Regulatory compliance alone won’t stop financial crime

Regulatory compliance alonewon’t stop financial crime

5 Oct 2021

In the four years since AUSTRAC’s enforcement action against Australia’s largest gambling company, Tabcorp, anti-money-laundering compliance has been in the spotlight. There’s now much more awareness of how financial intelligence on child exploitation, organised crime and terrorism flows from banks to government agencies, and how negligence, system errors and compliance breaches can choke off that flow.

This is a logical and desirable consequence of a run of significant enforcement cases and over $2 billion in fines. Less desirable is the singular focus on regulatory compliance, so that meeting the requirements of the anti-money-laundering and counter-terrorism-financing legislation enacted in 2006 becomes an end in itself.

Under this regime, banks and other reporting entities must maintain a program to mitigate and manage the risk of financial crime. Part of doing this is reporting international transfers, threshold transactions and suspicious matters. Filing reports doesn’t directly prevent financial crime, but it provides government agencies with crucial intelligence to support investigations. Failure to report this intelligence in full, on time or at all results in the ‘loss of opportunity to detect and disrupt possible unlawful activity’.

However, it would be wrong to think that faultless reporting can transform enforcement outcomes. There are much broader issues at play.

For example, the continued exemption of lawyers and accountants from reporting obligations means that they don’t have to report irregularities in the huge volumes of transactions they process. This means a lot of potentially valuable information is lost to investigators.

In addition, the offence of money laundering is slippery and difficult to prove. The Financial Action Task Force’s 2015 observation that Australia’s comprehensive reporting regime wasn’t matched by successful prosecution outcomes remains apt.

Another part of the challenge is the sheer scale of criminal markets and their integration with legitimate ones. The Australian Criminal Intelligence Commission recently estimated that a cartel of organised crime figures responsible for a third of drug importations into Australia generates annual revenue of $1.5 billion. Cashflow on that scale moves in numerous streams, infiltrating the property market and the gaming, hospitality and entertainment sectors.

Australian academic John Langdale has described a triangular illicit trafficking network between China, the United States and Canada. Chinese money-laundering organisations provide funds sourced from criminal groups to wealthy Chinese citizens seeking to invest in the Canadian property market.

In Langdale’s ‘Vancouver model’, money-laundering organisations match these onshore transactions by making equivalent funds available to criminal groups overseas. This allows Chinese citizens to evade currency controls meant to prevent capital flight and enables criminal groups to move illicit funds offshore without using detectable international money transfers.

The model is flexible; money-laundering organisations introduce the illicit funds into the Canadian economy through multiple sectors, including cash-intensive businesses and casinos. Langdale has observed that large Australian cities share characteristics with Vancouver that made the model work. He also warns that China’s increasing dominance in global trade will be matched by an increase in the worldwide influence of Chinese money-laundering organisations.

In addressing this kind of systemic threat, reporting and law enforcement investigations are necessary, but not sufficient.

Money-laundering organisations operate at a remove from the predicate offending, which usually involves drugs, fraud, tax evasion, people smuggling, theft or arms trafficking. Organisations also provide services to multiple criminal groups. The placement of cash is conducted by expendable ‘mules’. These low-level foot soldiers may be susceptible to surveillance, arrests and charges, but their removal won’t stop a network.

Full-scale investigation of both the predicate crime and the money-laundering activity of a criminal syndicate is a massive task. Undoubtedly it can and should be done; the seven-year Millstream investigation in New South Wales is a case in point. However, the question is whether this kind of intensive investigative activity can be scaled across the national economy to have a sufficiently disruptive effect.

Other methods should be explored. In Europe, the ‘administrative approach’ to tackling organised crime has been implemented across several countries. It involves agencies collaborating to create barriers that prevent criminals from using the economic and legal infrastructure of a state. Banks and traditional law enforcement are important stakeholders in this collaboration. So too are other service providers, local governments and industry regulators.

An important tool of the European approach is the ‘barrier model’. It involves a thorough mapping of criminal operating processes to identify the stages and enablers, as well as the touchpoints with the legitimate economy. This exercise helps with determining the barriers that should be created to most effectively disrupt a criminal enterprise.

There are numerous examples of how this could work. A local council rejects a development application for an apartment block funded with drug money. A nightclub with links to an outlaw motorcycle gang is denied a liquor licence. A law firm that funnels tainted funds into property purchases is disciplined by its professional regulator.

In fact, these kinds of barriers are deployed now, tactically and sporadically. There is value in exploring their strategic, coordinated use.

This doesn’t negate the importance of financial intelligence, or of reporting entities meeting their obligations. However, it recognises important truths: that criminal groups cannot exist entirely outside the mainstream economy; that banks, while important, are not the only actors in that economy; and that we can redistribute some of the pressure on law enforcement by using financial intelligence in more creative ways.