THE FEDERAL Government’s reform of Australia’s anti-money laundering (AML) laws could rival the Financial Services Reform Act in terms of impact, a leading lawyer has warned.
Senior financial services professionals have voiced this fear previously, and overseas AML legal reform suggests the compliance burden will be large. However, Australia is well-placed to learn from the experiences of the UK, US and Canada.
While the Australian legislation, expected to be published in the coming weeks, is based on the Financial Action Task Force’s 40 recommendations on money laundering (FATF 40), there is scope for a flexible local interpretation, said Ros Grady, partner at Mallesons Stephen Jaques.
“There is definitely room for flexibility locally,” she said. “The FATF 40 principles are very high level principles, but there is a need to interpret how they would work in practice, particularly if we go down the risk-based approach, which looks highly likely. This legislation will cover a huge range of industries, transactions and products and that inevitably leads to a need for guidance on how to implement the FATF recommendations.”
The Federal Government has confirmed that Austrac — at present a financial intelligence unit — will be responsible for enforcing the new regime, and this move will allay some of the problems experienced in the US. “In the US there was so much bad feeling about the plethora of regulators there and it really highlighted the need for a single regulator that knows its industry and the regulation really well,” said Grady, who has recently returned from an AML fact finding trip to the US, UK and Canada. “It would seem logical.”
While Australian banks are already subject to AML regulation internationally, for many industries the new framework will be their first contact with AML. For this reason, said Grady, industry groups here have a key role to play in developing workable guidelines. The legislation is expected to take the form of high level principles, as opposed to minimum standards, augmenting the role of industry bodies.
“The legislation is likely to be high level, but you would expect guidance, or we might go the UK route and have that guidance developed by industry itself,” Grady said. “That seems like a very logical way to go. You have the rules being developed by industry for industry with signs offs from the treasury. I think there’s a reasonable chance of that happening.”
However, there are fears that a growing debate over third-party verification of clients could make such a scenario unlikely. “We are seeing a lot of lobbying coming from non-financial institutions around third-party reliance on banking clients,” said one official with knowledge of the legislation process. “For example, a legal firm being able to say we don’t have to identify a customer as long as they give us their bank account details because the bank will have identified them and we can rely on that and that should be enshrined in the law. You can imagine the banks’ view of that.”
Grady agreed that the issue would be of major concern. “The bottom line is that this whole issue of knowing your customer and your customer’s customer and whether or not you can rely on someone else’s due diligence on an individual or organization will be very very big issue,” she said. “It goes back to making the legislation workable — there should not have to be duplication of information gathering. That is where the concerns of onerous regulation and high costs could be eroded.”
Observers with knowledge of the legislative process said one likely factor in the delays was the intense lobbying from various stakeholder groups intent on securing the best deal for their respective industries. The superannuation industry, for example, has claimed the reforms will cost it $900 million, while the credit union industry body CUSCAL has labelled the reforms Orwellian. The Real Estate Industry Association meanwhile said it was concerned that the Government would force it to do “extra checking, which we are not being paid to do” and the Securities Institute of Australia has said it sees the AML reforms as rivalling the Financial Services Reform Act in terms of compliance efforts.
Professional privilege under the microscope
THE UK’s AML law reform has propelled the issue of legal professional privilege into mainstream business debate. There, according to a former member of HM Treasury’s Money Laundering Advisory Committee, questions are being raised over whether the government has gone too far on the issue of lawyers informing on their clients in AML matters.
“There are currently challenges from Bar Councils and Law Societies who say they do not want to be acting informants,” she said. In the recent case of Bowman v Fels, the UK Court of Appeal ruled that it was not the intention of UK legislature to impose on lawyers the requirement to report on their clients in the process of litigation.
But there are examples where the legal profession has successfully lobbied to protect professional privilege regarding AML.
“I would imagine that the legal profession has fairly strong views that any information that is covered by legal professional privilege should not need to be disclosed and one would like to see that protected,” said Mallesons’ Grady.
“In Canada, there have been exemptions provided for the legal profession as a result of action taken by the Law Society. They went to the Supreme Court of Canada and got a negotiated settlement with the government which relates to their reporting requirements. They essentially self regulate.”
Stuart Fagg is the Editor of Risk Management, Lawyers Weekly’s sister publication.