Australian Institute of Criminology

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Introduction

Background

The primary aims of those who commit economic crimes are to secure a financial advantage and to be able to make use of stolen funds without being detected by police and regulatory agencies. Many criminals, but by no means all, seek to disguise the origins of their criminally derived funds by engaging in a process of money laundering. Others, however, simply spend the money obtained with little attempt at concealment—which often leads to detection by police then prosecution and punishment. Organised criminals, in particular, see many benefits in money laundering, which include the ability to enhance their lifestyle and to enable the profits of their crimes to be re-invested in future criminal activities or in legitimate business operations.

There are three stages to laundering the proceeds of crime. In the initial or placement stage, the money launderer introduces illegal profits into the financial system. In some cases, illegally obtained funds may already lie within the financial system, such as where funds have been misappropriated electronically from the accounts of businesses. Placement can also entail splitting large amounts of cash into less conspicuous smaller sums that are then deposited directly into a bank account, or by purchasing a series of financial instruments, such as cheques or money orders, that are then collected and deposited into accounts at other locations.

After the funds have entered the financial system, the launderer may engage in a series of transactions to distance the funds from their source. In this layering stage, the funds might be channelled through the purchase of investment instruments, or by transferring money electronically through a series of accounts at various banks. The launderer might also seek to disguise the transfers as payments for goods or services, thus giving them a legitimate appearance. Another device used at the layering stage is to use corporate and trust vehicles to disguise the true beneficial ownership of the tainted property.

Having successfully processed criminal proceeds through the first two phases, the money launderer then moves to the third or integration stage in which the funds re-enter the legitimate economy. The launderer might choose to invest the funds in real estate, luxury assets, or business ventures. It is at this stage that criminals seek to enjoy the benefits of their crimes, without risk of detection.

In response to mounting international concern about money laundering, FATF-GAFI was established in 1989. FATF-GAFI is an inter-governmental body which sets international standards and develops and promotes policies to combat money laundering and terrorist financing. In 1990, FATF-GAFI issued a set of 40 Recommendations to guide the fight against money laundering (FATF-GAFI 2004). The 40 Recommendations set out the framework for anti-money laundering efforts and provide a set of counter-measures covering the criminal justice system and law enforcement, the financial system and its regulation, and measures to enhance international cooperation.

Following the attacks on the United States on 11 September 2001, FATF-GAFI expanded its mandate to deal with the financing of terrorism and created an additional nine Recommendations aimed at combating the funding of terrorist acts and terrorist organisations (FATF-GAFI 2008c). Financial transaction monitoring expanded considerably with the inclusion of counter-terrorism financing into the regime. The financing of terrorism often involves the use of legitimately derived funds, unlike money laundering which invariably involves the proceeds of criminal activities. As such, regulators have been required to examine a wide and ever-increasing number of transactions in an attempt to locate those which could show evidence of money laundering or financing of terrorism.

In June 2003, FATF-GAFI completed a major review of its Recommendations. The revised Recommendations were designed to combat increasingly sophisticated money laundering techniques, such as the use of corporate and trust entities to disguise the true ownership and control of illegal proceeds, and the increased use of professionals to advise and assist in money laundering. The Recommendations indicate the measures FATF considers necessary within criminal justice and regulatory systems, the preventive measures FATF-GAFI suggests are to be taken by financial institutions and certain other businesses and professions, and measures to facilitate international cooperation (FATF-GAFI 2004).

The FATF-GAFI 40 plus nine Recommendations to combat money laundering and the financing of terrorism have three primary objectives (FATF-GAFI 2004):

  • to support the criminalisation of money laundering and the financing of terrorism;
  • to ensure that assets linked to money laundering or the financing of terrorism can be frozen and confiscated; and
  • to ensure that financial institutions and other regulated businesses comply with the Recommendations.

The strong emphasis that FATF-GAFI places on regulating financial institutions and other businesses aims to prevent money laundering and the financing of terrorism by making these activities more difficult for offenders to commit and facilitating the detection of offences by contributing information to law enforcement agencies. The removal of Burma (Myanmar) from FATF-GAFI’s Non-Cooperative Countries and Territories list in October 2006 (FATF-GAFI 2007b) signified basic levels of compliance with the 40 plus nine Recommendations by the vast majority of countries globally.

There is, however, considerable disparity in the manner in which different countries across the globe have implemented the Recommendations and the scope and application of the Recommendations continues to evolve as local legislation and case law appears. Some countries have, for example, placed stringent limitations on the scope of the Recommendations through the enactment of local legislation, as interpreted by the courts. On occasions, this has limited greatly the application of the Recommendations to specific business sectors or types of transactions. By contrast, many countries, such as Australia, have recently introduced further legislation or amended existing legislation to implement FATF-GAFI’s Recommendations more fully. The new legislation in these countries has yet to be tested, either before the courts in connection with prosecutions for non-compliance, by law enforcement organisations using the information gathered, or by the FATF-GAFI mutual evaluation process. It is timely, therefore, to review the state of international responses to the FATF-GAFI Recommendations to assess how countries have applied the requirements, what sectors have been subject to regulation and how compliance and enforcement are undertaken.

Aims and definitions

This report presents an environmental scan of the differing approaches taken by nine countries, including Australia, to adopting an AML/CTF regulatory regime and aims to make a meaningful comparison between those regimes in a number of key areas. It also seeks to document potential measures of the extent of the application of regulatory requirements within each selected country and to assess and compare the extent of compliance and enforcement activities under each regime.

The aim of this report is to provide an intensive comparative review and analysis of some of the primary AML/CTF regulatory issues across the globe, not to reproduce the information contained in FATF-GAFI Mutual Evaluation Reports. Some commentators, such as Harvey (2005) and Sproat (2007), have sought to evaluate the performance of the AML/CTF regime using data on money laundering prosecutions, suspect transaction reporting, asset recoveries and other activity measures. Both Harvey (2008) and Sproat (2007) note the difficulty of evaluating the impact of AML/CTF regimes in the absence of clear evidence on the volume of money laundering prior to implementing enhanced AML/CTF systems. Accordingly, there is little base-line data upon which to undertake a rigorous evaluative assessment. The impact on less tangible goals such as maintaining or improving the integrity of financial systems is more difficult to gauge.

The present report does not seek to evaluate the effectiveness of the AML/CTF regimes of the countries examined as this research activity will be undertaken in another Australian Institute of Criminology (AIC) study. It is apparent, however, that the measures of AML/CTF activity provided in this report are insufficient to draw conclusions on the value of the AML/CTF system in any of the countries examined or to compare performance between them. Many of the core aspects of implementation of the regime globally, such as financial intelligence reporting volumes and conviction rates, cannot be considered proxy measures of the success of the AML/CTF system in the absence of a direct link between these indicia and a working definition of success for the regime. Arguably, the volume of items such as reports of suspicious financial activity could be evidence of either a large-scale money laundering problem or a small one. Simply relying on reporting activity levels is an inadequate measure of the success or otherwise of the regime, as reporting is influenced by a range of considerations in addition to levels of underlying laundering activity and predicate crime. The volume of reports of suspicious financial activities in any given year, for example, could reflect close to the total number of suspect transactions that took place or were attempted in a single country in a single year. The volume could also simply reflect the results of action by regulators in educating regulated businesses concerning their reporting obligations. The extent to which suspect and other transactions are reported is also dependent on the view taken by those in the regulated sectors concerning the necessity for, and effectiveness of, reporting. Some may take the view that reporting is unnecessary in most situations, while others may report even low-risk matters in order to avoid risk of enforcement action for regulatory non-compliance. The number of reports made also reflects the number of transactions that take place within a country each year. Many reports may reflect the presence of a large economy with an active financial services sector—the business sector likely to be responsible for the highest proportion of suspect matter reports.

Similar considerations apply to the use of money laundering convictions as a measure of money laundering that occurs in a given country (Reuter & Truman 2005). Few convictions may mean that there is little detected money laundering occurring, or that money laundering simply is not being detected, reported or dealt with by police and prosecutors. Further, it may also mean that prosecutors favour charging predicate offences or alternative changes rather than using offences of money laundering where these exist. Put simply, official crime statistics in this area often provide a poor measure of underlying money laundering activity. These and other problems of evaluation will be canvassed more fully in another AIC report.

As the countries discussed in this report share a common basis in having agreed to be bound by FATF-GAFI’s Recommendations and other international AML/CTF standards, the central aspects of their AML/CTF regimes are similar. The legal definitions, however, of these common aspects are not uniform across all of the countries considered.

The following are definitions of key aspects of AML/CTF regimes discussed in this report that will be used throughout the report:

  • alternative remittance services (ARS)—transmission of money or value, including informal systems or networks, outside of the formal banking sector;
  • regulated entities—businesses, including financial institutions, MSBs and designated non-financial businesses and professions with AML/CTF obligations under respective regulatory regimes;
  • regulated sector—all businesses providing a financial, money service, or non-financial designated service currently regulated for AML/CTF purposes in each country;
  • financial institution—a person or entity conducting, as a business, one or more of the following activities or operations on behalf of a customer:
    • accepting deposits and other repayable funds from the public;
    • lending and financing commercial transactions;
    • financial leasing;
    • transferring money or value;
    • issuing and managing means of payment such as stored value cards;
    • providing financial guarantees and commitments;
    • trading in money market instruments, foreign exchange, exchange, interest rate and index instruments, transferable securities or commodities;
    • participating in securities issues;
    • portfolio management;
    • otherwise investing, administering, or managing funds on behalf of another person;
    • underwriting and placing life insurance and other investment-related insurance products; and
    • money and currency exchanging;
  • designated non-financial businesses and professions (DNFBPs)—businesses, outside of financial institutions, identified by AML/CTF legislation as exposed to risks of money laundering and the financing of terrorism. The DNFBPs identified by FATF-GAFI are:
    • casinos;
    • real estate agents;
    • dealers in precious metals;
    • dealers in precious stones;
    • legal practitioners, notaries, other legal professionals and accountants providing services to external clients; and
    • trust and company service providers.
  • reports of suspicious financial activity—reports lodged by financial institutions and other regulated entities to the financial intelligence unit of any transaction suspected of being the proceeds of criminal activity or involved in the financing of terrorism.
  • reports of high-value cash transactions—reports lodged by financial institutions and other regulated entities to the financial intelligence unit of any transaction in cash greater than a nominated value threshold.
  • reports of international movements of cash—reports lodged to the financial intelligence unit of the movement of physical currency across national borders, usually above a nominated threshold.
  • reports of international electronic transactions—reports lodged by financial institutions and other regulated entities to the financial intelligence unit of the electronic transfer of funds overseas, usually above a nominated threshold;
  • FIU—a central agency responsible for receiving (and as permitted, requesting), analysing and disseminating disclosures of financial information:
    • concerning suspected proceeds of crime and potential financing of terrorism; or
    • required by national legislation or regulation in order to combat money laundering and terrorist financing;
  • tipping-off provisions—requirements for entities filing reports of suspicious financial activity to avoid disclosing information about the details or the report, or the existence of a report, to the subject of the report or another prohibited party;
  • criminal penalties—penalties imposed following a criminal conviction for an offence;
  • civil penalties—penalties imposed following civil proceedings rather than proving an offence to a criminal standard or with criminal court procedures;
  • predicate offences—financially motivated offences generating funds to be laundered;
  • criminal asset recovery—freezing or confiscating the assets generated by a crime after a conviction for that offence; the required standard of proof is usually beyond a reasonable doubt;
  • civil asset recovery—freezing or confiscating assets that are believed to be generated by a crime in a process held independently from criminal proceedings or not reliant on a conviction for an offence; the required standard of proof is usually on the balance of probabilities and not beyond a reasonable doubt; and
  • unexplained wealth—requiring persons possessing suspect assets to demonstrate their lawful acquisition to a court; this process reverses the onus of proof.

The scope and application of each of these terms and concepts is governed by the precise terms of local legislation, as interpreted by the courts. The above definitions are used, in a general sense, for discussion purposes across all jurisdictions.

Geographical scope

This report compares data from eight countries that demonstrate diverse experiences of implementing AML/CTF measures from the position adopted in Australia. The jurisdictions were selected from North America (United States), Europe (United Kingdom, France, Germany, Belgium) and Asia (Singapore, Hong Kong, Republic of China (Taiwan)) in order to provide an indication of how diverse nations in separate continents have approached AML/CTF implementation. They were also chosen to be indicative of the measures taken in countries with different legal traditions; and of those that experience different types of risk in terms of money laundering and financing of terrorism.

Methodology

The majority of the information used in this report has been sourced from publicly available documents produced by regulatory bodies, financial intelligence units, law enforcement and other government agencies, industry bodies and FATF-GAFI itself.

The authors undertook a number of consultations with stakeholders in order to supplement the publicly available information. Consultations with the Australian Transaction Reports and Analysis Centre (AUSTRAC)—the Australian financial intelligence unit—provided additional estimates of the number of businesses currently regulated for AML/CTF in Australia. A Roundtable discussion was also held in Canberra in 2007 with 25 law enforcement and industry stakeholders.

Additional consultations held in the eight countries of interest expanded on the available information on the regulatory environment in those countries and on law enforcement responses to money laundering and the financing of terrorism offences.

  • In London, the British Bankers’ Association, the Law Society of England and Wales, the Solicitors Regulation Authority, selected legal practices, the Institute of Chartered Accountants in England and Wales, the Fraud Advisory Panel, the Financial Services Authority, the Organised and Financial Crime Unit, UK Home Office, the Serious and Organised Crime Agency, HM Treasury, the Foreign and Commonwealth Office, Counter Terrorism Policy Department, the International Association of Money Transfer Networks Ltd and the Economic and Specialist Crime Operational Command Unit, Specialist Crime Directorate of the Metropolitan Police Service all provided information on the United Kingdom.
  • Consultations with the Ministry of Justice, FIU Germany and Dr Thomas Spies contributed additional statistics and regulatory information for Germany.
  • The Banking Commission, situated within the International Chamber of Commerce, and the FATF-GAFI Secretariat in Paris also participated in consultations as part of this project.
  • In Belgium, information was provided by the Belgian Financial Intelligence Processing Unit in Brussels.
  • In the United States, consultations were held with the Peterson Institute for International Economics, Professor Peter Reuter, Maryland School of Public Policy, the Terrorist Financing Operations Section of the Federal Bureau of Investigation, US Treasury Executive Office for Asset Forfeiture, FinCEN, IMF and Mr Bruce Zagaris, Partner, Berliner, Corcoran and Rowe LLP.
  • In Singapore, consultations were held with representatives of the International Centre for Political Violence and Terrorism Research/Nanyang Technological University, Deutsche Bank AG, DBS Bank Ltd, Commercial Affairs Department, OCBC Bank, United Overseas Bank Limited, Citibank Singapore Ltd, BNP Paribas Singapore Branch and the Association of Banks in Singapore.
  • In Hong Kong, consultations were conducted with HK Customs & Excise, Joint Financial Intelligence Unit, Department of Justice, Independent Commission Against Corruption, Hong Kong Monetary Authority, Commercial Crime Bureau, Hong Kong Police Service, Hong Kong Association of Banks and University of Hong Kong.
  • In Taiwan, the Money Laundering Prevention Centre (MLPC), Central Bank of the Republic of China, Banking Bureau, Financial Supervisory Commission, Financial Examination Bureau, Criminal Investigation Bureau, National Police Administration, Ministry of the Interior, Interpol Taipei, Office of Homeland Security (Counter Terrorism Office), Crime Research Centre/National Chung-Cheng University, and SinoPac Bank in Taipei also contributed information during consultations.

Regulatory regime and case law

The details on the regulatory regime for each country were sourced from the following publicly available documents:

  • legislation;
  • guidance notes released by regulatory and industry bodies for specific sectors;
  • annual reports from financial intelligence units and government agencies and departments; and
  • Mutual Evaluation Reports conducted by FATF-GAFI, IMF and the Asia/Pacific Group on Money Laundering (APG).

The cases discussed for each country have been sourced from published case transcripts and other court documents, legal industry body websites, regulatory compliance agency publications and some media reports.

Evaluating the size of the regulated sector

The estimates of the size of the regulated sectors in each of the countries were drawn extensively from publicly available information from regulatory and supervisory agencies. Information from industry bodies without compliance or enforcement powers was used to estimate the number of businesses with AML/CTF obligations where official figures from regulatory agencies were not available. Mutual Evaluation reports published by FATF-GAFI, IMF, or APG were also employed to estimate the number of businesses in industries with AML/CTF requirements for some countries.

Compliance and enforcement

Compliance and enforcement data were derived from several years of financial intelligence unit and government agency annual reports, activity reviews and the Mutual Evaluation reports. English language translations were not available from some agencies; data were also gathered from agency websites in these instances.

Structure of this report

This report provides a summary of the regulatory regime and key cases in each country, the estimated size of the regulated sector and the extent of compliance and enforcement activity in each jurisdiction.

The second section describes the AML/CTF legislative regime in each of the nine countries. It includes the criminal provisions for money laundering and the financing of terrorism, as well as the basis of the preventative regulatory measures in place for each country. The structure of the financial intelligence unit, the scope of the regulated sector, the obligations to submit financial transaction reports and suspicious matter reports, the inclusion of tipping-off provisions and the basis of the required compliance programs are discussed. Less focus is placed on specific customer identification requirements, record keeping provisions and ongoing customer due diligence. A detailed discussion of emerging areas of concern, such as the use of informal banking systems and charities for money laundering and terrorism financing activities, is also beyond the scope of this report. These areas, however, are noted where countries regulate them for AML/CTF purposes.

The second section also provides some consideration of case law arising from money laundering convictions and sanctions applied for non-compliance with AML/CTF regulations. The focus is on prosecutions and other events specifically involving regulated businesses in the jurisdictions where this information is available. Discussion of criminal prosecutions of individuals for money laundering in some countries has also been included where this has challenged the perception of the money laundering offence in some way.

The third section attempts to describe and compare the size of the regulated sector in each country considered in the scope of the report. The contribution of businesses from the financial, money service and DNFB industries are compared for each country where the information is available. This section also documents the extent of regulation of key non-financial businesses such as legal practitioners, accountants, the gambling industry and dealers in precious metals and stones.

The fourth section surveys the extent of compliance and enforcement activity in the nine countries. A range of measures have been used in an attempt to gauge the degree of compliance and enforcement in each jurisdiction. The countries considered within the scope of this report have not adopted and reported uniform measurements of compliance of enforcement activity and as a result, the information presented for each country is a combination of financial intelligence report statistics, prosecutions statistics and asset freezing and recovery figures.

The final section documents some of the strategies adopted by financial intelligence units and regulators to promote compliance in the selected jurisdictions. The use of electronic report filing, the provision of timely feedback to industry, the extent of training provided to the regulated sectors and the degree to which financial intelligence units have sought feedback from the regulated sectors are methods for boosting compliance are discussed in this section.