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Tranche 1.5

Last week Nathan Lynch from Thomson Reuters wrote in a LinkedIn post that that the Australian government has made it’s ‘first modest step towards meeting its international obligations around #DNFBPs’.

While acknowledged that the 1.5 reforms would be big step to supporting the Fintel Alliance.

The Financial Action Taskforce Force (FATF) Mutual evaluation next month ‘will not be pretty’.

The bill was introduced to parliament last week Thursday and months after speculation that 10, 000 cash limit rule was a tranche 2-like piece of legislation.

According to the explanatory memorandum of the bill:

  • expand the circumstances in which reporting entities may rely on customer identification and verification procedures undertaken by a third party

  • explicitly prohibit reporting entities from providing a designated service if customer identification procedures cannot be performed

  • strengthen protections on correspondent banking by:

  • prohibiting financial institutions from entering a correspondent banking relationship with another financial institution that permits its accounts to be used by a shell bank, and

  • requiring banks to conduct due diligence assessments before entering, and during, all correspondent banking relationships

  • 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

  • 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

  • create a single reporting requirement for the cross-border movement of monetary instruments

  • address barriers to the successful prosecution of money laundering offences by:

  • clarifying that the existence of one Commonwealth constitutional connector is enough to establish an instrument of crime offence, and

  • deeming money or property provided by undercover law enforcement as part of a controlled operation to be the proceed

You can read Lynch’s analysis of the bill here.

This week the GRC Professional reached out to Andrew Ham, an expert in the AML/CTF Space, to get his take on the legislative amendments on the AML/CTF legislation last week.

What are the implications for Australia doing badly on their mutual evaluation?

There are no direct consequences for Australia doing badly in the next MER. We won’t be kicked out of anything, but there will be significant embarrassment, although this is probably already the case for the Australians attending meetings of the financial crime regulators club. Indirectly, the implications are already with us. Australia’s ranking in the Transparency International Corruption Perception Index is at a record low, and falling. Australia is in the company of Mexico, Turkey, Malta, and Chile whose rankings also declined. Taken to the extreme, if Australia was to be considered a high risk jurisdiction by the international banks and other financial institutions on which the financial system depends Australia’s lack of policy action to address the 2014 MER Report would have real world consequences as companies and other entities based in Australia find they are required to provide more information and verification documentation more often as the AML/CTF Programs of financial institutions around the world respond to Australia’s declining status. It’s hard to say if this is already happening, but it’s obvious to point out that Australia’s historical reputation as a trusted player in the global financial system, once lost will be difficult to regain.

Might there be another statutory review?

There won’t be another statutory review, it was a once off, required under s 251 of the Act itself.

What will the tranche 1.5 achieve?

The Bill that was introduced on 17 October is another baby step towards delivery of the plan that the Attorney-General’s Department originally laid out in late 2016, following the report of the Statutory Review. The Department of Home Affairs was reportedly working on this bill 12 months ago and it was a casualty of the election earlier this year, but that doesn’t appear to fully explain the extensive delay. The measures themselves are all good news and will help reduce the number of adverse findings in the next review report, but they are not the news we have been waiting for.

Tranche 1.5 will do several good things in matters of detail. It will allow reporting entities that are structured as a corporate group to communicate internally more effectively in relation to customers engaging in suspicious matters. It will also make it easier for third parties to conduct customer due diligence – now the requirements are restrictive.

Any action, baby steps, towards addressing property as a haven for money laundering in Australia would have an impact on the outcome of the next MER, so there is always time. The MER itself is always followed up in ensuing years anyway and ratings adjusted as progress is made. The issue also affects the sanctions regime (as reported in this AFR article).

Any idea why the government is so reluctant when it comes to regulating DNFBPs?

The government is reluctant to impose a perceived burden on small business by making lawyers, accountants, and real estate agents provide ID etc before they can deposit funds in the relevant trust account. The Law Council of Australia has been particularly opposed. These lobby groups had had difficulty accepting that these businesses might be used by organised crime and other money launderers. The typical scenario is that that a person may engage a real estate agent, lawyer or accountant to purchase an unidentified property and deposit funds into that businesses trust account from anywhere in the word. The funds may be utilised in a real estate purchase with no investigation as to their source, or if no purchase proceeds, be returned to the depositor’s nominated bank account. The costs of these added requirements to identify these depositors and the source of their funds are immediate and tangible both in terms of overheads and lost business, whereas the benefits are intangible and speculative. It is widely accepted that bringing the laundering of money through property under control will take such a volume of money out of the market it will have a significant effect on property prices.

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