Chapter 3 - Consideration of the Bill
3.1
The committee received submissions which raised a
number of concerns in relation to the changes proposed in the Bill.
Most of the submissions received by the committee referred to the draft
Anti-Money Laundering and Counter Terrorism Financing Bill (AML/CTF Bill) on which
the Attorney-General's Department (Department) is currently consulting.[18] Therefore much of the discussion in
this chapter is focussed on the Bill's interrelation
with the draft AML/CTF legislation. The Department released a revised exposure
draft of the AML/CTF Bill during the course of the committee's inquiry, and it
is this revised draft of the AML/CTF Bill which is referred to in this report.[19]
3.2
This chapter covers the following issues:
- the impetus for the amendments in the Bill;
- the amended definition of 'account' inserted
into Division 3A of Part II of the Financial Transaction Reports Act 1988 (FTR
Act) by the Bill;
- the amended definitions of 'customer
information' in sections 17FA and 17FB of Division 3A;
- the restriction of Division 3A to Authorised Deposit
Taking Institutions (ADIs);[20]
- clarification of the obligations on ADIs routing
messages through Australia;
and
- the need for amendments to the definition of International
Funds Transfer Instructions (IFTIs) in the FTR Act.
Reason for the amendments
3.3
The committee raised with the Department its
concern about the impetus for the amendments to the FTR Act proposed the Bill. In particular the committee sought advice as
to why the proposed amendments were not contained in other legislation, such as
the Anti-Terrorism Act (No. 2) 2005 (AT
Act) or the draft AML/CTF Bill which the committee has considered.[21]
3.4
In responding to these concerns the Department
noted that in late 2005, amendments had been introduced into the FTR Act to
better implement the Financial Action Task Force on Money Laundering's (FATF)
Special Recommendations VI, VII and IX on Terrorist Financing. The Department
pointed out that the amendment to improve the implementation of Special
Recommendation VII (SR VII)
was contained in Schedule 9 to the AT Act. The Department stated that the
amendments in Schedule 9 of the AT Act were 'intended to bring forward certain
obligations from Part 5 of the proposed [AML/CTF] Bill in a way consistent with
that Bill without making changes to the structure of the FTR Act'.[22]
3.5
Part 5 of the AML/CTF Bill is ultimately
intended to replace Division 3A of Part II of the FTR Act. However, in
consultation on the AML/CTF Bill it was found that there was an inconsistency
between obligations in Division 3A of Part II of the FTR Act and Part 5 of the
AML/CTF Bill, specifically in relation to the definition of 'account' in the
two Bills.[23]
3.6
The Department also stated that there has been
strong industry representation by non-bank money remitters that the coverage of
Division 3A of Part II of the FTR Act would adversely affect their business
viability if the Division were not restricted to ADIs.[24]
3.7
The Department noted that even if the AML/CTF
Bill is passed by Parliament in the forthcoming sitting period, there is likely
to be a transition period before it comes into force. The Department stated
that the amendments in the Bill are intended as
a short term solution to address inconsistencies between Division 3A of Part II
of the FTR Act.[25]
Definition of 'account' in section 17FAA
3.8
Item 2 of the Bill
inserts a new definition of 'account' into Division 3A of Part II of the FTR
Act. This definition of account will only apply to Division 3A, and the
existing definitions of 'account' as defined in subsections 3(1) and section
40C (Part VIA) of the FTR Act will be retained.[26]
3.9
The Department stated that the inconsistency
between the current definition of 'account' that applies to Division 3A of Part
II of the FTR Act and Part 5 of the draft AML/CTF Bill had been highlighted by
industry in the consultation on the draft AML/CTF Bill.[27] The Department explained that this
inconsistency between the FTR Act and the AML/CTF Bill could impact on the
number of systems changes that financial institutions are required to make:
This [inconsistency] was seen to be a problem because of the
need under section 17FA for a cash dealer to identify an account in some
situations. It was suggested that some financial institutions may be required
to identify one type of account when section 17FA comes into force and a
different type of account when the AML/CTF Bill is enacted. If so, that could
require successive sets of system changes instead of just one.[28]
3.10
The definition of 'account' inserted into
Division 3A includes a credit card account. The Australian Bankers' Association
(ABA) note that the effect of including a credit card account in the definition
of 'account' for the purposes of Division 3A is that where international funds
transfers are funded by credit card, a credit card account number must be
included in the IFTIs.[29] The ABA
is concerned that including a credit card account in the definition creates a
heightened, and unintended, risk of fraud where such information is included on
IFTIs being transmitted from Australia:
Credit card account numbers correspond to credit card numbers,
i.e., the number which is used to signify transaction authorisation for
non-signature based purchases, for example telephone and internet purchases.
Disclosure of a credit card number creates a much greater risk of fraud than
disclosure of other account numbers.
The [ABA] believes
that the supply of credit card numbers with IFTIs would unacceptably compromise
credit card security as there are no mechanisms available to ADIs to control or
protect this information once it has been sent the destination institution.[30]
3.11
The ABA propose that credit card accounts be
excluded from the definition of account, stating the practical effect would be
that when credit, charge or debit card accounts are used to fund international
funds transfers, an identification code can instead be used to satisfy the
customer information requirements for the IFTIs.[31]
3.12
The committee asked the Department to respond to
the ABA's concerns on this issue.
The Department referred to the Revised
Interpretative Note to SR VII, and stated that '[c]learly, SR
VII exempts credit card
transactions except where a credit card is utilised to affect a wire transfer'.[32] The Department noted that its
understanding is that credit card accounts are not commonly used as a source of
funds for wire transfers. However, the Department indicated its willingness to
discuss the matter further with the ABA.[33]
The definition of 'customer information'
3.13
Both Allens Arthur Robinson (AAR) and the ABA
raised concerns over the amended definition of 'customer information' in
section 17FA proposed by the Bill. AAR
is concerned that the amendment means Division 3A will not comply with the Interpretative Notes to SR VII on Terrorism
Financing. The ABA's concern is
that the definition is not consistent with Part 5 of the revised draft AML/CTF
Bill.[34]
3.14
AAR also considered that
the amendments proposed to the definition of 'customer information' in the Bill
may mean that section 17FB is not compliant with the Interpretative Notes to SR VII.[35]
'Customer information' in section
17FA
3.15
Subsection 17FA(3) of Division 3A sets out the
'customer information' to be included in an IFTI transmitted out of Australia. The proposed definition of customer
information in section 17FA of Division 3A means an IFTI being transmitted out
of Australia
will need the ordering customer’s name and full business or residential address
and either of the following:
- where the IFTI is from a single account of a
customer of the ADI, the account number; or
- in any other case – the identification code of
the instruction by the ADI.
3.16
The current drafting of section 17FA provides
that an identification code will be assigned to an IFTI when the customer does
not have an account with the institution.
3.17
The EM states that the amendment is intended to
clarify that either an account number or an identification code can be used as
the customer information that is required to be transmitted with an outgoing
IFTI:
an account number is only required to be included in or with the
instruction when the instruction relates to transferring money directly from a
single account held by the customer with the ADI. In all other cases, an
identification code should be permitted instead of an account number.[36]
3.18
The EM also explains the practicalities of being
able to use either an account number or an identification code:
Some customers sending money by an IFTI will not be an account
holder with a financial institution and clearly in this instance an
identification code should be able to be used.
In practice, financial institutions can transmit multiple
numbers of IFTIs in batch form and even if some or all are on behalf of account
holders it is more practicable to use one identification code to cover all of
the IFTIs being transmitted in a particular batch. [37]
3.19
AAR understand Articles 5 and 7 of the Interpretative Notes to SR VII to only
allow the use of a identification code as part of the customer information
accompanying an IFTI where:
- there is no account number for a single
transfer; or
- there is a batched file of transfers from a
single customer.
3.20
AAR argue that the amendments to the definition
of 'customer information' in section 17FA(3) allow for ADIs to use
identification codes in circumstances not set out in the Interpretative Notes to SR VII, in particular, where there are
batch files being transmitted from a number of different customers.[38]
3.21
AAR also makes the point that, contrary to
Articles 5 and 7 of the Interpretative
Notes to SR VII, the amendments to the definition of 'customer information'
in section 17FA(3) do not require the identification code for an IFTI to be
'unique' to that instruction.[39]
3.22
Finally, AAR are concerned that the changes to
the definition of customer information in section 17FA will mean that financial
institutions will need to undertake two systems changes in order to comply with
both the Bill and the requirements in section 67 of the revised draft AML/CTF
Bill with respect to 'full originator information' accompanying funds transfer
instructions.[40] In AAR's
view, the only way to avoid making two systems changes is for financial
institutions to adopt a practice of giving every IFTI a unique identification
code, even if the instruction is part of a batched file.[41]
3.23
The ABA's submission states that subsection
17FA(3) differs in wording to Part 5 of the draft AML/CTF Bill and the ABA
believe it is important that the two pieces of legislation be aligned:
The [ABA] considers
it fundamentally important that both pieces of legislation be aligned to ensure
that there is no change at all in the obligations of its members as the FTRA is
replaced by the AML/CTF Bill when it passes into law. Any change in these
obligations may require costly system reengineering.[42]
3.24
The Department disagreed with assessments that
the amended definition of 'customer information' in section 17FA would be
inconsistent with the Interpretative
Notes to SR VII:
[The Department] does not consider that the definition of 'customer
information' in section 17FA is inconsistent with Articles 5 (cross border wire
transfers) and 7 (domestic wire transfers) of the now Revised Interpretative Notes to SR VII. The use of the term 'identification code' is
used both in the FTR Act and FTR Regulations and this term was carried over to
the [Bill].[43]
3.25
The Department noted that it considers that the
term 'identification code' is consistent with the term 'unique reference
number' which is used in the AML/CTF Bill.[44]
3.26
On the issue of the cost of complying with
obligations in Division 3A of Part II of the FTR Act and Part 5 of the AML/CTF
Bill, the Department noted that it had endeavoured to minimise the compliance
costs on those bodies affected by the Bill:
the Government agreed to make the proposed amendments in order
to address issues raised by industry and non-bank money remittance businesses.
In particular, industry participants in the AML/CTF Bill
consultation process indicated that if the definition of 'account' in Division
3A of Part II of the FTR Act is made consistent with the term ‘account’ in the
AML/CTF Bill, this will assist industry by requiring only one systems change at
an institutional level rather than multiple changes. Multiple systems changes
would increase industry’s compliance costs.[45]
'Customer Information' in section
17FB
3.27
Subsection 17FB(6) of Division 3A sets out the
'customer information' of the person ordering the transfer which is to be
included with IFTIs being transmitted into Australia.
The amendments in the Bill provide that the
following customer information is to be included in incoming IFTIs:
- the ordering customer’s name;
- any one of the following: the ordering customer’s full
business or residential address; the ordering customer’s date and place of
birth; a unique identification number given to the ordering customer by a
foreign government; or the identification number given to the ordering customer
by the ordering organisation; and
- either:
- the number of the ordering customer’s account with the ordering
organisation; or
- the identification code assigned to the instruction by
the ordering organisation.
3.28
AAR raise a specific concern in relation to
paragraph (c) above which allows for the IFTI to include either the ordering
customer's account number, or an identification code.[46]
3.29
In the current drafting of Division 3A, IFTIs
can only include an identification code where the ordering customer does not
have an account number with the institution sending the instruction. The EM
gives the following explanation for the amendment:
The effect of this amendment is that the customer’s account
number or the identification code is now given equal standing for incoming
IFTIs received by Australian ADIs under section 17FB of the FTR Act. The
purpose of the amendment is overcome the potential practical difficulties faced
by Australian ADIs and AUSTRAC in determining whether a foreign customer has an
account with a foreign ordering organisation.[47]
3.30
In AAR's opinion, the
proposed amendment to the definition of customer information in section 17FB
will allow for the use of identification codes in circumstances not permitted
by the SR VII.[48]
3.31
AAR refer to Article 14
of the Interpretative Notes to SR VII
and argue this permits unique identification codes to be used only when an account
number does not exist. AAR suggest that the following
terminology, taken from the revised draft of the AML/CTF Bill should be
adopted:
- if the
money is to be transferred from an account held by the originating entity – the
account number; and
- if the
money is not to be transferred from an account held by the originating entity – a unique reference number for the transfer.
3.32
The Department rejected AAR's
suggested amendment, stating that it would not be feasible in practice:
An Australian institution which receives an incoming IFTI will
be able to determine whether it includes reference to an account number or a unique
identifier. However, if there is only a unique identifier, there will be
normally no way for the institution to know whether it was open to the sending
institution to use an account number. The AAR proposal
would set a test that an Australian institution would normally not be able to
meet.[49]
Restriction of Division 3A of the FTR Act to Authorised Deposit Taking
Institutions
3.33
Many of the amendments in the Bill
involve replacing the term 'cash dealer' with the term 'ADI', effectively
restricting the application of Division 3A to ADIs.
3.34
The EM states that the reason for this amendment
is 'due to problems that have arisen with the current application of [Division
3A] to non-bank money remittance businesses'.[50]
The FTR Act does not distinguish between non-bank International Funds Transfer
Instructions (IFTIs) that are 'same-institution' and those non-bank IFTIs which
are 'multiple institution'. According to the EM:
[i]t is impracticable to require IFTIs sent from one institution
in one country to the same institution in another country to include originator
information because in effect this would require the institution to ‘pass on’
the information to itself. In these situations, funds transfer requests are registered
on a single internal system of the institution, while the actual transfer of funds
is effected through net settlements between the institution’s various accounts around
the world.[51]
3.35
The Department stated that the impetus for this
amendment is that 'certain non-bank money remitters made strong representations
to the Government that coverage under Division 3A of Part II would adversely
affect their business viability if it is not restricted to [ADIs]'.[52]
3.36
By way of background, the Department provided
the committee with the following explanation of how international transfers
operate in relation to the Australian financial system:
Financial institutions use messaging systems when they conduct
international business or have direct relationships with foreign institutions
and need to settle transactions. In the
Australian financial services sector, it is primarily the larger ADIs who
conduct the volume of international business to warrant the subscription costs
to access [Society for Worldwide Interbank Financial Telecommunications
(SWIFT)]-styled systems. In effect a small number of banks act as conduits for
the processing of funds transfer traffic into the international banking system
on behalf of second tier banks and other financial institutions.[53]
3.37
The Department noted that some non-ADIs operate
remittance services which fit the description of being an international fund
transfer for the purpose of the FTR Act, but which do not use the SWIFT-style
systems. The Department argued that it would be difficult for an operator in
that position to send identification details with each transfer without making
major system changes, and in most cases it would 'serve no real purpose'.[54]
3.38
The AAR submission raised
concerns that restricting the application of Division 3A to ADIs would be
inconsistent with:[55]
- SR
VII;
- the revised draft of the AML/CTF Bill; and
- Division 3 of the FTR Act.
3.39
The Department responded to these concerns
stating that the amendments in Schedule 9 of the AT Act are a short term
measure intended to bring Australia
more closely into compliance with SR
VII. However, limitations in
the FTR Act framework have meant that SR
VII obligations can only be
applied to a more limited class than will be the case when the AML/CTF Bill is
enacted. The committee notes that Part 5 of the AML/CTF Bill is ultimately
intended to replace Division 3A of Part II of the FTR Act.[56] The Department has informed the
committee that the provisions of the AML/CTF Bill will comply with SR
VII.
3.40
The ABA noted that replacing the term 'cash
dealer' with 'ADI' will create a competitive imbalance as non-bank remittance
providers would be subject to less onerous requirements than banks (which are
ADIs) that are providing the same service. However, ABA
were prepared to accept the amendment as a temporary measure, until the
proposed AML/CTF legislation has passed:
We have been assured in discussions with the [Department] that
this situation is a temporary measure and that competitive neutrality will apply
once the draft AML/CTF legislation becomes law and all money remitters – whether
banks or non banks – will be obliged to conform with the same law. We accept
these provisions on the basis of this assurance from the Government.[57]
Obligations of Authorised Deposit Taking Institutions routing messages
through Australia
3.41
ABA
sought clarification on whether Division 3A applied to ADIs which were routing
messages though a hub and spoke system, as distinct from passing on payment
instructions as part of a payment chain.[58]
The ABA described the hub and spoke
messaging system that their members operate, and raised concerns that these
systems may be caught by section 17FA(1)(b):
... hub and spoke payments messaging systems [involve] a hub
computer located in Australia
and spoke connections to their offshore branches and subsidiaries. Payment
instruction messages sent by other financial institutions to such offshore
sites (or vice-versa) are routed through hub computer systems in Australia.
...
Our members are concerned that in passing on payment
instructions as part of a payment chain, Part II Division 3A of the [FTR Act]
may treat them as 'senders' of the message, and require inclusion of full
originator information even though our member is not the originating
institution, and unable to collect the information directly from the sender of
the payment. This is because s.17FA(1)(b) only grants an exemption where the
ADI sending the message acts on behalf or, or at the request of another ADI. The
definition of 'ADI' in section 3 of the FTRA does not extend to overseas or
international financial institutions. The practical effect of this would be to
require ADIs to block or hold over serial payments until the customer
information can be completed.[59]
3.1
The ABA
does not believe it is the intention of the Bill
to apply Division 3A to messages which are simply routed through their members
Australian systems.
3.42
The Department confirmed that section 17FA of
Division 3A of Part II of the FTR Act is not intended to apply in situations
where a wire transfer message passes through an Australian computer, but has
not specifically come through the Australian financial system.[60] However, the Department noted that it
would like to seek further input from the ABA
before any amendments were made to the Bill to
clarify this situation.[61]
The definition of International Funds Transfer Instructions
3.43
Both GE Money and AAR suggested
that the definition of IFTI in the FTR Act should be amended.[62] IFTIs are defined in the FTR Act as 'an
instruction for a transfer of funds that is transmitted into or out of Australia
electronically or by telegraph, but does not include an instruction of a
prescribed kind'.[63]
3.44
AAR stated that to overcome the problem
identified in the EM of non-bank money remittance businesses effectively being
required to pass information to themselves (in the case of single institution
transfers) the definition of IFTIs should be amended to include only multiple
institution transfers.[64]
3.45
In support of this suggestion, AAR
emphasised that SR VII
applies to cross-border and domestic wire transfers that occur between
financial institutions.[65]
3.46
When asked about the feasibility of AAR's
suggested amendment to the definition of IFTI, the Department informed the
committee that such an amendment would require extensive changes to the IFTI
reporting regime and would not be a practical way of resolving the issue in the
short term.[66]
3.47
GE Money is concerned that the current
definition of IFTIs applies to messages passed between its corporate groups and
so the amendments in Division 3A will not remove the impracticality of GE Money
entities effectively passing information 'to itself about itself'. GE Money's
submission outlined how its own group treasury activities operate:
Group treasury activities that underlie the GE corporate group's
management of funds and general business activities involve intra-group funds
transfers to and from group members, which may be located in Australia
or overseas. Intra-group international funds
transfers may be performed on instructions that originate from a GE entity that
is in Australia
or in a foreign jurisdiction. The
instructions may be given to another GE entity or financial institution that is
located in a different jurisdiction. In
the case of instructions that are given to a GE entity that is located in a
foreign jurisdiction, the GE entity that receives the instructions may then
communicate those instructions to the bank with which the relevant account is
held in order to effect the actual transfer to funds.[67]
3.48
Therefore, GE Money supported amending the
definition of IFTI, suggesting regulations to exclude from the definition of IFRI
instructions that are sent between related bodies corporate.[68]
3.49
The Department was also asked to consider an
amendment to the definition of IFTI in order to address the situation outlined
by GE Money. The Department stated that it is not convinced that such
regulations are required at this point. However, the Department did indicate
its willingness to discuss the matter further with GE Money.[69]
Other issues
3.50
There were several other issues that submissions
drew to the committee's attention, including:
- the different customer information requirements
for domestic and international funds transfer instructions;
- the need for further consultation on the AML/CTF
Bill;
- the need for a public awareness campaign; and
- technical issues.
Domestic and international funds transfer
instructions
3.51
The ABA
submission raised the issue of the different customer information requirements
for domestic and international funds transfer instructions, which occurs in
both section 17FA(3) and Division 2 of Part 5 of the AML/CTF Bill:
At present, the Government proposes separate standards of
originator information for domestic and international payments respectively.
Under the AML/CTF Bill as drafted, members must include, as part of the 'appropriate
originator information', an account number if it exists or alternatively a
unique reference number (as defined in clause 5). The preference for an account
number is not mandatory for domestic payments, in relation to which our members
may choose either an account number or a reference number.
In the view of our members, the distinction is unwarranted.[70]
3.52
The Department agreed that there would be
different requirements for domestic and international wire transfers under the
AML/CTF Bill.[71] However, the
Department noted that this distinction arose because SR
VII imposes different
requirements in relation to domestic and international wire transfers.[72]
Consultation on the AML/CTF Bill
3.53
Liberty Victoria's
submission focussed on concerns that it has about the obligations imposed on
non-bank money remitters by the proposed AML/CTF Bill.[73] Liberty
Victoria called for a public inquiry into
the specific issues relating to non-bank money remitters that arise from the
AML/CTF Bill.
3.54
The committee notes that the Department is in
ongoing consultation on the AML/CTF Bill. The committee itself has inquired
into, and reported on, the exposure draft of the AML/CTF Bill.[74] That report detailed the consultation
process the Department had undertaken, the concerns that the industry had
relating to the consultation, and the Department's response to those concerns.[75] The report also noted that while
consumer and advocacy groups were not involved in the ministerial advisory
group on the AML/CTF Bill, those groups were involved in parallel discussions
on the Bill.[76]
3.55
The committee believes that these parallel
discussions being conducted by the Department in relation to the AML/CTF Bill
would be the appropriate forum in which Liberty
Victoria could express the concerns it has
on the issues for non-bank money remitters.
Public awareness campaign
3.56
The ABA
in its submission noted that the changes introduced by Division 3A of the FTA
Act will require financial institutions to disclose potentially sensitive
customer information on IFTIs. The ABA
strongly urged that a public awareness campaign be carried out to ensure that
adverse customer reaction to the change be minimised.[77]
3.57
The committee notes that the Department has
previously given a commitment to conduct a public relations campaign in
relation to the AML/CTF Bill, although the appropriate time for such a campaign
is yet to be determined.[78]
3.58
The committee suggests that the Department
consider whether the awareness campaign in relation to the AML/CTF Bill might
also be an appropriate vehicle in which to raise awareness of the effects of
Division 3A of the FTR Act.
Technical issue
3.59
The committee notes that AAR's
submission draws attention to the need to replace 'cash dealer' with 'ADI' in
section 29(4) of Division 3A to ensure consistency.[79] The committee has raised this with
the Department and the Department indicated that the appropriate amendments
would be made to section 29(4) of Division 3A.[80]
Committee view
3.60
The committee notes that in late 2005, the
Government took steps to better implement SR
VII through amendments to
the FTR Act, specifically through the introduction of Division 3A of Part II of
the FTR Act, which requires cash dealers to include customer information in
IFTIs transmitted out of Australia.
3.61
The committee also notes that Division 3A of
Part II of the FTR Act commences on 14
December 2006, and that certain non-bank money remitters have made
representations to the Government that Division 3A will adversely affect their
business viability if it is not restricted to ADIs.
3.62
Given that there is the potential for the
viability of non-bank money remitters to be adversely affected by the operation
of Division 3A if it continues to apply to 'cash dealers', the committee
concurs with the need for the amendments in the Bill.
However, the committee does consider that the amendments made by the Bill
are an unfortunate complication to an already complex and drawn out process for
achieving compliance with the Special Recommendations.
3.63
The committee notes that in the course of the
inquiry the Department has indicated that it is willing to have further
discussions with the ABA and GE
Money in relation to specific concerns those organisations have about the Bill.
The committee urges the Department to pursue these discussions.
3.64
Finally, the committee notes that the Department
has indicated its intention to seek an amendment to the Bill
with respect to section 29(4) of Division 3A of Part II of the FTR Act. The
committee agrees that this additional amendment is necessary.
Recommendation 1
3.65
Subject to the committee's comments outlined above,
the committee recommends that the Bill be
passed.
Senator
Marise Payne
Committee Chair
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