Taken to the Cleaners
John Fennel explores the global money laundering problem and the role of the legal and accounting professions.
One notable feature of the global financial system has been its susceptibility to misuse by those who commit lucrative crimes. Among these ‘predicate’ crimes are fraud, human trafficking, drug trafficking, arms dealing, tax evasion, insider trading, child prostitution and corruption, to name a few.
In order for criminals to deal with the proceeds of their crimes, they must obscure the link between its existence and its source. This activity is known as money laundering, and it is a global problem in the order of between a few hundred billion and trillions of dollars.
Money Laundering – the Problem
The techniques used to launder money are plethoric, however they tend to be of increasing complexity. This suggests that money launderers either are, or are engaging the services of, professionals.
Money laundering typically involves three stages: placement, layering and integration.
Placement is the insertion of funds into the financial system. This is the most high-risk component of the money laundering process, as such money is extremely close to its source and can easily be traced back to the crime.
Once the money is in the financial system, it can be moved anywhere throughout the world in the second component of this process – layering. This stage requires both ingenuity and a great understanding of the ways of commerce. It is also the swiftest. Money is transferred from jurisdiction to jurisdiction in the blink of an eye through numbered bank accounts held in the names of secretive trusts and shell companies.
Integration, the final stage, involves the repatriation of criminal funds into the home jurisdiction for uninhibited use, whether for the commission of future crimes or for personal enjoyment. These funds are difficult to trace back to their illegitimate source.
This process is based on the drug trafficking model of money laundering and assumes that there are cash funds to ‘place’. However, funds already legitimately placed in the financial system may become ‘dirty’, thus requiring only the layering and integration stages to be carried out. This is often the case in tax evasion schemes.
Anti-Money Laundering – the Response
At the 1988 G7 Paris Summit, it was declared that “decisive action” was required in response to the world’s drug problem, which was said to have reached “devastating proportions”. This response was deemed necessary in light of the recent UN Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances (Vienna, 1988), where the criminalisation of money laundering was first called for. The Financial Action Task Force (FATF) was created with a mandate to develop and co-ordinate the anti-money laundering efforts on both a national and an international scale.
The result was a set of 40 Recommendations that were presented in the FATF’s initial report in April 1990. The Recommendations called for countries to require their financial sectors to implement a ‘risk-based approach’ to money laundering. Therefore, private-sector actors were required to carry out part of the investigatory role of law enforcement. Financial institutions had to implement measures to determine the identity of their customers and the nature of their business, and to report suspicious matters to the appropriate financial intelligence unit.
The Place for the Professions
Accordingly, the level of expertise required to implement modern, innovative money laundering techniques has greatly increased. Given that money laundering has become a centrepiece of the transnational crime enforcement environment, launderers must be capable of staying one step ahead of the investigatory agencies. It is non-financial service professionals, like accountants and lawyers, who have this expertise at their fingertips.
Society has long recognised those who perform the roles and functions of accountants and lawyers as belonging to a ‘profession’. A professional is generally seen as an individual with extensive education in a specific field (for example, law or accounting), who also adheres to a strict ethical code and well-developed traditions. They are often part of an exclusive society such as the Bar Association, the Law Society or the Institute of Chartered Accountants of Australia, and are generally afforded a great deal of respect by the community.
Although the legal profession is considered one of the quintessential professions, accountants are increasingly being afforded this appellation by virtue of their advancing institutionalisation, their exclusivity and the degree of education required to attain entry to the various professional organisations. Today, a Chartered Accountancy and a law degree are among the most commonly sought qualifications for individuals in business.
The services provided by these respectable professions may be misused for money laundering purposes, both wittingly and unwittingly. Functions such as creating trusts and companies, opening bank accounts, acting as a nominee director and providing a business address are all susceptible to misuse in the placement, layering and integration processes.
The global anti-money laundering response recognises the risks inherent in these services, and calls for countries to require professions to implement the FATF regime as applied to financial institutions. Generally, countries that have committed to implementing the FATF regime have comprehensively applied the Recommendations to the financial sector, requiring banks and other financial service providers to develop and carry out the risk-based approach. However, the same cannot be said for the professions.
The Global Experience
On the one hand, the European Union, by way of their Third Anti-Money Laundering Directive of 2005 (‘The Directive’), has required that all activities of accountants and lawyers be subject to the anti-money laundering regime. This goes well beyond the requirements of the 40 Recommendations, and recognises that these professions are potentially vital in the money laundering process.
The EU Directive notes that some communications between client and adviser are subject to legal professional privilege. The Directive does not require that information acquired in such circumstances be reported. These safeguards are vital to protect the accessibility of justice, fairness and due process via the professions.
On the other hand, in Australia and the U.S. there is no requirement that professionals abide by the anti-money laundering requirements in the FATF Recommendations. This is despite the fact that they are members of the FATF, which at a minimum commits them to adhere to its framework. It is intended to be only one part of their overall commitment to combat financial crime.
Nonetheless, the U.S. was one of the first countries in the world to criminalise money laundering in 1986 with the Money Laundering Control Act. It is hardly plausible to suggest that they do not take this problem seriously – globally, they have some of the most aggressive anti-money laundering laws which allow the investigatory authorities to freeze bank accounts, undertake sting operations and impose heavy penalties on money launderers. Their non-inclusion of professionals in the requirements reflects their perception that such a step is unnecessary. Whether or not this perception is well-founded is subject to debate.
The Australian approach reflects an intention to fully incorporate the FATF’s recommendations. However, this has not been followed with comprehensive legislative action.
You Call That a Knife?
There has recently been a multi-million dollar effort to combat the laundering of money derived from tax evasion offences in Australia. This is known as ‘Project Wickenby’, and it has been a model inter-agency investigatory effort. The Australian Tax Office, Australian Federal Police and Australian Transactions Reports and Analysis Centre (among a number of other agencies) have been afforded broad information-sharing powers to deal with this damaging crime.
Their targets have primarily been individuals, acting in their capacity as advisers or professional service providers, who have knowingly promoted and implemented schemes to defraud the Government of taxes. As of August 31, 2010, the ATO had recovered over $A500 million in tax from an outlay of $A431 million since 2006.
Certain high-profile individuals have been caught in this investigatory net, including Paul Hogan and John Cornell. Both are notable for their on-screen successes, as the star and producer respectively of the quintessential Australian film franchise, Crocodile Dundee.
It is alleged that the manner in which their tax avoidance scheme was set up involved an international round-robin of offshore trusts, companies and bank accounts. At the heart of this scheme is the accountant Anthony Stewart, who purportedly conspired with the Swiss accounting and consulting firm Strachans to implement the deception.
Offshore structures were apparently set up for the purpose of holding the global intellectual property rights to Crocodile Dundee 4. These structures are said to have received the film’s royalties so as to minimise tax.
Auditors from the ATO claim that Cornell and Hogan, through their accountant Stewart, failed to disclose their interest in these trusts or to declare these royalties as assessable income. As a result, the Commissioner of Taxation deemed this to be a tax avoidance scheme.
To compound the illegality of this scheme, Cornell and his family allegedly used credit and debit cards in false names which enabled them to enjoy the money cleaned by this scheme without paying any tax.
These cases are illustrative of the role of professionals in the money laundering process, as well as the general lack of any positive requirement that they take part in its detection and prevention. Many other professionals have been targeted in ‘Project Wickenby’, suggesting that this practice in which professional advisers engage in money laundering may be endemic.
Australia needs to respond, starting with the FATF Recommendations.
Where To From Here?
Professionals who provide services relating to the creation of legal entities such as trusts and companies must be required to report suspicious matters to the financial intelligence unit. There must be improved education to enable them to recognise the risks of money laundering as they arise.
There also must be safeguards in place to prevent conflict with matters of legal privilege. This is especially necessary in the case of lawyers, whose conversations with their clients may be protected by legal professional privilege. Accountants have no such protection.
Finally, Australia must consider the feasibility of extending the approach to include other activities of these professionals. The EU approach that encapsulates auditing, assurance and tax advice services goes a long way towards deterring launderers from exploiting businesses for their criminal purposes. However, this approach has proven to be a substantial burden for accountants in the UK, as the majority of the firms providing such services are rather small and cannot cope with the extra requirements. A cost-benefit analysis must therefore inform the legislative response.
Australia’s legal and accounting professions are awash with dirty money. It’s time to take them to the cleaners.
John Fennel is in his fourth year of a Bachelor of Economics, majoring in Economics and Business Law. He is currently completing Honours in Business Law.
