Summary - The FATF Mutual Evaluation Assessment on the Australian AML/CTF Regime (October 2005)
The Financial Action Task Force (FATF), an international inter-governmental body that develops policies to combat money laundering and terrorist financing, released its report (the FATF report) on the results of its Mutual Evaluation Assessment on the Australian anti-money laundering (AML) and counter-terrorist financing (CTF) regime on 14 October 2005.
Introduction
The FATF report concludes that Australia does not comply with accepted global standards; that is, the Forty Recommendations that were revised in 2003 (the Revised Recommendations) and its nine Special Recommendations on CTF (the Special Recommendations). However, FATF did acknowledge Australia's proposal to update its legislation to fully implement the Revised Recommendations and the Special Recommendations.
In response to the FATF report, the Minister for Justice and Customs, Senator Chris Ellison, who welcomed the evaluation, said that 'while no country was fully FATF compliant, the evaluation adds support to the Government's proposed AML/CTF reforms aimed at meeting the challenges posed by increasingly sophisticated money laundering and terrorist financing techniques'.
In order to rectify some of the deficiencies in the CTF regime identified in the FATF report the Government has already included amendments to the Criminal Code Act 1995 (Cth) (Criminal Code) and the Financial Transaction Reports Act 1988 (Cth) (FTRA) in the Anti-Terrorism Bill (No 2) 2005.
The Government has also announced that the exposure draft of a Bill setting out further and more extensive reforms to the existing AML/CTF regime is expected to be released in late November and will be followed by a four-month public consultation period.
Background
The original Forty Recommendations were drawn up by FATF in 1990 as an initiative to combat the misuse of the financial system by money launderers.
In previous assessments using the original Forty Recommendations as a benchmark, FATF acknowledged the strength of Australia's AML legislative regime. The Australian Transaction Reports and Analysis Centre (AUSTRAC), Australia's anti-money laundering regulator and specialist financial intelligence unit, was recognised for its efforts in the receipt and analysis of financial data. The FTRA requires significant and suspicious cash transactions reporting and customer identification and verification. The Proceeds of Crime Act 1987 (Cth) and its successor the Proceeds of Crime Act 2002 (Cth) provided the means to confiscate laundered money. Money laundering was criminalised under the Proceeds of Crime Act 1987 (Cth) and then under the Criminal Code.
In October 2001, the FATF announced an additional eight recommendations aimed at combating terrorist financing, referred to as the 'Special Recommendations'. Subsequently, one more recommendation was added to the Special Recommendations.
In 2002, the Suppression of Financing of Terrorism Act 2002 (Cth) amended the Charter of the United Nations Act 1945 (Cth), the Criminal Code and the FTRA suspicious transaction reporting regime to include terrorist financing offences.
In June 2003, the Forty Recommendations were significantly revised by the FATF to address new and sophisticated money laundering techniques and systems. The Revised Recommendations and the Special Recommendations are now accepted globally as the AML/CTF benchmark and have been, or are in the process of being implemented worldwide.
Using the benchmark of the Revised Recommendations and the Special Recommendations, the FATF carried out a Mutual Evaluation Assessment of Australia's AML/CTF regime in March this year. The FATF report sets out FATF's assessment of the AML/CTF measures in place in Australia, describes and analyses those measures, and makes recommendations as to how certain aspects of the existing system could be strengthened.
The results of the FATF assessment come as no surprise. The Government had already flagged that the FATF would find that the existing Australian AML/CTF regime does not fully comply with the Revised Recommendations and the Special Recommendations. This was the background against which, in December 2003, Minister Ellison announced the Government's intention to introduce legislative reforms aimed at bringing Australia's AML/CTF regime into line with global standards.
The FATF report
The extent of money laundering in Australia
According to the FATF report, one Australian Government estimate suggests the amount of money laundered in Australia ranges between A$2-3 billion per year. The FATF report identifies fraud related offences as the major source of illegal proceeds within Australia although narcotics offences still generate substantial proceeds of crime.
The FATF report suggests that a range of money laundering techniques are used in Australia including:
- the use by money launderers of the services offered by mainstream retail banking and larger financial service and gaming providers;
- the use of false identities and false name bank accounts facilitated by forged documents that facilitate the use of the regulated financial sector; and
- the transfer of funds offshore by international funds transfers or smaller or informal service providers such as alternative remittance dealers.
Additionally, the FATF report notes that Australian law enforcement agencies recognise a growing trend in the use of professional launderers and other third parties to launder criminal proceeds.
Compliance with the Revised Recommendations
The FATF report concludes that Australia does not comply with nine of the 40 Revised Recommendations and partially complies with 10. In terms of the other 21 recommendations, Australia is fully compliant with 12 of them and largely compliant with the other nine.
The areas of non-compliance or partial compliance include, among other things:
- non-compliance with customer due diligence (CDD)
requirements. The FATF report criticises existing methods of verification of
customer identification as inadequate. The acceptable referee method of
verification is too broad. The 100 point test is dependent on documents that
could be of questionable reliability.
There is no requirement to re-examine existing clients' information on the basis of materiality and risk, or to carry out CDD when there is a suspicion of money laundering or terrorist financing.
In particular, the FATF report notes:
- the lack of general obligations to identify and verify beneficial owners, to obtain information on the purpose of a business relationship and to conduct ongoing due diligence on customers;
- the lack of a general obligation to identify/verify customers at the account opening stage: accounts below A$1000/2000 can operate indefinitely without customer identification until a threshold is triggered;
- CDD obligations are limited to opening accounts and do not cover all situations of establishing business relationships;
- verification procedures for identifying customers who conduct cash transactions for AUD 10,000 or more are unclear. Identification verification for other non-cash occasional transactions of USD/EUR 15,000 or more should be required;
- the lack of specific obligations regarding dealings with politically exposed persons (PEPs) and correspondent banks;
- existing procedures whereby financial institutions can rely on third parties are inadequate. They should be required to immediately obtain identification data from the third parties to satisfy themselves that copies of that data will be made available without delay and that the third party is itself regulated and supervised;
- the failure of the existing AML/CTF regime to require financial institutions to put in place institutionalised AML/CTF internal controls and policies, to take account of technological developments in money laundering and financing of terrorism and to provide specific and effective CDD procedures for non-face-to-face customers;
- the lack of a general obligation for financial institutions to perform enhanced due diligence for higher risk categories of customer, business relationship or transactions;
- partial compliance with obligations to monitor complex, unusual transactions. The FATF report assesses Australia as only partially compliant with the obligations to monitor and review complex, unusual or large transactions with no visible economic purpose; to prohibit correspondent relationships with shell banks; and to pay special attention to transactions that involve countries that do not adequately apply the Revised Recommendations and the Special Recommendations;
- non-compliance with the requirement to expand obligations to a wider range of institutions and professions. The existing regime imposes CDD obligations on 'cash dealers' (as defined in the FTRA) only and does not comply with the Revised Recommendations, that expand the CDD, record keeping, suspicious transaction reporting and internal control obligations beyond cash dealers to other financial services and non-designated financial businesses and professions.
Compliance with the Special Recommendations
The FATF report concludes that Australia is largely compliant with five of the nine Special Recommendations relating to terrorist financing, partially compliant with three and non compliant with one.
Areas of non-compliance or partial compliance included:
- money/value transfer services. The existing regime does not require the registration or licensing of all money/value-transfer service operators.
- International funds transfer Instructions. The FATF report noted that although Australia has a mandatory system for reporting all international funds transfer instructions to AUSTRAC the procedures for recording and maintaining originator information are inadequate.
- Bearer negotiable instruments. The FATF report also suggested that although Australia does have a comprehensive system for reporting cross border movements of currency above the A$10,000 threshold, there should be a corresponding system for declarations or disclosure of bearer negotiable instruments with appropriate sanctions.
- Terrorist financing offences. The FATF report recommended that the CTF regime extend the existing terrorist offences to include specific offences of collecting funds for terrorist organisations and financing individual terrorists.
The Government has already proposed amendments to the Criminal Code and the FTRA in its Anti-Terrorism Bill (No 2) 2005 in order to rectify these deficiencies.
