4.1
As established in chapters two and three, a common thread in evidence to the inquiry was recognition of the need to combat money laundering and terrorism financing, and a willingness to contribute to ongoing improvement of the regulatory regime. A number of proposals were put forward in this regard. This chapter outlines some of these and concludes with the committee’s view and recommendations.
Regulation of DNFBPs
4.2
Despite the concerns raised by tranche 2 entities (see chapter 2), a number of submitters asserted that these reforms are ‘entirely feasible…with the political will’. Others pointed to the other 195 countries that have already legislated these reforms, with two of the remaining five (the United States and China) having commenced the implementation process. Mr Neil Jeans observed that similar concerns were raised in other countries that have now legislated the reforms, including New Zealand in 2018. Mr Jeans stated that in New Zealand, these requirements are now ‘part of normal business’. He suggested that once these reforms are implemented, ‘the reality is found to be different’ to that predicted by critics of the reforms.
4.3
A number of inquiry participants proposed options for mitigating the concerns identified as possibly arising from implementation of tranche 2 reforms. These included:
To prevent duplication of existing obligations:
a comprehensive assessment of existing obligations against the objects of the anti-money laundering and countering terrorism financing (AML/CTF) regime, including a consideration of the effectiveness of current mechanisms;
mapping potential points of regulatory duplication in relevant service supply chains;
To mitigate the burden on small business:
broad consultation with representatives from industry, small business and consumers;
a cost/benefit analysis of the impact on businesses that would be captured in each proposed extension including, if applicable, the industry contribution levy;
‘an appropriate and reasonable timeframe for implementation’ to allow businesses to implement requisite processes and customers to understand the new requirements;
a register of beneficial ownership enhance and simplify ‘know your customer’ searches;
a requirement for trust disclosure and for nominee directors to disclose who they are acting on behalf of;
improving and linking databases to streamline searches for the purposes of establishing and vetting identities;
AUSTRAC issuing guidance to assist businesses in complying with various requirements;
To protect legal professional privilege
reconciling the AML/CTF regime with Australian law; and
considering the operation and implications of section 242 of the Anti-Money Laundering and Counter Terrorism Finance Act 2006.
4.4
With regard to the suggestion that a cost-benefit analysis be undertaken, AML Experts stated:
[e]ither Australia accepts its FAFT obligations with respect to all of the FATF Recommendations, or it does not. There is no scope under the FATF Recommendations for a cost benefit analysis of whether to implement some, or all, of those Recommendations.
4.5
Key to many of the suggestions put to the committee, including many of those listed above, was open dialogue and consultation between government, industry and consumers in both the design and implementation of any reform. The Australian National University Law Reform and Social Justice (ANU LRSJ) Research Hub described this step as ‘best practice’ which it says:
…looks like increased public awareness of the risks of money laundering and the things to look out for when you're identifying whether there is a risk that money laundering has occurred through your business. In the collaboration process, it looks like having regard to both members of industries and academic experts who are not seeking to solely advance the interests of their industry, as well as having a measured approach that balances regulation and the interests of the industry.
4.6
Representatives of designated non-financial business and professions (DNFPB) sectors, despite their concerns and/or objection to tranche 2 reforms, uniformly expressed willingness to engage with government to maximise the effectiveness of any potential outcomes to be gained.
4.7
The committee heard from bodies representing accountants, lawyers and real estate agents that they have not recently been consulted on tranche 2 reforms. IPA and the Law Council told the committee that they were not aware of whether the cost/benefit analysis recommended by the 2016 statutory review of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (AML/CTF Act) had been completed.
4.8
The Department of Home Affairs (the department) confirmed that ‘the government has committed to tranche 2 and has committed to simplification of the regime as a whole, taking a phased approach to reform of AML/CTF’.
4.9
Ms Ciara Spencer, First Assistant Secretary, Aviation and Maritime Security and Executive Director, Transport Security, stated that the focus of AML/CTF reform has been on tranches 1 and 1.5, and the simplification of the regime. Ms Spencer confirmed that a cost/benefit analysis of the tranche 2 reforms was undertaken in 2017, but noted that ‘[t]here is a sense that some of the costs at that time were overestimated to account for innovation and new technology’. Ms Spencer stated that, in addition to advances in technology, Australia is taking into account the experiences of the United Kingdom and New Zealand. She explained:
The 2017 cost-benefit analysis was at a point in time. The time is now right to look at that again, and we're doing the design work around an approach to tranche 2 that would enhance the outcomes and meet the intent of FATF's obligations to get that targeted, high-value intelligence.
4.10
Ms Spencer provided further detail on work currently being undertaken:
The secretary and deputy secretary gave evidence at estimates around the work we're doing to inform a new cost-benefit analysis, and some of that goes to design work to undertake the cost-benefit analysis; to look at the options for regulating tranche 2 sectors; to take into account some of the regulatory reforms we have already achieved, particularly in relation to customer due diligence; to quantify the benefit of extending the regime to tranche 2; to better understand the nature and the quantum of the costs involved for businesses; to factor in options for lowering the regulatory costs, whether that be staggered implementation, templates or sector guidance, leveraging the existing regulation, and professional obligations; to address some of the limitations of the 2017 cost-benefit analysis, and some of the witnesses here have talked about the overestimation of compliance costs in the past to try and get a little more detail on that; to take into account innovation and new technology in the space; and to leverage the experience of our partners. So we have ongoing discussions with partners—New Zealand and UK and others—around their experiences of implementing tranche 2. So there is what I would call internal policy work being undertaken across government. That is internal at this stage, and we haven't reached out to broader stakeholders or industry at this point in time.
4.11
The department explained that tranches 1 and 1.5 were developed in a co-design process with industry, and agreed that such a practice should occur for tranche 2. Additionally, the department indicated that it intends to do a stocktake of existing regulatory and professional obligations, with a view to getting high-value, actionable intelligence without a great regulatory impost. Ms Spencer explained that ‘rather than re-inventing the wheel, we're looking at how we can utilise the ones that are already in place to leverage off them’.
4.12
The department confirmed while this design work is ongoing, the timeline for full implementation of tranche 2 ‘will be a matter for government’.
Improvements to the AML/CTF framework
4.13
A number of inquiry participants indicated that the current AML/CTF framework is unnecessarily complex, which makes it difficult for many of the regulated entities to understand their obligations. Transparency International Australia (TIA) suggested that reforms to the current AML/CTF framework to make it more easily navigable, especially for small-business operators, would also make it easier for regulated entities to understand their obligations and ease concerns about compliance costs.
4.14
GOVLAW suggested that, if the existing AML/CTF Rules were simplified by re-ordering those rules under consistent themes and removing redundant chapters, it would provide ‘great value for regulated businesses’. The department suggested that a simplified system would also contribute to greater compliance and higher volumes of valuable intelligence for the department to act upon.
4.15
A number of inquiry participants also suggested that wider use of technologies that have been developed since the AML/CTF Act came into force in 2006 will simplify KYC obligations and enhance the effectiveness of the AML/CTF Act.
4.16
Some submitters argued that the AML/CTF framework should operate according to the risk profile of each regulated entity, as this would reduce the compliance burden. The reporting requirements of each regulated entity ‘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’. There are challenges to adopting a risk-based approach, however, as information necessary for assessing risk is not, at present, uniformly available.
4.17
Mr John Chevis suggested that the current penalties for money laundering are too low to act as a deterrent to corporate entities. Mr Anthony Quinn had a similar view and argued that greater individual accountability is required to more effectively deter corporations, and decision-makers within them, from participating in money laundering. Mr Chevis argued that the introduction of a civil penalty provision that holds individuals personally responsible, if not criminally liable, would provide the greatest disincentive to banks, casinos and other corporations from participating in, or overlooking, money laundering.
4.18
However, it can be difficult to prove that any one person was involved in, or had knowledge of, money laundering within a corporation and hold them personally liable for that money laundering. Mr Chevis suggested that this impediment could be overcome by having the Australian Transaction Reports and Analysis Centre (AUSTRAC) gather and provide detailed and specific information on money laundering within a corporation to the senior leaders of that corporation. In doing so, information about money laundering would be ‘forced’ on personnel working within corporations or other regulated entities to overcome the difficulty that has prevented prosecutions in the past.
4.19
AUSTRAC’s resourcing and whether or not the agency is appropriately resourced to implement tranche 2 was discussed during the course of the inquiry. It was also suggested that AUSTRAC’s current ‘design, operational approach, and demonstrated effectiveness in enforcing existing legislation is not appropriate for implementing Tranche 2 legislation’. Murray Waldren Consulting argued that the only feasible way to successfully implement tranche 2 in Australia is to invite third parties to work with AUSTRAC to oversee the expanded regulatory framework.
Committee view
4.20
Money laundering and terrorism financing are a scourge on Australian society and undermine our financial system. In order for our economy, financial system and certain industries, such as legal services and real estate, to remain robust, competitive and appealing to legitimate clients and consumers, they must not only withstand but actively seek to prevent money laundering and terrorism financing.
4.21
The committee respects that the Commonwealth government has been and is pursuing an agenda of reform in this space; however, the delays in doing so, particularly in relation to tranche 2 reforms, are exposing Australians and the Australian economy to harm and risking Australia’s credibility.
4.22
Australia is a laggard on the world stage, one of only three states to fail to enact any regulation in relation to DNFBPs. As a founding member of FATF, Australia has committed to the implementation of its recommendations and has reaffirmed its commitment as recently as the G20 Summit in Rome in October 2021. The government’s failure to enact tranche 2 reforms call into question these commitments. It is difficult to ignore the gap between the Commonwealth government’s words and its actions.
4.23
As the committee heard, ongoing non-compliance risks grey-listing by FATF, which could cause significant economic harm to Australia. Regardless of the likelihood of whether that will occur, the real-world consequences are already being felt. As a result, Australian banks are being required to go out of their way to prove Australia’s suitability to receive credit. To risk Australia’s reputation and economy in that way is reckless.
4.24
So too, the failure to regulate tranche 2 entities leaves a gap in the ability of law enforcement agencies to disrupt the activities of those seeking to profit from crime. Money laundering is not a victimless crime. The ability of criminals, through the use of lawyers, accountants and real estate agents, to build and maintain the structures required to continue to profit from crime is harming Australians. The committee is of the view that implementing tranche 2 reforms will bolster the ability of Commonwealth agencies to keep Australians safe.
4.25
The committee considers implementation of tranche 2 reforms essential. Successful implementation will require broad consultation and considered design of an appropriate model, and the committee acknowledges that this will take time. However, the need for action cannot be ignored, and the government has dragged its feet for too long. In the committee’s opinion, the Commonwealth government must implement tranche 2 reforms in line with the FATF recommendations in a timely manner.
4.26
The committee acknowledges that these reforms must be implemented correctly and that will require genuine consultation with relevant stakeholders. The committee fully endorses the department’s commitment to continue its practice of co-design with industry in undertaking any future improvements to the AML/CTF regime. However, none of the peak bodies that appeared before the committee appear to have been consulted in relation to tranche 2 reforms since 2017. A commitment to consultation is not consultation. To give effect to tranche 2 reforms, the government needs to proactively and diligently consult with stakeholders, all of whom told the committee they stand ready to engage with government.
4.27
The Commonwealth government committed to FATF long ago and has repeatedly voiced its commitment to implementing tranche 2 reforms. The process now should focus on how to implement these reforms, rather than if.
4.28
Consistent with the Commonwealth government’s long-standing position, the committee recommends that the Commonwealth government accelerates its consultation with stakeholders on the timely implementation of tranche 2 reforms in line with the Financial Action Task Force recommendations and ensures that the Australian Transaction Reports and Analysis Centre and the Department of Home Affairs have the right resources to adequately and effectively implement and manage the tranche 2 regime.
4.29
The committee recommends that the Commonwealth government’s acceleration of its consultation with relevant stakeholders be broad, with specific consideration given (but not be limited) to:
the impact of regulatory burden on small business;
opportunities and efficiencies that might be gained from technological innovation, especially where it could streamline regulatory processes and lower costs; and
existing regulatory and professional obligations on tranche 2 entities, including their effectiveness against the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.
4.30
The committee recognises the specific concerns raised by the Law Council of Australia with respect to potential incompatibility with legal professional privilege and the duty of client confidentiality. The committee agrees that it is important that any future model does not abrogate this privilege, which, as the Law Council states, is a cornerstone of our legal system. The committee is of the view that lessons can be learned from jurisdictions where such reforms have been reconciled with legal professional privilege (including the United Kingdom and New Zealand), and where issues have arisen (for example Canada).
4.31
That said, while the experience in international jurisdictions can be instructive, the model proposed must be context-specific and compatible with Australian law. Consideration of existing law, including the operation of section 242 of the AML/CTF Act, is necessary to ascertain whether amendments are necessary to properly serve the extension of AML/CTF regulations to the legal profession under tranche 2.
4.32
The committee recommends that the Commonwealth government seeks advice as to whether section 242 of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 should be amended to ensure the proper operation of legal professional privilege.
4.33
The committee observed discrepancies between some DNFBPs’ awareness and assessment of the risks and occurrence of money laundering and terrorism financing within those businesses and professions, and the experience of law enforcement agencies such as AUSTRAC and the AFP. Greater engagement between law enforcement agencies and these businesses and professions will assist the latter to play their part in strengthening AML/CTF compliance.
4.34
The committee acknowledges that while AUSTRAC was supported by a wide range of inquiry participants, it was commonly held that significantly increasing the number of reporting entities would require a substantial and commensurate injection of resources. As Professor Allan Fels AO said, ‘behind every regulator’s failure is a lack of backup from government’. Implied in the government’s commitment to the FATF Recommendations is a commitment to ensuring that the responsible regulatory agency is properly resourced to carry out its responsibilities. The committee therefore considers that resourcing of AUSTRAC should be an explicit consideration in the implementation of tranche 2 reforms.
4.35
The committee acknowledges the evidence that the development of a robust beneficial ownership register would both mitigate the burden on small business by enhancing and simplifying ‘know your customer’ searches and at the same time would reduce Australia’s vulnerability to money laundering.
4.36
The committee recommends that the Commonwealth government pursues a beneficial ownership register.
Senator the Hon Kim Carr
Chair
Senator for Victoria