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Anti money laundering and terrorist financing


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									                                                              cash into the non-cash economy. For
   Anti money laundering and                                  example, a criminal or terrorist may make a
                                                              large cash payment into a bank account, or
   terrorist financing                                        a financial service provider’s trust account.
                                                              Often the dirty money will be mixed with
   You are probably aware of moves to                         legitimate deposits. It may be deposited in
   improve Australia’s anti-money laundering                  small amounts or in several accounts. One
   regime. We suspect this awareness may                      of the early ways of “washing” money was
   prompt the following questions:                            for criminals to own laundrettes. They
                                                              would deposit the cash, in the form of
         q   What is money laundering, how                    coins, into coin operated washing
             does it occur and what is my role as             machines. The criminal organisation could
             a financial adviser in stopping it?              then reclaim the money as the business
                                                              proceeds from conducting the laundrette.
         q   How will it affect me? In particular:            Rumour has it that this led to the practice
             o What impact will the mooted                    being called money laundering.
               changes have on my business?
             o What additional compliance                     The second stage, layering, has the
               measures will I need to put into               purpose of breaking the link between the
               place?                                         criminal and the proceeds of the crime.
             o Will I need to incur significant               The origin of the initial deposit is disguised
               expense, over and above what I                 through multiple transfers and transactions.
               have recently incurred to comply               The criminal may instruct the financial
               with the new FSR regime?                       service provider to pay the “dirty” money
                                                              deposited into an account into his lawyer’s
   In this article we describe the way money                  trust account, or to split it between other
   laundering takes place. This will provide a                accounts or service providers. Those
   backdrop for understanding how financial                   providers may then be instructed to make
   advisers could unwittingly assist criminals                payments to other parties, or to use the
   and terrorists in hiding their money and                   money in a series of transactions, for
   financing their illicit activities. An outline of          example in foreign exchange transactions.
   the additional steps that will be required of              The whole idea is to confuse the audit trail.
   financial advisers and institutions will then
   be given.                                                  Finally the “dirty” money re-enters or
                                                              integrates into the clean economy by
   The classic definition of money laundering                 being used to purchase a legitimate asset.
   is:-                                                       For example, the money may be used to
                                                              purchase a legitimate business, property or
   “the process by which criminals attempt to                 shares. The proceeds of that business,
   conceal the true origin and ownership of                   property or shares, is then available for the
   the proceeds of their criminal activities. If              criminal to use. It has become “clean”.
   undertaken successfully, it allows them to
   maintain control over these proceeds and,                  The scope for financial services providers
   ultimately, to provide a legitimate cover for              to be the unwitting vehicles for money
   their source of income.1”                                  laundering should be apparent from this
                                                              description. They could become involved
   How is it achieved? There are typically                    in any of the three stages.
   three stages in laundering money:
   placement, layering and integration.                       When a client deposits cash money, either
                                                              in a series of small transactions or in large
   The first stage, placement, has the                        amounts, there is always a chance that the
   purpose of getting illicitly obtained (“dirty”)            money may be placing the proceeds of
                                                              criminal activity.
       British Bankers Association

AddressLevel 1, 224 Queen Street              Phone: (03) 9670 8200               Email: law@holleynethercote.com.au
Melbourne VIC 3000                            Fax: (03) 9670 5499                 Web: www.holleynethercote.com.au
Mail: GPO Box 3045 Melbourne VIC 3001
Holley Nethercote Commercial Lawyers                                                             2

When a client instructs a financial services     laundering. This risk is being recognised
provider to use funds in an account to           by the Government, which enacted new
finance a number of different transactions,      legislation last year to reduce this risk. The
or moves funds from one account to               legislation is the Anti-Money Laundering
another without any apparent reason for          and Counter-Terrorism Financing Act 2006.
doing so, the client may be layering the
proceeds of criminal activity. For those         The impetus to improve our money
AFSL holders who are foreign exchange            laundering regime was provided by the
dealers, customers who change large              report of FATF into money laundering and
amounts of cash, and send them overseas          terrorist financing. Australia’s anti-money
may be involved in layering. Clients that        laundering regime and its regulator
are constantly buying and selling securities     AUSTRAC (the Australian Transaction
for no apparent reason (i.e. there is no         Reports and Analysis Centre) have enjoyed
apparent financial advantage in them doing       a good international reputation. FATF is
so) may be layering.                             the leading international body against
                                                 money laundering and is made up of 29
If a client purchases securities that don’t      member countries. It released a report in
appear appropriate, having regard to other       October, 2005. It was estimated that the
things you know about that person, or            amount of money laundering in Australia
purchases securities in cash, or is putting a    ranges between AUD 2-3 billion per year.
large amount of money into a managed
investment or buying a property or               The report contained 40 recommendations
business, and these things appear out of         against which different countries were
place, or inconsistent with other things you     benchmarked. The Australian Government
know about the person, they may be               has moved to implement those
integrating the dirty money into the             recommendations. A summary, insofar as
legitimate economy.                              they affect financial planners follows.

Of course, most clients won’t be doing this,     The Act introduces a number of
even if they do like to pay cash, enjoy          requirements which can roughly be
trading or buying properties at great prices,    described as:
etc. It is tempting to believe that all of our
clients are honest, hard working people          q   customer due diligence;
who are not involved in crime and that           q   transaction due diligence;
“criminals” use firms or providers which are     q   reporting obligations; and
probably knowingly complicit in the              q   compliance and record keeping
arrangements. That is a comfortable                  obligations.
thought, but probably naïve.
                                                 The obligations will be triggered when
According to the Financial Action Task           financial service providers provide a
Force (FATF), hundreds of billions of            designated service. There are 54
dollars (US) are laundered worldwide each        financial services which are “designated
year. The International Monetary Fund            services” listed in Section 6 of the Act.
estimated in 1996 that money laundering          Those most relevant to financial planners
constituted between two and five per cent        are:
of the world’s gross domestic product that
year.2                                           q   arranging for a client to take out a life
The reality is that there is a real risk that    q   buying and selling securities (for
financial service providers may be                   example, shares or interests in
unwittingly used for the purpose of money            managed investment schemes) as an
                                                     agent for the client;
Holley Nethercote Commercial Lawyers                                                            3

q   arranging for a client to buy or sell            extend to e-currency transactions of
    securities (for example, by instructing a        $10,000 or more, reports of suspicious
    stockbroker on behalf of the client); or         matters and reports of international
q   arranging for a client to buy or sell            funds transfer instructions. This
    derivatives.                                     obligation will start on 12 December
You may recall that, while the legislation
was being debated in Parliament, industry        q   keeping records of dealings with
lobbied for the new regime not to apply to           customers. All records relating to the
financial planners. The outcome of this              provision of the designated service will
lobbying was that providing advice will              need to be kept for seven years after
generally not be a “designated service”.             the service is provided. This
However, as you can see, a number of                 obligations started in December 2006
services which are often provided by                 so you should be doing this now.
financial planners will be caught.
                                                 q   developing, maintaining and complying
Not all of the new obligations will apply            with anti-money laundering and counter
straight away. They are being phased in              terrorist financing programs. For
over a period of two years.                          “program”, read “risk management plan
                                                     for anti-money laundering and terrorist
The obligations include:                             financing risk”. Most readers will be
                                                     familiar with the concept of a risk
q   verifying customer identity before               management process because the
    providing a designated service to a new          Corporations Act requires all AFSL
    customer. This will extend to the                holders to have one relating to other
    beneficial owners of funds and require           business risks. The requirements for
    you to take reasonable steps to                  the “program” will be set out in the
    understand the ownership and control             Rules accompanying the legislation.
    structure of corporate clients, trusts and       The Rules will be developed over the
    partnerships. This requirement will              course of this year, with public
    start on 12 December 2007.                       consultation. This obligation will start
                                                     on 12 December 2008, by which time
q   if you buy or sell securities as agent for       the Rules will have been finalised,
    the client or if you hold financial              letting you know what to do.
    products on behalf of your clients –
    conducting ongoing risk-based                Will I need to incur significant extra
    customer due diligence throughout the        expense?
    relationship. Some thought will be
    required in relation to appropriate          Undoubtedly there will be additional steps
    procedures to monitor clients’               to build into current practices. There will be
    transactions throughout the                  a need to be more thorough in taking
    relationship. Appropriateness will be        instructions from clients. Staff will need to
    determined by a risk-based assessment        be equipped with new expertise to enable
    of the type of client and transaction.       them to understand business structures
    This obligation will start on 12             and to spot suspicious transactions.
    December 2008.                               Record keeping and risk management
                                                 processes will need to be revised to
q   reporting suspicious matters,                incorporate the new requirements. These
    international funds transfer instructions    steps will cost money. Perhaps the most
    and some high-value transactions to          significant impact will be to the information
    AUSTRAC. Readers will be familiar            technology budgets of larger financial
    with the current requirement to report       services licensees. The spend by banks
    physical cash transactions exceeding         and funds managers is expected to be
    $10,000. The new obligations will
Holley Nethercote Commercial Lawyers                    4


However, by now most AFSL holders will
have a functional framework in place that
will assist them to accommodate the new
requirements. There will already be a staff
training plan, a compliance plan and a risk
management plan. There will be staff with
the designated responsibility for
compliance. In short, most readers should
be well equipped to implement the new
regime efficiently and effectively.
Additional expense will be minimised
through a sensible use of existing

Grant Holley and Sam Kimpton

The law is current as at February 2007.
Please note that this paper is a summary of the law
only and is not a substitute for legal advice. Holley
Nethercote is able to assist companies in meeting
their obligations in this area by providing practical
and prompt legal advice.

Training and creation of compliance programs are
also available via an associated business, Compact-
Compliance and Corporate Training.

We invite you to contact Holley Nethercote:

Telephone (03) 9670 8200
Facsimile (03) 9670 5499

Email law@holleynethercote.com.au

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