1. BACKGROUND
The Anti-Money Laundering and
Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF
Act) represents Tranche One of Australia's anti-money
laundering and counter-terrorism financing reforms, and is aimed at
sectors that provide 'designated services' (the financial sector,
the gambling sector and bullion dealers). The second tranche of
reforms will focus on certain professions, including lawyers. An
Exposure Draft of the Tranche Two legislation was expected during
the first half of 2009, however the Federal Government has
suggested the release date may be delayed. The Federal Government
is concerned about burdening businesses with more 'red tape' during
the global financial crisis.
Tranche Two legislation is likely to implement the Financial Action
Task Force recommendations and be comparable to compliance regimes
in other jurisdictions.
This article is divided into two sections: recent case law and
proposed developments to the Anti-Money Laundering and
Counter-Terrorism Financing Rules Instrument 2007 (No 1)
(AML/CTF Rules).
2. CASE LAW
UPDATE
2.1 Reasonable grounds in suspicious
matter reporting
From 12 December 2008, reporting
entities will be required to report suspicious matters to the
Australian Transaction Reports and Analysis Centre
(AUSTRAC) under s 41 of the AML/CTF Act. The
AML/CTF Act requires that there be reasonable grounds for such a
suspicion.
The reporting obligations under the AML/CTF Act replace similar
obligations under the Financial Transactions Reports Act 1988 (Cth)
(FTR Act), under which a cash dealer must make a
report if they have 'reasonable grounds to suspect' that
information the cash dealer has concerning the transaction may be
relevant to:
- an investigation of evasion of taxation law;
- an investigation, or prosecution, of an offence against a law
of the Commonwealth or of a state or territory;
- enforcement of the proceeds of crime legislation; or
- financing of terrorism.
Section 41 of the AML/CFT Act requires a reporting entity to report
to AUSTRAC if it suspects, on reasonable grounds, that:
-
the person, or agent of that person,
is not the person they claim to be;
-
information it has concerning the
provision, or prospective provision, of the service may be relevant
to the investigation, or prosecution, of a person for an evasion or
attempted evasion of taxation law, or an offence against a law of
the Commonwealth or a state or territory, or be of assistance in
the enforcement of the Proceeds of Crime Act 2002;
-
the provision or prospective
provision of the service is preparatory to the commission of a
financing of terrorism or money laundering offence; or
-
information it has concerning the
provision or prospective provision of the service may be relevant
to the investigation or prosecution of a financing of terrorism or
money laundering offence.
AUSTRAC concluded that the requirement of 'reasonable grounds to
suspect' in the FTR Act and 'suspects on reasonable grounds' in the
AML/CTF Act are essentially the same.
In its Public Legal Interpretation No 6 of 2008 - Suspect
transactions and suspicious matter reports, AUSTRAC stated that the
reporting entity must have a 'real suspicion of the relevant
matters (subjective element) and the suspicion must be based on
matters or evidence that support the truth of the suspicion
(objective element)'. A suspicious matter reported to AUSTRAC must
also contain a statement of the grounds on which the reporting
entity holds the relevant suspicion.
In Shah & Anor v HSBC Private Bank (UK)
Ltd1 (Shah), the High Court of England and
Wales discussed the requirement to report suspicious matters under
the UK Proceeds of Crime Act (POCA). The court
rejected the argument that a suspicious matter report must be based
on 'reasonable grounds'.
The claimants were account holders with the defendant bank. The
claimants alleged that they had suffered substantial damage arising
out of delays by HSBC in executing transfers from the claimant's
account. HSBC suspected that the funds were criminal property, but
before it could proceed with the transfers it was compelled under
POCA to make an authorised disclosure to the relevant authorities
and wait for appropriate consent under POCA. The court held that
the issue of suspicion under POCA is a purely subjective matter and
no legal requirement for the establishment of reasonable grounds
existed for the suspicion.
Ultimately, it does not matter whether or not there are reasonable
grounds for the suspicion, provided it was a genuinely held
suspicion.
Significantly, the AML/CTF Act requires that there be 'reasonable
grounds' for a reportable suspicion. The court in Shah commented on
this requirement noting that there are good and practical reasons
why requiring reasonable grounds is not appropriate. The court
stated that 'unlike law enforcement agencies, banks have neither
the responsibility nor expertise to investigate criminal activities
to satisfy themselves that the grounds for their suspicion are well
founded, reasonable or rational'.
The general position is that banks are unlikely to know whether or
not the property is criminal property; but if a bank suspects that
it is, then in order to avoid potential liability, it must make a
disclosure and seek consent.
The AML/CFT Rules to date have not
provided guidance as to factors that may be considered as
reasonable grounds for a reporting entity to foster a
suspicion.
2.1.1 Recommendations
- Section 41 requires reporting entities to report suspicious
matters to AUSTRAC - failure to do so will attract civil
penalties.
- Internal procedures in financial institutions need to be
developed, if not already so, to allow for the reporting of
suspicious transactions.
- Banking contracts and arrangements will need to evolve to avoid
potential breaches with clients.
2.2 Anti-Money Laundering and
Counter-Terrorism Financing Rules
Under s229 of the AML/CTF Act, the CEO
of AUSTRAC may make Anti-Money Laundering and Counter-Terrorism
Financing Rules.
The following is a list of draft AML/CTF Rules open for public
consultation in recent times:
2.2.1 Draft AML/CTF Rules to exempt certain reporting entities
from threshold transaction reporting
These rules propose to exempt reporting
entities from providing the threshold transaction reports required
by s43 of the AML/CTF Act, if those threshold transactions take
place wholly between:
-
one authorised deposit-taking
institution (ADI) and another ADI;
-
one Exchange Settlement Account*
holder and another Exchange Settlement Account holder;
-
the Reserve Bank of Australia
(RBA) and Exchange Settlement Account holders;
or
-
a cash logistic carrier who provides
item 51 (collecting physical currency) or item 53 (delivering
physical currency) designated services under subsection 6(2) of the
AML/CTF Act, where these designated services relate wholly to a
transaction between one ADI and another ADI.
*An Exchange Settlement Account means an account held at the RBA
which is used for the final settlement of obligations between
Exchange Settlement Account holders.
2.2.2 Draft AML/CTF Rules setting special circumstances for the
applicable customer identification procedure
Section 32 of the AML/CTF Act specifies
that an applicable customer identification procedure
(ACIP) must be carried out before the provision of
a designated service by a reporting entity. The AML/CFT Act also
makes allowances for carrying out the ACIP after the commencement
of the designated service (s33).
Section 34 allows the relevant period to be specified by the
AML/CTF Rules, or if the AML/CTF Rules do not specify the period, a
default period of 5 business days applies.
The AML/CTF Rules specify the circumstances where a reporting
entity may carry out the ACIP after commencing to provide the
designated services of:
-
acquiring or disposing of a security,
derivative or foreign exchange contract on behalf of a person;
and
-
issuing or selling a security or
derivative to a person.
In the case of securities, reporting entities may experience
difficulties in carrying out the ACIP before the provision of a
designated service, due to financial market conditions that may
apply at the time the designated service is provided.
2.2.3 Draft AML/CTF Rules relating to applicable customer
identification procedures in certain circumstances - assignment,
conveyance, sale or transfer of businesses
These draft rules were previously
listed for public consultation in early 2008, but as a result of
that consultation, the draft rules have been amended and are now
available for public consultation.
If a business restructure results in a customer of one reporting
entity ceasing to be a customer of that entity and becoming a
customer of another reporting entity, then under s32 of the AML/CTF
Act, the second reporting entity must conduct an ACIP on that
customer before providing them with a designated service.
Such business restructures may result in large customer transfers
from one reporting entity to another, causing a significant
business impact on the second reporting entity and significant
inconvenience to the customer.
The draft rules exempt the second reporting entity from carrying
out the ACIP on transferring customers, but only if it has:
-
assessed the money laundering and
terrorism financing (ML/TF) risk it may face in
providing a designated service to those customers;
-
established whether an ACIP has been
conducted; and
-
considered whether it is reasonable
for the second reporting entity to rely upon that procedure.
The rules also allow the second reporting entity to treat
pre-commencement customers of the first reporting entity as if they
were its pre-commencement customers, having assessed the ML/TF
risk.
2.2.4 Draft AML/CTF Rules relating to applicable customer
identification procedures for correspondent banking
relationships
A vostro account is an account held by
a financial institution on behalf of a foreign financial
institution with which it has a correspondent banking relationship.
Many individuals may give instructions for the operation of the
account.
Thus, it is not feasible for financial institutions to carry out an
ACIP each time an employee of another financial institution, which
is the account holder, is added as a signatory to the vostro
account.
The draft rules will:
-
exempt financial institutions from
the requirement to carry out an ACIP when a person who is an
employee of an account holder is added as a signatory to the vostro
account a financial institution provides for use in correspondent
banking relationships; and
-
ensure that financial institutions
are exempted from carrying out an ACIP on a signatory to a vostro
account before it allows a transaction to be conducted.
2.2.5 Draft AML/CTF Rules relating to premium funding loans for
a general insurance policy
Following an exemption application from
the Insurance Premium Funding Association Australia, the AUSTRAC
CEO agreed to exempt reporting entities that provide insurance
premium funding for general insurance, from performing the ACIP
under s32 of the AML/CTF Act, except when the loan is cashed out or
redeemed before the expiration of the term of the loan.
Provision of general insurance is not covered by the AML/CTF Act as
a designated service.
2.2.6 Draft AML/CTF Rules amending the definition of
'designated business group' to allow law and accounting
practices
The current definition of 'designated
business group' (DBG) excludes partnerships such
as law and accountancy practices from forming DBGs. Upon review,
AUSTRAC considered that the current definition does not accommodate
the circumstances of the legal and accounting professions, as they
were formulated for those reporting entities which operate within
the corporate financial sector.
The draft rules suggest a broader definition of DBG to include law
and accounting practices, subject to certain conditions. They also
allow persons who assist in the provision of a designated service
(such as administrative, paralegal or conveyancing companies) to be
included.
AUSTRAC considers that the extension of the AML/CTF Rules to
include non-reporting entities, officers of reporting entities or
persons required to lodge specified reports, may be beyond the
scope of the AML/CTF Act and thus have not been included in the
draft rules.
2.2.7 Draft AML/CTF Rules for record-keeping obligations under
section 107 of the AML/CTF Act
Section 107 states that if reporting
entities make a record of information relating to the provision of
a designated service to a customer, that record of information must
be retained for 7 years after the making of the record.
The draft rules declare certain records as being exempt, noting
that the record of information must be kept by a reporting entity
providing a designated service.
Records that must be retained include:
-
customer-specific documents (for
example, account statements), correspondence and publicly available
statements, forms and documents which a reporting entity routinely
provides to its customers and product or service information;
-
general correspondence with
customers;
-
overdrawn notices and accompanying
correspondence;
-
information provided to a customer of
a reporting entity to a customer which relates to product or
service enquiries or comments from customers; and
-
records of interviews or
conversations with customers.
1 [2009] EWHC 79 (QB)
For more information, please
contact:
Elpis Korosidis, Partner
Ph
(direct): +61 3 9608 2215
Email:
e.korosidis@cornwalls.com.au