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
British Bankers Association
AddressLevel 1, 224 Queen Street Phone: (03) 9670 8200 Email: email@example.com
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