ANTI-MONEY LAUNDERING AND COUNTER-TERRORISM FUNDING (AML/CTF)
Belle Murray, Matthew Ku, AND Yangfan Xia
May 25th, 2021
Introductory remarks
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the “Act”) imposes obligations on the Australian financial services industry to restrict the use of banking and financial services being used in criminal activity [1].
Following the highest ever fines in Australian corporate history of over $1bn in relation to breaches of the Act, including against Commonwealth Bank in 2017 and Westpac in 2020, the business and banking communities have become increasingly concerned about anti-money laundering and counter-terrorism funding (AML/CTF) [2].
However, with developing technologies and the rapid pace of globalism in the 21st century, money laundering and terrorism financing have become particularly difficult to police, both within and across borders [3].
Background
Since the end of WWII, world trade has exploded. Increasing in value from $US57bn in 1947 to $US14.9tn in 2010, global trade is attributed to creating greater prosperity, increasing accessibility to new cultures and markets, and lowering costs for products [4]. The phenomenon, however, has also resulted in new, globalised crimes. The proliferation of sex tourism, bribery of foreign officials, terrorism, and money laundering are just some examples of this [3].
Combating Money Laundering
In Australia, it is a penal offence under Division 400 of the Criminal Code to engage in money laundering [5]. The code acknowledges that, in the 21st century, modes of laundering are “imaginative” and are constantly changing. Prosecuting money laundering offences in Australia is often complex given that it often involves foreign jurisdictions, requiring overseas cooperation and evidence.
Money laundering has numerous consequences, but none are more noteworthy than terrorism funding. In Australia, it is an offence under Division 103 of the Criminal Code to finance terrorism as it sustains terrorist groups domestically and overseas, and can also threaten the credibility of our financial institutions and financial system [5]. But terrorism financing usually involves small amounts of money, making it difficult to detect suspicious transactions.
In Australia, the relevant act dealing with anti-money laundering and counter-terrorism financing (AML/CTF) is the AML/CTF Act, along with the AML/CTF Rules (subordinate legislation) [1]. The Act’s objectives are set out at section 3 of the AML/CTF Act and include catching and disrupting money laundering and its consequences, reporting back to relevant authorities domestically and internationally to therefore fulfil Australia’s international obligations under numerous United Nations commitments, and promoting public confidence in the Australian financial system [1].
The Act also regulates AUSTRAC (Australian Transaction Reports and Analysis Centre), the main financial intelligence agency responsible for monitoring and preventing AML/CTF activities [1].
An Australian Example: Westpac and the AML/CTF act
Here in Australia, AML/CTF issues have been drawing increasing attention from Australian media and corporations, in light of recent breaches causing hefty fines. Breaches of the AML/CTF Act has led to the largest fine ever handed to an Australian corporation in history [2].
In 2020, retail banking group Westpac agreed to pay a $1.3 billion civil penalty for more than 23 million breaches of anti-money laundering laws [2].
The major failures of Westpac in complying with AML CTF Act consisted of:
1) Failure to properly report instructions to transfer money overseas or receiving foreign funds into Australia. The 19.5 million unreported instructions amounted to a staggering $11 billion.
2) Failure to pass on information regarding the source of funds to other Australian banks involved in the transactions.
3) Failure to properly assess and monitor the risks associated with transactions involving banks in “higher risk jurisdictions”.
4) Failure to make adequate checks on some customers who were sending regular payments overseas, and to discern payment patterns typical of child exploitation activities, despite repeated warnings from AUSTRAC. [6]
The result from Westpac’s failure to monitor and report suspicious transactions had grave consequences.
After the action against Westpac was launched by the regulators, a subsequent review uncovered a further 250 customers who made transactions to the Philippines, other parts of South-East Asia and Mexico, exhibiting tell-tale signs of engaging in child exploitation, such as the live streaming of child sex or procurement of children for sex. In several cases, the customers also physically travelled to the Philippines, which would have made it very obvious to Westpac, due to the overseas activity on their accounts. [6]
Aside from the likelihood that Westpac services were exploited by paedophiles, the bank's failure to properly record and report many overseas transactions could have allowed criminals, terrorists, and sanctioned individuals or governments to transfer money into or out of Australia without detection. [6]
What do Australian businesses need to do to comply?
Given the increasing attention placed on AML/CTF issues, it is more important than ever for Australian entities to comply with AML/CTF obligations. For Australian entities required to comply with the AML/CTF Act, an AML/CTF program showing how compliance is achieved with the legislation must be established [7]. The reporting entity has the discretion to some extent in constructing a program tailored to the entity’s specific needs, risks, and characteristics.
The program must be comprised of two parts. Part A must include procedures to identify, mitigate, and manage the money laundering and terrorism financing risks that it may face. Part B has to be set up for identifying customers including those who are politically exposed persons with high risks. [7]
This obligation is further complicated by the AUSTRAC’s requirement that those Australian businesses already caught by the AML/CTF Act and also operate internationally need to have additional anti-money laundering measures in their programs’ Part A. [7]
These additional measures need to take the form of:
the appointment of a management level AML/CTF compliance officer;
ongoing supervision of Part A of your AML/CTF program by the board and senior management;
regular independent review of Part A of your AML/CTF program and reporting of the review outcome to the board and senior management; and
consideration of feedback and guidance material from AUSTRAC on money laundering/terrorism financing risks. [7]
Ultimately, given the recent attention focussed on the issue of AML/CTF risks, scrutiny of these obligations will only continue to increase. The issue is one which business, legal, and risk management communities across the private sector must continue to be vigilant about.
[1] https://www.legislation.gov.au/Details/C2020C00362
[2] https://www.abc.net.au/news/2020-09-24/westpac-settles-austrac-money-laundering-case/12696438
[3] https://www.jstor.org/stable/40206861?seq=1
[4] Manfred Steger, Globalization, a Very Short Introduction, 41.
[5] https://www.cdpp.gov.au/crimes-we-prosecute/money-laundering
[6] https://www.abc.net.au/news/2020-09-24/westpac-money-laundering-austrac-fine-explained/12696746