Buying a home in Australia? Hopefully you will soon not have as much competition from drug dealers, corrupt officials and criminals with dirty money due to proposed new laws and a boost to enforcement. But the lobby groups are at work to prevent this legislation passing.
For decades Australia has lagged the world in anti-money-laundering legislation, meaning real estate agents, lawyers, accountants and dealers in precious metals and stones did not have to report suspicious transactions or do “due diligence” — i.e. Know Your Customer (KYC) checks — on their clients.
As far back as April 2021, I wrote an On Target CEO Blog on ‘Money Laundering’ where I reported that Australia’s financial crimes watchdog the Australian Transaction Reports and Analysis Centre (AUSTRAC) was concerned that lawyers and real estate agents were being used for money laundering purposes (Ratnatunga, 2021).
At that time, there was some evidence that laundered money was being ‘integrated’ in the trust funds of lawyers, accountants, and real estate agents (referred to as Tranche 2 entities) to buy legitimate assets such as real estate and share investments. Some of these professionals were being unwittingly used to avoid money laundering detection; but there were also those who were intentionally involved in criminal activity.
These concerns were raised in October 2020, following reports in the media in Australia and USA revealing how a secretive international operation was targeting dozens of Australian taxpayers to use a Puerto Rican bank, Euro Pacific, co-owned by American celebrity business figure Peter Schiff (Galloway, 2020).
The revelations sparked renewed calls from financial crime experts for the Australian federal government to introduce long-stalled laws that would force lawyers, accountants, and real estate agents to report their clients to authorities if they move money in a suspect fashion, including offshore.
At that time (2021), the Australian federal government was again considering whether to introduce the “tranche 2” laws, after lawyers, accountants, and real estate agents successfully lobbied for the regulations not to apply to them in 2018. If this legislation were passed, it would have included a requirement to submit suspicious matters and transaction reports. However, the lobby groups once again successfully prevailed in 2021, and stalled the legislation.
Legislating Tranche 2 Global AML rules: The History of Resistance
In 2003, Australia agreed to implement comprehensive ‘Tranche 2’ global AML rules covering so-called real estate gatekeepers: accountants, lawyers, and real estate agents. Unfortunately, passing legislation to implement these rules has been continually postponed by Australian Federal Governments (with Prime Ministers from both the Liberal and Labor parties) due to strong pushback from the same industries that would be subject to the regulation.
This resulted in the global AML regulator, the Paris-based Financial Action Taskforce (FATF), issuing a warning in 2015 that large sums of money were being laundered through Australian residential housing, mostly from China. As such, the FATF urged Australia to implement AML regulations to bring real estate gatekeepers under regulatory scrutiny. The FATF again warned before the Covid pandemic that large sums of money were “suspected to be laundered out of China into the Australian real estate market”.
Likewise, the Australian Transaction Reports and Analysis Centre (AUSTRAC) warned that “laundering of illicit funds through real estate is an established money laundering method in Australia”.
All of these warnings fell on deaf ears.
In 2023, it was estimated that billions of dollars have been laundered through Australian homes over the past two decades, primarily by Chinese nationals (van Onselen, 2023).
Fast Forward to 2024 – Can Australia close the loopholes?
Like Groundhog Day, the current Australian Federal Labor Government under Prime Minister Anthony Albanese is undergoing another industry consultation process on the Tranche 2 AML laws.
Anti-Money Laundering (AML) Laws
Australia has some of the weakest anti-money laundering (AML) laws in the world, which has made Australian housing an easy conduit for laundering dirty money
Today, out of more than 200 countries, Australia is still, alongside China, Haiti, Madagascar and the United States, one of the very few countries that have not regulated ‘Tranche 2 entities’ (accountants, lawyers, and real estate agents).
As such, in a speech to the National Press Club in May 2024, Australian Attorney-General Mark Dreyfus said Australia is now at risk of being “grey-listed” by the International Financial Action Task Force (FATF) for failing to meet global standards.
“Australia is continuing to fall behind global standards on anti-money laundering and counter terrorism financing measures, with cash, banks, luxury goods, real estate and casinos providing continued channels for money laundering.” (Chau and Khadem, 2024).
In June 2024, the government began the next stage of consultation on reforms to Australia’s anti-money laundering and counterterrorism financing regime, aiming to reduce the criminal abuse of our financial system after what the attorney-general called “nearly a decade of inaction by the former government.”
AUSTRAC will get $166.4 million in the budget to help affected professions abide by the new laws. and to support industries to meet their obligations. This will mean, for example, education programmes for real estate agents on what to do when they are confronted with a suspicious transaction (Ziffer, 2024).
Transparency International Australia (TIA) has welcomed the government’s reforms. Clancy Moore, CEO of TIA, said:
“Financial crime impacts all of us. When kleptocrats, criminals and corrupt officials hide their ill-gotten gains in Australia, it robs local communities of money for essential services and distorts our economy. Too often, lawyers, accountants, and real-estate agents choose to look the other way, actively support, or unknowingly enable criminals to launder their proceeds of crime in Australia. It’s time to close this massive loophole in Australia’s financial system.”
The ‘Golden Ticket’ Visa Scheme
In addition to weak AML laws, Australia has a the ‘golden ticket’ visa scheme, which was introduced by former Labor Treasurer Chris Bowen in 2012 and has operated for 10 years with near zero rejections. These ‘golden ticket’ visas grant automatic permanent residency in Australia, and unlike other visa classes, no English language proficiency is necessary. Chinese citizens make up 90 per cent of successful applicants. And over 20,000 Chinese have been approved for the Significant Investor Visa scheme, which requires a $5 million minimum commitment.
The “golden ticket” visa scheme has also facilitated money laundering. Anti-corruption campaigners have long lobbied for these visas to be abolished, claiming that corrupt officials are using them to enter Australia and launder funds. Australia’s Productivity Commission has also called for the ‘golden visa’ programme to be axed, noting they are conduits for laundering ‘dirty money’ into Australia (van Onselen, 2023).
Other developed countries have already discontinued similar ‘golden ticket’ visa programmes, which, when combined with Australia’s lax AML rules, have made Australian real estate an easy conduit for laundering funds (Onselen, 2023).
Resistance from the Real-Estate Industry
Implementation of these rules could result in more than 100,000 real estate gatekeepers being subject to AML regulation, which has caused another round of fierce pushback from the impacted industries.
These vested interests defeated similar stakeholder consultations in 2008, 2010, 2012, 2014, and 2017. And there is the concern that they will be successful again, delaying the implementation of the global AML rules first agreed by Australia in 2003 into the never-never.
As expected, the lobbying has recommenced, with the Real Estate Institute of Australia (REIA) cautioning against changes to money laundering laws, saying that the federal government needs to be careful not to hurt businesses as part of its crackdown on money laundering.
REIA Deputy President Hannah Gill said that introducing blanket compliance requirements on all real estate businesses appears once more to be ‘taking a sledgehammer to a walnut’.
“The Attorney General himself has said today that he has no knowledge and there is no evidence to substantiate that money laundering is driving house price growth. The last thing we want is Australian homes falling into the hands of sophisticated criminals with legitimate buyers who are hardworking Australian families and individuals missing out.” (Khadem, 2024).
The Money Laundering Process in Australia
Money laundering is the process of making illegally gained proceeds (“dirty money”) appear legal (“clean”). In Australia, historically, most of its anti-money laundering laws linked money laundering (which is concerned with the source of funds) with terrorism financing (which is concerned with the destination of funds) when regulating the financial system. Using ‘dirty-money’ obtained overseas to purchase Australian property has been seen as good for economic growth. The only concern of some state governments was that the prices of real estate are rising astronomically as foreign buyers with deep pockets are outbidding local (voting) families who may vent their frustration at the polling booths.
In essence, money laundering involves three steps: ‘placement’, ‘layering’, and ‘integration’.
First, the illegitimate funds are introduced into the legitimate financial system (placement). Then, the money is moved around to create confusion, sometimes by wiring or transferring through numerous accounts (layering). Finally, it is brought into the financial system through legitimate looking transactions — such as buying real estate — until the “dirty money” appears “clean (integrated).
The ‘placement’ of dirty money can take several forms, although most methods can be categorised into one of a few types. These include “bank methods; smurfing (also known as structuring); using legitimate cash businesses (such as casinos); currency exchanges, and double invoicing”. ‘Bulk cash smuggling’ involves physically smuggling cash to another jurisdiction and depositing it in a financial institution, such as an offshore bank, with greater bank secrecy or less rigorous money laundering enforcement.
Often, a corporate entity is used for ‘placement’ either knowingly or unknowingly, using the following vehicles:
- Shell companies and trusts: Trusts and shell companies disguise the true owner of money. Trusts and other corporate vehicles, depending on the jurisdiction (such as in the State of Delaware, USA), need not disclose their true, beneficial owner. Such companies are sometimes referred to as ratholes.
- Controlled Foreign Corporations: Here, money is deposited in a controlled foreign corporation offshore, preferably in a tax haven where minimal records are kept, and then shipped back as a foreign direct investment, exempt from taxation. This is called ‘round-tripping’. A variant on this is to transfer money to a law firm or similar tranche 2 entity, as funds on account of fees, then to cancel the retainer and, when the money is remitted, represent the sums received from the lawyers as a legacy under a will or proceeds of litigation.
In Australia, the most common form of money laundering is where corporations or individuals purchase real estate with illegal proceeds obtained overseas and transferred to a tranche 2 entity (lawyers, accountants, or real estate agents) to purchase a property. Often, this is the final resting place of the dirty money.
However, there are those who want ‘clean cash’ rather than real estate. In such cases, the tranche 2 entity makes arrangements to sell the property. The proceeds from the sale look like legitimate income. Alternatively, the price of the property is manipulated, with the seller agreeing to a contract that underrepresents the value of the property and receives criminal proceeds to make up the difference.
Case Study
Despite the objections from the Real Estate Institute, the problems caused by international money laundering are far from theoretical. A new report from Transparency International Australia reveals millions of dollars of dirty money could be flowing from the impoverished nation of Cambodia to Australia annually, with gaps in the law-making Australia’s real estate sector an attractive destination for money laundering.
According to the advisory firm KordaMentha’s report, Cambodian foreigners settled 118 properties worth a total of $110 million in Australia in the five years leading up to 2022 (Ziffer, 2024).
To give a sense of scale, in 2020, more than $516 million in total funds were transferred from Cambodia to Australia. Much of it could be legitimate financial activity or investment. But the value of money flowing from Cambodia is vastly disproportionate to the nation’s wealth — just under 1 percent of Cambodia’s gross domestic product. (The average income in the authoritarian state is just $1,690 annually).
Although Cambodia is an incredibly poor country with lots of people living in poverty, it is also a regional hub for money laundering, human trafficking, and the drug trade as well. So that amount of money coming in is quite concerning. It raises serious red flags as to the source of those funds. As such, those who work in the field have welcomed the news that greater diligence will be required by Tranche 2 entities in the future when suspicious transactions are made.
KordaMentha partner Alice Saveneh-Murray, who works in the field of financial crime, says signing up to Tranche 2 laws will make the nation safer.
“This brings into focus the regulatory gaps in Australia’s regime and how AML/CTF reform will bring Australia closer to being compliant with its international obligations. We know that this issue is not isolated to Cambodia and the Asia-Pacific region, but our research clearly emphasises the need to take urgent steps to reduce the risk of Australian real estate being used by criminals for money-laundering and terrorism financing, as well as in other industry sectors that will be covered by the AML/CTF tranche 2 reforms proposed by the government.” (Ziffer, 2024).
Summary
The Albanese government needs to break the 20-year cycle of stonewalling and implement the Tranche 2 AML rules once and for all.
The government should also follow the Productivity Commission’s recommendation to scrap the ‘golden ticket’ visa programme, as well as ban temporary migrants from purchasing established Australian homes.
Otherwise, locals will continue to be priced out of housing by foreigners, and Australian housing will remain a global magnet and shelter for dirty laundered money.
Money laundering is a real risk not only in the banking and finance institutions, but also in the legal, accounting, and real estate professions. Effective Know-Your-Customer (KYC) protocols are a vital part of any anti-money laundering (AML) regime.
It is therefore refreshing that a crackdown on money laundering has been proposed so that real estate agents, lawyers, and accountants will need to report suspicious transactions. If passed by the Australian Parliament, such laws will bring Australia into line with similar nations and stem the process of criminals converting illegal profits into money that looks legitimate.
When done right, KYC processes can help financial institutions better understand and manage their risks and prevent money laundering. However, it is one thing to have strong KYC guidelines on paper and another to implement them. Therefore, it is good that AUSTRAC will get A$166.4 million in the budget to help affected professions abide by the new laws.
The question is, will the lobby groups be successful once again in stalling the legislation?
References
Chau, David and Khadem, Nassim (2024), “As it happened: Lawyers, accountants, real estate agents target of new money laundering laws”, abc.net. July 9. https://www.abc.net.au/news/2024-07-09/asx-markets-business-live-news/104073806, accountants, real estate agents target of new money laundering laws
Galloway, Anthony (2020), “Lawyers, accountants and real estate agents should report suspicious activity: AUSTRAC boss”, The Age, Business, October 23, p.1,28.
Khadem, Nassim (2024), “’Sledgehammer to a walnut’: REIA cautions against changes to money laundering laws” abc.net. July 9. https://www.abc.net.au/news/2024-07-09/asx-markets-business-live-news/104073806, accountants, real estate agents target of new money laundering laws
Ratnatunga, Janek (2021), “Money Laundering: Traditional vs. Digital: Key Lessons for Bankers and Finance Professionals”, On Target, April 27. https://ontarget.cmaaustralia.edu.au/money-laundering-traditional-vs-digital-key-lessons-for-bankers-and-finance-professionals/
van Onselen, Leith (2023), “Reason millionaires are flooding into Australia”, news.com, November 16. https://www.news.com.au/finance/economy/australian-economy/reason-millionaires-are-flooding-into-australia/news-story/4df3f345449e347042b98624e1327148
Ziffer, Daniel (2024), “New laws to stem drug dealers, corrupt officials and dirty money from heating up Australia’s real estate market”, abc.net, May 6. https://www.abc.net.au/news/2024-05-06/new-laws-to-stem-money-laundering-through-real-estate/103800070
The opinions in this article reflect those of the author and not necessarily those of the organisation or its executive.