Australia’s mixed record on money laundering potentially exposes accountants

Money laundering is the process of concealing the origins of illegally obtained money, usually through transfers that involve legitimate businesses or foreign banks.

It has been argued that, in recent years, the Australian government’s progress in developing effective anti-money laundering and counter-terrorism financing (AML/CTF) legislation has been relatively slow. 

While Australia’s corporate sector is comparatively well regulated, other entities may be exposed. In fact, local accounting firms could potentially be involved in international money laundering activities without knowing it.

Australia’s legislation

Tranche 1 of Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act was passed in 2006 and was phased in over two years. It was aimed primarily at large institutions such as banks, other financial services providers and casinos, all of which are required to report suspicious transactions.

The legislation has since caught a number of institutions out. For example, in 2018, the Commonwealth Bank was convicted of over 53,000 breaches of AML/CTF laws and was ordered to pay $700 million – the biggest fine in Australian corporate history – plus legal costs. In November 2019, Westpac CEO Brian Hartzer resigned following allegations that the bank was complicit in child exploitation, money laundering and violating counter-terrorism financing laws.

Back in 2006 it was envisaged that, within a few years, the act would be expanded to include reporting requirements for smaller entities such as accounting, legal and real estate firms.

While such an expansion has proceeded in a number of other jurisdictions, such as New Zealand, it has been delayed in Australia, partly due to the potential extent of the compliance burden on small businesses.

Global AML ranking

The Basel Institute on Governance has developed the Basel AML Index, an independent annual ranking that assesses the risk of money laundering and terrorism financing (ML/TF) around the world. 

The index measures the risk of ML/TF in countries, using data from publicly available sources such as the Financial Action Task Force (FATF), Transparency International, the World Bank and the World Economic Forum.

Countries are ranked from the highest to the lowest level of risk, with Australia performing well, ranked at 110 out of 125 countries. Australia’s overall risk score also improved slightly between 2018 and 2019.

The Index identifies five ‘domains’ (each of which has a degree of emphasis indicated by a percentage) as key to ML/TF risks:

• Domain 1: Quality of AML/CFT framework (65 per cent)
• Domain 2: Corruption risk (10 per cent)
• Domain 3: Financial transparency and standards (15 per cent)
• Domain 4: Public transparency and accountability (5 per cent)
• Domain 5: Legal and political risk (5 per cent)

In terms of Domain 1 (‘quality of AML/CTF framework’), Australia’s performance is positive, ranking ninth among the countries that have recently undergone an evaluation by the FATF (utilising its ‘fourth-round’ evaluation methodology).

In terms of Domain 3 (‘financial transparency and standards’) criteria, Australia ranks seventh.

Co-operation with international counterparts

Australia also appears to be proactive in liaising with other nations to counter international money laundering activities.

For example, on 24 January 2020, the Australian Taxation Office (ATO) announced it had taken part in a global initiative to put a stop to the suspected facilitation of offshore tax evasion.

The ‘day of action’ took place as part of a series of investigations in multiple countries into an international financial institution located in Central America, the products and services of which were believed to be facilitating money laundering and tax evasion for customers across the globe.

According to the ATO website, “It is believed that, through this institution, a number of clients may be using a sophisticated system to conceal and transfer wealth anonymously to evade their tax obligations and launder the proceeds of crime.”

This was the first major operational activity for the Joint Chiefs of Global Tax Enforcement, known as the J5, comprising the leaders of tax enforcement authorities in Australia, Canada, the UK, the US and the Netherlands.

Mixed record on transparency

Despite such positive measures, Australia has recently been described as a “money laundering hotspot”, following a recent report on financial secrecy issued by the Tax Justice Network.

The network’s Financial Secrecy Index ranks Australia as a creditable 48th in terms of the secrecy and scale of its offshore financial activities. This does not mean, however, that it is entirely clean or transparent.

According to the report, “Despite its relatively low ranking … a number of cases demonstrate that Australia undoubtedly hosts significant quantities of illicit funds from outside the country.”

Lachlan Maddock, in an Investor Daily article (19 February 2020), links the proliferation of such cases, (with significant funds lost to money laundering activities) directly to the delay in the expansion of AML/CTF legislation in Australia.

“The losses are partly due to the failure to extend money laundering laws to real estate agents, accountants and lawyers,” Maddock writes.

“And while it’s impossible to quantify the exact amount of money lost, government programs – including Project Wickenby, which saw 77 people charged – often recover billions of dollars.

“In 2007, the federal government proposed draft legislation to extend AML provisions to those agents, but the legislation was never implemented. The government consulted on new provisions again in 2017, but despite strong support – and little opposition from businesses at the time – no public progress has been made.”

Accountants may be vulnerable 

According to the At your service report by Transparency International in the UK, “A lack of awareness of money laundering risk amongst those offering unregulated services … has provided an opening for corrupt individuals to make use of their services without challenge.”

Unregulated businesses – which in Australia include accounting firms, law practices and real estate agencies – continue to offer services to corrupt individuals and high-risk clients, sometimes without their own knowledge of these clients’ true identities.

Applying AML/CTF requirements to such businesses could potentially benefit both Australia’s anti-money laundering efforts and the businesses themselves.

Accountancy firms, for example, could potentially reduce legal risks and enhance client relationships through a more stringent application of the AML/CTF regulations’ ‘know your customer’ measures. 

IPA submission on AML/CTF

In December 2019, the Institute of Public Accountants responded to the House of Representatives Explanatory Memorandum for the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Bill 2019.

In the submission, the IPA’s group executive advocacy and technical, Vicki Stylianou, indicated that the IPA supports changes that expand the relevant powers that lead to closing down ML/TF activities.

“The IPA’s UK operations have been working in this space for some years and that experience is helping to inform our Australian members, who are predominantly but not essentially involved in the small business sector,” Ms Stylianou wrote.

“As such, the IPA’s focus in response to the bill pertains to accountants and the need to educate them to ensure they understand the legislation and their responsibilities in signalling AML to AUSTRAC and relevant authorities.”

The submission indicates that the IPA supports the bill’s intention to “expand the circumstances in which reporting entities may rely on customer identification and verification procedures undertaken by a third party”, but questions whether there are similar processes in place with other agencies, so as to avoid compliance duplication and associated costs.

The IPA also supports the bill’s intention to “expand exceptions to the prohibition on tipping off to permit reporting entities to share suspicious matter reports (SMRs) and related information with external auditors and foreign members of corporate and designated business groups”.

In addition, the IPA supports the bill’s intention to “provide a simplified and flexible framework for the use and disclosure of financial intelligence to better support combatting money laundering, terrorism financing and other serious crimes”, and expresses its commitment to incorporate increased education within the IPA’s continuous professional development program for members.

In terms of the bill’s statement “deeming money or property provided by undercover law enforcement as part of a controlled operation to be the proceeds of crime for the purposes of prosecution”, the IPA agrees that this activity is important and may lead to greater deterrence.

Overall, the IPA agrees that AML/CTF legislation is critical. However, the institute asked that compliance costs are considered in terms of the impact on small entities.