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Yes Minister, but it's a matter of national security!

Yes Minister, but it's a matter of national security!

Extensive non-compliance and indifference, a delay in implementing Tranche II, a one-size-fits-all approach and increasing complexity have hardly endeared Australia's anti-money laundering and…

Extensive non-compliance and indifference, a delay in implementing Tranche II, a one-size-fits-all approach and increasing complexity have hardly endeared Australia's anti-money laundering and counter-terrorism financing initiatives to the broader business community, writes James Cozens.

AUSTRAC, the body responsible for protecting the integrity of Australia's financial system in relation to the prevention of money laundering and terrorism financing, has been extremely busy in recent weeks dealing with some high-profile cases of non-compliance within the financial services sector, as well as addressing growing pressure from senior executives and industry bodies questioning loopholes in the current regime.

The primary issue is the Federal Government's delay in implementing Tranche II of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, which is supposed to bring lawyers, accountants, real estate agents and jewellers within the AML/CTF regime. At present, these types of businesses are not monitored at all, providing a great roadmap to safe havens for criminals. Indeed, failure to implement Tranche II makes the whole exercise read like an episode of the British television classic Yes Minister.

Jim Hacker, Minister for Common Sense: "But, Sir Humphrey, surely this makes a complete joke of the whole regime. We need to explain things to the people. We need to do something about this."

Sir Humphrey: "Unfortunately, Minister, there is simply nothing we can do. This is now classified. It is a matter of national security!"

Australian Bankers Association chief executive David Bell has questioned the delay and highlighted the dangers in not monitoring industry sectors that "complete large transactions similar to financial institutions and are in an ideal position to report instances of suspected money laundering". While many may find it difficult to feel any sympathy for bankers at the moment, Bell does have a pretty good point.

In face of such ongoing criticism, Attorney-General Robert McClelland commented that the Government is "conscious of the need to balance the second tranche of reforms against the very immediate needs of business in the current financial climate". His department's website recently announced that the Government now proposes to reconsider the implementation process for the second tranche of reforms in December 2009.

While this is good news for businesses that will fall within the second tranche of legislation, it is bad news for the credibility of Australia as an international business centre.

When I spoke with outgoing AUSTRAC CEO Neil Jensen a few weeks ago he confirmed that there could be up to 40,000 entities caught up in Tranche II, although he qualified the statement by adding: "We don't really know what Tranche II is going to cover at this stage".

This is not AUSTRAC's fault. It is because the Government has not told the regulator what it is doing. About 40,000 businesses - the majority of which will be small-to-medium-size - coming to grips with the complexities of the AML/CTF Act and implementing risk management and compliance systems will, at the very least, be a challenge. Spare a thought for the small-town regional accountants, lawyers, real estate agents and jewellers who probably have not the slightest clue about what is about to come their way.

Further criticism has recently been directed at AUSTRAC due to a perceived lack of enforcement against non-compliant entities within the financial services sector, and also a lack of serious penalties for those businesses that have failed to lodge a compliance report for the 2008 period. Estimates suggest that about 20 to 25 per cent of the approximately 15,000 reporting entities across Australia have failed to lodge compliance reports, suggesting an alarming level of "don't care" sentiment.

There are growing concerns, particularly within the gaming industry, that many entities do not have adequate programs in place or, worse still, have not even addressed the issue. Of course, this is not really surprising when you consider that similar rules and obligations apply to big banks and right through to the local pub in a country town operating a few pokies - albeit that the entities do not share the same degree of complexity.

Many of the businesses that have done the right thing and spent considerable time and money during the financial crisis building programs to address AML/CTF obligations are becoming increasingly disillusioned by an apparent lack of penalties for non-compliance. Little wonder, then, that the regulator has just struck back, after having accepted enforceable undertakings from Barclays Bank and Mega International Commercial Bank. In my discussions with Jensen he made it very clear that AUSTRAC is not just going to sit back. It has a range of powerful enforcement tools and intends to use them.

Overall, however, Australia remains behind many other Western nations in terms of the regulation and prevention of money laundering and terrorism financing. This cannot be a good thing, particularly in light of recent corporate scandals and the international desire to crack down on money laundering activities.

As Jensen prepares to step down from his post at AUSTRAC he can probably be satisfied with the initiatives he and his team have put in place over the past few years - especially the requirement that all reporting entities lodge targeted annual compliance reports and undertake regular independent reviews of their AML/CTF programs.

The real question is what the Federal Government is doing to close the gaping holes in the system and how it is going to deal with the enormous challenge of having tens of thousands of small-and-medium-size enterprises comply with a piece of legislation that can be headache-inducing in its complexity.

James Cozens is a consultant with corporate governance solutions specialist CompliSpace.

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