 14,000 regulated entities to understand, interpret and implement them’. The Law Council of Australia (Law Council) indicated that ‘[u]necessary complexity, and ineffective or arbitrary enforcement undermine the effectiveness and increase the regulatory burden associated with the [AML/CTF] regime’.
3.4
Transparency International Australia (TIA) suggested that it is possible to prevent, or at least ease, the regulatory burden on designated non-financial businesses and professions (DNFBPs). Reforming the current AML system to make it more easily navigable, especially for small-business operators, would go some way towards easing concerns about compliance costs.
AUSTRAC has previously published a new simplified version of the entire AML/CTF Rules on its website, for public comment. That new simplified version re-ordered the Rules under consistent themes and removed redundant Chapters. A simplified version of the entire Rules would be of great value for regulated businesses. It is submitted this project be revisited as a priority.
3.6
Mr Paddy Oliver, Director, AML Experts, agreed that:
…the current AML laws and rules as they apply to reporting entities are overly complex, making it more expensive and problematic for reporting entities to comply than is actually necessary. Complexity arises from many aspects, including the definition of designated services; complex know-your-customer rules; and the all-crimes suspicious matter reporting obligations.
3.7
It was noted that the AML/CTF Act and rules ‘remain largely unchanged from when they were first enacted in 2006, almost 15 years ago’. There have been numerous major technological advancements during that time, however, which have ‘substantially driven the costs of compliance down and allow regulated entities to meet obligations in an efficient and cost-effective manner’.
3.8
The Australian Banking Association (ABA) recommended that the current AML/CTF legislation be modernised ‘so that all reporting entities can use new technologies to adhere to their obligations’. It was suggested that the simplification and modernisation of the know your customer (KYC) obligations, through the wider use of newer technologies, is one enhancement to the effectiveness of the AML/CTF Act that ‘would have the greatest regulatory impact’. That reform would benefit not only the 14,000 existing reporting entities, but also any new reporting entities that would come on board as a result of implementing tranche 2.
3.9
Waterstone AML also argued that KYC requirements ‘are unnecessarily complicated’. It stated that simplification of customer due diligence (CDD), which it describes as likely to be one of the key requirements applicable to tranche 2 entities, ‘was recommended in the [Attorney-General’s Department’s 2017] Statutory Review but has not been undertaken’.
3.10
In addition to the simplification of CDD obligations, Waterstone AML also suggested that:
the provision of better, more straightforward advice and guidance by AUSTRAC to its regulated population to provide certainty on how to comply with AML obligations would assist in reducing regulatory costs. These measures would provide regulatory benefits to not only Tranche 2 but also Tranche 1 entities (many of which are also small businesses).
3.11
In relation to guidance for DNFBPs, AML Experts suggested that:
[t]o ensure that all newly regulated DNFBPs have sufficient formal guidance implementation of the new AML obligations AUSTRAC would need to work closely with the current DNFBPs’ peak bodies and regulators.
3.12
The Department of Home Affairs (the department) stated, in accordance with the recommendation of the 2016 statutory review undertaken by the Attorney-General’s Department, simplifying the scheme is a key priority:
so that we could have less of a regulatory burden on entities but also so that we get greater compliance and we’re not getting very high volumes of unactionable intelligence but are getting targeted, high-value, actionable intelligence from what we’re doing. The government has committed to tranche 2 and committed to simplification of the regime as a whole, taking a phased approach to reform of AML/CTF...Part of the thinking about that is that you want to get your house in order and have a simplified system that’s not over complex, particularly when you’re applying it, if we’re looking at tranche 2, to up to 100,000 new entities, a significant number of which are small, sole-entity businesses. We want to make sure that we have a less complex and more simplified regime to be able to do that.
3.13
The department also noted the importance of working closely with all stakeholders as part of the simplification process:
There are almost two conversations there. One is a conversation with already-regulated entities around how we simplify that regime and that conversation would also apply to tranche 2. But where we have the opportunity to design, and we’re dealing with an entirely different cohort, look at what other things may impact and what works best for those sectors or if there are specific areas that need to be addressed or specific requirements. For example, when you are dealing with banks, you are generally dealing with larger, more professional organisations, as opposed to sole-entity businesses.
Beneficial ownership scheme
3.14
Some inquiry participants suggested that a publicly accessible, centralised beneficial ownership register would support the AML/CTF regime. Money launderers use anonymously owned companies to hide their assists and it was suggested that a public register would make it more difficult for them to do so.
3.15
TIA observed that commercial databases used by reporting entities to identify high-risk customers ‘can often have missing or incorrect data’. TIA recommended that ‘AUSTRAC should either develop a database for reporting entities – funded from fees charged on reporting entities – or should at least audit the commercial databases’.
3.16
Ms Serena Lillywhite, Chief Executive Officer of TIA, noted that there are several deficiencies within the current AML/CTF system:
It’s an example of the deficiencies within our current corporate register system that I've mentioned. It's an example of the fact that we don't have a register of trusts. It's an example of the fact that it is not necessary for nominee directors to disclose who they're acting on behalf of. It's an example of the fact that we don't have a public register of beneficial ownership, which contributes to the first set of questions that were put to us as to how we go about assessing and determining—undertaking the necessary due diligence—to determine whether a person or an individual is fit and proper to conduct business in Australia. The examples that you just made reference to are certainly replicated in the current gaps within our anti-money-laundering regime, noting that it's not just our AML/CTF legislation; it is the ecosystem that I mentioned. We need to fix other things alongside implementing tranche 2.
3.17
Dr John Coyne from the Australian Strategic Policy Institute (ASPI) shared Ms Lillywhite’s view regarding the deficiencies proving beneficial ownership. He suggested that Australia has ‘a way to go in being able to prove beneficial ownership in comparison to, say, the US, the UK and parts of Europe’.
3.18
Ms Lillywhite ‘recommend[ed] that, in addition to a public register of beneficial ownership disclosure, that include trust disclosure and a requirement for nominee directors to disclose who they’re acting on behalf of’.
3.19
The Law Council stated:
It would reduce the regulatory burden imposed on reporting entities required to collect and verify identification information about the beneficial ownership and control of a customer, for ASIC to be required to collect this information in the annual statement for Australian companies, and to make this information available to reporting entities. The Australian Taxation Office could perform a similar function for trusts with an ABN, as part of the annual reporting obligation of the trusts.
3.20
While it is not a complete solution, the centralised collection of this information:
would be more efficient than the current duplication of the same often time-consuming and difficult enquiries by multiple reporting entities dealing with the particular customer may need to make to ascertain that customer’s beneficial ownership and control.
3.21
The Australian Taxation Office (ATO) noted that the introduction of a director identification number, which assigns a unique identification number to each company director in Australia, will assist in combatting illegal phoenix activity and the abusive use of trusts. The technology supporting the director identification number will assist regulators to ‘start highlighting if there could be a stooge director put in place to hide the true beneficial control or ownership’ of a corporation or trust.
3.22
The department conceded that FATF had indicated that ‘Australia’s measures to ensure the availability of accurate and up-to-date information on the beneficial owners of companies and trusts in a timely manner needed improvement’.
Risk-based approach
3.23
The Law Council stated:
AML/CTF programs are said to be risk based and relate to the size and nature of each business, the designated services offered and its ML/TF risk profile. However, in practice the requirements of the AML/CTF are highly prescriptive and detailed with little scope for a true “risk-based” approach.
3.24
According to Arctic Intelligence, FATF’s 3rd Enhanced Follow-Up Report, released in November 2018, recommended assessing risks and applying a risk-based approach to regulated entities.
3.25
The Law Council agreed with that recommendation and suggested that ‘[s]ervice providers that are very low risk or only tangentially providers of designated services should have greater latitude to take a “scalable” approach’.
3.26
The Australian National University Law Reform and Social Justice Research Hub (ANU LRSJ Research Hub) suggested 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’. AML Experts reported that ‘[t]here are many designated services which could be considered low-risk services therefore allowing reporting entities to avail of a simplified verification standard’.
3.27
AML Experts suggested that the best way to extend the AML/CTF Act to include DNFBPs, and meet the FATF recommendations:
is to move away from the concept “designated services” [and] rather only capture DNFBPs by entity type which reflect the narrower scope of FATF Recommendations. If the extension is attempted by way of placing a DNFBP specific table of designated services into the Act, as was proposed in 2008, then there will be a significant cost to the proposed regulated cohort in trying to understand which services are actually caught.
3.28
GOVLAW remarked that ‘the information needed to properly assess risk is not uniformly available’. It explained:
For example, despite writing to the SA Police and gambling regulator, information key to performing the risk assessment for clients at the heart of the AML/CTF program, was not made available in any format. This information is publicly available in Victoria. It is submitted the AML/CTF Act be amended to give AUSTRAC the responsibility for working with state regulators and police to ensure crime statistics and gambling revenue information is available in relevant formats to assist reporting entities.
Civil and criminal penalties
3.29
Concerns were raised by inquiry participants that the current penalties for non-compliance with the AML/CTF regime by corporations and other reporting entities are insufficient deterrence mechanisms. For example, Mr John Chevis argued that large entities treat the multi-million-dollar fines imposed on them for money laundering as cost of doing business:
They are in many respects, a fine paid by the shareholders for offences committed by senior management and, as such, provide a limited deterrent to repetition of such offences.
3.30
Mr Chevis provided the example of maximum penalties for money laundering activities by corporate entities. He explained:
Currently the maximum penalty for money laundering by corporate entities under the Criminal Code is 1500 penalty units -which equates to $330,000. This is clearly insufficient to provide a deterrent – or apparently provide sufficient incentive for prosecutors to embark on what are likely to be long and expensive court actions.
3.31
A number of submitters argued that holding an organisation responsible for breaches of the AML/CTF regime while individuals, such as company directors or senior executives, suffer no personal consequences or detriment curtails the effectiveness of the regime. Mr Anthony Quinn, Founder and Director, Arctic Intelligence, explained:
The organisation might suffer a fine or penalty or have to put in remediation processes or be subject to class actions…or enforceable undertakings–or share price might go down, but, ultimately, there is no individual accountability, and that’s what needs to happen for things to change.
3.32
Initialism concurred, explaining that Australia imposes ‘some of the least prescriptive AML/CTF accountabilities on Board Directors and Senior Management of a Reporting entity’. It pointed out that this was:
despite it being recognised both in Australia and internationally that the Board of Directors and Senior Management of a business regulated under an AML/CTF regime play a vital role in the efficacy of managing ML/TF risks and achieving sustainable compliance...This issue was raised in the FATF 2015 Mutual Evaluation Report, which recorded only “Partial Compliance” with FATF Recommendation 35, in part because the Australian AML/CTF regime does not extend sanctions to Directors and Senior Management if a reporting entity has contravened the AML/CTF Act or AML/CTF Rules.
3.33
Mr Chevis extended this criticism to recourse under the Criminal Code Act 1995 (Criminal Code), stating:
…the current Criminal Code doesn’t provide a realistic deterrent or an easy way to sheet blame home to individuals, and that’s why we’re not seeing prosecution of corporate entities for money laundering, because the penalties are so low.
3.34
These inquiry participants argued that a mechanism whereby individuals experience the consequences of money laundering and/or terrorism financing within an organisation for which they have professional responsibility is needed to bring about change. Some argued that the introduction of a civil penalty provision would promote greater compliance with the AML/CTF regime. Mr Oliver suggested that such a provision be extended to directors, owners and senior managers of reporting entities and require that ‘reasonable measures to ensure that a compliant AML program [have] been implemented’.
3.35
Mr Neil Jeans, Principal, Initialism, indicated that while AUSTRAC is capable of tackling accountability and responsibility, the appropriate mechanism for this is lacking. He stated that senior management accountability and responsibility is a key pillar of AML/CTF regimes internationally, which in some instances extends to the money-laundering officer responsible. He identified that the Australian Prudential Regulation Authority (APRA) currently has such a power, but APRA’s regulatory reach is limited to banks:
APRA obviously only regulates the banks; it does not necessarily regulate the whole code. If you look internationally, a key pillar of AML regimes is senior management accountability and responsibility, even down to the money-laundering officer being responsible and personally liable themselves. Making people responsible, making people's own wellbeing and own reputation and own assets be exposed, creates change and creates an appropriate level of focus.
3.36
Mr Chevis supported the idea of making individuals personally liable for breaches of the AML/CTF Act as doing so ‘would sharpen the focus inside the entities covered by the AML/CTF Act’.
3.37
Dr Coyne, however, argued that the introduction of a civil penalty provision is not necessarily the greatest priority at this time:
I think that we’re far better off getting the financial sector on board to be more proactive in terms of working together. We’ve seen the beginnings of this in AUSTRAC with the private and public sector working together. I would think that we would be far better off putting greater efforts into that collaboration than introducing more sticks and regulation.
3.38
Mr Chevis looked to the Criminal Code as an alternative accountability mechanism. He argued in favour of increasing penalties for corporate money laundering and making it easier to prosecute individuals and entities involved under the Criminal Code. Mr Chevis opined that such a mechanism:
…would cover all of the other entities that aren't currently covered by the AML/CTF Act and may never be covered by the AML/CTF Act—so not just DNFBPs but dealers of high-value goods, import/export companies, people involved in running nightclubs and bars and tattoo parlours and all of the cash intensive businesses. There are a whole range of other ways to money launder outside of the area that is currently covered by the AML/CTF Act, and in fact it appears that, because of the increase in the other methods, as people learn methods of circumventing the laws, the areas that are covered will become decreasingly relevant.
3.39
Mr Chevis suggested that the maximum penalty for corporate money laundering under the Criminal Code ‘should be at least equal to the value of the money laundered’. Mr Chevis conceded, however, that this deterrent may be ‘a notional deterrent for larger entities that may factor such penalties into their risk/reward calculations’.
3.40
Mr Chevis further indicated that the main impediment to individual convictions is the difficulty in proving that any one person knows enough to be held criminally liable for money laundering. Corporate entities convicted of money laundering appear to be aware of this weakness, as they appear to have ensured that no individual could be held criminally liable ‘by deliberately “spreading the blame around” and ensuring that no one person could be shown to have known enough to be criminally liable’.
3.41
Mr Chevis suggested that this impediment to individual convictions could be overcome by having AUSTRAC or another agency gather and provide detailed and specific information on money laundering occurring within corporate entities. Mr Chevis explained:
Information of this type is widely available in the multitude of court cases involving the prosecution of the customers and clients of these entities for money laundering and other predicate offences.
Provision of this information is in effect “forcing” knowledge on personnel within banks, casinos and other corporations and entities in order to overcome the difficulty that has prevented prosecution of those people in the past. If those people, having been provided such information choose not to take action to prevent repetition or continuation of the offences, then they may reasonably expect to be the subject of a money laundering investigation – an offence which carries a significant gaol term.
3.42
While that approach would not be available in every circumstance, it is likely to be available in enough circumstances to act as a deterrent to banks, casinos and other corporate entities to encourage them to reconsider their involvement in money laundering.
3.43
According to Mr Chevis, AUSTRAC is unlikely to undertake the sharing of information with key management personnel unless it is provided with ‘some form of policy directive from government’.
3.44
Alternatively, Mr Chevis suggested further recourse could be sought through amendments to the Corporations Act 2001 (Corporations Act). He suggested that an entity could be convicted for money laundering and then the directors of such entities could be disqualified from holding directorships in the future. This approach:
would require an amendment to Section 206B of the Corporations Act 2001 to include “being a director of a company that is convicted of money laundering” as a reason for automatic disqualification from managing corporations.
3.45
The department and AUSTRAC advised that ‘[t]he Government recently strengthened penalties for money laundering offences with the commencement of the Crimes Legislation Amendment (Economic Disruption) Act 2021 on 17 February 2021’. The department explained that under that Act:
…criminal liability can be established where a person is wilfully blind as to the illicit origins of property, hides predicate offending behind complex legal structures and deals with property at an arm’s length.
With the amendments made by the Act, the maximum penalty for dealing with proceeds of crime worth $10,000 or more is now life imprisonment and/or a fine of 2,000 penalty units ($444,000) for an individual and 10,000 penalty units ($2,220,000) for a corporation.
Whistleblowers
3.46
International and domestic cases have shown that large-scale money laundering by banks and other corporations often come to the public’s attention through the actions of whistleblowers.
3.47
Whistleblowers can put themselves at risk by reporting money laundering and those risks act as a disincentive to doing so. Mr Chevis suggested that offering a reward could encourage whistleblowers to report any money laundering in which their employer is involved. That could, in turn, force banks and other entities to reduce their involvement in money laundering, as it increases the risk of their staff reporting them to authorities.
3.48
The ABA assured the committee that:
the banks take their anti-money-laundering counterterrorism financing obligations very seriously…A lot of banks are risk managers. Whether it is money-laundering risk or operational risk or credit risk, they are risk managers, so every process, policy and procedure in a bank is about making sure that the right steps are followed. It's not just trusting your [staff]; it's also verifying that trust. You trust your staff to take steps in accordance with the policy, but there is verifying as well, through processes like internal audit and elsewhere. If there was ever a matter where an issue was found, you would expect banks would take the appropriate action and report it to either law enforcement or AUSTRAC, or both.
3.49
Mr Aidan O’Shaughnessy, Executive Director, Policy at the ABA also noted that protection for whistleblowers was introduced into the banking industry as part of the ABA’s Better Banking program.
3.50
The CA ANZ, CPA Australia and IPA stated that whistleblower protections for members of the accounting profession should emulate those presently under Part 9.4AAA of the Corporations Act for company employees, officers, suppliers or service providers. They suggested that, while professional accountants may already be covered by those protections, a breach of AML/CTF legislation could be added to remove any doubt. Additionally, these submitters stated that AUSTRAC should be prescribed alongside ASIC and APRA as regulators to whom an individual can provide information or make a disclosure, triggering whistle-blower protections, and a review be undertaken to ascertain whether other regulatory authorities should be added.
3.51
The Financial Planning Association of Australia (FPA) reported that:
financial planners and reporting entities who identify suspicious matters and make a report about a client to AUSTRAC are not offered vital protections under the AML/CTF Act and do not qualify for protection under the whistleblower regime established in the Corporations Act 2001 and Taxation Administration Act 1953.
3.52
The lack of whistleblower protections for financial planners is a significant concern for the profession. The FPA suggested that the profession would have greater confidence in the AML/CTF regime if financial planners and item 54 reporting entities who make suspicious matter reports to AUSTRAC were protected by the law to the same extent as whistleblower disclosures made under the Corporations Act and the Tax Administration Act 1953.
3.53
Under section 298(2) of the Proceeds of Crime Act 2002, the Commonwealth can spend amounts in the Confiscated Assets Account on crime prevention measures, law enforcement measures, measures relating to treatment of drug addiction or diversionary measures relating to illegal use of drugs. The department advised that it:
has not provided advice to the Minister for Home Affairs on whether funds confiscated as proceeds of crime could be used as a reward or payment to encourage informants or whistleblowers. Whether or not funds could be used for this purpose depends on whether there is a sufficient nexus between those payments and the purposes in subsection 298(2) of the Act.
3.54
The department advised it is unaware of any overseas jurisdiction that uses confiscated proceeds of crime as a reward or payment for informants or whistleblowers. It noted, however, that confiscated assets are used to fund crime prevention or law enforcement measures in some jurisdictions, including in Italy and France. For example, in the United Kingdom, a percentage of confiscated assets are returned to agencies to incentivise further asset confiscation and legislation allows confiscated assets to be invested in community projects.
3.55
In the domestic context, the department referred to the passage of the Treasury Laws Amendment (Enhancing Whistleblower Protections) Act 2019 in February 2019. It informed the committee that ‘[t]his legislation encourages stronger corporate compliance and strengthens protections for corporate sector whistleblowers who come forward to report on corporate misconduct including money laundering’.
3.56
AUSTRAC informed the committee that, under the current regime, privacy and secrecy provisions preclude just any citizen from reporting suspicious activity:
With some of the privacy and secrecy provisions of our regime to report suspicious matter reports, it’s not as easy as any citizen providing a suspicious matter reports. You need to be enrolled with us as a reporting entity…If more businesses were captured by the regime [through the implementation of tranche 2], there would be more companies that would be required report suspicious matters to AUSTRAC.
Scope of AUSTRAC’s regulatory responsibilities
3.57
During the course of the inquiry, concern was raised that if tranche 2 reforms are implemented, AUSTRAC may struggle to meet the challenge of a significant increase in reporting entities, which could rise from around 14,000 to in excess of 100,000.
3.58
Of particular concern was AUSTRAC’s resourcing. As Arctic Intelligence explained:
AUSTRAC does not appear to have sufficient resources to properly oversee the design and implementation of a different ML/TF risk-based approaches of the 14,000 regulated entities to provide effective enough oversight.
3.59
Dr Coyne similarly argued that AUSTRAC appears to be struggling to keep up with the use of technologies by criminals, within the scope of its current regulator responsibilities. He observed:
Criminals have become really adept…at early adoption of new technologies. It takes organisations and bureaucracies a lot longer to develop them. Unfortunately, there are a couple of factors and strikes against organisations like AUSTRAC and the law enforcement space. First is the overarching demand for acting in the now. It's not like there's a whole heap of spare capacity within, say, the Australian Federal Police or AUSTRAC that's sitting there not being exercised right now or that could be focused on the future. The demands of the now are so intense. I always put it this way: the amount of reported crime—this goes for AML as well—far exceeds the capacity of law enforcement in this country to respond.
3.60
Dr Coyne also noted that AUSTRAC and the AFP may require new analytical capabilities, either in terms of people or artificial intelligence or both, to process and gain meaning from intelligence provided by foreign intelligence gathering agencies. The Australian intelligence exchange system may also require reform to allow Australian financial intelligence agencies to better share data with their foreign counterparts.
3.61
Mr Chevis observed that:
there are also resourcing issues within the Australian Federal Police for the prosecution of money laundering matters, and I think there's also perhaps a cultural shift that might be worth examining inside AUSTRAC. The apparent failure to detect 23 million international funds transfers over a five-year period equating to $11 billion in Westpac implies perhaps that a process within AUSTRAC isn't capable of detecting non-compliance within regulated entities already, and, if you add another $160,000 [sic] [regulated entities], there's perhaps a lower level of capacity of detection of non-compliance. So, yes, it's about resourcing but also cultural shift, or perhaps carving off that regulatory function from AUSTRAC and giving it to a body dedicated to the regulation and enforcement of anti-money-laundering and counterterrorist financing regulation and law.
3.62
Murray Waldren Consulting suggested that:
the implementation of Tranche 2 provides Government with an opportunity to look beyond the traditional approach of scaling up existing regulatory responsibilities. Experience with this approach shows that simply increasing regulatory accountabilities without commensurate budget and adequate (or skilled) resources is largely unsuccessful. Looking at separating AML/CTF responsibility for all or part of any uplift to a partner agency (e.g., the Australian Taxation Office) might also lead to confusion and a weakening of the existing regulatory environment. Instead, we propose that this is a moment for oft thought of but rarely attempted smarter regulation. This approach empowers mature entities, specialist services and third parties to take on key roles in working with AUSTRAC in operationalising the regulatory framework and strengthening the regulatory ecosystem against financial crime. It is our view that this is the only feasible way to successfully implement Tranche 2 in Australia within a reasonable and realistic timeframe.
3.63
AML Experts expressed a similar view and opined that AUSTRAC ‘would need extra resourcing including people with significant sector knowledge’.
3.64
AUSTRAC ‘estimated that extending regulation to DNFBP sectors would result in a six-fold increase in the reporting entity population’. Mr Soros argued that additional resourcing for AUSTRAC is not unreasonable, stating ‘I don’t think it’s unreasonable to expect that we would absolutely need more resources if our population moved from 16,000 to, let’s say, over 100,000’.
Industry Contribution Levy
3.65
Some discussion was had about how expanding the regulatory scope and resourcing of AUSTRAC would be funded given that, at present, a significant amount of AUSTRAC’s expenditure is recovered through an industry contribution levy, paid by reporting entities. The Australian Financial Markets Association explained:
In the 2019/20 AUSTRAC Annual Report, AUSTRAC received $72 million in appropriations to largely cover its operating costs; this amount was in turn recovered from reporting entities under the “Industry Contribution.” Under the Industry Contribution model, the amount contributed by each reporting entity is a function of earnings (applicable to entities with earnings in excess of $100 million), volume of transaction reports lodged with AUSTRAC and value of transaction reports lodged with AUSTRAC.
3.66
The Australian Financial Markets Association objected to the industry contribution model on the basis that it ‘does not adhere to the Government’s own Cost Recovery Guidelines’. It explained:
…not all entities that create the need for the regulation are proportionately contributing to the cost of that regulation. Based on AUSTRAC’s 2018/19 Industry Contribution Discussion Paper, only 570 of the 14,000 reporting entities that are subject to AUSTRAC regulation are liable to contribute to AUSTRAC’s operating costs, based on a minimum payment threshold of $1,100.
3.67
The ABA expressed similar concerns about the industry contribution at present and stated that while banks might ‘have economies of scale…the cost of administering and adhering to the obligations under the [AML/CTF Act] are significant’. Mr O’Shaughnessy emphasised that ‘if AUSTRAC changes its role or expands its role, it has to be a much more equitable model on how it's funded’. The ABA submitted if tranche 2 is introduced, the model must be:
…representative of the AUSTRAC regulated population, the level of AML/CTF risks posed by those different industry sectors and the level of effort required by AUSTRAC to ensure reporting entities in those industry sectors adequately mitigate risks of illegal activity in their sector.
3.68
Mr O’Shaughnessy suggested that instead of having industry fund AUSTRAC, the money recovered by AUSTRAC (which is facilitated by industry and other reporting entities) could be used to fund it.
3.69
The Australian Financial Markets Association made a similar suggestion, stating:
AUSTRAC generates significantly more revenue for the Government than its operating costs. As noted in AUSTRAC’ [sic] 2019/20 Annual Report, over the last ten years, AUSTRAC’s financial intelligence has been relied upon by the Australian Taxation Office to raise additional revenue for the Government in the order of $2.6 billion. In addition, there have been penalties imposed on reporting entities that would, if allocated to AUSTRAC’s operating costs, would [sic] fund such costs for a significant period.
When consideration is given to the regulatory burden associated with expanding AML/CTF to incorporate Tranche 2 entities, at the same time consideration should be given to recognising the public benefits (including additional tax revenue) arising from AML/CTF regulation in determining the funding arrangements for AUSTRAC and ensuring that any funding model aligns the cost of regulation to those that create the need for regulation, consistent with the Government’s Cost Recovery Guidelines.
3.71
Ms Stylianou stated that ‘[w]e don’t want to be in a situation where there’s another cost to industry and to the [accounting] profession because AUSTRAC, or whichever agency it might be, is not adequately funded and resourced’.
International models for the regulatory authority
3.72
The committee was told that, in contrast to the single regulator model that currently operates in Australia, the United Kingdom has taken a different approach, wherein peak bodies play a significant role.
3.73
AML Experts explained that the United Kingdom:
took the approach of making the respective professions’ regulatory bodies the AML regulator with respect to each profession. Further, detailed sector specific guidance around AML/CTF operational policies, process, and controls was developed for each profession to follow. This allows each profession to have a tailored set of guidance which, if followed, provides a safe harbour against a potential prosecution for regulatory breaches.
3.74
A similar approach exists in Ireland where ‘[e]ach DNFBP sector is regulated by [its] peak body where it has one. For example, lawyers in Ireland are regulated for AML by the Law Society of Ireland’.
3.75
CPA Australia supported AUSTRAC as the single regulator, noting that ‘[t]he UK experience has shown multiagency supervision results in disparity amongst supervisors’ interpretation and application of the AML/CTF regime, which in turn creates an additional cost to businesses’.
3.76
CPA concluded that ‘AUSTRAC remains the appropriate Commonwealth agency to be responsible for detecting, deterring and disrupting criminal abuse of the financial system to protect the community from serious and organised crime’.