AMLCTF: Criminal consequences for financial institutions

(Note: For information on the offence of money laundering please see federal money laundering offences.)

Section 41 of the AML/CTF Act 2006 provides that reporting entities must report certain suspicious matters related to the provision, or potential provision, of designated services to AUSTRAC (the SMR regime). Failure to comply with the SMR regime can render the reporting entity liable to a civil penalty of up to $17,000,000. ((Section 175(4) of the AML/CTF Act 2006, s 4AA Crimes Act 1914 (Cth) ))

The risk of such proceedings being brought by AUSTRAC is often viewed as remote. No application for a civil penalty has ever been sought by AUSTRAC. ((Based on results of a search of Federal Law Search on 21 March 2014.))

Criminal prosecutions for money laundering

Any risk analysis around compliance is not complete without having regard to a far greater risk. Failure to report a suspicious matter can also leave a reporting entity exposed to the risk of a criminal prosecution for money laundering under Division 400 of the Criminal Code (Cth).

Prosecuting money laundering is not the domain of AUSTRAC, rather it falls to the Australian Federal Police. While AUSTRAC often favours education, the AFP tends to favour prosecution.

The penalty for a money laundering offence may be lower, in dollar terms, than a civil penalty under the AML/CTF Act, however a criminal conviction for money laundering will have other consequences.

Publicity

The publicity of a conviction in and of itself is a first concern.

Other regulators and relationships

Additional concerns surround the use that can be made of a conviction by other regulators (for instance APRA and banking regulators in other countries, particularly the United States). A money laundering conviction could also cause contractual defaults and difficulties in correspondent banking relationships.

Reducing Risk

The risk of criminal proceedings for money laundering can be significantly reduced by proper compliance with the SMR regime. The effect of s 51 of the AML/CTF Act 2006 is that information reported to AUSTRAC in an SMR is not available to be used in criminal money laundering prosecution of the reporting entity. That is the entity can ‘wash its hands’ of the information it has reported.

Any information omitted from an SMR is available to be used against a reporting entity in a money laundering prosecution. ((See the supplementary explanatory memorandum to the Cash Transaction Reports Bill 1987 (Cth), pg 13. It addressed s 17 of the Cash Transaction Reports Act 1988 (Cth), which was in relevantly identical terms to s 51 of the AML/CTF Act 2006))

It is worth noting AUSTRAC has historically pronounced the view that a common error with SMRs is “Defensive reporting”. ((AUSTRAC used to publish online learning tools including in relation to SMRs. This has been removed but can still be accessed at the web archive)) That is, unnecessarily lodging an SMR where there is not a reasonable suspicion, perhaps in an attempt to avoid deciding that the matter is suspicious, but still giving the appearance of complying with the AML/CTF Act.

Hypothetical scenario

• A man comes in to a bank branch to open a small business transaction account.
• He is wearing patches that identify him as a member of a self-described Outlaw Motor Cycle Gang.
• He opens the account with a cash deposit of $100.
• He tells the teller he is going to use the account for a new business venture he is starting with an associate.
• He wants the associate to be a signatory with online access to the account.
• The teller advises this is not possible because the associate needs to be identified in person.
• The account is opened solely in the name of the primary customer as sole signatory.
• The teller relays the above later in the day to the branch manager who notes it all in his diary.
• The manager immediately contacts the AML/CTF unit.
• The bank files a suspicious matter report with AUSTRAC. The report says in effect: “Mr John Big opened an account [details provided] with a cash deposit of $100. He was wearing bikie patches. He was identified by [medicare card / passport / drivers license].”
• The report makes no reference to the associate who the account holder wanted to add. Probably because no bank employee had a name at that point. I suggest that is not a justification. ((Under the previous FTRA and CTRA, reports were called SUSTRS (Suspicious Transaction Reports). The change from Transaction to Matter was intended to broaden the scope of what is reportable.))
• The next day the account holder comes back in and introduces his business partner. He is of middle-eastern appearance. However he presents a passport from the tiny and impoverished South Pacific nation of Kiribati.
• The account holder wants his partner added as a signatory, and says the partner needs online access to the account and his own ATM card.
• The bank fails to file a further SMR.
• A range of electronic transactions occur on the account – all authorized by the associate’s internet banking credentials.
• None of the transactions trigger the bank’s automated systems to flag the conduct as suspicious.
• None of the transactions are threshold nor International Funds Transfer.
• No further reports are lodged.
• In due course, the associate (who is only a signatory on the account) is arrested trying to negotiate an arms sales for Iran.
• He is also found in possession of $600k cash.
• The associate is charged with various offences.
• The authorities identify the account, which now has a balance of $2.3m.
• The majority of the funds can be traced as follows (the bank does not know this):
  1. Firstly to an account with another Australian bank;
  2. Secondly to a Kiribati account, held in the name of a New Zealand company;
  3. Thirdly to an account in Fiji held by a bearer share BVI based company; and
  4. Finally to Iran. It is from surrounding evidence now clear that the funds were intended to be used to acquire embargoed arms but their precise source is unknown. Iranian authorities are not cooperating with the investigation.

Analysis

How does s 51 AML/CTF Act 2006 operate in this scenario?

• It deems the bank to not have known the account holder was a bikie.
• But it leaves the bank fixed with knowledge that:
  • the account was being operated for all intents by a person whose legal identity (as revealed by his passport) was incongruous with his physical appearance; and
  • large unexplained sums were being deposited into the account by that person.

The fact that the bank did not know the source of those funds is beside the point. A reasonable bank would have concluded that there was a real risk that the money was proceeds of or could be used to facilitate the commission of an offence (at the very least money-laundering by the primary customer and/or the additional signatory).

In short, s 51 does not protect the bank from criminal prosecution for a money laundering offence.

Advice

I am available to provide advice nationally to reporting entities (either via a firm of solicitors, or a direct brief from in-house counsel) on these and other provisions of the AML/CTF Act 2006. I accept electronic briefs for discrete advice work. If you require urgent advice on the formulation of an SMR please telephone me on 0417 921 300.

Please note: The individuals, circumstances and transactions described in this scenario are fictional. Any resemblance to real parties, circumstances and transactions are coincidental and unintentional. While all care has been taken in the preparation of this information, nothing on this website constitutes legal advice and this blog post does not contemplate your specific circumstances.