Paying a Ransom could be an Australian Money Laundering Offence

The use of ransomware by criminals is a significant and growing threat to all organisations, particularly businesses.  Recent attacks on the Colonial Pipeline company in the United States which shut off a major US fuel pipeline significantly disrupting supplies and on JBS Foods, the world’s largest meat producer, have highlighted the danger the crime type poses.  While those attacks were carried out on US companies, Australia has not been immune.  Ransomware attacks have been perpetrated on four major Queensland hospitals, UnitingCare Queensland, Nine Entertainment and the Lion Beverage Company to name a few. 

So, what is a ransomware attack?  According to the Australian Cyber Security Centre (ACSC), “ransomware is a type of malicious software (malware). When it gets into your device, it makes your computer or its files unusable. Cybercriminals use ransomware to deny you access to your files or devices. They then demand you pay them to get back your access”. This is reportedly what happened in the Colonial Pipeline incident. And in Australia, research has shown that where Australian companies have been the victim of a ransomware attack, some have paid the ransom to the hackers to regain access to their computer systems or to retrieve stolen data or both.

The ACSC offers advice to organisations on how to protect themselves from such attacks including: “We recommend you do not pay the ransom. There is no guarantee paying the ransom will fix your devices. It can also make you vulnerable to future attacks”. I agree with that advice but would advise readers, if they are an Australian citizen, Australian resident, or an Australian company, to not pay the ransom because paying it could amount to an offence against Australian money laundering law.

Now this might surprise some people.  What has money laundering law got to do with paying criminals to get your own property back or to get access to a computer system they own?  Well, in brief, the payment of a ransom could amount to money laundering because under Division 400 of the Criminal Code Act, a law of the Commonwealth of Australia, the payment would amount to an instrument of crime.  Division 400 of the Criminal Code Act (Cth) defines an instrument of crime as:  “money or other property is an instrument of crime if it is used in the commission of, or used to facilitate the commission of, an offence against a law of the Commonwealth, a State, a Territory or a foreign country that may be dealt with as an indictable offence (even if it may, in some circumstances, be dealt with as a summary offence).   It is not the intention of this article to fully discuss Commonwealth money laundering law as it would not be practical here.  But payments to the criminals, to regain access to blocked files or to secure their return if stolen, would amount to being used in the commission of the crime or to facilitate it.  When received by the cybercriminals the money becomes the proceeds of a crime. Commonwealth money laundering law applies to the instruments of crime for all indictable offences against Commonwealth, Territory, or foreign law.  It applies to instruments of crime in relation to State indictable offences in limited circumstances and these primarily involve where the money or property is moved or transferred during or for the purposes of the importation or exportation of goods to or from Australia; or via the use of a postal, telegraphic, telephonic, or other like service within the Commonwealth’s constitutional authority; or outside Australia. 

Other instruments of crime involved in ransomware incidents that could snare an individual or an organisation in a money laundering offence include any phones, computers and other communication devices or systems used to communicate with any of the criminals involved in the attack to discuss the ransom and/or return of any data or used to make any payment to the criminals. It does not only involve the method of payment.

A person can be convicted of money laundering where they have full knowledge of the intended use of any funds or property or are reckless or negligent as to the intended use of the funds.  And depending on the value of any money or property involved and the level of knowledge held, the penalties can be severe. Up to life imprisonment if the payer has intention to pay the ransom and the money or property involved is worth $10 million or more.  And whether a person or an organisation is convicted or not of money laundering, their involvement in paying a ransom could trigger the powerful non-conviction based forfeiture provisions of Commonwealth law, potentially rendering all assets they control liable to forfeiture.

The defence of duress is available under Commonwealth law for victims of ransomware who make payments to the cybercriminals.  However, that defence is subject to conditions as prescribed in Section 10.2 Criminal Code Act 1995.  A person or organisation making any payment must reasonably believe that a threat has been made and that it will be carried out unless an offence is committed (the payment of the ransom); there is no reasonable way that the threat can be rendered ineffective; and the conduct is a reasonable response to the threat.  While it is court that decides whether a person or an organisation met those tests, any victim would need to demonstrate that they took steps to render the threat ineffective and those steps were reasonable.  This would include for example contacting the ACSC and seeking its advice and reporting the crime to the Australian Federal Police (AFP) and seeking its assistance. 

When reporting a ransom demand to the AFP, the person or organisation should request that the AFP undertake or consider undertaking a controlled operation involving the payment of funds or any property to the criminals under Part IAB Crimes Act 1914 (Cth).  Where that occurs, any civilian participant authorised to take part in the controlled operation, is deemed not to be criminally responsible for the offence.  Involvement by a civilian participant in a controlled operation to pay the ransom, provides greater protection than the duress provisions.  Any controlled operation is at the discretion of the AFP and where it decides not to conduct one, the victim of the ransomware demand should get its reasons for not doing so in writing.  Whether or not the AFP undertakes a controlled operation, a request from the person or organisation would be strong evidence that it did everything reasonable before being compelled to make any payment.  The engagement of a solicitor or barrister with extensive experience in handling AFP matters would be a distinct advantage.

And it is not just the direct victims of the ransomware attack that are at risk of being implicated in money laundering.  Any bank or remittance business (in relation to money) or virtual currency exchange (in relation to virtual currency) risk being charged with money laundering, if they knowingly or a reckless or negligent in transferring a ransom to cybercriminals.  Any controlled operation, if undertaken, would need to capture those entities as well.

It is probably unlikely that any Australian authority would pursue a money laundering case against a victim of ransomware if the victim paid a ransom to secure the release of their computer systems and or return of their stolen data.  But a victim in those circumstances needs to be careful. A money laundering action can be undertaken using the criminal law provisions in Division 400 or by using the powerful Commonwealth civil forfeiture laws, which do not require any person to be convicted of a crime.  Readers should note that the AFP has pursued and continues to pursue victims of “cuckoo smurfing” which is a money laundering technique perpetrated by international crime syndicates.  Using that method, criminal’s highjack legal funds sent by remittance agents and substitute it with the proceeds of crime.  The people sending and receiving the money have no knowledge that the criminals are doing it.  The AFP then seeks the forfeiture of any criminal funds that have been deposited into the accounts held by innocent victims.  The AFP is pursuing that action against victims because it believes, mistakenly, that it will stop the criminals from using that technique.  It is not.  But given the AFP action in relation to victims of cuckoo smurfing, it is highly plausible that the AFP could act against victims of ransomware for the same illogical reason.  For example, if a ransom was paid and partially or fully recovered, the AFP might seek to restrain and forfeit the funds.

Australian money laundering law would also apply to other circumstances where a ransom is paid by an Australian citizen, resident, or Australian company.  For example, a ransom paid to secure the release of a person kidnapped either in Australia or offshore.

The advice offered by the ACSC would be enhanced if organisations stopped treating criminal risk in silos.  Far too often, as a consultant, when I am examining various compliance programmes, for example, anti-money laundering & counter-terrorism financing programmes, I see that they have been developed in isolation from other programmes, such as anti-bribery & corruption, anti-slavery, and cybercrime programmes.  That approach ignores the risk posed by polycriminal groups, is ineffective as gaps between programmes are ignored and is inefficient as many programmes have common elements which are often re-examined leading to time and money being wasted.  All criminal risk should be assessed at the same time, and mitigation measures developed to prevent, identify, and report crimes.  Without a comprehensive approach to criminal risk, individuals and organisations will not only become a victim of crime, but also fall foul of Australian money laundering and forfeiture law.

Please note this article expresses an opinion only.  It does not constitute legal or financial advice and does not take into account individual circumstances. It is highly recommended to seek specialist advice before taking any action in relation to the issues raised in this article.

Chris Douglas is the owner of Malkara Consulting, a consultancy firm that specialises in the provision of training and advice in relation to financial crime including money laundering, terrorist financing, corruption and bribery, financial investigations, and proceeds of crime law. He is a former Australian police officer with the elite Australian Federal Police (AFP) for 31 years where he was involved in drug trafficking, people smuggling, human trafficking, corruption, organised crime, and fraud investigations.

He may be contacted at Chris.douglas@malkaraconsulting.com.

Comments on the Currency (Restrictions on the Use of Cash) Bill 2019 (Australia)

“Banks are to the economy what the heart is to the human body. They cycle necessary capital through the whole, and they are barely noticed until pressure, necessity, or crises.”

― Hendrith Smith, Essays on the Banking Industry”.

1.       Background

1.1     In the 2018/19 Budget, as a result of recommendations by the Black Economy Task Force, the Commonwealth Government announced it would introduce a cash payment limit of $10,000 for payments made or accepted by businesses for goods and services. Transactions equal to, or in excess of $10,000 would need to be made using the electronic payment system or by cheque. The need to tackle tax evasion and other criminal activities were the reasons given by the taskforce.

1.2     The Government has released for public consultation draft legislation known as the Currency (Restrictions on the Use of Cash) Bill 2019 [Provisions] (“the Bill”) and accompanying explanatory material which it intends to implement from 1 January 2020.  However, it is intended that the new measure will apply for some AUSTRAC reporting entities from 1 January 2021[1].

1.3     Following passage of the Bill through the House of Representatives, the Senate referred the provisions to the Economics Legislation Committee for inquiry.  The committee has been tasked by the Senate to inquire and report on provisions of the Bill. That committee is due to report by 7 February 2020[2]. 

2.       Response to Public Comments

2.1     There have been many submissions made in relation to the proposed legislation.  Some of them oppose the legislation but fail to provide cogent evidence to support their arguments.  Some comments are emotional and not supported by facts.  With any discussion on public policy the final position should be grounded on solid evidence and nothing else.  In this paper, statements made by several members of parliament have been commented on.  They have been singled out because as politicians they should be showing appropriate and honest leadership on public policy issues.  And in relation to the Bill, some have not done so.  They have sided with only one segment of the community and have ignored the rights and the impact on those members of the public who do not directly benefit from or engage directly in the black economy.

2.2     It has been claimed that the “cash ban bill” as some have referred to it; could breach people’s privacy.  However, what those claimants fail to mention is that the greatest threat to privacy or security of a person’s data, does not originate from Government but from the private sector.  Many people who primarily deal in cash already have deposit accounts and credit card accounts with banks and/or are members of store and airline loyalty programmes.  These facilities enable the location and spending habits of a person to be tracked, analysed, used in research and marketing and sold to other users for a profit.  The proposed restriction on the use of cash by the Federal Government is insignificant compared to the already extensive use of private information collected and held by non-government entities.  At least there are and will continue to be stringent restrictions on the use of any data collected by the Government, which are largely absent in the private sector.  Those who argue that the bill is a breach of privacy, including federal members of parliament, fail to enquire with those who complain to them about the loss of privacy, if they already engage with a bank or fail to mention the greater intrusion into a person’s privacy by other methods and organisations. 

2.3     Another claim made is that the restriction on the use of cash is designed to push people into the clutches of the banks so that they must engage in the banking system.  This claim implies that the Australian banking system is something to be avoided at all costs[3].  And while there were serious forms of misbehaviour identified during the banking royal commission, the Australian banking system is still one of the most reliable, efficient and safest systems in the world.

2.4     The push by the Australian Government and most world governments to get people using the banking system is not new.  In Australia, the process gained significant momentum about 30 years ago when the Australian Government introduced direct credit payments to bank accounts for all welfare recipients.  Thousands of people who did not have a bank account had to open one.  The author recalls that there was push back from the banks at that time who argued that maintaining accounts for people whose only means of support was a welfare payment from the Government, would cost them money.  Australian banks initially claimed they would lose money if they didn’t charge fees to recover the cost incurred by those people who simply received a payment and withdrew most of it, leaving only a minimal amount in their account.  This concerned various welfare advocacy groups who feared that the money paid to welfare recipients would be reduced by bank fees.  The situation was resolved by the Commonwealth Government directing all Australian banks to provide a bank account to Australian welfare recipients without any fees or a low fee being applied.  The Australian Government made it clear that the provision of a low fee/no fee account for welfare recipients was a condition of their banking licence.  This action by the Australian Government to introduce direct electronic payments and to impose conditions on the banks, probably brought into the Australian banking system tens of thousands of unbanked people.  Primarily designed to reduce fraud and the cost in providing payments to welfare recipients, the move increased the participation rate or financial inclusion, of Australians in the formal banking sector. It was a sensible policy initiative at the time and continues to this day.  Contrast the actions by the Australian Government with the situation in the USA, where there are millions of unbanked citizens still being paid welfare benefits and salary by cheque and incur significant fees and charges by having to have those cheques cashed at cheque cashing establishments.  Having Australians engage with the banking sector produces benefits to them and to society as the above example demonstrates.

2.5     Globally there is a push by the World Bank and other institutions to increase financial inclusion by having millions of unbanked people use the formal financial system.  The World Bank defines financial inclusion as:

“Financial inclusion means that individuals and businesses have access to useful and affordable financial products and services that meet their needs – transactions, payments, savings, credit and insurance – delivered in a responsible and sustainable way.

Being able to have access to a transaction account is a first step toward broader financial inclusion since a transaction account allows people to store money, and send and receive payments”[4].

The low rate of financial inclusion around the world, including in countries regarded as being developed, is not a problem in Australia.  Smart Government policy decades ago eliminated that issue here.  The global push to include unbanked people in the formal financial sector is recognition of the numerous benefits of having a bank account.  In Australia, our banking system is perhaps the one of the safest in the world.  And while, it is correct to sound out a bank when it operates illegally or unethically, the fact is, banks are the pillar of our economy and millions of Australians trust their wealth with them.  Holding a bank account has many benefits. One of those benefits has been highlighted above.  Other benefits are the security for funds that banks provide and the ease and speed of transferring money to pay for goods and services in Australia and offshore.  Cash offers none of those benefits.  And having evidence of a savings history in the form of bank statements, assists when the time comes for the person to obtain finance.  Or to obtain a visa and travel as many countries require evidence of an ability to support oneself when overseas.   Increasing the flow and amount of cash into the banking sector; benefits all Australians.  It results in more local funds being available for lending and investment and reduces Australia’s reliance on foreign capital and decreases the amount of interest payments sent offshore.  Casting banks in Australia in a manner indicating that they are high risk to customers, as some politicians have attempted to do, is not only foolish, it is irresponsible.  Many Australians do not know how well off they are in relation to our financial system.  There are millions of people in the world who would be grateful to have access to the services, security and quality of Australian banks. If all Australians stopped using the Australian banking system and held onto their cash, the Australian economy would collapse with a detrimental impact on all of us.   

2.6     Mr Andrew Wilkie the Federal member for Clark has stated that his biggest concern was that "this bill is simply not necessary". And that "there's already a requirement to report transactions over $10,000”[5].  With respect to Mr Wilkie he is wrong.  Referring to his second point first.  In relation to the requirement to report transactions of $10,000 or more, Mr Wilkie is referring to the requirement for reporting entities in Australia to report to AUSTRAC, transactions of not less than $10,000 involving physical currency or digital currency[6].  Many of the entities that will be captured by the Bill if they are involved in a cash payment of $10,000 or more are not reporting entities under the auspices of the Anti-Money-Laundering & Counter-Terrorism Financing Act 2006 as they do not provide any of the services listed in section 6 of that Act.  In relation to his first point that it is not necessary, the Black Economy Task Force has already assessed the issue and determined that it is. And there are numerous Australian law enforcement intelligence reports and operations that support the Black Economy Task Force.  If Mr Wilkie, MP has at his disposal other information that can rebut the findings of the task force; he should present it to the committee. 

2.7     The Australian Chamber of Commerce and Industry has argued that cash was not the cause of the black economy[7].  The ACC is right. The cause of the black economy is not cash.  The major cause of Australia’s black economy is the poor compliance by organisations in many different industries with not only Australian taxation law but also employment law and immigration law.  Often those three areas of non-compliance are linked or interrelated.  But a major instrument that enables the black economy to thrive is the use of cash.  It is the authors experience that the extensive use of cash in the building & construction, fishing, horticultural, tourism and hospitality and agricultural industries enable:

2.7.1   Receipt of cash by employees and sub-contractors which is not declared for taxation purposes, and related purposes for example assessing their determination to pay Medicare and/or child maintenance

2.7.2   People to receive welfare support from the Federal Government, particularly unemployment and invalid pension benefits that they would not otherwise be entitled to if their true earnings were known

2.7.3   Foreign citizens who have entered Australia by any means, to remain anonymous and hidden while working either illegally in the country or in excess of the number of hours specified under the terms of their visa

2.7.4   Increases the risk of human trafficking in Australia particularly in the sex industry, including in those states where prostitution is legal.

  2.8.   Ms Rebekha Sharkie, the Federal Member for Mayo has reportedly advised that the legislation “exemplifies the nanny state that this Government pretends it has not become”.  And “restricting people’s ability to purchase products with cash and forcing them to use banks or other financial intermediaries for purchases over $10,000 is an unreasonable restriction on their personal freedom”.   Reference to the “nanny state” in relation to the proposed legislation is irrelevant.  It makes no sense.  Given that welfare payments constitute 36% of total Federal Government spending or over $500 billion, is Ms Sharkie suggesting that Australia is already a nanny state and that welfare expenditure on the nanny state should be curtailed?  Perhaps she should come out and make that clear to her constituents that she wants to cut unemployment benefits, age pensions, invalid pensions and benefits for war veterans to prevent or wind back the ‘nanny state” provisions.  The Committee is advised to ignore emotional unintelligent statements that contribute nothing to the discussion about the Bill. 

2.9     Ms Sharkie, Mr Wilkie and others including various lobby groups, need to understand that the services provided by the Government have to be paid for. And other than borrowing the money, the services are paid for by taxation.  Those individual taxpayers who are paid electronically by their employer or by a business are subsidising the services used by those Australians who deal in the black economy. And when those people who deal in the black economy claim government benefits to which they are not entitled, they are stealing from the majority of law abiding citizens who declare their income to the Government. All Federal members of parliament, including Mr Wilkie and Ms Sharkie should understand that.  Their position would clearly change if the bulk of their constituents who are paid electronically ceased being silent and decided that they would not vote for them at the next election due to those members supporting a minority who want to receive the benefits of our society but are not prepared to pay for them.  Those voicing their opposition to the Bill on the grounds that it breaches their right to use cash and that it is not necessary, are seeking to preserve a status quo that supports their privileged position.

2.10    In relation Ms Sharkie’s comment that the bill is an unreasonable restriction which forces people to use banks.  As outlined above, the Australian Government in directing the development of Australia’s payment system by moving from using cheques to direct credit transfer, drove the increase in bank accounts by Australians.  It was a positive and beneficial move.  It was real leadership.  Restricting the use of cash is not impacting on anyone’s personal freedom.  People will still be able to use cash in Australia.  Though there are no benefits from using large amounts of cash, other than to avoid taxation.  Using cash is risky and inconvenient[8].  Whereas electronic payment methods carry vastly less risk, are more convenient and are limited only by the funds the person has access to, either in the form of savings or credit or both.  And while banks and other institutions charge fees for the use of payment services, those fees are the cost of doing business just like any other business expense.  Financial transaction costs are minor compared to the other costs of operating a business such as rent, power, transport, wages and salary etc.  Financial transaction costs should be incorporated into the selling price of any product or service.

2.11    Reference has been made by members of parliament, other individuals and interest groups that the Bill will force people to use banks and if interest rates shift into negative territory people will lose money.  That is a hollow argument. Cash does not grow in value and left in the form of cash it loses value due to inflation. If the cash is deposited into a bank account and interest rates fall to negative values, investors have options other than bank accounts to invest their money either in Australia or offshore. And if the Bill becomes law, there will be no restriction on the amount and volume of money a person can hold and/or store.  People who insist on keeping large amounts of money at home can continue to do so.

2.12    According to CPA Australia “some businesses have high cash takings such as laundromats, market stalls or personal services providers and may, either in single or multiple transactions, pay for their expenses in cash for convenience or to avoid bank transaction costs. The cash is deposited at some point in the supply chain and transactions can be traced through invoices and accounts. There is no intent to avoid detection, nor is the cash used to facilitate criminal activity”[9].  Paragraph 2.10 above addressed the issue of bank transaction costs.  With respect to CPA Australia it cannot make a broad brushed claim that ALL businesses record all cash they receive and that all of it can be traced through invoices and accounts.  Many members of CPA Australia, other accounting bodies, ATO auditors and police officers engaged in money laundering and civil forfeiture investigations would disagree with that statement. And claiming that the cash is not used to facilitate crime is naïve. One of the oldest money laundering methods is the co-mingling of funds technique[10]. It involves mixing the proceeds of crime with the cash takings from legitimate business activity.  Though in some cases, all the recorded revenue is the proceeds of crime as the business is a front and not trading or not trading successfully.    In Australia, the co-mingling of funds technique is used extensively by criminals in various industries including the agricultural sector, scrap metal businesses, second hand vehicle and car part sales, car rental businesses, money remittance, laundromats, carparks, hotels, clubs and pubs, construction sector, service industries, restaurants and fast food outlets.  In relation to the capture of revenue by cash based businesses in Australia and their use by criminals to launder money, the claim by CPA Australia is not supported by evidence.

3.       Advice on the Draft Legislation

3.1     Generally, the measures outlined in the Currency (Restrictions on the Use of Cash) Bill 2019 are sound, subject to the proposed amendments in paragraph 3.2.  The move by the Commonwealth Government is consistent with measures implemented by other countries to combat tax evasion, corruption, money laundering and terrorism financing. 

3.2     Though in support of the objective of the bill, other options that should be implemented in the future are briefly outlined below.

3.2     In relation to the bill, the following amendments are recommended:

3.2.1   Persons who attempt to defeat the cash limit requirements of the Bill by undertaking a series of transactions of less than $10,000 engage in similar activity to what is known as “structuring”.  The AML/CTF Act provides an offence for those who structure transactions to defeat the reporting provisions[11].  Any new offences in the bill relating to similar activity should to the extent where relevant mirror section 142.

3.2.2   Cash is untraceable.  And it is a myth that following the money will lead to a crime[12]. Implementation of the Bill will drive criminals including tax avoiders to use different methods to achieve the same results that they currently obtain using only cash.  In relation to transactions of $10,000 or more, the simplest methods involve combining the use of cash with other payment instruments when undertaking a transaction or a series of transactions for the same supply. The combining of cash with other payment instruments are common money laundering and tax evasion techniques. Usual assets acquired using a combination of cash and bank cheques have included cars, houses and boats.  To be successful, all that criminals needs to do is to acquire payment instruments under the cash reporting limit of $10,000.  That would prevent a reporting entity from sending a Threshold Transaction Report to AUSTRAC.  Typical payment instruments include a bank cheque, money order, credit card or a prepaid debit card. Bank cheques and money orders can easily be obtained from multiple locations thereby reducing the risk of detection and reporting as a suspicious matter by a reporting entity.  And to further reduce the risk of detection; all payment instruments can be obtained using third parties or nominees.  Welfare recipients; new immigrants; tourists; refugees; local and foreign students; family and friends; employees and business associates are common third parties used to acquire non-cash payment instruments.  As cash is untraceable, the Senate should consider examining and recommending the introduction of a mandatory reporting scheme similar perhaps to the cash reporting or form 8300 reporting as is it known in the United States; where a business is required to report to the Internal Revenue Service any transaction involving the use of cash and cheques in a transaction that equals or exceeds $10,000 in value.

3.2.3   Referring to 3.2.2 above, an alternative measure would be to expand the current Anti-Money Laundering & Counter-Terrorism Financing framework in Australia. This would require the inclusion not only of the entities that are not currently captured by the scheme as required by international standards[13] which Australia claims to have adopted; but also, major activities of high risk for money laundering, terrorism financing and tax evasion.  The latter are already captured by several countries which have more expansive AML/CTF frameworks than Australia[14].  Implementing the recommendation outlined will negate the need to develop a new reporting framework outlined in 3.2.2 above.

4.       Rebutting the Low Regulatory Cost Myth

4.1     The explanatory memorandum (EM) states that the regulatory costs are estimated to be minor.  And then refers to the cost implications for business. What the EM is referring to in relation to business is compliance cost not regulatory cost which must be borne by Government authorities.  As is frequently the case, the Federal Government introduces new laws and fails to equip the agencies responsible for enforcing them with the necessary resources.  And where it does provide the resources, the application of efficiency dividends renders the programme/s inefficient and ineffective.

4.2     The Senate should recommend that the Federal Government provides the resources to the responsible agency, namely the Australian Taxation Office to enable it to educate the public in relation to the new measures and to implement the new laws effectively.  And that the resources allocated are exempt from any current or future efficiency dividend/s.

5.       Future Directions

5.1     The proposed bill is an important and appropriate step in the right direction to combat illegal activity and tax evasion.  However, the Senate should also consider in the near future, the abolition of cash in Australia.  With Australia’s current banking and payment systems, and the technology that is available there is no reason why any person or business has a need to use cash. Even in Australia’s remotest areas, payment could be and is made electronically. 

5.2     Australia was an early leader in payment system development but that has now declined as a result of poor political leadership.  The type of poor political leadership which is on display in relation to the Bill.  For example: The Octopus mass transit card which is used in Hong Kong on buses, ferries, trains and trams.  The system was designed by Australia-based company ERG Ltd[15].  The Octopus card is a e-usable contactless stored value smart card for making electronic payments in online or offline systems. ERG Ltd was selected in 1994 to develop and install the Octopus system. The card is one of the most advanced store value card payment systems in the world and in addition to being used on public transport it is used in fast food restaurants; supermarkets; vending machines; convenience stores; parking metres; car parks and other retail businesses where frequent small payments are made. 

5.3     Unfortunately, no Australian state or territory government chose the Octopus card when each of them upgraded their fare payment system[16].  If all Governments had chosen Octopus, then in Australia we would have had a national store value card upon which a national non-cash payment system could have been built[17].  Now Hong Kong promotes the Octopus as being “its payment card” when it was an Australian invention.

5.4     Opponents will argue that older and poorer people and those living in remote areas will not be able to use it.  Those arguments are too broad, should be dismissed as a result and give those Australians little credit for ability.  Many of those Australians already use electronic cards and/or grew up during the “Bankcard era”. And the technology is easy to use.   

5.5     In the near future, there will be moves by the Australian Government to abolish the 5 cent piece or perhaps all coins below $1 in value.  Let’s not have another senseless time consuming discussion about it.  It is a minor issue.  All coins and notes can be and should be replaced.   Australia has the technical ability to go cashless.  It just needs political leaders with the courage to drive it. 

6.       Conclusion

6.1     The measures contained in the Bill are an appropriate response to the loss of revenue in the black economy.  However, additional measures as outlined above should be implemented to prevent criminals including tax evaders from achieving the same objectives but by using different payment methods in association with cash.

Chris Douglas, APM

Director

Malkara Consulting Pty Ltd

Perth, Western Australia

15 November 2019

[1] https://www.treasury.gov.au/consultation/c2019-t395788

[2] https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Economics/CurrencyCashBill2019

[3] Though if a person is seeking to avoid their taxation obligations, which the bill is trying to prevent, then avoidance of the banking system is a necessary component of tax evasion.

[4] https://www.worldbank.org/en/topic/financialinclusion

[5] https://www.abc.net.au/news/2019-10-25/cash-ban-law-under-inqury-post-mp-concerns-on-freedom-breach/11640124

[6] Section 43 of the Anti-Money Laundering & Counter-Terrorism Financing Act 2006 refers.

[7] https://www.bankingday.com/nl06_news_selected.php?selkey=25416

[8] Banks in some countries charge customers a fee for cash deposits.  It is recognition of the cost involved by a bank in having to handle and store cash.

[9] https://www.cpaaustralia.com.au/-/media/corporate/allfiles/document/media/submissions/taxation/restrictions-cash-bill.pdf?la=en&rev=cf7c6e5e1b5742309726ca6620447cf3

[10] Also known as Blending.  The term money laundering is derived from the 1920s in the USA where the proceeds of gambling, prostitution and sale of alcohol during the Prohibition era were mixed or hidden in revenue derived from laundromats. 

[11] Section 142 refers.

[12] There is probably only one case in modern criminal history where following cash found in possession of criminals lead to the commission of other offences and that was the Watergate Scandal.  In that case, the men caught breaking into the Watergate Building were each found in possession of brand new $100 notes.  At that time in the USA, banks recorded the serial numbers and names of customers who were issued with $100 bank notes. Authorities were able to trace the notes to the bank who issued them, which identified the relevant customer, who provided evidence that he had obtained the money and given it to the committee to re-elect President Nixon. Today when law enforcement authorities refer to following the money, they are referring to the use of indirect methods of proof to establish that a person has benefited from crime for example Net Worth Analysis (also known as the Asset Betterment Method or Unexplained Wealth).  NWA was first used during the investigations by Treasury agents into Al Capone and others in the late 1920s.

[13] Lawyers, accountants, real estate agents and jewellers.  The Senate should note that some bodies representing these entities have already commented on the current Bill and expressed their opposition to it and have expressed opposition to being captured by the AML/CFT Act 2006.

[14] Australia is a member of the Financial Action Task Force and as a member it is required to show leadership.  It is failed and continues to fail by not implementing international AML/CTF standards.

[15] ERG Ltd no longer exists but sold all operating assets to Vix Technology https://vixtechnology.com/

[16] Though the NSW Opal system is similar to it.

[17] In Australia there are no stored value cards issued by financial institutions.  Cards that are referred to as store value cards contain no value.  They are prepaid cards.  Referring to those cards as stored value or references to “topping them up” etc are marketing techniques.

Australian Journalists Risk Money Laundering Charge

Raids by the Australian Federal Police (AFP) on the Canberra home of Ms Annika Smethurst and the Sydney Headquarters of the Australian Broadcasting Corporation (ABC) have sparked an outcry from journalists, the organisations impacted upon and politicians.  In both cases, which the AFP has stated are not connected, concern the investigation into the leaking of information from the Commonwealth.  Concerns have been expressed about the AFP searching a private home and workplaces occupied by journalists and the need for their sources to be protected.  I wonder, if the AFP was searching for the source of a leak involving the unlawful disclosure of private tax records, social security information or Medicare data pertaining to those journalists and politicians, would their outcry and demand for answers be as strong?  I highly doubt it.

Information held by the Commonwealth Government is owned by the Government and it has an obligation to protect it from unlawful disclosure and misuse. Journalists and politicians cannot have it both ways.  There cannot be two investigative approaches and two standards pertaining to the unlawful release of information.  The person/s involved in the leaks must be found.  From a national security perspective, those involved in the leaking would be potential targets for foreign espionage and criminal cultivation.  If a vigorous pursuit of those involved in not undertaken then other potential leakers would be motivated to unlawfully release information.  And what will be the next leak?  The characteristics and capability of our new Attack class submarines? And if that occurred, would senator Rex Patrick from the Centre Alliance claim that any journalist involved in publishing the classified information, was simply performing their public duty?

In relation to the AFP raid on Annika Smethurst's home, the police were seeking the source of a leak of national security information pertaining to a story she wrote in April 2018. According to media reports, the story written by Ms Smethurst included photographs of government documents. While the ABC raid relates to a series of stories known as the Afghan Files which were broadcast in 2017.  The stories revealed allegations of unlawful killings and misconduct by Australian special forces in Afghanistan and were reportedly based on hundreds of pages of secret Department of Defence documents leaked to the ABC.

Commentary has revolved around the right of journalists to protect their sources.  This article does not address that issue.  Missing from the arguments is the potential criminal liability that could arise to the journalists themselves, their managers and their respective media organisations by their direct or indirect handling of stolen or unlawfully obtained Commonwealth information. Mr David Anderson, managing director of the ABC has been quoted as saying the broadcaster will stand by its journalists and will protect its sources.  Well, if he had knowledge of the nature of the information, as opposed to the source, then a question might arise as to who is going to protect him and the ABC? Because as I will outline below, the issue could easily be about the journalists and their managers and not entirely about the sources involved.

 According to the ABC, Mr Porter the Commonwealth Attorney-General has stated that: "The investigation is not about the journalist per se. It's about the disclosure of information." But potentially it could be.  Under Commonwealth Law an employee of the Commonwealth Government can be convicted of an indictable offence if he or she unlawfully discloses information.  And any person can be convicted of stealing intangible property, which includes information, belonging to the Commonwealth.  There is a Commonwealth offence for receiving stolen property and that offence could be applied to any person receiving intangible property stolen from the Commonwealth.  But no similar offence applies to a person who receives information that has been unlawfully provided by a Commonwealth officer or former Commonwealth officer.  In relation to the offence of stealing Commonwealth property, namely the information, any journalist who received it or handled it, would be in no different position to any person who receives stolen tangible goods.

A little known provision in Commonwealth Criminal Law that is relevant in this argument is the money laundering provisions contained Division 400 of the Criminal Code Act.  The provisions are very broad and have extra territorial reach.  While referred to as money laundering, a more accurate description would be property laundering.

A person commits money laundering if he or she directly or indirectly, deals with money or other property that is either proceeds of crime or an instrument of crime.  Proceeds of crime means any money or other property that is wholly or partly derived or realised, directly or indirectly, by any person from the commission of an indictable offence against a law of the Commonwealth, a State, a Territory or a foreign country.  The Commonwealth offence of receiving stolen property and the unlawful release of Commonwealth information by a serving or former Commonwealth employee would be captured by the term Commonwealth indictable offence. Property under the money laundering provision includes intangible property.  Information held by the Commonwealth, regardless of its security classification, would be intangible property.  This would include the classified documents received and held allegedly by Ms Smethurst and ABC journalists Mr Dan Oakes and Mr Sam Clark.  And it does not have to have been communicated or given to them directly by the person who stole the information or who released it unlawfully.  The act would apply if it was conveyed somehow to them by a third party, no matter where in the world they are located. 

Dealing in money or other property can be undertaken many ways, but for the purposes of this issue, it includes receiving, possessing or concealing of property.  It is a matter for a court to decide if the provision has been satisfied by a course of action.  However, the handling of an envelope or storage device containing classified documents or receipt of an email etc might constitute receiving.  Uploading of the material to another device, computer or the cloud would amount to possessing the items and if the information was later encrypted or password protected or both by a journalist, then those actions might amount to an act of concealment. 

Commonwealth money laundering law has three levels of mental complicity. To satisfy the mental element, a person must have had full knowledge of the facts or was reckless or negligent at the time they were involved in the dealing.  All of these elements would be easy to prove if the documents in question contained security classifications.  The presence of which would alert any prudent journalist that the person releasing the information to them, would not be entitled to do so.  And it is important to note, that the prosecution does not have to prove that the journalist knew if the stolen or unlawfully released information related to a Commonwealth, State, Territory or foreign indictable offence.  The crown only needs to prove that the act of releasing the information was a crime.

There also exists in the money laundering provisions two offences where the prosecution does not have to prove a mental element.  A journalist could be convicted of dealing in property that is “reasonably suspected of being the proceeds of crime”.  Reasonable suspicion would be established by the presence of a security classification supported by other marks for example: name of the department involved.

To ground a money laundering charge, a value for the property must be established, including the provision dealing with reasonable suspicion.  However, Commonwealth money laundering law enables a charge to be laid where the property in question is “any value”.  That section does not apply to the reasonable suspicion provision.  Even a hard copy of a photograph or a printed report has extrinsic value, albeit if it is minor.  Though the prosecutor might argue that the intrinsic value of the documents was far greater and attempt to assign a higher value which would result in a person being charged with a money laundering offence that carries a higher penalty. 

But where assigning a value to proceeds of crime was not possible, an instrument of crime includes any money or property used in the commission of an indictable offence or used to facilitate an indictable offence.  Mobile telephones, laptops, computers, storage devices, etc used by journalists and media organisations to receive, store, communicate and publish stolen or unlawfully obtained Commonwealth information would be instruments of crime.  Any vehicle used by a journalist to meet with any person considering communicating information obtained unlawfully or to receive such information would be an instrument of crime.  A journalist could be prosecuted for money laundering if any of the equipment was used by them to possess or to receive or conceal information stolen or unlawfully obtained from the Commonwealth.

While managers and chief executive officers of media organisations, who are not directly involved in the dealing of proceeds of crime or an instrument of crime could not be charged with money laundering.  They could be liable for aiding and abetting the receiving of stolen property or aiding and abetting money laundering if they had knowledge of the facts or were reckless or negligent, and provided assistance in relation to the dealing in the property.  While not suggesting in any way that Mr Gaven Morris, the ABC’s director of News, was involved in any criminal activity, it is worth noting that the AFP chose to name him in the search warrant.              

Any decision to prosecute any person for money laundering vests in the Office of the Commonwealth Director of Public Prosecutions.  And it is probably unlikely the AFP would consider pursuing any journalist for money laundering or for receiving stolen Commonwealth property.  However, journalists and their managers need to be aware that the Commonwealth has many options available to it, to pursue matters involving the theft or unlawful disclosure of Commonwealth information.  A major function of the AFP is to “safeguard Commonwealth interests”.  It would be a mistake to under estimate the extent the AFP would go to lawfully, to protect those interests.

Chris Douglas is a Director at Malkara Consulting Pty Ltd in Australia. He is a former member of the Australian Federal Police (AFP) for 31 years. Whilst there, he was involved in drug trafficking, people smuggling, human trafficking, corruption, organised crime and fraud investigations. His extensive experience in the investigation of money laundering and in the conduct of conviction based and civil forfeiture based investigations. His experience with investigating money laundering schemes pre-dates the introduction of AML/CTF legislation in Australia.

Coalition's proposed anti-corruption body flawed and weak, police veteran warns

A recent article published in The Guardian in April written by Chris Douglas.

Australia’s Submarine Program: A Failure in Anti-Corruption Due Diligence?

Australia is embarking on a naval building program, the largest undertaken since the Second World War. A significant aspect of that building program is the replacement of the current Collins class submarines, known as the Future Submarine Program (or Project SEA1000). The estimated cost of building 12 new diesel electric submarines is $50 billion, not including the combat system.

On 20 February 2015, the Australian Government announced that a competitive evaluation process (CEP) would be undertaken involving design concepts submitted by 3 submarine manufacturers namely; Direction de Constructions Navales Services (DCNS) of France; ThyssenKrupp Marine Systems GmbH (TKMS) of Germany and Mitsubishi of Japan. On 26 April 2016, the Australian Government announced that DCNS had been selected as the preferred partner to build the submarines.

DCNS is now known as the Naval Group. It was previously DCN. Since 1997, DCNS has been involved in 5 major corruption scandals. Three of these events were known before the company was selected to design Australia’s submarines and two have come to notice since it was selected. Four of the incidents involve the supply of submarines or frigates to Taiwan, Pakistan, Malaysia and Brazil and the loss of information pertaining to the submarines the company is building in India. DCNS has denied any wrongdoing, but too many incidents have occurred to be ignored, and further information should be sought by the Australian Government about them and appropriate anti-corruption measures applied. But have they?

A Call for a Senate Enquiry into the Australian Federal Police Cuckoo Smurfing Strategy.

The Australian Federal Police (AFP) has been investigating a money laundering technique known as Cuckoo Smurfing for almost 20 years. It is a technique which involves criminal groups intercepting the transfer of lawful funds to Australia and substituting that money in Australia, with money derived from crime, mainly drug trafficking. 

Valuable intelligence has been collected over the years from investigating syndicates using the cuckoo smurfing technique. Significant drug busts were made as a result. But in 2014, the AFP changed its strategy. The agency shifted its focus away from targeting organised criminal activity and towards innocent victims of cuckoo smurfing. This action by the AFP continues to this day. This civil forfeiture action by the AFP has resulted in innocent people having to explain the source of their funds in court. 

There are currently at least 20 cases that is before the Australian courts involving innocent people from various backgrounds, such as those sending money to their children studying here. 

This issue should not be left to the courts to determine as the principal legislation involved, the Proceeds of Crime Act contains inadequate third-party protection mechanisms. Parliament intended that agencies involved in the enforcement of the Proceeds of Crime Act discharge their duties responsibly. This is not happening. Malkara Consulting calls for an inquiry by the Australian Senate into AFP forfeiture operations generally, including its handling of cuckoo smurfing cases and strategy to combat organised crime using civil forfeiture legislation. Holding a Senate inquiry will enable all interested and affected parties to make submissions and be heard on this important issue relating to human rights in Australia.

What Does the UK Bribery Act Mean to You?

Globalisation has created enormous opportunities for businesses and people to trade in goods and services on a scale previously unknown in human history.  The development and growth of transport, logistics and payment systems enable firms to reach customers anywhere in the world and receive payment securely and easily. Technology enables organisations to reach markets without having to have a physical footprint in them.

British firms have driven the growth of globalisation since the invention of the steam engine.  And today, UK commercial organisations compete successfully in many global industries, including banking and finance, insurance, manufacturing, mining, aerospace and defence, shipping and logistics.  British companies and citizens can be found in every country.  And they are not just engaging in commercial activities.  The UK plays a major role in providing humanitarian aid particularly in Africa either alone or in conjunction with other international bodies for example, the United Nations and European Union. 

And if the citizens of the UK are not working for home grown firms and organisations, they will be employed by foreign entities in a variety of roles.  In Singapore, UK citizens can be found working in all sectors of the economy.  While the British empire no longer exists, British influence around the globe is perhaps stronger than it has ever been.    

The environment in which British firms and UK citizens operate is very competitive.  And unfortunately, it is not a level playing field.  When competitors cannot compete equally on quality and price, some of them resort to bribery and corruption to win contracts.  Denying profits and growth opportunities to UK firms that comply with the law and do not resort to criminal acts to succeed.

The actions of foreign firms who engage in bribery to secure a commercial advantage, places pressure on UK firms to follow suit.  And unfortunately, several British firms have been caught committing bribery to win contracts. 

Many unscrupulous companies know that most developing countries and authoritarian regimes have weak or poor systems of governance compared to advanced countries.  And they take advantage of them.  Organisations and individuals who engage in foreign bribery and corruption contribute to the theft of funds from Governments and their people who can least afford it. Bribe payments made by an organisation are often recovered by increasing the price of the goods or services it provides. Every dollar paid by a foreign government for over priced goods and service is one less dollar available to be spent on the health care, education and public safety.  Any organisation or person who engages in foreign bribery is responsible for the growth in human misery and suffering it causes, particularly amongst the poor and children. 

Preventing bribery and corruption is not just the responsibility of Governments and organisations.  Governments can only do so much.  And there is a limit to the measures that a company or organisation can implement to prevent itself from engaging in bribery and from becoming a victim itself from corruption.  Everyone has a responsibility to combat corruption.  It is the decent and right thing to do.  And all members of humanity are impacted in some way by corruption.  We all want clean air.  Clean water.  Clean Food.  And a safe and secure environment to live in and raise our families.  Corruption has denied these essential rights to billions of people on the planet and left unchecked will also impact on developed countries as well.  It already is in many parts of the developed world.  The migration of people from Africa, the Middle East and Asia is not due entirely to war.  Corruption resulting in the deterioration of essential services and a loss of opportunities has forced people to seek opportunities in developed countries.  These people must move to survive.  They have no other alternative.  It is the visible human cost of corruption.

The risk to any organisation of being caught in a corruption scandal is ever present regardless of the local and foreign environment they operate or interact with, or the ABC risk management plan that is in place. Corruption does not discriminate, it can affect anyone anywhere, including in jurisdictions which are considered to have low corruption.

Within organisations, preventing bribery and corruption is not just the responsibility of the board and the Chief Executive Officer.  While they ultimately are accountable for the actions of their company, it is the duty of every person at every level in an organisation to prevent bribery and corruption. It does not fall solely on the shoulders of staff working in an anti-bribery & corruption role. They can only advise, assist and monitor compliance against existing guidelines of an anti-bribery corruption management plan.  But they cannot do it alone and it cannot be done effectively without everyone having ownership and every person in the organisation playing their part.  Every person needs to be a manager and a leader in combating corruption regardless of their role in an organisation.

And it should not stop there.  Organisations no tolerance for bribery and corruption need to extend to contractors and all third parties engaged by it.  Illegal acts involving corruption by contractors and third parties can and do bind a company particularly in relation to foreign bribery.   

But it’s not just the risk of corruption occurring by staff and contractors of an organisation.  An organisation itself can be a target of corruption. Organised crime and competitors will seek to steal trade data and client information by bribing staff and contractors engaged to service or operate a company’s services or equipment.

Corrupt staff and contractors have caused significant loss and reputational damage to organisations via the theft of data and trade secrets.  Having greater knowledge in preventing corruption that goes beyond mere awareness is an attribute being demanded by organisations today. 

While, those firms operating in the defence, financial and telecommunications industries face the threat from foreign intelligence services who are sanctioned by their governments to undertake bribery and corruption to obtain sensitive information of value to their defence.  Foreign intelligence agencies that employ corruption techniques (particularly grooming), to identify vulnerable staff and contractors so as to corrupt them and obtain information.  In other words, no amount of due diligence conducted on staff, third parties and organisations can completely safeguard an organisation from the threat of organised crime, competitors or foreign governments.

In response to international criticism of UK handling of foreign bribery cases, the UK Government passed the UK Bribery Act on 1 July 2010.  The Act modernised the law on bribery in the UK.  And today, the UK Bribery Act is regarded as setting the gold standard in preventing foreign bribery and corruption.  So, what does the UK Bribery Act mean to you?  Other than containing several offences to prosecute those who commit bribery, it represents a clear statement from the UK Government that it will not tolerate bribery being committed by UK companies, firms or citizens.  It is in a way a statutory code of conduct which has a wide reach beyond the UK.

The Bribery Act has near global jurisdiction applying to a body which is incorporated under the law of any part of the United Kingdom and which carries on a business there or elsewhere. The Act is unique amongst global anti-foreign bribery law in that it does not distinguish between bribery and facilitation payments large or small.

However, the most important aspect of the Bribery Act which is designed to prevent UK firms from engaging in foreign corruption is the offence of bribing a foreign government official and the offence of failure by a commercial organisation to prevent bribery.  The Act establishes liability for UK companies for acts of corruption committed by persons acting on behalf of the company, for example by an employee, agent or subsidiary. This means that a UK firm could be held liable for the offence of bribing a foreign government official where the act of bribery is committed by a subsidiary, an agent of the organisation or an employee.  This could have very serious consequences for any UK commercial organisation operating in countries with weak governance. 

However, with modern day communication systems, payment methods and logistic networks, a UK commercial organisation could engage in acts of foreign bribery from anywhere in the world including in the UK or in Singapore for example.  The organisation does not have to be operating in a weak foreign jurisdiction to commit the act of bribery.  Inducements could be communicated by email to a foreign government official, accepted by text message and the bribe paid into an account held by a company controlled by a related third party in a secrecy jurisdiction. 

Knowing that it is almost impossible for any organisation to completely prevent bribery being committed “in its name”, the Act has on offer a defence for commercial organisations who have been charged with the offence of failing to prevent bribery.  Under the Bribery Act, a commercial organisation has a defence available to it if it can prove it had ‘adequate procedures’ to prevent a bribe being paid on its behalf.

The Act requires the UK Secretary of State to publish guidance about procedures that is relevant to the offence.  Advice on what might constitute an adequate procedure can be found on the Ministry for Justice webpage.  But in the end, what constitutes an adequate procedure/s is a matter for a UK court.  A commercial organisation operating offshore either directly, with a physical presence in a country or indirectly using e-commerce systems, cannot afford to be complacent about the procedures it has put in place to prevent foreign bribery.  Prevention of bribery, like any crime requires ongoing monitoring and due diligence.  And when it comes mounting a legal defence to a charge of failing to prevent bribery, how many adequate procedures are enough to prevent a jury reaching a verdict of GUILTY?

A commercial organisation could target harden itself from being both a perpetrator and a victim of bribery, by implementing measures that go beyond what is recommended by the UK Ministry of Justice.  Training staff in how to recognise a bribe, particularly a bribe concealed in a complex web of transactions routed through various international business companies and in grooming techniques used by criminals and foreign intelligence agencies would be just some additional measures it could implement.  Another important measure would be to implement International Standard ISO37001 Anti-Bribery Management Systems.  The introduction of ISO37001 in 2016 was an important milestone in the prevention of corruption globally and should be considered by all UK commercial organisations building adequate procedures into their anti-bribery and corruption risk management plans.

Malkara Consulting will be delivering a workshop designed to meet the needs of UK companies, who are covered by the UK Bribery Act.  The prime focus of the workshop is the defence provision of “adequate procedures” available under the UK Bribery Act to the offence by commercial organisations of failing to prevent bribery.  The workshop will outline advice published by the UK Government on what is meant by adequate procedures but supplement that information with practical recommendations on bribery prevention gained from extensive experience operating in high risk situations and high-risk markets. The Act will be briefly explained and its provisions mapped against the adequate procedures advice issued by the UK Government to identify where they can enhance an organisation’s anti-bribery & corruption risk management plan.   

Singapore Must Embrace Asia Africa Growth Corridor

It has been almost a year since the joint declaration by Prime Minister Narendra Modi of India and Prime Minister Shinzo Abe of Japan of the Asia Africa Growth Corridor (AAGC) initiative.  The AAGC is still only a concept and the vision statement underpinning the initiative advises that it will evolve in time as various stakeholders in Asia and Africa are consulted.  But does that mean that Singapore businesses should wait to be consulted on opportunities in Africa?  Clearly not, unless they want to be left behind.

The AAGC will be based on the four pillars of:

1.    Development and Cooperation Projects

2.    Quality Infrastructure and Institutional Connectivity

3.    Enhancing Capacities and Skills

4.    People-to-People partnership, with this pillar being unique amongst the others.

In each of these categories Singapore could be a significant contributing player and a substantial benefactor from two-way trade between the city state and African countries.

Areas where Singapore enjoys a global competitive advantage include health and medical, logistics and transport management and infrastructure development; air and sea transport, manufacturing, electronics, banking and finance, commodity trading and education.  Yet during my travels in parts of Africa, I have struggled to find a solitary footprint of Singapore’s presence on the continent.  And question is why is that the case?

Research by Malkara Consulting Singapore has revealed a reluctance by Singapore business to invest in Africa, or even consider undertaking an investment mission to any part of the continent.  Common grounds expressed by Singapore businesses surveyed include high levels of corruption, poor governance and the weak rule of law.  And while many countries in Africa have some if not all those issues to tackle, it would be wrong to conclude that they are all the same or that they are insurmountable.  And it would be equally incorrect to assume that investment opportunities in some industries cannot be found.

The performance of African countries varies significantly.  They can range from low corruption and well governed small Botswana located in Southern Africa to Nigeria, the largest economy in Africa, which has governance issues at a Federal and State level and weak infrastructure.  Both countries despite the variance in governance and economic size offer investment opportunities.  Botswana is land locked and is positioning itself as a southern transport and logistics hub.  While Nigeria derives substantial wealth from international trade and has a requirement for new and improved ports. Both have a legal system similar to Singapore, which is grounded on English common law.  Botswana’s story is almost the same as Singapore’s.  It has had a stable democratically elected government since becoming independent in 1966.  At that time, the country had only one sealed road and was not expected to survive economically.  But its leaders and people proved the critics wrong.  Now it is thriving with evidence of sound economic management being found in the new CBD and nearby major shopping centres. Both Nigeria and Botswana would benefit from greater engagement with Singapore and the island state would benefit from trade with them.

African countries have a growing middle class, low by Asian standards, and a very young tech savvy population.  While some international companies have not performed well in Africa, this has primarily been due to an overestimation of the size and spending habits of the consumer class and a poor understanding of local markets.    Poor results obtained by some international companies in boutique market segments should not deter investors in others.  

There is money in Africa.  African pension funds alone have over $700 billion invested in Western banks, while African central governments have invested over $600 billion in foreign reserves offshore.  To tap those markets, Singapore banks, insurance firms and investment and advisory companies need a presence on the continent. And the physical evidence of wealth is not hard to find either.  Earlier this year, I was driving from Francistown to Gaborone, the Capital of Botswana.  On the way, I was overtaken by one hundred plus white colour top of the range Mercedes, Audi’s and BMWs.

Large Singapore companies with an international focus, that are competing in saturated markets with reducing margins, perhaps should consider newer markets in emerging economies. Land travel within Africa is difficult and in places dangerous and consequently most people and freight move by air.  Singapore Airlines and its low-cost airline Scoot should explore the development of a hub in Africa that mirror its successful operations in Singapore.

But it is in shipping, transport and logistics where Singapore enjoys a significant advantage. Other foreign competitors are considering developing ports on the East coast of Africa.  Unless Singapore port operators move quickly they could be locked out.  Nigeria like many African countries needs new ports not just to move oil, but also general cargo. Singapore technology, management skill and development expertise would give it a competitive edge over other countries seeking to invest in Nigeria and other emerging markets such as Kenya and Ghana. While Nigeria has the largest economy in Africa now, it has not yet even started to reach its potential.  There is significant room for growth.  And Singapore companies would be unwise to ignore it.

But the AAGC initiative is not just available for large international companies.  Malkara Consulting encourages small to medium companies to consider exploring opportunities in Africa.  Young Singapore entrepreneurs building a new start up could test and hone their business skills by being in Africa.  Whether successful or not, young business people learn and develop more quickly operating in challenging multi-cultural markets that are different to where they were schooled and trained.

Business risk in Africa is higher than in Singapore but risks can be mitigated.  Malkara Consulting advises clients to start small and undertake appropriate due diligence.  In other words, do your homework.  But doing nothing is not a business strategy.  If Singapore businesses want to be part of the AAGC initiative then they need to start planning now.  And that starts with finding appropriate local and international partners who can assist in the business transition to the growing opportunities that await them on the African continent.

More information 

• 2017 Japan commited USD$200 billion to the proposed growth corridor
• 2017 Africa Economic Outlook, China consumed 27% of Africa total global export USD$327.7 billion
• 2016 Africa export, contributed only 2.1% (USD$ 327.7 billion) of world export of USD$ 15.862 trillion
• 2016 Africa GDP USD$ 6.027 trillion, at 1.138 billion population, export consist of 5.4% of total economic output at USD$288 per capita. 
• 2014-2015, Africa contributed USD$71.65 billion (9.4%) of India's total trade USD$758 billion  

Reference
http://www.vifindia.org/article/2017/june/05/asia-africa-growth-corridor-can-it-be-a-game-changer

https://www.tralac.org/news/article/8371-africa-india-facts-and-figures-2015.html

https://www.tralac.org/images/docs/8371/africa-india-facts--figures-2015-uneca-cii.pdf

https://www.afdb.org/fileadmin/uploads/afdb/Documents/Publications/AEO_2017_Report_Full_English.pdf

http://www.worldstopexports.com/top-african-export-countries/

Corruption Threat: Foreign Intelligence

It is the experience of Malkara Consulting that when discussing corruption with clients or colleagues, they regard the crime as being solely committed by organisations or individuals against other organisations or governments.  They have never viewed it as being an act committed by Governments against organisations and other governments.  Government arms involved in state sanctioned corruption usually include police and intelligence agencies. 

When Malkara Consulting examined the anti-bribery and corruption program of a client recently, we were surprised and in some instances shocked, at their poor level of understanding about the threat posed by intelligence agencies. 

The ultimate target of an intelligence agency is information.  And in this information age, data is power. And the loss of it can have serious consequences for an organisation.  Private sector organisations are a treasure trove of information that competitors and governments strive to get their hands on.  Foreign intelligence services know that the political and military opponents of their country use private services to operate.  They shop, they travel and they use financial services.   And in doing so, provide important data about themselves, their family members and any business they operate in, to a private organisation. 

And it is not just personal data that a foreign intelligence agency seeks.  Industrial spying is carried out on a significant scale by governments against the private sector.  The theft of industrial, scientific and commercial information enables countries to grow and remain competitive.  Successful Government intelligence agencies who have stolen important information provide it to companies in their country to enable those organisations to retain or acquire a competitive edge.

Organisations use a variety of techniques to protect their information much of it is technology based.  But they ignore the single biggest weakness in any defences against corruption undertaken by any entity and that is people. 

Readers would recall the 2007 theft of client name information by Sina Lapour, from Credit Suisse, which he provided to the German tax office via a middle man.  Or Heinrich Kieber, who stole thousands of customer files from LGT Group, a Liechtenstein bank and sold it to the BND, Germany’s intelligence service.

While the banks involved and other financial institutions have tightened their staff selection and deployment processes, with only entrusting long serving employees with sensitive customer information, other financial and non-financial institutions have not. 

Outsourcing of services to third party providers increases the risk of penetration by foreign intelligence services.  The most common service outsourced is IT, security and in some instances the human resource portfolio.  The services are often provided by foreign companies.  When assessing the risk of one client, we were alarmed at how employees of a contractor who had responsibility for maintaining the IT system; were allowed free unrestricted unsupervised access to most areas. The IT firm involved had been linked to working with a foreign intelligence service. 

Every bit of data helps a foreign intelligence service advance its objectives.  All the pieces matter in the intelligence collection game.  Once they discover a vulnerability, it is exploited.  And if the vulnerability is a person, then they will use a variety of methods to cultivate that person, including grooming techniques.  All employees, contractors and third-party providers are vulnerable if they are not trained in how to identify if they are being groomed and the threat posed by foreign intelligence organisations.

Information gathering operations undertaken by an intelligence agency are sanctioned by the Government owning it and given legislative protection.  For example, the UK Bribery Act which is the international standard setter in anti-bribery and corruption law, contains a provision protecting its intelligence service and those who work for it.  Under Section 13 of that Act, it is a defence to a bribery offence if that person establishes that their conduct was necessary for the proper exercise of any function of an intelligence service.  The Act applies to any person or organisation that has a close connection with the UK. 

The question therefore, is how many UK citizens working in the banking, insurance, logistics and shipping industries in offshore jurisdictions such as Hong Kong, Dubai or Singapore are working for MI6?  The UK Bribery Act protects them from prosecution at least under UK law; while they undertake espionage on behalf of the UK Government.  And how many foreign citizens working around the world in commerce, trade, financial sector or education and research, work for a foreign intelligence service? If they are, they are engaging in corruption and violating local anti-bribery and corruption laws.

Recruiting expatriates in offshore jurisdictions to undertake spying activities, a form of internal corruption if used against their employer or client is easier to achieve than corrupting a local person.

Organisations employing foreign residents or foreign companies, whose loyalty lies with a foreign country, need to have enhanced know-your employee/contractor procedures in place, otherwise sensitive information is vulnerable to exploitation.   

Malkara Consulting is holding a 2 day workshop in Singapore on 16 and 17 of October 2017 to arm equip people and organisations and individuals on how to protect reduce their susceptibility vulnerability to bribery and corruption. The workshopis  will offer greater protection than any ABC program based on compliance with local and international law can. Go to our events page to find out more.

http://www.malkaraconsulting.com/upcoming-events/2017/8/30/anti-bribery-corruption-workshop-people-are-the-weakest-link

Corruption: It's All About People

Every Anti-Bribery and Corruption risk management plan Malkara has examined, ticks all the right boxes. The programs have been mapped against local and international law, particularly US and UK anti-bribery and corruption legislation.  Advisors who drafted the ABC plan and the managers, have gone to great lengths to ensure that the organisation, their client, does not breach the law. 

But missing from the plans, are measures designed to harden the organisation against corruption.  And while no organisation can totally be protected from corruption, the implementing of an ABC program based on compliance with the law, only provides limited protection.

ABC laws are not effective. ABC programs are often based around assessing the risk that bribery and corruption will occur.  Many ABC advisors are ill-equipped to offer advice to clients on external and internal risks because they have no experience in the investigation of bribery and corruption.  They have no firsthand knowledge or experience in the threat posed by organised crime groups, who use “grooming techniques” to cultivate employees, contractors or third-party providers.  Or techniques used by criminals to recruit from universities high preforming finance students and arrange for them to be placed into financial institutions where after they have been working for several years and become trusted, steal information and or funds.

Financial Crime advisors will design ABC plans for clients based around open source information, for example, quoting Transparency International country rating index.  Countries with a low rating are regarded as being of low risk.  But often forgotten is that the ratings are based on perceptions.  A country that has a robust corruption prosecution framework can be adversely viewed as being corrupt when in fact, its ABC law enforcement strategy is exposing corruption and dealing with it effectively.  While countries that are not even bothering to look, get a low rating.  A low rating of corruption does not mean that corruption does not exist.

An example is Singapore.  It has a low rating for corruption.  But it is masked.  Like almost every country, employees who are caught committing fraud are charged with fraud when their acts also amount to corruption.  And large firms, fearing embarrassment if illegal actions committed by managers and employees are exposed are often simply sacked and no charges are brought.  Meaning there is no public record of the issue occurring.  And therefore, no effective way to assess corruption risk.

It is not uncommon in countries with a low corruption rating, to “recycle” corrupt managers and employees.  Most internal fraud is committed by middle to senior managers.  And if they are dismissed rather than charged criminally with a crime, poor vetting procedures by executive and non-executive recruitment firms, often results in those managers being re-employed in similar or higher roles in other organisations.

Malkara Consulting recently advertised an ABC Workshop to be held in Singapore on 16 and 17 October 2017.  The focus of the workshop is people.  Interestingly was the vast majority of emails received requesting they be unsubscribed from future emails, came from executive hire firms.  And why?  Because they make money on successful placements.  And undertaking vetting of a candidate to expose past corrupt behaviour takes time and costs money. Resulting in less profit for the firm.

Corruption is a major risk even in countries with a low rating of corruption.  Organisations with money and data to protect need to take the risk of corruption seriously and not wait until an incident happens to them. By then it’s too late.  

Corruption undermines internal controls. It is important that employees, contractors and third parties undergo intensive training to ensure that they understand how criminals use grooming techniques, how bribes are paid and how organized crime operates. This will offer greater protection than any ABC program based on compliance with local and international law can.

Malkara Consulting is holding a 2 day workshop in Singapore on 16 and 17 of October 2017 to equip organisations and individuals in identifying and protecting their susceptibility to bribery and corruption. Go to our events page to find out more.

http://www.malkaraconsulting.com/upcoming-events/2017/8/30/anti-bribery-corruption-workshop-people-are-the-weakest-link

Flying with the Enemy: Know Your Passenger

Introduction

This concept paper identifies a significant weakness in security relating to domestic airline travel which could be exploited by terrorists.  And proposes changes to the way in which domestic airline travel is booked and how passengers board domestic aircraft.  The proposals bring domestic travel almost in line with international air travel requirements.

Background

Islamic State and those who support or are aligned with that terrorist organisation, both in Australia and abroad, are becoming more creative in the methods they use and the targets they attack.  Trucks, mini vans and knifes are their simple and effective weapons of choice.  And when deployed by those who are determined to inflict maximum injury and death upon innocent people, they create and spread fear and panic in our community.

And after every attack, our Government and law enforcement leaders assure us that everything that can be done is being done to protect us from a terror attack in Australia.  But it is not. Australia has not to the extent possible identified all potential risks and all examined options to prevent a future terrorist attack.

Risk management models used to identify and assess the risk of a terrorist attack no longer apply.  It is impossible to assess the likelihood of an attack by a group of terrorists or a lone wolf attacker.  And while attacking soft targets such as people walking on a bridge causes fear and destroys life; it does not result in substantial physical damage and economic loss. It does not cause extensive inconvenience to the lives of thousands of people, nor force authorities and private sector companies to commit substantial resources to prevent future attacks.  All of which are primary objectives of terrorist organisations.

Security Weakness in Our Domestic Air Travel        

Terrorist attacks on soft targets should not cause us to become complacent and ignore high risk targets such as airports and air travel. An attack in an airport or aircraft would cause significant harm, damage and alarm within our community.   

Domestic air travel in Australia is vulnerable to the use and exploitation by terrorists.  Suspect terrorists use air travel to meet supporters, attend training and plan an attack.  And if given an opportunity, to commit a terrorist attack on a domestic flight. 

It is an offence in Australia to acquire an air passenger ticket using false identification information and to undertake a domestic flight using an air passenger ticket acquired using false identification information.  However, currently, any person who books a domestic or international flight in Australia is not required to identify themselves at the time of making a booking. 

While an international traveller is required to identify themselves at the time of check in and again prior to boarding a flight by presenting their passport; a person checking in and boarding a domestic flight is not.  And the person, in whose name the ticket has been booked, is not required to identify themselves prior to boarding any aircraft engaged on a domestic flight.  These are significant weaknesses in Australia’s domestic air travel system.  Even many motels and hotels in Australia ask for photo identification when a customer checks in. 

A terrorist could book a flight in a name, including a false name and any person could use that ticket to undertake the flight.  The offences that render that activity illegal are only minor offences and do not present a deterrent.  And a terrorist intending on travelling on the flight for any reason would not be deterred by the offences anyway, regardless of how serious they were.

Lack of Intelligence

There is a large number of people in Australia who support Islamic State and Al Qaeda.  ASIO, the Australian Federal Police and State and Territory police forces do not have the resources to monitor them all using physical and/or electronic surveillance.  And those measures can be easily defeated.  Resulting at times in the location of the suspect being unknown to authorities.  If recent attacks in the UK are any guide; the attackers were known to authorities but they did not have the resources to monitor them.  Intelligence was lacking.  And in countering the actions of terrorists three things must be known by the intelligence and law enforcement authorities at all times.  They are location, location and location.  Where has the suspect been previously?  Where is he/she now?  And from the information obtained from answering those questions; where is he/she likely to go next?  Only the receipt of timely intelligence provides those answers.   

Screening Does Not Identify High Risk People

Counter terrorism measures at Australian airports are designed to identify a potential terrorist by detecting anything a person might be carrying that could cause harm to people, the airport or to an aircraft. The screening is not designed to alert authorities to the movement of a person who might pose a risk to the airport, people or to aircraft. And even with current measures in place, it is possible for a potential attacker to arm themselves at an Australian airport; once they have cleared security screening; by obtaining metal knives and forks from an airport lounge or from a supporter who works in any of the cafes located at Australian airports.  Other than presentation of a credit card to pay for membership, a person is not required to identify themselves when applying to become a member of an airline operated lounge.  While the implements available in lounges and cafes are relatively blunt; they can still inflict significant injury or death if used with sufficient force on a person’s head, neck and other soft tissue of a person’s body.  Terrorists armed with implements obtained airside wouldn’t be able to get access to the cockpit, but that would not be their objective. Why would a terrorist/s attack people on the streets of an Australian city with knifes, when they could achieve better results, from their perspective, by hacking and attacking fellow passengers at 30,000 feet in a pressurised aircraft?

Travelling in small groups, they could cause significant harm to other passengers before they were stopped by other passengers and/or crew, if they are stopped at all. It is not hard to imagine a nightmare scenario of a domestic flight making an emergency return to an airport following an attack on board a plane, only for the authorities to discover that all or most of the passengers have been killed or seriously injured.  The one-hour delay, for well-conceived reasons, by Victoria Police to enter a Malaysian Airlines aircraft following as incident on board a flight out of Melbourne, only highlights the possibility of serious harm being done to passengers during the time it takes for authorities to assume control of a situation.

Target Hardening Domestic Travel

So how does Australia target harden our domestic airlines from being used by potential terrorists?  First, Australia needs to implement a “Know Your Passenger” system for our domestic airline system.  This could operate in a manner similar to the Know Your Customer framework currently in place to combat money laundering and terrorism financing.  Any person who books a flight would be required to submit various forms of identification to prove who they are.   Unlike other institutions such as a bank, an airline operating in Australia does not undertake electronic verification of a traveller. On line verification can occur by requiring a person who is booking a flight to quote one form of acceptable identification, similar to the primary identification documents required when opening a bank account. 

If a person is making a booking through a travel agent, the agent would be responsible for checking their identification and retaining a copy of it.  For example, an Australian passport or drivers licence. Those who do not have either document can quote in the case of an online booking or if booking through an agent, present a Medicare card number.  The information on any of those documents can easily be checked online by any airline that has acquired access to the information. Foreign travellers could be asked to quote a visa reference.  And if they do not have a visa at the time of making the booking, then it is to be quoted prior to any flight being undertaken or the booking is cancelled.  That reference could be checked against Commonwealth Government records.  For this process to occur the Australian and States Governments must share passport, Medicare and drivers licence identification data where relevant with all airlines and aircraft charter companies. 

New Zealand citizens would be required to quote similar identification documentation to Australian citizens and residents.  The New Zealand Government would be required to share primary identification data with Australia, as a condition of allowing its citizens to travel to our country visa free. 

Passengers would then be required to identify themselves again during the boarding process by presenting acceptable government issued photo identification only.  While requiring a passenger to present their identification when presenting their boarding pass might appear to delay the boarding process, the reality is it wouldn’t.  As anyone who has every travelled economy class will testify, often after presenting your boarding pass and heading to the aircraft, you are delayed in a long line waiting for others to board and take their seats.  But any potential delay can be avoided by the identification inspection being undertaken with airline staff checking the identity of travellers standing in line prior to presenting their boarding passes. This process is already undertaken by many airlines when passengers are cueing to board an international flight.

No one should be allowed to travel on a flight unless they have been identified. Know your passenger identification requirements would prevent any person seeking to travel on a name that is false or using someone else’s name.  While it would not deter a potential terror suspect from travelling, it would alert authorities to the presence of that suspect or suspects at an Australian airport, provided the data was linked to our intelligence and law enforcement networks. 

Monitoring the Movement of Terror Suspects

Currently, Australian intelligence and law enforcement agencies monitor the movement of people arriving and departing Australia by placing a person on “alert” using the PACE system. This system is maintained and monitored by Australian Border Force.  While it was designed to enhance our ability at the international border to detect persons of interest, it could be extended to the airline booking process for domestic flights.  Australian terror suspects could be uploaded into the extended domestic PACE and if linked to the booking system operated by domestic airlines, any known terror suspect would be detected when their details are entered at the time a booking is made and again when they check in and board their flight.  

Authorities would then have real time intelligence on the location of a terror suspect and their intended travel to another location in Australia.  A decision would then need to be made by ASIO and the police in conjunction with the airline on whether that suspect would be allowed to travel.  And if so, under what conditions.

Potential Response by Airlines

Like financial institutions, airlines would baulk at the cost involved in implementing the proposed Know Your Passenger system.  But it will result in a significant enhancement to the security of our domestic airline system and our intelligence monitoring of terror suspects.

And if an airline doesn’t want to implement the system or the Federal Government does not; they might find the insurance companies who ultimately cover much of the risk of air travel, institutional investors and large institutional shareholders in an airline, might impose it upon them anyway. Those institutions understand risk management better than most and would see it as a common sense move to protect their investment and financial interests.

Recommendations

Australia implement the following measures in relation to its domestic air travel system:

1.     A know your passenger system similar to the processes currently in use in Australia involving the know your customer electronic verification of potential customers by Australian banks be implemented.

2.     Passengers boarding a domestic flight in Australia be required to identify themselves using an acceptable government issued photo identification.

3.     The Australian Government in conjunction with the State and Territory Governments should expand “PACE” the current system used to identify persons of interest entering or leaving Australia, to include persons booked to travel and about to travel on an Australian domestic flight. 

Conclusion   

No system is totally effective and the system proposed would only detect known suspected terrorists and supporters. But as a traveller, I would more assured of my safety, if the intelligence and law enforcement community were aware of a potential terror suspect boarding my flight and was prevented from doing so.  And all Australians would support any inconvenience caused by the implementation of new measures.

Chris Douglas, APM

Malkara Consulting

 18 July 2017

Money Laundering Workshop Held for Nigerian Judges & Prosecutors

Money Laundering Workshop

Judges & Prosecutors in Nigeria

8 to 12 May 2017

 Chris Douglas, APM

Between 8 to 12 May 2017, a 5 day workshop was delivered to Nigerian Judges and Prosecutors in Nigeria.  The workshop was organised by the UNODC Lagos and funded by the European Union.  And delivered by Chris Douglas, consultant to the UNODC.

During the 5 day Workshop the following subjects were delivered by Malkara Consulting:

Subject Description

1.               Asset Freezing, Forfeiture and Related Issues. The freezing and forfeiture of assets can involve complex issues particularly in relation to property ownership.  A range of entities can claim an interest in property that is subject to restraint and potential forfeiture.  For example, the rights of a lending institution or other third party that holds security over the property will need to be recognised and dealt with.  Unregistered lenders or creditors and family members, particularly those living in and/or using frozen property create particular problems when it comes to forfeiture.  Undiscovered family trusts further complicate forfeiture issues.  This unit will explore those issues with participants being afforded an opportunity through group discussion to identify solutions guided by the course coordinator. 

2.               Business & Property Concealment Techniques.  In this unit participants will gain an understanding of various techniques used to conceal illegal funds in a business or real property or how criminals conceal their ownership of a business or property to prevent discovery and seizure. Particular emphasis will be placed upon the study of how real estate and businesses or front companies (using cash swaps, co-mingling technique) are used to conceal and move money including using legal and fake loans.

3.               International Standards in Asset Tracing & Financial Investigations.  This unit briefly examines relevant international financial investigation standards; particularly standards prescribed by the Financial Action Task Force and the European Commission (Directorate-General Justice, Freedom and Security) as prescribed in the European Financial Investigation Manual.  Particular emphasis will be placed on ensuring participants understand key concepts for example, the difference between money laundering and proceeds of crime investigations, the meaning of effective control and the distinction between ownership and registration.

4.               International Cooperation in Funds Tracing. International inquiries pose legal and operational difficulties.  This unit will explain the informal and formal law enforcement cooperation schemes that exist to enable funds to be traced offshore.  Political, legal and logistical issues will also be canvassed to ensure that investigators have a realistic expectation of what can be achieved in the pursuit of the proceeds of crime and money laundering cases.  The unit will conclude with a discussion amongst participants on any potential issues involved in obtaining and presenting foreign evidence in a Nigerian court.

5.               International Funds Concealment.  This unit explains the basic techniques used by criminals to hide funds offshore.  Concepts of bank secrecy, secrecy jurisdictions and the services they offer including corporate structures (international business corporations, trusts and foundations) and their use in asset protection schemes will be explained.  A key aspect that participants should learn from this unit is an understanding of the key differences between where a company is formed, where it is sold, where it is ultimately managed and the assets it holds.

6.               International Responses to Money Laundering. In this unit, major responses to combat money laundering will be introduced including an overview of the role and function of the Financial Action Task Force, regional anti-money laundering bodies, the Egmont Group of Financial Intelligence Units and international conventions designed to combat money laundering, transnational crime and corruption.

7.               Introduction to Money Laundering. This unit is a foundation unit for money laundering.  The meaning of money laundering is explained and participants are introduced to the money laundering cycle and the type of predicate crimes that are often linked to money laundering.  The unit will also briefing explain the international organisations involved in combating money laundering.

8.               Investigating Money Laundering.  This subject canvasses the various covert and overt techniques and tools used to investigate money laundering, taking into consideration the investigative tools available in Nigeria.  The importance of circumstantial evidence will highlighted and the types of evidence that have been used to secure convictions for money laundering.  A group discussion on the use of circumstantial evidence in Nigerian money laundering cases will follow.

9.               Money Laundering & Financial Institutions. Financial institutions are defined and explained in this unit together with the common techniques used to move funds through them.  The unit will canvas structuring and smurfing techniques, threshold transactions and various financial instruments namely telegraphic transfers, bank drafts, debit and credit cards and loan arrangements to launder money.  The use of formal money remitters, including mobile phone remittance systems, to launder illegal money will also be highlighted.

10.           Moving Value Using Commodities. The unit will explain that not all illegal money is moved using currency.  Brief examples will be provided on how illegal funds are moved or concealed in valuable assets or commodities. The operation of trade based laundering schemes will be demonstrated and discussed.

11.           Nominees and Beneficial Owners. This subject explains the meaning of a nominee and beneficial owner and outlines how they are used in money laundering schemes and asset protection/concealment schemes frequently encountered in proceeds of crime and money laundering investigations.

12.           Prosecuting Money Laundering. During this session, the training coordinator will facilitate discussion amongst participants on issues relating to the prosecution of money laundering in Nigeria including legislation, the Courts understanding of money laundering, standard of prosecution briefs of evidence, and any areas for improvement in processes and the law.

13.           Quality Assurance Review.  A quality assurance review will be conducted during the course to assess the acquisition of knowledge by participants.  Part 1 will involve an assessment of knowledge currently held by participants.  While Part 2 will assess the increase in knowledge gained by participants during the workshop.

In the photo Chris Douglas (Consultant to the UNODC and owner of Malkara Consulting) meets with Justice Olayinka Faji (centre) a Judge of the Federal High Court of Nigeria and Mr Joseph Sunday (right), Director Prosecutions and Legal Services, National Drug Law Enforcement Agency of Nigeria.

When Compliance Is Not Enough

Introduction 

Since 11 September 2001, there has been a global increase in AML/CTF[1] regulations relating to money remitters, both formal affiliated members of large global networks and unaffiliated operators connected via informal channels.  These measures are designed to ensure that money remitters are bound by the AML/CTF regulations that other reporting entities have to comply with.

In Australia, money remitters are subject to the provisions of the Anti-Money Laundering & Counter Terrorism Financing Act 2006 (“AML/CTF Act”) and related rules.  Progress in ensuring compliance by money remitters with the AML/CTF Act is progressing, but there is still much more work to be done.  Both in Australia and in other jurisdictions.  But increasingly, money remitters in Australia are being targeted for investigation by law enforcement authorities for alleged money laundering.  Including for activities undertaken by them during officially sanctioned transition periods designed to enable them to adjust their business model to comply with new customer due diligence and know your customer obligations under the AML/CTF Act.

But as the following case example will demonstrate[2], being in compliance with AML/CTF obligations is not enough to prevent being charged with money laundering. This paper will outline the circumstances to the case and propose several issues that reporting entities in Australia and elsewhere should be mindful of when dealing with customers who might represent a beneficial owner.

Ramy[3] was charged with money laundering for engaging in 3 remittance services as instructed by 3 customers.  The prosecution alleged that Ramy had engaged in money laundering because he had provided a remittance service on the basis of a false customer name or customer anonymity.  In this case, it was alleged the real customer in the remittance process was a person referred to as “F”.  Ramy appeared before the District Court of Western Australia in November 2016 to answer the criminal charge. After almost 4 days of deliberation, the charge of money laundering against Ramy was dismissed by the court. 

Background

Ramy was a manager and director of an Australian company ITS Pty Ltd (“ITS”) which conducted a remittance business in Perth.  His father was also a director but he lived overseas.  The company was registered as a provider of designated remittance services with AUSTRAC, the Australian Financial Intelligence Unit and Anti-Money Laundering regulator.  The registration took effect in 2012. 

ITS had a AML/CTF Program as required under the AML/CTF Act 2006.  That internal policy limited the transfer of cash to no more than $50,000 per person per day.   The policy also prescribed in Part B, the identification process to be followed for all new customers.  The policy was clear, that all new customers would be identified in a face to face relationship.

ITS provided remittance services mainly to China and neighbouring countries.  It also provided some foreign exchange services. 

A person referred to here as “F” wanted to remit money from Australia and he asked “B” to arrange for other people to undertake the remittances.  B was a foreign student studying in Australia and earned some money driving people around Perth which included F. Prior to this occasion, F and B had sent money from Australia and had been previous customers of ITS.  Both men were known to Ramy as past customers of ITS. 

As instructed, B recruited three backpackers in Australia to remit money.  Each person was engaged to remit $50,000. In relation to the current circumstances, the remittance process commenced with B driving to F’s house and collecting him and the cash.  B was often engaged by F as a driver.  F provided to B on a piece of paper the numbers for the accounts held in China which were to receive the money to be remitted from Australia.  Both men then drove to the premises of ITS in Perth. 

On arrival, B took the money into the premises of ITS and gave it to Ramy who counted it.  B also provided Ramy with the Chinese account numbers.  While at the premises B contacted three backpackers, “X”, “Y” and “Z”.  Sometime later, they arrived to remit the money.  In response to questions from Ramy and in accordance with the customer identification policy of ITS, each person presented their passports to Ramy for identification and provided their telephone numbers and addresses in Perth.  Ramy scanned the front page of each document, capturing a facial image in colour of each customer.  The front page including the photograph together with transactional information were retained on record in a customer file, in accordance with AML/CTF policy of ITS. 

For each remittance, being $50,000 cash in each case, Ramy prepared a receipt recording the name of each person and the account details of where the money was to be sent, namely to China.  All of the backpackers then signed the receipt acknowledging that the details were true.  That receipt or remittance form as referred to by the court, contained the reference number for the transaction, the date of the transaction, the name of the person sending the money, the currency received, the amount received, the transfer fee of $10, the exchange rate being offered, the currency in which the transfer was to be paid, the amount in that currency to be paid and the beneficiary account to receive the funds.  But importantly, the document contained a declaration which was acknowledged by each backpacker signing the form stating that:

“I confirm that all information I have provided is accurate and I understand relevant requirements of AUSTRAC under Australian law.  I declare this money remittance service is not used for any illegal purpose and the funds are from legitimate sources.  The information provided is in accordance with the regulations for the prevention of money laundering, terrorist financing and illegal activities”.

After completing the identification process and signing the receipt, the backpackers departed the premises where they were each paid $100 by B.  At all times the process was overseen by B, who was also paid around $200 to $400 by F for his services to him, including his taxi driving services.

Ramy then arranged for the money to be deposited into the Chinese accounts as instructed.

There was no information or suggestion put to the court by the prosecution that the identifying information provided by the three backpackers was not entirely genuine.  Each person, referred to as X,Y and Z, gave their real names, used genuine passports, real addresses and real telephone numbers.

The Money Laundering Offence

Australia has an extensive money laundering offence framework that is little understood or known by reporting entities.  The Commonwealth Criminal Code, Australia’s primary national criminal offence legislation, contains 38 money laundering offences.  Of those offences, one offence contained in Section 400.9 of the code is relevant.  Section 400.9 contains an offence that relates to the dealing of money or property that is of $100,00 or more.   This offence is not the most serious money laundering offence in Australia, providing a penalty on conviction of imprisonment for a maximum of 3 years.  But it can be effective in combating money laundering if applied in appropriate circumstances.  And a serious violation of a person’s rights if it is not. 

Two features of the Section 400.9 offence that makes it a significant legislative weapon, is the minimal requirement of establishing the source of funds are proceeds of crime on the basis of reasonable suspicion only.  And secondly, there is no requirement for the prosecution to establish the mental state of the accused person at the time they dealt with the money or property.  Any knowledge they held, if any, as to the source of the funds is irrelevant in determining guilt or innocence.  The impact of this provision, as will be seen in this case, is that a person not involved in the predicate crime and having no knowledge of the source of the funds or any suspicion as to the source of the funds that would require him or her to report it as a suspicious matter, could be convicted of money laundering.

Ramy was charged with an offence against Section 400.9 in that he dealt with money in which it was reasonable to suspect that the money (in this case more than $100,000) was proceeds of crime.

The prosecution can prove reasonable suspicion by either demonstrating by direct or circumstantial evidence or both, the grounds that a reasonable suspicion exists in relation to any money or property.  Or the prosecution can rely on what are known as the “deeming provisions” of Section 400.9 to establish reasonable suspicion. In the case involving Ramy, the prosecution decided to apply the latter.   

The deeming provisions are extensive and beyond the scope of discussion in this paper.  Most of the provisions involve proving the commission of another offence contained in the AML/CFT Act 2006, which is then used to satisfy the reasonable suspicion.  By proving that other offence, the reasonable suspicion is deemed to be proven.  The prosecution does not have to identify any other offence as being the source of the funds.

For the purposes of Ramy’s case, the prosecution relied upon establishing that his company, had committed an offence against Section 139 of the AML/CTF Act 2006.  If an offence against section 139 could be proven, then it is taken to be proved that it was reasonable to suspect that the money was the proceeds of crime.

A person commits an offence pursuant to section 139 AML/CTF Act 2006, if the person is a reporting entity (in this case a money remitter but applies to all reporting entities including a bank) and the person commences to provide a designated service (in this case, a remittance service) and the person does so using a false customer name or the person does so on the basis of customer anonymity and at least one provision of division 2, 3 or 4 of Part 2 (which relate to identification procedures) of the AML/CTF Act applies to the provision of the designated service.  The provision of one aspect of Part 2 was not an issue for the court to content with, as Ramy undertook an identification procedure for each backpacker in accordance with Australian AML/CTF legislation and the AML/CTF Program of ITS.

Source of the Funds

Ramy conducted three international funds transfers (remittances) in the names of X, Y and Z, with each transaction being $50,000.  Under Australian money laundering law, the prosecution can combine the three transactions into one criminal charge. Which means that Ramy was charged with the more serious of the section 400.9 provisions, dealing with money amounting to over $100,000, reasonably suspected of being the proceeds of crime. 

X, Y and Z were not the source of the money.  They had been contracted by B to help him remit the funds.  B was also not the source of the funds. 

The source of the funds was F, who at the time the remittance processes were being processed, remained in a vehicle outside the premises occupied by ITS.

Ramy was never informed about the source of the funds by any person.  But he had ensured that each backpacker had signed a declaration confirming that the money was not derived from crime or intended to be used in crime.

Court Finding

When the prosecution had finished delivering its case, the defence lodged an application pursuant to section 108 of the Criminal Procedure Act (WA) that Ramy had no case to answer. This is an application that is lodged prior to the defence tendering its evidence before the court to rebut the prosecution case.  The court accepted the defence submission and dismissed the prosecution case negating any need for the defence to respond further. 

In dismissing the case, the court accepted the arguments put before it by the defence:

·       Section 6 of the AML/CTF Act 2006 defines who is to be the subject of the customer identification procedure, and in relation to remittances, it is the person from whom an instruction is accepted for the transfer of money.  It is not the person who gives an instruction. 

·       A false customer name means a name other than a name by which the customer is commonly known. Customer anonymity is not defined in the AML/CTF Act and therefore recourse must be had to the meaning of the word anonymous which means nameless or of unknown name. The AML/CTF Act 2006 specifies who the customer is for any particular designated service. Item 31 of Section 6 of that act specifies that in relation to a remittance arrangement, the customer is the person from whom an instruction is accepted for the transfer of money.

·       If the customer in each transaction was X, Y and Z, then Ramy did not provide the designated service using a false customer name or alternatively did not provide it on the basis of customer anonymity.  The customer is not to be equated with the source of the money or the owner of the money or the person on whose behalf the money was remitted.  In this case, in relation to the last two points, it was F[4].

·       The mere provision of bank details did not amount to the instruction to remit funds.   They were incorporated into the instruction to remit money once it was received.  That instruction was not received from B.  He contracted X, Y and Z and assisted them on their arrival.  If they had not arrived, then the transactions would not have occurred.  B had no intention of remitting the money.  And ITS would not have been able to comply with its own customer identification procedures until they did arrive, which it is required to do before engaging in a remittance service.

·     There is no requirement for an instruction to a remitter to be in writing.  But how the instruction is given is not relevant. It is the acceptance by the remitter that binds the arrangement (the court mentioned that the remitter merely offers a service involving the remittance of money at various rates and commission.  This amounts to an “invitation to treat”[5].   

·     The AML/CTF Act does not specify the owner of money, the source of the money, or on whose behalf the money is remitted.  Australian law focuses on the person from whom an instruction is accepted. 

The court held that the prosecution could not prove that ITS committed an offence pursuant to section 139 and therefore was unable to prove the second element of the offence charged pursuant to section 400.9. Based on the above arguments, no properly instructed jury, acting reasonably, could find that ITS had accepted an instruction from F to transfer funds.  In relation to the receipt of the bank account information from B, the court held the view that it was only information received by Ramy in anticipation of receipt of the instructions from the backpackers.

Relevance to Reporting & Non-Reporting Entities

This case has several issues that should be of concern for all reporting entities, large and small.  And not just for money remitters. 

The two prime issues are understanding the beneficial owner and Australia’s money laundering laws making criminals out of innocent people.

Under FATF Standards and Australian AML/CTF law, a reporting entity is required to identify all and any beneficial owner behind a transaction or an account.  And while that sounds reasonable, it is an extremely difficult process to undertake in practice.  Often a beneficial owner is hidden behind a corporate entity or a third party.  And while X, Y and Z were the transferrers of funds in Ramy’s case, the potential real owner and therefore beneficial owner, noting that it was not established, was F.  He was not present when the transactions took place.  The question therefore is if a reporting entity is required to identify the beneficial owner of funds or an account or transaction, how can they do that when that person is masked by remaining outside of the premises?  How far should the reporting entity go?  Place camera’s outside their premises to identify other parties?  Record all car registrations in the vicinity?  Obviously both solutions would not be practical or effective to implement.  And given that under Australia law, a transferrer of funds is the person who actually communicates an instruction to a reporting entity, namely a remitter, what is the point in establishing the beneficial owner anyway? 

“…..a reporting entity is required to identify all and any beneficial owner behind a transaction or an account.  And while that sounds reasonable, it is an extremely difficult process to undertake in practice”

In regards to Australian money laundering law, it is beyond the scope of this paper to explain in full the Commonwealth provisions.  But all entities should note the wide reach of Section 400.9.  A person can be convicted of money laundering on establishment of “reasonable suspicion” that money or property they deal with, is the proceeds of crime. 

ITS had in place an AML/CTF Program containing both Part A and Part B that was a risk based assessment prepared in compliance with the AML/CTF Act.  If Ramy had acted, and it appears he did, in accordance with the AML/CTF program developed for GF, how was it that he was charged with money laundering?  What risks did the business fail to identify?

A risk based approach to combating money laundering pushes the onus from AUSTRAC (or any financial intelligence unit) onto the reporting entity.  And it is often misunderstood what is meant by a risk based approach.  RBA does not mean there will be “zero faults”.  RBA is not designed to guarantee absolute assurance that all money laundering risks will be identified, prevented and/or reported.  It is only designed to give “reasonable assurance”. When a risk based approach is implemented for anything, it means and does result in the system failing at times. And failure must be accepted, particularly in relation to money laundering, because that crime often involves deception, which is masked in documents and by people in what they do or don’t do or say or don’t say.  In money laundering things and people lie.  And while not their sole purpose, money laundering techniques can defeat AML/CTF controls.  Any control can be defeated by them.  This is not often understood by reporting entities, by AUSTRAC (and other financial intelligence units) and by investigative agencies such as police.

“RBA does not mean there will be “zero faults”.  RBA is not designed to guarantee absolute assurance that all money laundering risks will be identified, prevented and/or reported.  It is only designed to give reasonable assurance”.

Therefore, when a control fails, is it appropriate to charge an employee of the reporting entity involved, in this case Ramy with money laundering?  If the answer is yes, then Australia can expect a large number of people to be charged with money laundering as AML/CTF controls fail every day and fail often. 

And this could occur in relation to the Section 400.9 offences, because as reported in this case, the prosecution needs only to prove that there is reasonable suspicion the money is proceeds of crime.  Knowledge by the accused at the time they dealt with the money or property is irrelevant.  However, an accused person charged with Section 400.9 has a defence.  If they can establish that they had no reasonable grounds to suspect the money or property, as the case may be, was not derived from any unlawful activity, then they are entitled to be acquitted.  But unlawful activity includes both minor and serious offences.  Including offences against Australian law (Commonwealth, State and Territory) and foreign law.

Getting back to Ramy’s case.  How is a money remitter, or an employee of any reporting entity, including AML monitoring staff in a bank (and for that matter a non-reporting entity in Australia for example a real estate firm) expected to know the criminal law of every Australian jurisdiction and every foreign country? For example, how are staff of a reporting entity, particularly a small money remitter, expected to know the offences contained in the Primary Produce Safety (Egg) Regulations 2014 of Tasmania?  Namely, supplying any egg, or egg product, that has not been lawfully produced for human consumption. Or offences relating to the unlawful dealing in precious stones in Botswana?

Given Australia’s ethnic diversity, it is expected that a money remitter would be involved directly or indirectly in sending or receiving funds around the world.  And it would therefore be highly probable that they would handle money that could be the proceeds of crime being sent from Australia or received from overseas.  They cannot be expected to make an accurate assessment on whether every transaction they are involved in, is reasonably suspected of being the proceeds of crime on every single occasion.  A RBA approach to money laundering will not ensure that they can.  But in Australia, if they don’t and the transaction is detected by the authorities and they hold the view there is reasonable suspicion that the money is proceeds of crime, they face the prospect of being charged with money laundering.  The criminal money laundering laws in Australia are therefore inconsistent with and clash with the risk based approach adopted in anti-money laundering frameworks. RBA might identify the risks that a firm or a person might handle the proceeds of crime and assist in the activity being reported to AUSTRAC, but it offers no protection to the staff of a reporting entity from being charged with money laundering, if not suspicion matter report is filed.

“The criminal money laundering laws in Australia are therefore inconsistent with and clash with the risk based approach adopted in anti-money laundering frameworks”

 Recommendations

Like any business risk, money laundering risk needs to be mitigated.  Being charged with money laundering can destroy or damage a business. Therefore, prosecution risk and reputational risk need to be mitigated as well. These risks need to be captured in the risk management plan or AML/CTF program of reporting entities.  And steps taken to mitigate against them to the extent possible.  But planning to reduce the risk of inappropriate action by an FIU or law enforcement agency is an extremely difficult task, if not an impossible task, with the consequences for an employee of a reporting entity and the entity itself being severe.

Taking into consideration the issues raised in this case, reporting entities, should consider adopting the following practices:

1.    Risk indicators in AML/CTF risk plans should incorporate foreign students and foreign travellers as a risk. 

2.    In relation to foreign customers, reporting entities should demand proof of residence.  Are they in the country legally?  Is their given address accurate? (via Google check).

3.    Ask themselves the question, why is a foreign student or traveller sending a large amount of money offshore?  Or receiving a large amount of money onshore?  Or regularly sending smaller amounts offshore which in total amount to a large amount of money for their status and or age?

4.    Train staff to make an assessment on whether any money or property involved in a transaction is reasonably suspected of being the proceeds of crime.  If it is, report it as a suspicious matter.  And if in doubt, err on the side of caution and report it to AUSTRAC (or other FIU if offshore) anyway.  This might lead to over reporting and a rebuke received from AUSTRAC.  But it is not AUSTRAC that faces the risk of prosecution for money laundering.  It is the entity and its employees.  Any feedback from AUSTRAC to a reporting entity that it is “defensive reporting” should be ignored until the reporting entity has received legal advice from a lawyer or barrister who specialises in criminal money laundering law.

5.    Staff should be trained in the Criminal money laundering law of Australia, particularly Commonwealth money laundering law.

6.    AML/CTF programs should address the risks posed by the wide reach of Commonwealth money laundering law, particularly the fault of elements of knowledge, recklessness and negligence and the reasonable suspicion element and deeming provisions in Section 400.9 Criminal Code Act 1995.

7.    Insert into any application to remit or receive funds the following statements in an attempt to identify the beneficial owner:

a.    Q.1 Are the funds you are sending or receiving your money?

b.    Q. 2 Have you been asked to act on behalf of another party to send the money or to receive the money?

If the answer to question 1 is no and/or the answer to question 2 yes, then further due diligence should be applied.

Malkara Consulting is able to provide guidance to any reporting entity on lawyers and/or barristers who have experience with prosecuting and defending Commonwealth money laundering cases.

____________________________________________________________________

AML advice in this case was provided by Malkara Consulting.

[1] Internationally referred to as AML/CFT.

[2] Details withheld to protect the identity and reputation of the business and all persons involved in the management of the business.

[3] Not the defendant’s real name.  Changed to protect his identity.

[4]The prosecution argued that X, Y and Z were sham customers signing the remittance forms with the effect that F, achieved anonymity or was identified by a false name in that he was not known by their names.

[5] Similar to a retailer offering goods for sale.  The customer accepts the offer by paying a consideration usually money.  But in the case of a remitter it is the giving of an instruction which is accepted by the remitter that binds the contract.

Don't Become a Victim of Cuckoo Smurfing

Background

Recent actions by the Australian Federal Police involving the pursuit of victims of Cuckoo Smurfing[1], should send shivers down the spines of all Australian exporters; international migrants intending to come to Australia and foreign based families sending money to Australia to pay for their children’s education or cost of living.  Large exporters of services for example, education providers and migration agents are particularly vulnerable. 

Cuckoo Smurfing

Cuckoo Smurfing is not a legal term. It is a money laundering technique used by organised crime to pay for the importation of narcotics or to move the proceeds of crime offshore.  It involves criminals intercepting lawful international payments into Australia and substituting that money with the proceeds of crime.  And while this paper relates to Australia, Cuckoo Smurfing is a global problem.

The term Cuckoo Smurfing refers in part to the Cuckoo bird which lays its eggs in the nest of other bird species.  Those birds then raise the cuckoo bird chicks as their own (refers to the European Cuckoo bird as the Australian Cuckoo bird does not raise its young that way).  And smurfing is a reference to a group of criminals who move from bank to bank conducting transactions usually under threshold reporting levels[2].  In relation to money laundering, it involves criminals, without the knowledge or consent of an account holder, depositing money from crime in their account.  While legal or clean money, the customer was expecting to receive, usually from offshore, is hijacked and given to offshore based crime groups.

Other Descriptions

The Cuckoo Smurfing description is not particularly helpful.  It could be more usefully described as the “Matching Technique” or the “Lateral Transfer Technique”.  Matching would refer to the fact that the money deposited into an account in Australia by criminals, matches exactly the amount of money given offshore by a customer to a money remitter. Not a dollar more or a dollar less.  Australian based criminals ensure that no customer is left short changed as it would cause the customer to contact their bank and/or the person who sent the money.  That might generate a suspicion somewhere, which criminals seek to avoid.

While lateral transfer would refer to an offshore based customer wanting to send money to Australia giving money to the money remitter who gives it to crime group.  And a similar sum of money is deposited into the account nominated by the offshore party in Australia. One transfer occurs offshore and the other is transferred on shore.

Cuckoo Smurfing Process

AUSTRAC reports that Cuckoo Smurfing involves 4 simple steps.  But AUSTRAC is not an investigation agency and does not investigate money laundering.  The technique is more complex than that and involves:

1.     A customer living overseas wanting to send money to Australia, provides funds to a money remitter in a foreign country for transfer to an Australian bank account.  The money remitter may or may not be authorised or approved to operate in the jurisdiction it operates from.  The money could be sent by the customer as payment for goods or services bought from an Australian exporter, or income being sent home to family, or to themselves or as a gift for family and friends. The bank account receiving the money therefore, may not be in the name of the remitting customer.

2.     Without the knowledge of the remitting customer, the money remitter has been corrupted by organised crime.  He/she has been engaged to launder money for crime syndicates situated offshore from Australia.  To this end, the foreign remitter sends to a money laundering syndicate operating in Australia; remittance information provided by the customer; including the amount of money to be sent, the IBAN and account number and the name of the account the money is to be paid into.  The remitting customer does not consent to his/her information being used in this manner.

3.     The money laundering syndicate operating in Australia then collects bulk cash from criminal syndicates in Australia.  The money is either the proceeds of crime or funds to be used to pay for the importation of narcotics or both.

4.     The money laundering syndicate then divides the bulk money up into separate packets of cash.  These packets or bundles correspond exactly to the amount of money that has to be deposited into the Australian account nominated by the customer.  If the customer, sent $7,000 to Australia, then $7,000 would be selected from the bulk funds collected from the crime group and deposited into the account.

5.     If a number of customers located offshore each sent money to Australia under $10,000, then the money would be deposited into their account as per their instructions.  From an intelligence perspective, multiple customers each nominating an account to receive money would appear that the crime group is structuring the deposits.  But this is not correct.  Structuring is not a legal term, but a process to launder money by engaging in a transaction with a reporting entity (in this case a bank) under the reporting threshold. 

6.     However, if a customer sends funds equal to or greater than the reporting threshold via an offshore money remitter, then the money laundering syndicate has available to it two options to deposit the crime money into the nominated account/s. The group can either structure the funds into the account or deposit the total amount.  For example, if the offshore customer sends $16,000 to Australia to pay for university fees for their child or as a payment related to their immigration process, then the crime group could deposit the entire amount in cash or break up the amount and make each deposit under $10,000.

7.     For the Australian based money laundering syndicate, both approaches involve risk.  Structuring the deposits poses the greatest risk, as that action amounts to an offence against Section 142 of the Anti-Money Laundering & Counter-Terrorism Financing Act 2006.  It is on the basis that the funds have been structured and are therefore an instrument of crime, that the AFP has taken action to restrain the funds held in the account of people innocent of any crime (the receiver of the funds sent by the offshore based customer).

8.     Deposit of the cash by the money laundering group on or over the threshold amount (as per the overseas customer’s instructions) poses the least risk.  While it would be reported as a Threshold Transaction to AUSTRAC, it is unlikely to be singled out and selected for further analysis by the financial intelligence unit or a law enforcement agency.  The transaction would probably be drowned out in the “white noise” of other significant cash transactions being made that day either at a particular bank or in a busy business area (Cuckoo Smurfing money laundering syndicates prefer operating in the larger cities of Sydney and Melbourne for that reason).

9.     Once the money has been deposited, the money laundering syndicate notifies the offshore money remitter that the transaction has been undertaken.  The money remitter then pools each sum of money given to it by legitimate customers and later passes those funds in bulk to an organised crime group.  The money is either to be used to pay for the importation of narcotics into Australia or is to be laundered by the crime group that wanted to shift illegal funds offshore.   

 Money Mule Schemes

Cuckoo Smurfing is not to be confused with a money mule scheme, where account holders are recruited on line to receive into their accounts money which is not theirs to receive.  And who get paid a commission for their involvement.  Which they deduct from the funds they have received and forward the balance onto another account as instructed by the crime group who recruited them.

Cuckoo smurfing victims expect to receive the money sent to them.  It is payment for goods, services, or for other lawful purposes.  The money is not derived from crime.  It is sent by people who owe them money or who are giving or sending them money to be applied for a lawful purpose.  It is not stolen from people by way of a scam or fraud as is the case in money mule schemes.  Victims of Cuckoo Smurfing do not in any way benefit from the money laundering scheme and do not consent for their information or their accounts to be used in the process.

“Victims of Cuckoo Smurfing do not in any way benefit from the money laundering scheme and do not consent for their information or their accounts to be used in the process”

 Who Incurs the Risk?

With Cuckoo Smurfing, Australian based drug groups outsource their money laundering risk to professional money laundering syndicates.  By doing so, they reduce the risk to their operations should law enforcement decide to “follow the money”.  The crime money they dispose of, is concealed in the accounts of innocent people.  While they have access to or if paying for a drug shipment, have available to them, clean money which will be applied offshore. 

The Chinese say “If you put your ladder against the wrong wall, every step you take is in the wrong direction”.  The banks receiving the deposits, incur little if any risk.  If a bank forms a suspicion about a cuckoo smurfing deposit and raises a Suspicious Matter Report in relation to it, the bank will report their customer, usually not anyone involved in making the deposit!!  Once received by AUSTRAC and by a law enforcement agency, unless they know about the scheme, it will cause them to chase the wrong people.  As the AFP is currently now doing.  It is going after the victims of crime, instead of the real criminals.  The AFP has placed its ladder against the wrong wall.  And it is going in the wrong direction. 

“If you put your ladder against the wrong wall, every step you take is in the wrong direction”

 Who is At Risk from AFP Operations

Since the AFP commenced applying the civil forfeiture provisions of the Proceeds of Crime Act 2002 to the deposited funds that have been structured, then any and all funds of that nature are at risk of being restrained and subsequently forfeited.  The AFP claims that the funds are an instrument of crime.  Which is defined as any money or property used or intended to be used in the commission of an offence. The offence nominated by the AFP is structuring or more precisely, conducting a transaction with the sole or dominant purpose of avoiding a Threshold Report being made, a contravention of Section 142 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006.

Potential victims of AFP action include, if they are not already:

·       Mum’s and Dad’s sending money to their children in Australia for education and cost of living expenses.

·       People seeking to immigrate to Australia who send money to Australia to pay for fees, to buy a house etc

·       Foreign investors sending money to Australia to invest in Australian property, shares, or industry

·       Australian exporters who are paid by customers who purchased their goods or services.

How to Reduce the Risk of Becoming a Victim

Money that is targeted and intercepted by cuckoo Smurfing money laundering syndicates is linked to offshore money remitters.  Any person seeking to send money to Australia should engage a bank to send the money or a large international money remittance service.  While the charges are higher and the currency conversion rate (the spread between buying and selling) is not as attractive as on offer by smaller remitters, using a bank or large remittance service, eliminates the risk of misuse of any money by criminals.

Similarly, an Australian entity expecting funds from overseas, should insist that the offshore entity use a bank to remit the money or if they are an exporter, use a trade finance arrangement (e.g. a letter of credit). 

 What to do if you are a Victim

If you are expecting funds to be sent to you from overseas, they will be received into your account as a credit entry.  It will be recorded as an electronic transfer.  As in any international or domestic transfer between entities, no money actually moves.  Only value.  The easiest way to determine if your account or business account has become a target of Cuckoo Smurfing money laundering syndicates is to check the deposit made into the account.  If the credit entry was generated by a cash deposit either as a lump sum or several lump sums made in close proximity to each other in time and place, then it is highly likely your account has been compromised. 

Prior to the AFP changing strategy and pursuing the funds deposited into Australian bank accounts by Cuckoo Smurfing money laundering syndicates, holders of those accounts and the owners of the money, had nothing to fear.  The AFP pursued those behind the money laundering.  Advising the police, or AUSTRAC on what was happening was an appropriate response.  The AFP could be trusted.

But now, customers whose accounts have been compromised are advised NOT to contact the AFP or AUSTRAC.  When it comes to Cuckoo Smurfing, the AFP can no longer be trusted to act in the public interest and uphold and protect the rights of victims.  And victims are advised not to discuss the issue with their bank.  The bank if it suspects cuckoo smurfing will report the activity to AUSTRAC who will report it to the AFP.  The bank will not and have not protected its customers from Cuckoo Smurfing activity.

“When it comes to Cuckoo Smurfing, the AFP can no longer be trusted to act in the public interest and uphold and protect the rights of victims”

Any person who is suspected of being a Cuckoo Smurfing victim is advised to first seek LEGAL advice before doing anything.   Not only is the person a victim of cuckoo smurfing but also a victim involving the theft and misuse of their personal financial information. Dealing in identification information to commit an offence[3] and dishonestly obtaining or dealing in personal financial information,[4] are indictable offences under Commonwealth criminal law. 

Malkara Consulting can provide guidance on lawyers who have experience in handling Cuckoo Smurfing matters involving proceeds of crime action.  Malkara Consulting can also provide advice to any lawyer or law firm who has a client concerned that they have been a victim of Cuckoo Smurfing.

[1] See Commissioner of the Australian Federal Police v Kalimuthu [No 3] [2017] WASC 108. [on-line]. Available http://egreaves.com.au/wp/wp-content/uploads/2017/04/Commissioner-AFP-v-Ganesh-Kalimuthu-Anor-2017-WASC-108.pdf (2017, April 22).

[2] A US derived term which refers to the fictional small blue humanoids with a gnome like appearance that live in mushroom shaped houses.  The Chinese refer to them as ants and in other jurisdictions as money mules.

[3] Section 372.1 Criminal Code Act (Cth).

[4] Section 480.4 Criminal Code Act (Cth).

The Deadly Wind. An Alternative Platform for the Delivery of WMD

There were many reasons why terrorists were able to successfully attack the United States of America on September 11, 2001. But as the 911 Commission identified; the most important failure was one of imagination by US authorities.  There was an absence of creative thinking by intelligence, law enforcement and military agencies. The type of thinking that identifies all potential threat scenarios involving large scale terrorist attacks anywhere.  And while that might sound very critical of US agencies; I doubt any country in the western world at that time was focused on predicting the strategic thinking of al Qaeda.

The use by North Korean agents of sarin gas, a weapon of mass destruction, to kill the half-brother of North Korean President Kim Jong Un, raises international risk levels to a new high. Sarin gas is easy to produce.  For example, in 1993, the Japanese Aum Shinrikyo, a doomsday cult, developed and successfully tested sarin gas at a remote cattle station in Western Australia. On 20 March 1995, the sect released sarin gas into the Tokyo subway killing 12 people and injuring over 1,000.  That incident demonstrated the ease at which a terror group can develop a deadly weapon in a country’s backyard and use it.  Had the Aum Shinrikyo sect, combined the sarin gas with a better delivery system; they might have been more successful with their attack in Tokyo.  Development of or the use of poisonous gas by terrorists or by agents of rogue states, such as North Korea, in other countries such as the United States is not beyond possibility.    

One potential delivery system for weapons of mass destruction, particularly biological and chemical weapons are hot air balloons.   During World War 2, the Japanese were credited with developing the world’s first intercontinental missile threat.  In response to the US attack on Tokyo and other cities in Japan during what is known as the Doolittle Raids, the Japanese military and scientists identified that balloons could be launched from Japan and using Pacific wind currents, deliver bombs to the United States.   

US intelligence estimated that the Japanese launched over 9,000 balloon bombs during the war, of which only 290 were known to have successfully landed, including 73 in Canada.  Among the reasons for the poor success rate was the fragile construction of the balloons and the use of a weak anti-freeze solution that did not prevent their batteries from freezing. The balloons were made primarily of paper, but launched in the winter months when the jet stream is the strongest, they could travel at over 200 miles per hour at a height of between 20,000 to 40,000 feet.  The balloons could carry a thermite (incendiary) bombs and a high explosive anti-personnel bomb.

The balloon carrying bombs had two primary purposes:

1.     The incendiary devices they carried were designed to start fires in the vast North American forests; and

2.     Cause panic and casualties amongst the citizens of North America

Of real concern to US authorities at that time was the potential use of the balloons to disperse chemical or biological agents across the United States.  The Japanese were already experimenting in China with chemical weapons, but they were not deployed on the balloons. 

It is not beyond possibility that North Korea could already possess this simple means to deliver high explosive bombs, biological or chemical agents to the United States and its allies.  The recent assassination in Malaysia of Kim Jong-nam, the half-brother of the North Korean president, using sarin nerve agent suspected of being delivered by North Korean agents, confirms that the country has that weapon in its arsenal and is prepared to use it on foreign soil.

Balloon bombs if used by North Korea would have a number of tactical benefits to that country:

·       They are cheap and easy to acquire

·       Difficult to detect on radar and at night

·       Powered by the wind, they have a long endurance range and therefore the capacity to deliver weapons, particularly biological weapons over a wide area of a country as they travel

·       Can be launched from any location in North Korea or any ship particularly one positioned close to the United States

·       If they are bright and colourful they might not be seen as a potential threat by any person who observes them flying

·       Exponentially increases the number of systems available to deliver weapons of mass destruction.  The majority of balloons do not have to carry any weapons at all and merely act as decoys or dummies increasing the chances that the balloons actually carrying weapons make it to their intended targets.  If North Korea launched thousands of balloon bombs at North America in one massed attack; it would strain the resources of the US and Canadian military to track and destroy them all in time before some detonated or deployed their dangerous cargo.

And North America does not have to be and probably would not be the sole target of North Korea. Balloon bombs could be launched in a mass attack on Japan and South Korea, who would have less time to identify the threat and respond. 

In 2003, the Pong Su, a North Korean cargo ship delivered 125 kilograms of heroin onto a southern Australian beach, near the city of Melbourne.  It is not beyond the capability of the North Koreans to launch a balloon carrying a weapon from a boat sailing near the Australian coast or the remote coastline of any other country opposing it or allied to the United States.  An attack on any country including the United States could be part of a larger scale attack or counter-attack in response to US action involving multiple delivery systems. 

The potential use of balloons to deliver weapons does not have to be restricted to North Korea.  They are a potential delivery device of weapons of mass destruction by terrorists.  Balloons are easy to acquire in Western countries.  And many countries including the United States and Australia for example, have large numbers of commercial hot air balloon operators and host hot air balloon festivals in warmer months. In the United States, there are 15 hot air balloon festivals scheduled for April and May 2017 alone.   It would be easy for terrorists (or North Korean agents) to acquire a balloon or join a balloon flight either on a single flight or part of a large balloon flight festival and release biological agents or other weapons as they travelled.  Few, if any, people would suspect an attack was occurring and who was conducting it, until it was too late.

It is frightening to imagine, what might have happened if the Aum Shinrikyo Sect, having developed Sarin gas in remote Western Australia, had decided to test it in Perth or another Australian capital city, by flying over it and releasing the weapon from a balloon.  Thankfully, they tested it on sheep and killed hundreds with it.  Or delivered the weapon from a balloon flying above Tokyo, with the delivery mechanism and dangerous toxin carried only by the wind.

Al Qaeda’s capability to kill and destroy was underestimated which resulted in the death of thousands of people and billions of dollars being lost from the US and global economy.  It is imperative that the world remains vigilant and remembers the mistakes of the past by not suffering from a lack of imagination in identifying potential risks from terrorists and rogue states.

Chris Douglas, APM

Proprietor, Malkara Consulting

Perth, Western Australia

www.malkaraconsulting.com

 19 April 2017

 Bibliography

1.     Carroll, R. (2014).  How Japan’s fire balloons took the second world war to American soil. The Guardian [on-line]. Available  https://www.theguardian.com/us-news/2014/oct/30/japan-secret-weapon-balloon-bomb-world-war-oregon (2017, April 17).

2.     Gregory, P. (2006).  Pong Su Smuggler Jailed for 23 Years. The Age Newspaper. [on-line]. Available http://www.theage.com.au/news/national/pong-su-smuggler-jailed-for-23-years/2006/04/06/1143916634557.html (2017, April 17).

3.     Jolley, M. (2004).  North Korea.  Pong Su.  ABC Foreign Correspondent. [on-line]. Available http://www.abc.net.au/foreign/content/2004/s1162110.htm, (2017, April 17).

4.     Klein, C. (2015). Attack of Japan’s Killer WWII Balloons, 70 Years Ago. History.com. [on-line], Available http://www.history.com/news/attack-of-japans-killer-wwii-balloons-70-years-ago [2017, April 17].

5.     Morton, E. (2014).  The Tokyo Sarin Cult's Outback Australian Test Ranch. Slate. [on-line].  Available http://www.slate.com/blogs/atlas_obscura/2014/02/28/the_secret_sarin_test_ranch_in_outback_australia.html (2017, April 17).

6.     Rizzo, J. (2013). Japan’s Secret WWII Weapon: Balloon Bombs.  National Geographic. [on-line]. Available http://news.nationalgeographic.com/news/2013/05/130527-map-video-balloon-bomb-wwii-japanese-air-current-jet-stream/ 27 May 2013. (2017, April 17).

One Nation. Bad for Trade. Bad for National Security

“The views expressed by One Nation and like-minded groups are based on ignorance; are exaggerated or emotional in parts or are incorrect.”

It was the Muslim period of Ramadan in 2016 and I was delivering financial investigation training to a group of investigators from a Nigerian law enforcement agency in Lagos, Nigeria.  For half of the class, it was going to be a long day.  Being Muslims, they were fasting.  No drinking, eating or smoking until the breaking of the fast later in the early evening of each day.  Like many training courses, lunch was provided, and the other half of the class, being Christians, proceeded to dine.  Though, before they ate, I noticed the Christian participants were preparing take away meals.   I thought they were packaging meals to take home to their family, which commonly occurs, but only after everyone has eaten. These participants were selecting food before anyone had eaten, including them.  I made inquiries with one senior course participant, a Christian, as to what was happening and to my surprise, she told me “we are preparing meals for our Muslim brothers.  They cannot eat now.  But they will be able to when the fast ends but by then they will be travelling home and stuck in traffic for hours.  They will be very hungry”.  I asked if they had checked if the food was halal and she replied: “it’s all halal.  And we eat it too.  It makes no difference”. 

Nigeria has serious problems, not the least being terrorism, particularly from Boko Haram. Given the existence of a major terror group in the country with a history of violence towards Christians and anyone opposed to their ideology, I was surprised to observe in Lagos and Abuja just how well the Christians and Muslims related to each other.  There appeared to be no animosity between them.  And they did not separate into two distinct groups during breaks which I would have expected, if either group feared or distrusted the other.  And given the level of violence in some parts of the country, it would be reasonable for Christians at least to be hostile or suspicious towards Muslims.  All I witnessed were Muslims and Christians working together; eating together; socialising together; and praying together.  Each morning before lessons began, the Christians would commence with a prayer followed by the Muslims. And each group prayed for their fellow participants.  And I was often told that both groups prayed for me.  Knowing I was a Catholic turned atheist, they prayed that I would find my way back to God.  And it was not uncommon to see Muslims reading Christian material brought into the room by a participant and Christians and Muslims discussing in a friendly and respectful manner their religious beliefs.

“It’s all halal.  And we eat it too.  It makes no difference. ”

I had been to Nigeria on 5 previous occasions.  But with each trip I make to that country, like my many visits to other Muslim countries, Indonesia, Malaysia and Pakistan; I was enriched by the experience. 

And upon returning to Australia, the land of my birth, I cannot help but notice the hostility that is growing towards people of Islamic faith, their customs and values.  The bulk of the opposition to Muslims is driven by Pauline Hanson’s One Nation Party.  But there are other political contributors including the Q Society of Australia and Australian Liberty Alliance to name a few.  They all preach a similar anti-Islam message, each containing common elements including inflated emotional rhetoric about halal certification in Australia; banning or restricting Muslim immigration and banning the wearing of the Burqa[1].  Comments made in relation to One Nation could equally apply to anyone of those organisations.  One Nation goes further though in its anti-Islam rhetoric, including calling for a Royal Commission to examine whether Islam is really a religion! 

The views expressed by One Nation and like-minded groups are based on ignorance; are exaggerated or emotional in parts or are incorrect. And while the causes of resentment and alarm are beyond this discussion, it is clear that people no matter what their problems are in life, will be attracted to anything that they see as being the cause, promulgated by the person who shouts the loudest.  I doubt if supporters of One Nation and other right wing groups have seriously thought about the impact their policies and statements could have on Australia’s trade and Australia’s national security.     

Any ban restricting the religious or cultural rights of a person, including calls to ban the Burqa by outlawing the wearing of it in public or government buildings is a serious breach of human rights.  And any law could easily be sidestepped and would be expensive and difficult to enforce.  Noting of course, that the wearing of a burqa by a woman is cultural and unique to those countries where it is practiced.  Early Christian women, covered their head and face and the practice has all but ceased in Australia and around the world.  A similar trend is occurring in relation to the wearing of a burqa by women of Islamic faith, where it is in decline in many countries.  I know Muslim women in Indonesia, Malaysia, Pakistan and Nigeria who do not wear a burqa in public.    

Issues with women wearing burqas or any other form of attire, can easily be addressed by current laws and procedures.  A blanket ban is unnecessary.  In Muslim and non-Muslim countries, simple procedures provide for the identification of women.  For example, at international airports, women wearing burqas are searched in private screening areas and are required to show their face to a woman. Banning women from wearing a burqa in public or in a Government building will only cause or increase resentment amongst Islamic Women and marginalise them even further.  Amendments to specific relevant laws, where they are required, would be more practical, for example: a female driver wearing a burqa being required to show her face to a male police officer or when having her driver’s licence photo taken.  But even in the latter case, there is no reason why the photo couldn’t be taken by a woman.  And while proposals also amount to a breach of a person’s rights, they are minor compared to a total ban and would be a small price to pay by Muslim women for living in a free and open society. 

In relation to halal certification of food in Australia, from a marketing perspective, it is simply good business sense to do it[2].  One Nation wants to ban halal certification in Australia.  Amongst its many views on the issue, it argues that the current halal certification system in Australia funds terrorism.  Despite there being no evidence that it has or is being used to fund terrorism in Australia. Any funds, including illegally and legally obtained can be a source of funds to support terrorism.  Supporting material used by One Nation to support its claim of funds derived from halal certification being used in the United States to fund terrorism is incorrect.  Similar incorrect or unbalanced claims appear on the websites for the Q Society of Australia and Australian Liberty Alliance. What will be the response from One Nation and other groups, if Islamic finance becomes a major financial product in Australia?  Claim Islamic finance funds terrorism as well!!  One Nation and other right wing groups would better serve our country if they directed their outbursts and concern towards real criminal threats and activity, instead of inventing issues and creating unnecessary alarm in our community[3].

One Nation while wanting to ban halal certification will grant exemptions to exporters.  This indicates that members of One Nation have never been food manufacturers of any significant scale in Australia.  Production costs in Australia are high enough and the last thing any manufacturer needs is another expense being added.  Any Australian food manufacturer supplying both the Australian and domestic market knows that to comply with any anti-halal certification law proposed by One Nation, it might have to operate two different labelling and supply systems.  This would add to the cost of supply which would be passed on to the consumer, including Australian consumers of non-halal products.  And not to mention the loss of market share in Australia and subsequent profits, by those Australian food manufacturers who would be prevented from suppling halal products to the local Australian market.  They would lose out to imported halal certified food products which would not be captured by the proposed ban.

One Nation, Q Society of Australia and Australian Liberty Alliance all express alarm on their websites about the payment of halal certification fees.  If there is an issue surrounding how products are halal certified in Australia, then changes to the existing model or development of a new model regulated by Government should be considered.  One Nation makes reference to the size of the halal food markets overseas.  And reports facts as if the industry is something to be feared.  For example, One Nation states that the halal food industry is worth more than $7 billion a year in France alone.  That should be great news for Australia.  Instead of reporting negatively about halal food products and the current halal certification system in Australia, all political parties and business organisations should recognise the potential of the market, embrace it with enthusiasm and work together to develop a world best practice halal certification system that excels all others in existence and enables Australian exporters to capture and hold key international markets.

“And there is a growing sense of concern among Australian exporters that anti-Islamic views held by One Nation and other parties could seriously damage trade with our international partners.”

Unlike other advanced industrialised countries, Australia has very few industries that have an international competitive advantage.  Agriculture is one of them. Banning halal certification is an absurd economic policy that does no good, but harms the competitiveness of Australian food suppliers in local and international markets.  Loss of sales to foreign made products would have a flow on effect to other suppliers in the food industry, including farmers and industry employees.  Perhaps One Nation, it supporters and other groups opposing halal certification, if they are not swayed by sound economic arguments, should simply follow the advice of Nigeria Christians, and that is: “it makes no difference”.

I have worn two uniforms in the service of Australia.  The first while serving as a seventeen year old infantry soldier in the Australian Army from 1976.  The other as a member of the Australian Federal Police.  Now as a financial crime and risk management consultant, I am an exporter of services, one of the fastest growing export segments in Australia.   I operate in a very competitive international market, where I am up against the best in the industry.  And the last thing I and other exporters need is an artificial barrier being created, particularly at home, that will impact on my capacity to compete internationally.  When I am overseas, I often receive first hand feedback of the growing resentment from foreigners towards Australian anti-Islamic views. Some of the comments I have received are hostile but most are expressions of dissatisfaction and dismay at Australia.  

And there is a growing sense of concern among Australian exporters that anti-Islamic views held by One Nation and other parties could seriously damage trade with our international partners.  A country does not grow its wealth by trading within itself.  It must export to grow its GDP.  Australia successfully competes in global markets including the Middle East and Asia. Areas that contain large Muslim populations.  This includes countries regarded as being “Muslim countries” and countries with large Muslim populations, for example India[4]. They are important markets for Australia and Australian business. 

Smart business people living in those countries seeking international partners to import goods and services into their country quickly identify ignorance and stupidity.  If they are not personally offended by the policies of One Nation and other groups, they will think carefully about the risk to them, their business and business name by engaging in any deal with an Australian company or an Australian.  In overseas business circles where I mix and One Nation is discussed; Australians are seen as ignorant and worse, as being stupid.  Unfortunately, the policies of One Nation impact on us all. They tar us all with the same brush.  Not just them.

If One Nation and similar groups continue with their absurd assault on Islam in Australia, major Muslim countries will take notice, if they haven’t already.  Consequently, there is a risk that those countries, either alone or acting as a block of nations, might retaliate and ban the importation of all Australian goods and services into their countries.  If that were to happen, it would be a financial disaster for Australia. 

Any Australian business engaging directly in the export of goods or services, including food from Australia or who benefits indirectly from that activity, for example a supplier to a manufacturer or a person employed by an exporting business, would be unwise, perhaps foolish, to support One Nation and any other similar political party or group.  If they do, then they should be prepared to lose income, their business or their job if and when governments of Muslim countries and Muslims generally, reject their products or services.  And any business and individual involved or employed in the export of goods and services, particularly rural communities, cannot afford to be complacent either and say nothing about the anti-Islamic sentiment growing in Australia.

Since the 9/11 attacks, Western security and police services have learned from the mistakes of the past, and have made considerable progress towards building relationships within the various Islamic communities.  A key issue identified since those attacks was the absence of effective human sources to gather intelligence in relation to Islamic terror groups.  Since September 2001, community engagement programs by Australian law enforcement agencies and ASIO with Islamic communities in Australia, have been highly effective.  While gaining the trust of all ethnic communities is a primary police objective, building respect in Muslim communities is particularly challenging. Especially given that many Muslims fled to Australia to escape Islamic extremism and oppressive corrupt governments.  A fact forgotten by supporters of One Nation and other right wing groups in Australia.  

Building trust in a community in Australia cannot be achieved overnight. It takes time, commitment and patience.  And above all total honesty.  Skills I learnt while residing in the Sydney suburb of Lakemba in the early 1980’s, while still serving in the Army and later with the AFP and living amongst Lebanese Christians and Muslims who had fled war in Lebanon. 

Polices promulgated by One Nation against Islam and Muslims in Australia, only makes the job of police and ASIO to engage with Islamic communities harder if not impossible to implement.  Anti-Islamic policies, drive away potential informants which are difficult and costly to recruit and maintain. General sources of information within a community also dry up.  And police and ASIO operatives are viewed with greater suspicion and trust begins to erode or is not established in the first place.  Each and every time a One Nation representative speaks out against Islam, I can imagine police chiefs in Australia sighing heavily and slapping their forehead wishing they and similar groups would just shut up and go away. 

And anti-Islam policies plays into the hands of extremist groups especially Islamic State.  They and other terror groups will use it as further evidence that western societies are targeting Muslims, making it easier to cultivate disgruntled youth in the Islamic communities in Australia, particularly those individuals who are unemployed or suffering from mental illness.

Police and ASIO in Australia have been very successful in identifying and preventing terrorist attacks.  Much of the valuable information received by those agencies has originated from Muslims, particularly from close family members.  Receipt of that cooperation is threatened.  Does anyone think that a woman of Islamic faith, who has been banned from wearing her burqa or has been threatened with the potential banning of wearing her burga in public and who feels ostracised or threatened by the introduction of such a measure, is going to make a report to the police about the suspicious activities of a family member?  One would hope she or her family would, but policies by One Nation and other groups put all of that at risk.  And why take a risk to our national security, when it isn’t necessary? Given that it is hard to assess the value of forgone information because it was never received; we might never know the impact foolish policies by political parties and interest groups have on our national security. If One Nation and other similar groups want to protect the Australian community, they are going about it the wrong way.

Policies of One Nation and other right wing groups potentially impact on our trade relations and threaten our national security efforts.  Calls to ban the wearing of the burga; restrict or prevent immigration on the grounds of religion; ending or curtailing halal certification, are a breach of human rights.  They are contrary to the Australian core value of fairness, and amount to nothing more than a fool’s harvest.  

All major Australian political parties, Australian businesses and business organisations should make a stand and speak out publicly against the policies of One Nation and other like-minded groups and individuals. And all Australians should speak out against any attempt by a group or person to reduce the rights of an individual or group on religious, cultural, race or political grounds. 

Australians opposed to Islam would be wise to travel to countries with large populations of Muslims, Christians and other religious groups living together and learn the real meaning of tolerance and acceptance.

Chris Douglas, APM
Proprietor, Malkara Consulting
Perth, Western Australia

[1] Known by other names, for example as the Chadri in Central Asia.

[2] The Dubai Chamber of Commerce estimates that the customer base for the halal industry is approximately 1.6 billion Muslims worldwide with US$1.1 trillion spent every year on halal products. Muslim markets remain net importers of halal food with the Organisation of Islamic Cooperation countries importing 50% of their vegetable products, 32% of processed food, and 18.5% of animal products.

[3] The One Nation website pays more attention to the “threat” posed by Islam and Halal certification then it does to the threat of organised crime in Australia including the challenges posed by the current usage of “ice” in Australia.

[4] India has the third largest population of Muslims in the world, with over 172 million Muslims residing in that country.  By 2050, while still predominantly Hindu, India is expected to have the largest Muslim population in the world. India is a growing Australian market for a range of products and services, with Indian Muslims playing a major role in country’s industrial and financial sectors.

Terrorism Financing & Credit Card Fraud

Introduction

The current AML/CFT frameworks that exist to combat the financing of terrorism are based largely on an anti-money laundering and arrangement introduced in the 1980’s.  Those frameworks have been amended and expanded following various amendments to the Financial Action Task Force recommendations and subsequent implementation by national governments.

AML/CFT frameworks adopt a risk based approach to the detection, reporting and prevention of money laundering and terrorism financing. This risk based approach shifts responsibility from AML/CFT regulators to reporting entities.  It is a significant change from the previous framework with reporting entities now required to do more than just comply with relevant AML/CFT legislation.  The shift was a necessary adjustment because a focus by reporting entities on compliance and reporting alone did not necessarily identify and manage money laundering and terrorism financing risks.

The adoption of a risk based approach means that the level of understanding by reporting entities of the sources of terrorist financing in particular sources of funding derived from criminal activities is more onerous under the AML/CFT framework than under the previous compliance focused regulatory regimes. However, as will be identified later, there is a question as to whether reporting entities and for that matter by extension Financial Intelligence Units and law enforcement agencies understand the nature of the risk posed by the use by terrorists and foreign fighters of the proceeds of fraud.

Putting aside minor variations to various report titles, the AML/CFT reporting framework in most countries comprises:

• Threshold Reports,
• Cross Border Currency Reports, and
• Suspicious Transaction Report/Suspicious Matter Reports (STR/SMR).

Other than a Suspicious Matter Report all report types are mandatory when certain conditions are satisfied.  While acknowledging that all of the AML/CFT reports are important, a criminal investigation including a terrorism investigation are more likely to be triggered when an STR/SMR is filed with an FIU.  This is due to the greater emphasis placed by law enforcement, revenue and intelligence agencies on “suspicions” communicated by reporting entities in particular by financial institutions.

AML/CFT reporting frameworks were established during an era when the risk of terror attack particularly a home grown terrorist attack was low.  They have not kept pace with recent international and domestic developments in terrorism or with developments in payment technology.  None of the reports are filed in real time by the reporting entities and FIU’s do not have access to any real time transactions.  As a consequence an FIU, police and intelligence agencies are not able to monitor and track in real time the movements and activities of a terror suspect using the financial foot print he or she leaves behind.  This is a major weakness in an AML/CFT framework.
 

Reporting of Suspicious Matters

The reporting of a suspicious matter report by a reporting entity requires the raising or forming of the requisite suspicion by that entity.  If no suspicion is raised in relation to any matter arising from the provision or delivery of a service by that reporting entity then no STR/SMR is raised and sent to an FIU.

 The forming of the suspicion by the reporting entity is subjective.  An STR/SMR only becomes a mandatory report when the level of suspicion in relation to the issues contained in relevant AML/CFT legislation is reached. 

What one reporting entity might regard as suspicious and therefore warrants being reported to an FIU, another reporting entity assessing similar information might not.  The time for reporting a suspicious transaction does not arise until the reporting entity forms the relevant suspicion.  In the case of an organisation this means when a responsible officer of the organisation forms the suspicion.  For example, if a bank teller thinks that a transaction is suspicious and reports it to the relevant Money Laundering Reporting Officer (MLRO) the bank time to report the transaction does not commence to run until the MLRO officer forms the suspicion.  There could be some delay in the identification of the behaviour by a front line officer and the reporting of that information to an FIU by the MLRO in the financial institution. 

If the MLRO does not agree with the suspicions raised by the officer who initially reported the behaviour then no suspicion is grounded and no STR/SMR is sent to the FIU.  The process is very subjective and when left to staff with little or no training or experience with investigating crime, particularly terrorism then the effectiveness of the system is brought into question.

And this is where a problem can arise from the perspective of law enforcement and intelligence agencies.  Information held by a reporting entity might not be suspicious when that organisation views it in isolation.  But if that information was combined with information filed by another reporting entity or with intelligence held by a law enforcement/intelligence agency it might form a strong suspicion or a higher level of proof that results in the generation of an active investigation into the reported activity.  But if no information is reported then nothing will happen.  An important piece of information could be lost which in relation to terrorism might have potential tragic consequences for our community.

““The process is very subjective and when left to staff with little or no training or experience with investigating crime, then the effectiveness of the system is brought into question””

Credit Card Fraud & Terrorism

In relation to the reporting of suspicious matters, the main area of concern is the reporting of suspicious activity relating to terrorism and terrorist financing.  By extension this includes the reporting of information that potentially relates to foreign fighters recruited to engage in terrorist activities abroad primarily in Syria, Iraq and Somalia. 

The commission of credit card fraud is a crime type that is misunderstood when it comes to the financing of terrorism.  Without any nexus to terrorism it is often only treated as a local crime problem to be solved by police.  And credit card fraud would only be considered a terrorist financing matter if the fraud was connected to terrorist activity or someone engaged or suspected of terrorist activity.  Or alternatively, the credit card fraud is reported as being suspicious and that suspicion relates to terrorism financing.  From the perspective of terrorist financing, the risk posed by credit card fraud is the least understood risk by reporting entities, FIU’s and police agencies.  It is difficult for financial institutions to assess and manage the risk because often they manage financial crime risks in separate crime silos.

““From the perspective of terrorist financing, the risk posed by credit card fraud is the least understood risk by reporting entities, FIU’s and police agencies”. ”

The problem that confronts a reporting entity (usually a financial institution) in relation to credit card fraud is establishing the requisite reasonable suspicion that the funds derived from credit card fraud relate to the financing of terrorism.  Financial crime and engaging in terrorist activity are clandestine activities which are planned and executed to prevent the identification and investigation of those involved in the crime.  Often the nexus between criminal activity and terrorism is not obvious to bank staff charged with identifying such activity. That issue is compounded by the lack of experience and training by staff of terrorist funding. It is also not always obvious to police investigators involved in the investigation of the offences.

From engagement with employees and managers in the AML/CFT environment it has become apparent that financial institutions do not or have not, either on every occasion or on many occasions submitted to an FIU, STR/SMR’s detailing credit card fraud activity where no person has been identified as the suspect involved in the crime. It is also not always certain that credit card fraud involving known offenders is reported to an FIU via the STR/SMR process as those fraud incidents are usually dealt with by the bank or not dealt with at all as the amounts involved are below the acceptable “risk appetite” of the bank. 

The identification and investigation of offenders is a function of the police.  Generally it is usually not the responsibility of an FIU.  While the responsibility of a reporting entity is to detect, report and monitor.  Police and intelligence agencies will use a range of sources including STR/SMR’s submitted by other reporting entities to identify those involved in the crime and the intended use of the funds.  But those actions and powers used by law enforcement agencies are only “triggered” by the receipt of financial intelligence such as an STR/SMR from a financial institution.

If that situation outlined above is occurring, then it is of serious concern from a terrorism financing perspective.  Credit card fraud is a major source of funding for groups planning a terrorist act.  The following examples highlight the issue:

1. The convicted ‘‘Millennium bomber,’’ Ahmed Ressam, who took part in a plotted attack on Los Angeles International Airport, opened a store in Montreal, Canada, where he obtained credit card information and passed it on to Al-Qaeda associates.
    
2. The 1998 US Embassy bombings in Africa and the first World Trade Centre bombing in 1993 were funded by criminal activities which included credit card fraud.
    
3. An al-Qaeda cell in Milan, Italy stole credit card information that was remitted to a Frankfurt cell to procure chemicals for explosives.
    
4.  Algerian Armed Islamic Group (GIA) cells in Europe provided the bulk of the organization’s funds through petty theft and credit card fraud.
    
5. The Salafist Group for Prayer and Combat (GSPC)[1] based in Algeria and highly active in Western Europe (particularly in France) have also been involved in a range of crimes such as car theft, credit card fraud and document forgery.
    
6. In 2005 a Melbourne based terrorist group engaged in systematic credit card fraud involving payment to taxi drivers to provide them with the credit card numbers of unsuspecting taxi passengers.
    
7. In the UK two Liberation Tigers of Tamil Eelam (LTTE) members were arrested for obtaining credit and debit card information at over 200 petrol stations that used pumps through the use of skimming machines.
    
8. Ali Al Marri was arrested in Illinois in December 2001 for having lied to FBI Agents about having contact with facilitators of the 9/11 terrorist attack. At the time of his arrest, Al Marri had 36 credit card numbers and account information in his possession. A subsequent search of his computer found he had compiled over 1,000 credit card numbers and other identifying information.
    
9. Mohammed Belaziz, a Salafist, was arrested on 25 September 2001 in Spain.  Inquiries revealed that Belaziz and other members of his cell had been financing their operations through credit card fraud.
    
10. The terrorists who bombed the trains in Madrid in March 2004 supported themselves through drug trafficking while another Al Qaeda cell in Spain supported itself over an extended period of time through credit card fraud.
     
11. The Liberation Tigers of Tamil Eelam (LTTE) who established cells in as many as 38 countries in Europe, North America, the Middle East and Australia funded operations through extortion, narcotics trafficking, credit card fraud, social security fraud, counterfeit currency, piracy, people smuggling, and gun running.  Special cells operating within the LTTE focused on each criminal activity.
     
12. Imran Samudra admitted prior to his execution for his role in the Bali nightclub bombings in 2002 that together with another JI member he encouraged jihadists to engage in hacking and online credit card fraud and money laundering.
     
13. Younis Tsouli a British citizen and his partner, Tariq al-Daour, began acquiring stolen credit card numbers on the web, purchasing them through various online forums, such as Cardplanet.   When Tsouli and al-Daour were arrested, al-Daour had accumulated 37,000 stolen credit card numbers on his computer, which they had used to make more than $3.5 million in charges.  Tsouli used 72 credit cards to register 180 websites, hosted by 95 different companies which were used to launder the proceeds of the credit card fraud.

The examples above demonstrate that credit card fraud is an important source of revenue for terrorist groups or terrorist supporters. But from a terrorist financing perspective it is one of the most difficult financial crimes to detect and to investigate.  And as discussed above it is extremely difficult to draw the nexus between the funding and its intended purpose namely financing terrorism. 

However, the investigation by law enforcement agencies into the source of terrorist funding is frustrated if they do not know where to look.  Important leads are often identified via suspicious matter reports lodged by reporting entities.  And if reporting entities such as financial institutions do not submit STR/SMR’s reporting the commission of financial crime, law enforcement agencies are blind as to the activity. Whether an offender is identified by the reporting entity or not is totally irrelevant. Consequently all instances of credit card fraud should be reported in real time to an FIU whether or not an offender is identified.
 

Real Time Reporting

Under the current AML/CFT reporting frameworks operating in the world none of the reports submitted by reporting entities are received by an FIU in real time.  Consequently the information received by intelligence and law enforcement agencies is dated.  At best the transactions or events reported occurred at least 24 hours previously but in most cases several days previously, particularly where the responsible officer is assessing the information.  When it comes to preventing terrorist acts this time delay could have fatal consequences.

Credit card transactions are monitored by financial institutions in real time.  Often those organisations review transactions independently but when patterns of fraud develop the major financial institutions consult with each other and exchange intelligence on the activity leading to the identification of suspects and prevention of loss and on occasions to the apprehension of offenders.  If suspected terrorists or foreign fighters are using credit cards anywhere in the world they or the person using the card can be tracked live.

The same technology could be applied to the use of debit cards and to the identification of any device (computer, laptop, smart phone) used to access bank services and any IP address associated with it.  This live examination of financial data, IP addresses and hardware is very useful in combating fraud and in terrorist financing cases would be an extremely valuable tool.

Application of the technology by intelligence and law enforcement agencies would enable suspects to be tracked live with connections being made between people, places and transactions in real time.  This information is probably more effective than current intelligence that is sent to an FIU via the existing AML/CFT reporting frameworks which is often several days late.

““This live examination of financial data, IP addresses and hardware is very useful in combating fraud and in terrorist financing cases would be an extremely valuable tool”.”

Reporting Credit Card Fraud

It appears that the involvement of terrorists in credit card fraud only becomes apparent after they have achieved their intended purpose which often results in their death and the death of innocent people.  That is clearly not an acceptable outcome.  And as referred to earlier unless a nexus between the terrorist or terrorist group and the credit card fraud is made, no STR/SMR alerting the authorities to the issue will be filed by the relevant reporting entity. Given the covert nature of terrorist financing and the difficulty of establishing the connection between credit card fraud and terrorist activity, in particular acts of preparation relating to a future terrorist attack, it might be prudent to report all fraudulent credit card activity to an FIU.

The issue for consideration is determining the best way to communicate information to the intelligence and law enforcement community about credit card fraud to determine if it might relate to terrorist financing?  There are possibly two solutions to the problem.

The first approach would involve financial institutions sending to an FIU reports of all credit card fraud activity involving both identified suspects and no known offenders.    There are however, two significant issues with this approach:

1. The FIU would be OVERWHELMED with information and would not have the capacity or capability to analyse it.  The FIU would require assistance from Police and from people with experience in analysing credit card data to assess the material, and
    
2. There is a risk that the information would be communicated using the current format and not be sent or processed in real time. 

The second approach involves the development of a specialised team to be situated in an FIU Headquarters.  The team would comprise specialists from the FIU, Police and each of the major banks.  The seconded police would be specialists in terrorism investigations with access to all relevant databases holding information on all known terrorist suspects or persons who are suspected of being associated with or recruited to be foreign fighters.  The bank officers would be specialists in credit card and bank fraud and have access to the databases of participating banks which detect and monitor credit card transactions and fraud.  This approach has a number of advantages:

1. Credit card transactions including credit card fraud would be communicated in real time to the team.
    
2.  Suspects identified by the bank would be passed to the police and cross matched against police and intelligence records to determine if they had come to notice as being suspected terrorists or foreign fighters.  All information received would be stored in police databases for future reference.
    
3. Where no offender is identified the credit card fraud activity would be matched against other activity known to have occurred involving suspected terrorists or foreign fighters.  For example: mobile phone metadata of known suspects would be compared to credit card fraud transactions to identify potential connections between them (e.g. common locations and time of events).
    
4. The FIU and police would provide the details of terror suspects and foreign fighters to the banks who would identify the credit card account details of those persons and continue to monitor their activity in real time.  The transactions and data would be fed back to the FIU and police for analysis with other data.  FIU and police would obtain the account data from the banks without the need to obtain a warrant or production order.  
    
5. The team would operate on a mutual benefit basis.  Any information obtained by the FIU and police that identifies any person or group involved in credit card fraud that does not relate to terrorism would be communicated back to the banks to enable them to take appropriate action either alone or in conjunction with other police agencies.

Financial institution staff working with the FIU would be subject to the same security vetting processes undertaken by police and intelligence employees occupying similar positions of responsibility.  With this approach the skills of bank employees in analysing credit card fraud and the information derived from their activities are combined with the expertise and information held by the FIU and law enforcement representatives.  And the information being analysed is viewed in real time.

[1] Now known as the Organization of al-Qa’ida in the Land of the Islamic Maghreb.

Risk Management: Illicit Drug Use by Employees

She sat across from the interview table and it could be seen from her poor physical health that this young woman had committed the fraud upon the bank due to a drug habit.  The long sleeve top she was wearing hid the injection scars and her withered veins destroyed by the drug she was using.  It was not difficult to identify the new point of entry for her habit.  One of her eyes was blood shot and looked off centre.  With no more veins to pick in her arms, legs and feet she needed an entry point that would enable a successful and quick hit.     

Her personnel file recorded she was in her early twenties but she carried the wear and tear of someone twice her age.  According to her manager she was a great worker. She paid attention to detail, was extremely focused and never needed to take a break including lunch often relieving for other staff to enable them to eat during peak periods.  It was the amphetamine she was injecting that gave her the stamina to work harder, longer and with greater concentration than her colleagues.  Over a period of months as she relieved staff in key areas of the bank and learned the various processes, she was able to put in place her scheme that defeated all internal controls and resulted in the fraud.  But no one would believe she did it because she was such a nice person and so productive. Her co-workers were surprised to learn she was a drug addict.

That incident occurred over 30 years ago and while it is a good example of the threat posed by drug addicted employees it highlights two issues.  The difficulty in detecting an employee with a substance abuse problem without direct management intervention and how a drug addiction will drive a person to find ways to circumvent internal controls including the manipulation of the people around them. 

The loss in that case was money.  That incident occurred in an era when information was held by an organisation in manual form and in a non computerised records system, access to a large amount of sensitive data by any one individual was rare.  But today, business is different.  The evolution of the digital age has brought significant productively benefits and outreach for all organisations.  For local and global companies the world is now their market.  But it has also created different risks. Information and funds are more centrally controlled and have to be protected by new systems.  And while the barriers preventing unauthorised access to funds and information are significant, the weakest link is still the human factor.

Adding to changes in the business environment bought on by digitalisation have been changes to illegal business operations.  Organised crime has evolved too.  New and more sinister drugs are being marketed today in addition to the traditional hard drugs of heroin and amphetamine.  With the latest drug scourge being methamphetamine or “ice” which is a global problem.  And the threat from drugs while being discussed at national and international levels of government does not appear to have reached the boardrooms of many medium to large companies.  Few directors understand the threat posed to their business by organised crime.  And fewer still are asking themselves who is consuming the billions of dollars in drugs sold globally each year and do any of them work for their company?  Company directors are holding the mistaken view that drug consumption occurs somewhere else and is undertaken by other people but not by their employees.

Drug addicted employees are a major threat to any organisation but particularly to those that hold financial assets and information.  Information is shaping as being the biggest asset that many organisations possess today.  It comes in many forms, from national security data for those involved in defence contracts to valuable information about customers and customer behaviour which organisations are using to gain a competitive edge.  All information has a sale price. It is valuable not just for the organisation holding it but also for competitors, organised crime and national and foreign governments.

Putting aside the threat posed by drug addicts who need funds to feed their habit, they can and are subject to manipulation by any of those external interest groups, but particularly by criminal groups.  Employees who use narcotics easily come to the attention of crime gangs.   Organised crime lieutenants prey on unsuspecting victims who buy and or use narcotics in popular distribution centres such as night clubs.  Once targeted, employees are threatened or blackmailed into covertly working for criminals. Organised crime has a global reach and any large national and international company is a prime strategic target for criminal groups.  Infiltration of these companies can be achieved by corrupting current employees or recruiting corrupted graduates to work in targeted organisations.  But penetration is made easier if the employee has an illicit drug problem.

So what should an organisation do to protect itself?  One measure that it could introduce is mandatory random illicit drug testing of all potential new employees, current employees and all contractors who have access to a company’s premises, assets or information.  While a number of companies have adopted compulsory drug testing it has usually being introduced from a health and safety perspective, not from a security perspective.  Compulsory drug testing is common in the mining industry but not in other industries.  No one would want a drug addicted surgeon operating on them.  Or an addict addicted to amphetamine or methamphetamine managing a large investment portfolio, foreign currency trading transaction or a large commercial project. But Anecdotal evidence suggests that illicit drug use amongst high income or highly stressful occupations is common.

It is acknowledged that enhancement of any internal control measure comes at a cost.  And if it is not cost effective to drug test all employees and contractors then all workers who occupy high risk positions as deemed by a risk management plan, should be routinely randomly tested for the presence of illicit substances.

If illicit drug testing is implemented all board members should submit to a regular test and ensure that their participation receives wide publicity throughout the organisation.  It demonstrates commitment to the program and to the core values of the company.  And every time an employee undertakes a random drug test, the procedure reinforces in them, company values.

Drug testing together with an effective whistleblower program; employee declarations of past drug use and past and current affiliations with criminals and crime groups is recognition by senior managers that it understands all the risks facing the business and is taking action to mitigate them. 

While some company directors may be more concerned about privacy, a greater area of concern is the risk that illicit drug dependant employees pose to other employees, to customers and to the organisation.  Those needs far outweigh individual privacy issues.

Sophisticated investors, shareholders and customers are becoming more concerned about the safety of their investments and the information an organisation holds about them.  They would be unforgiving of any company director or manager who failed to properly assess all of the risks and take appropriate action to mitigate them.

Money Laundering and Foreign Property Ownership in Australia

On 2 May this year, the Australian Federal Treasurer the Honourable Joe Hockey MP announced a foreign investor moratorium for any person who illegally purchased Australian property without first obtaining prior approval from the Foreign Investment Review Board (FIRB).  Under the moratorium foreign investors will have until 30 November 2015 to “self report” by disclosing to the Australian Government their illegal real estate purchases or face potential prosecution.

Additional measures announced by the Treasurer include increasing penalties from the current 2 years to 3 years imprisonment or a fine of up to $127,500.  Those foreigners who self disclose will be forced to sell their properties but according to the Treasurer they will not be subject to criminal prosecution. The Australian Taxation Office will be tasked with administering the new regime when it is implemented.

The Treasurer also announced that third parties who knowingly assist a foreign investor to breach the rules will also be subject to civil and criminal penalties under the new arrangements.  Despite the assurance from the Treasurer, a foreign investor who self-reports under this scheme may expose themselves and involved third parties to criminal prosecution or other legal action. While not mentioned by the Treasurer third parties could include real estate agents, settlement agents, solicitors and bankers who have either in some way been involved in the movement of money relating to the sale or purchase of property or in the purchase or settlement of Australian property purchased illegally by a foreign person.  Australian citizens and permanent residents who are friends or family members of foreign investors who are often involved in the purchase of Australian property could also be captured by the changes. 

While legislation relating to the new measures is yet to be drafted, of concern is that the Treasurer made no reference to how the current foreign investment framework and the new policy will work in conjunction with other federal laws in particular the money laundering provisions in the Criminal Code Act 1995 and the forfeiture provisions of the Proceeds of Crime Act 2002.  

Australian federal money laundering laws are perhaps the most powerful criminal money laundering provisions in the world. The laws apply to all Commonwealth indictable offences, which is an offence that carries a penalty of imprisonment greater than 12 months.  Offences relating to the illegal purchase of real property (referred to as Australian Urban Land) in Australia by a foreign person carry penalties not exceeding 2 years imprisonment.  Federal money laundering law therefore applies to indictable offences in the Foreign Acquisitions and Takeovers Act 1975.

The money laundering laws apply to property (real and personal) as well as money. And the laws capture the proceeds of crime, which could include the sale of any property purchased illegally and to instruments of crime which include funds used to the purchase property illegally. If a foreign investor therefore has purchased property in contravention of the current foreign investment rules or under the new regime or sells property purchased illegally then there is a high chance they will also commit a money laundering offence.

““Australian federal money laundering laws capture instruments of crime (money used to purchase property illegally) and to proceeds of crime (which includes funds derived from the sale of property purchased illegally)” ”

Breaches of federal money laundering law carry penalties up to 25 years imprisonment and/or a fine of up to $255,000 if any property involved (either purchased or sold) is more than $1 million in value.  A summary of the penalty provisions relevant to federal money laundering law is attached. Many purchases by foreigners of Australian property would probably fall into the high value category and therefore attract the harshest penalty. This could have significant implications for any foreign investor.  They and any involved third party could potentially be charged with money laundering if they follow the Treasurer’s advice and disclose and sell their property.  And the Treasurer despite his announcement, he and FIRB cannot grant immunity from prosecution.  Only the Commonwealth Director of Public Prosecutions (CDPP), an Australian prosecution body, has the authority to do that.

Third parties such as real estate agents, family members and others who assist foreign investors may be charged with money laundering offences even if their conduct was reckless or only negligent. Full knowledge of the circumstances is not required. The Australian Federal Police investigate most money laundering matters in Australia and they are prosecuted by the CDPP.

Australia was one of the first countries to implement criminal money laundering laws.  They were initially implemented to combat the laundering of the proceeds of drug traffickers.  Australian federal money laundering laws were later extended to apply to all indictable offences.  Primarily the money laundering laws were expected to target organisers of human trafficking, people smuggling, illegal gun running and tax evasion.  But the extension to all indictable offences means that foreign nationals and third parties could be captured by and prosecuted on a similar scale to drug dealers who launder their illegal money.

Australian federal money laundering legislation has extended jurisdiction.  The law applies to Australian citizens and Australian companies operating offshore from Australia.  And to any other entity or person where the money or property is intended to become an instrument of crime or there is a risk the property could become an instrument of crime or the money is the proceeds of crime.  Consequently a third party operating offshore could be bound by Australian money laundering law if they are involved in the transmission of funds to Australia that will be used or there is a risk it could be used to illegally purchase property.

Similarly, if the offshore third party for example a bank, a lawyer or a corporate service provider receives funds from Australia that were derived from the sale of property purchased illegally then they could potentially face prosecution for money laundering.  Third parties (i.e. bank or lawyer) based in Australia who facilitate the movement of funds derived from the sale of an illegally purchased property to other offshore third parties could face a criminal charge of money laundering.

““a third party operating offshore could be bound by Australian money laundering law if they are involved in the transmission of funds to Australia that will be used or there is a risk it could be used to illegally purchase property””

But more confronting is that under the current foreign investment regime there is already a risk that the illegally purchased property or proceeds of the sale of any property could be seized as proceeds of crime. Seizure can occur whether or not someone is charged with or convicted of a criminal offence.  But the change in the penalty for breaching the foreign ownership rules to 3 years imprisonment increases the options available to seize the property or the proceeds of any sale under the Proceeds of Crime Act 2002.

Other than the indictable offences in the Foreign Acquisitions and Takeovers Act 1975 relating to the purchase of Australian property illegally, the AFP can allege a money laundering offence as a way of seizing property or the proceeds of the sale of illegally acquired property and applying for its confiscation.  They don’t need to lay a criminal charge to do this. “Reasonable suspicion” a very low legal standard is all that is needed to initiate court action.  This could also occur if the foreign investor has evaded Australian tax.  And as announced by the Treasurer, the Australian Taxation Office will use data matching with other agencies to identify violators.

““Reasonable suspicion a very low legal standard is all the AFP needs to establish to initiate civil forfeiture action in relation to property purchased illegally in Australia. The increase in the penalty to 3 years expands the options available to the AFP””

Foreign investors who have bought property illegally or have sold it could face the might of the AFP’s normal investigative powers (such as search warrants) as well as specific powers under the Proceeds of Crime Act. For instance, the federal police can also compulsorily question people in connection with the purchase and sale of the property. There is no right to silence.  It is very powerful legislation.

A foreign investor who follows the Treasurer’s advice and discloses their property may not only be forced to sell. They could find themselves facing serious criminal charges and loss of all their property. Third parties who are involved in property transactions with foreign nationals should also be cautious in their dealings. 

The policy changes in relation to foreign ownership of real property in Australia announced by the Treasurer have been put forward without due consideration to the wider issues that have been raised in this paper.  The serious criminal and financial implications makes it prudent for foreign investors and third parties to get specialist legal advice before making a self-report of any breach of Australia’s foreign investment rules. Advice should also be sought from a specialist in criminal money laundering legislation and Australian federal civil forfeiture investigations (as opposed to a specialist in Australian anti-money laundering legislation and framework).

The Australian Treasurer has no power to tell the AFP or the DPP what to do, they are independent agencies. It would be folly to place faith in assurances given by the Treasurer at least until the legislation implementing the new measures has been drafted.

Please note this publication expresses an opinion only.  It does not constitute legal or financial advice and does not take into account individual circumstances. It is highly recommended to seek specialist advice before taking any action in relation to the issues raised in this article.

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Australian criminal money laundering laws and related offences contained in the Anti-Money Laundering & Counter-Terrorism Financing Act 2006 are complex.  Further complications arise when those offences are combined with any forfeiture action initiated under the Proceeds of Crime Act 2002.  Malkara Consulting is the only Australian consulting firm with extensive experience in the investigation of Australia’s criminal money laundering legislation and AML offences and in the application of the conviction and civil forfeiture provisions of the POC Act.  No other Australian consulting firm has the experience teaching money laundering and civil forfeiture in Australia and offshore.

Consequently Malkara Consulting is available for an initial consultation to examine individual cases and circumstances and discuss available options, including if necessary where to obtain legal advice.

Malkara Consulting is also available to deliver training sessions on Australian criminal money laundering provisions and the relevant forfeiture provisions contained in the Proceeds of Crime Act 2002.

Chris Douglas, APM

Malkara Consulting

Perth, Western Australia