Welcome to the dark side of the Great Australian Dream, an investigation by Nathan Lynch. Australia is facetiously referred to as the Lucky Country for its ability to ship off endless boatloads of minerals, surfing the waves of economic good fortune with a “she’ll be right” swagger. But there’s another more important driver of the 30-year Australian economic miracle — credit growth, real estate and the business of providing a secure home for international flight capital.
Unfortunately, the latter business model clashes with Australia’s international commitment to stamp out money laundering and terrorism financing through the gatekeeper professions. Most of the major international money laundering schemes that have been uncovered rely on lawyers, accountants or real estate agents.
After 13 years of empty bipartisan promises about “Tranche 2” AML/CTF laws, the deeper question needs to be asked: does Australia really have the political fortitude to dam those rivers of illicit money? Or is our economic model too precarious, and our democracy too feeble, to risk taking some juice out of the politically sacred property market?
For 30 years, the fortunate citizens of Australia, the lucky country, have enjoyed an unending wave of economic growth, powered and juiced along by resources, credit and the once-in-a-century property market.
On the other hand, this has created a bipartisan political paralysis where governments are loathe to go anywhere near the sacred cow of house prices. At a state government level, meanwhile, house price growth means billions of extra dollars in rising stamp duty receipts.
The policy failure on “Tranche 2” of the AML/CTF regime over the past 13 years indicates Australia is willing to subjugate all other interests to the inflation of its property market. It will do this even if it means forcing homebuyers to bid at auction against international criminals, drug dealers buying with powder-coated cash or terrorism financiers.
This was all due to come to a dramatic head this month, with international assessors from the Financial Action Task Force (FATF) coming to Australia to conduct a scathing review of the country’s sclerotic AML/CTF reform program. This was being viewed in the financial crime compliance sector as the moment of reckoning for Australia. Falling foul of the FATF obligations can lead to a country being greylisted, which is what happened to Iceland at the most recent plenary meeting in Orlando.
Countries that are struggling to overhaul their laws against insurmountable odds, such as Pakistan, have a Sword of Damocles hanging over their heads in the form of FATF blacklisting. This would choke the country’s access to international development loans and increase the cost of doing international business. The FATF has ways of making countries act.
But Australia is indeed the Lucky Country. Thomson Reuters has revealed today that the FATF has cancelled its mutual evaluation follow-up program indefinitely while a “strategic review” takes place. In a stroke of extremely good fortune, the review of Australia’s Tranche 2 failures has been put on ice.
The decision has also sparked claims that the standard-setter has become overtly politicised and buckled to pressure from major backers, including Australia, the United States and China.
Australia is already on an enhanced follow-up remediation program over its 13-year failure to pass laws to cover lawyers, real estate agents, accountants and high-value goods dealers.
The controversial decision to suspend the review comes as Australia was preparing for a disastrous on-site visit this month, culminating in FATF’s five-yearly follow-up report. Australia was one of the first jurisdictions to receive a fourth-round evaluation in 2015. This meant it would be the first country to face a follow-up visit while being in breach of all three recommendations on designated non-financial businesses and professions (DNFBPs).
Australia, the United States and China have all received fourth-round evaluations that highlighted their failure to regulate DNFBP professions. Recommendations 22, 23 and 28 cover the so-called gatekeeper professions. The United States and China, however, are still several years away from receiving their follow-up assessments.
In 2018, FATF published the first follow-up report on Australia’s technical compliance with the 40 recommendations; Australia has been rated as “non-compliant” or “partially compliant” on 14 of them.
“On this basis, Australia will remain in enhanced follow-up. According to the enhanced follow-up process, Australia will continue to report back to the FATF on progress to strengthen its implementation of AML/CFT measures,” the 2018 review said.
The second report, incorporating this month’s crucial on-site component, was due to tackle the issue of effectiveness.
A FATF spokesman in Paris said the review process for Australia had been running in the background for the past four years. FATF decided to suspend all the follow-up reviews, starting with Australia’s, in October.
“The FATF has decided to temporarily pause the start of all scheduled follow-up assessments pending the outcomes of the strategic review of FATF currently underway. The FATF plenary will discuss aspects of this review at its next meeting in February 2020. New dates for the start of follow-up assessments, including for Australia, are still to be finalised,” the spokesman said.
Financial crime officials sharply criticised FATF’s decision to suspend the Australian review at such a crucial time. They have also raised concerns FATF will water down the assessment methodology before re-starting with the Australian review.
“The FATF says it wants to pause the start of all follow-up assessments. But Australia’s assessment wasn’t starting — it was almost completed. This decision sends a terrible message for an organisation whose reputation hinges on being politically impartial. The perception is that Australia has made empty promises to the FATF, with impunity, for over a decade,” said Bill Majcher, a financial crime consultant in Hong Kong.
FATF has been very strict with countries such as Pakistan, which is facing a possible blacklisting, and Iceland, which was grey-listed at the most recent plenary meeting.
“Australia is already on ‘enhanced follow-up’ over its non-existent Tranche 2 laws. All of its neighbours have moved ahead on this. New Zealand was well behind Australia but managed to pass its own laws for DNFBPs in 2017,” Majcher said.
“It raises a serious question: what does it take for a FATF founding member like Australia to face a grey-listing, like some of the non-members?”
Financial inaction, in action
Australian compliance practitioners are scratching around for explanations as to why a country with a leading financial intelligence unit (FIU) would disregard its FATF obligations. The Home Affairs Department has continually missed the deadlines in its reform timetable following a 2014 statutory review of the AML/CTF Act.
Anthony Quinn, founder of Arctic Intelligence in Sydney, said the AML/CTF community had been watching the Australian review closely. It was crucial FATF showed it was politically impartial and there were consequences for ignoring it — and not just for weaker countries and non-members, he said.
“If there is a plausible reason for the Financial Inaction Task Force to postpone then I would love to hear it. Australia has addressed less than 10 of 84 recommendations since 2015, as set out in the country’s Statutory Review timetable. This clearly demonstrates that Australia is unfazed by international criticism by the FATF,” he said.
Quinn questioned the sincerity of the Australian government’s public statements on its commitment to tackling financial crime.
Peter Whish-Wilson, Greens senator from Tasmania, said the failure to move on AML/CTF commitments reflected a deeper political malaise.
“The FATF’s abandoning of the review of Australia’s anti-money laundering laws is an indictment on this government. Australia is one of a handful of countries where lawyers, accountants and real estate agents are still exempt,” he said.
“We’ve had 13 years of inaction, from both Liberal and Labor governments, on the fabled Tranche 2 of the AML/CTF Act. Billions of dollars in hot money has washed through Australia’s property market in that time.”
Whish-Wilson said the Greens would consider introducing a private member’s bill if the government fails to act. The Greens aim to explore these issues, as part of a broader “black economy” review, if the government’s proposed cash limit legislation enters parliament. The controversial laws are under consultation.
“I suspect that donations from developers and investors go a long way towards explaining why successive governments haven’t acted. There are simply too many people making too much money and wielding too much influence,” Whish-Wilson said.
Tough on terrorists, easy on facilitators
The failure to address the money laundering risk in Australia’s gatekeeper professions comes amid a heightened international concern over terrorism financing risks. Earlier this month, Australia hosted the second “No Money For Terror” conference in Melbourne, which featured senior government ministers from around the world who made a commitment to work together to choke the funding lifelines that fuel violent extremism.
“No one country, no matter how powerful, can defeat terrorism alone. The international community must continue to stand shoulder-to-shoulder against what is an increasingly complex and borderless threat,” Peter Dutton, Australia’s Minister for Home Affairs, said during an opening address.
Despite these high-level commitments, financial crime experts have warned that DNFBPs are commonly exploited in sophisticated, cross-border terrorism financing schemes.
Yehuda Shaffer, former head of Israel’s financial intelligence unit, said it was well established that DNFBPs pose a high threat for terrorism financing, which must be properly mitigated. Mossack Fonseca’s client base included 33 suspected financiers of terrorism, which indicates that TF-linked entities are seeking professional advice, he said.
“Much of the movement of funds by terrorist organisations and individuals is still undetected. But there is growing anecdotal evidence that they also rely on complex legal structures to hide the underlying beneficial owner,” he said.
“The Panama Papers show that OFAC-listed terror-related persons used complex structures to avoid sanctions. We have TF-related suspicious transaction reports regarding trusts mentioned in some of the FATF reports, such as the Cayman Islands. We have seen the Isle of Man criticised in its report for not understanding its terrorism financing DNFBP risks.”
Major financial centres, such as Australia, needed to ensure they are not being used as a source of terrorist funds or as a “pass through” jurisdiction, Shaffer said. They needed to harden their system to avoid the abuse of non-profit organisations and charities, legal entities and complex structures.
FATF has reaffirmed its official public position that Australia takes the agency’s demands regarding DNFBPs seriously.
“As a member of the FATF, Australia has committed to fully and effectively implement all of the FATF recommendations, including those that concern DNFBPs,” the spokesman said.
The Department of Home Affairs, meanwhile, said it was still committed to the Tranche 2 reforms.
“The Morrison government is committed to continually improving Australia’s AML/CTF laws and working with industry to ensure that Australia’s financial system is hardened against criminals and terrorists, without placing undue burden on industry,” a spokesman said.
Thirteen years on, however, Australia’s promises and the FATF’s assurances are starting ring a little hollow among the financial intelligence community.
“There is zero political will to regulate lawyers, accountants or the real estate sector in Australia, where a Chinese political donor has allegedly squirrelled away a $1.2bn property portfolio in Australia,” Quinn said.