Money Laundering Regulations Being Put Through The Wringer


Money Laundering Regulations Being Put Through The Wringer
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Australia’s reputation as a money laundering haven appears to be locked in a permanent spin cycle.

For almost a decade and a half, both major parties have failed to fully tackle the problem of illegally acquired dirty money being filtered through Australian real estate and delivered clean to criminals, tax-dodgers and suspect foreign investors.

In 2006 the Government introduced improved money laundering laws, to be introduced in phases. Tranche I expanded the Anti-Money Laundering/Counter-Terrorism Financing Act 2006 to include the financial sector and other high-risk industry sectors, such as gambling enterprises and remittance providers.

The long-awaited Tranche II remains stuck in a political spin cycle. It’s intent, should it pass in parliament, is to expand the Act’s reach to real estate agents, gem dealers, accountants, and legal practitioners.

In October 2019, the Australian Government introduced a bill into Parliament to implement the next phase of reforms to the country’s anti-money laundering and counter-terrorism financing (“AML/CTF”) laws. The broadened laws were to take in real estate agents, lawyers and gem dealers.

It was recommended that action be taken on “Tranche II”, as it is known in money laundering and political circles, during a review by the attorney general’s department that began in 2013 and finished in 2016. In November 2017 the government committed to conduct a cost-benefit analysis. But since the consultation period closed, nothing much has happened. The few minor recommendations that were implemented instead of Tranche II were rather cynically dubbed Tranche 1.5.

Meanwhile, the money laundering continues at a scale that is only guessed at. The real estate sector has often been identified as a large compliance hole, and AUSTRAC (a Federal body that monitors cash flows) estimates there were suspicious transactions worth $1 billion in the Australian property market that emerged from China during the 2016 financial year.

The Real Estate Institute of Australia (REIA) has backed the new rules in principle, saying the issue needs to be addressed but without burdening small real estate agents with unnecessary red tape and expense.

REIA President Adrian Kelly said they had been working with the Federal Government and AUSTRAC for two years to resolve what “isn’t an easy issue”.

“We need to make sure that the 80-85 per cent of small real estate agents in the regions and suburbs that aren’t likely to ever encounter these suspect buyers are not encumbered with costly, time-consuming and ultimately pointless procedures,” Mr. Kelly said.

“Currently, all the government information they’ve indicated would be needed is already captured by the conveyancers when a property deal is transacted.

“Some simple deterrents could be put in place quite quickly, such as attendees at auctions being required to submit photo ID, and the REIA has no issue with this information being shared with government.

“But many real estate agents do not even come into direct contact with the buyers during high laundering risk transactions, as is the case with large developments where hundreds of apartments could be sold to buyers around the world.”

Foreign buyers have also been blamed for pushing up property prices in Sydney and Melbourne but Mr. Kelly said the crackdown on money laundering, even if completely successful, would not have a significant impact on the nation’s property markets.

Washing machine’s moving parts

Compared to other methods, money laundering through real estate – both residential and commercial – can be relatively uncomplicated, requiring little planning or expertise. Large sums of illicit funds can be concealed and integrated into the legitimate economy through real estate.

Criminals may be drawn to real estate as a channel to launder illicit funds due to the:

  • ability to buy real estate using cash
  • ability to disguise the ultimate beneficial ownership of real estate
  • relative stability and reliability of real estate investment
  • ability to renovate and improve real estate, thereby increasing the value.

Criminals are also motivated to buy property for further profit or lifestyle reasons.

There are myriad ways domestic and international buyers can clean the mud from their ill-gotten gains.

To avoid direct involvement in the money laundering process, criminals may seek to buy property using a third party or family member as a legal owner, usually a “cleanskin” with no prior criminal record.  They may use loans or mortgages to layer and integrate illicit funds into high-value assets such as real estate. Loans or mortgages are essentially taken out as a cover for laundering criminal proceeds. Lump-sum cash repayments or smaller 'structured' cash amounts are used to repay loans or mortgages, allowing illicit funds to be commingled with legitimate funds.

To legitimise illicit funds, criminals provide tenants with illicit funds to cover rent payments, either partially or in full. Criminals can also deposit their illicit funds into an account as 'fictitious' rent that gives the appearance of legitimate rental income. 

Front companies, shell companies, trusts and company structures established domestically or offshore are used to launder money through real estate. Property titles held in the name of a company or a shell company distance the criminal from ownership, with control vested in the hands of third parties to avoid any obvious links to criminals.

“Tranche 1.5”

The Government’s next round of amendments to the AML/CTF Act had been expected to include the “second tranche” of reforms, expanding the sectors covered to real estate agents and others. However, the mostly incremental changes proposed in the October Bill have instead been dubbed “Tranche 1.5” in Australia’s AML/CTF reforms as they fail to extend the reach of the AML/CFT laws as envisaged in 2006.

The Bill must be passed by both Houses of Parliament before it can come into force. Although the dates for those votes have not yet been fixed, the Bill is not expected to reach this stage until early 2020.

The latest changes do propose to substantially amend some parts of the AML/CTF regime, including by simplifying numerous procedures and requirements, but do not take the step of expanding its coverage to designated non-financial business and professional sectors. This means that financial institutions can expect to continue to bear the brunt of the regulatory burden of scrutinising customers and their transactions for potential money laundering and terrorism financing risks.

Where does the (crooked) buck stop?

The Financial Action Task Force (FATF), a global intergovernmental group fighting illicit money laundering and the financing of terrorists and weapons of mass destruction, warned back in 2015 that the failure to extend the rules to real estate agents put Australia well behind its global peers.

The banks, despite their own well-publicised failures in the money laundering arena, have also made it clear the responsibility for identifying and preventing money laundering needs to be shared more widely.

The Australian Bankers’ Association (ABA) has advocated for the progression of the Tranche II reforms as a priority.

In a statement, the ABA said it supported “the FATF’s recommended actions for Australia to ensure that lawyers, accountants, real estate agents, precious stones dealers, and trust and company service providers understand their money laundering/terror funding risks … and to implement risk mitigating measures.”

Until the government makes its position clear, the real estate industry is left to deliberate on what it may all mean to them.

REIA Deputy President Hayden Groves said the government may seek to introduce legislative requirements mandating real estate agents to report certain transactions but the details relating to which transactions are not yet entirely clear.

“Until the details and final recommendations are made and industry consultation completed, it’s hard to say how effective the Government’s strategy will be,” Mr. Groves said.

“It remains questionable if real estate agents are best equipped to carry the responsibility for reporting.

“If there are punitive measures implemented for non-compliance, agents could be held to account for the unlawful behaviour of others, which is something the industry is justifiably concerned about.”

Political spin cycle

Professor of Law at La Trobe Law School, Louis de Koker, said more could and should be done to prevent foreign criminal funds being laundered through Australian property but it had fallen into the political “too hard basket”.

It’s a long way from the 1980s, when Australia became one of the first countries to adopt anti-money laundering laws. In 1989 it joined a small group of countries in the Financial Action Task Force (FATF), taking the lead in identifying appropriate measures to combat money laundering.

“Australia has a well-developed set of statutory money laundering and terrorist financing offences, both at the federal and a state/territory level, but more needs to be done to increase the protection of the property market against criminal abuse, particularly from overseas,” Professor de Koker said.

“While we await implementation of Tranche II, law enforcement should work with the available legal tools and prosecute money laundering offences involving the property market.”

“There are concerns that proceeds of foreign corruption are being invested in Australian property. These are concerns that can only be addressed in close cooperation with foreign counterparts.”

He added that Australia must also enhance the transparency of beneficial ownership of companies and trusts.

“If criminals find it riskier to purchase property in their own names, they will increasingly hide behind business structures, therefore it’s important to improve public information regarding the control of companies and trusts.”

Professor de Koker saw a role for real estate agents to contribute to an across-the-board approach to tackling the issue of money laundering but acknowledged that with all the resources at the disposal of the major banks, they had been unable to effectively deal with the problem.

“This year needs to see political movement on the Tranche II recommendations.

“There is also space for the industry to consider how AML/CFT measures can best be designed to lower costs and increase effectiveness.

“Technology allows for exciting new ways of compliance and due diligence collaboration,” he said.

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