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directors
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chapter 1
chapter 2
chapter 3
chapter 4
chapter 5
chapter 6
chapter 7
chapter 8

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Chapter 6

Changes in the Australian financial sector

Our strategic directions - proposed amendments to the FTR Act

Regulation review of the FTR Act

Researching electronic commerce

Strategic Framework for the Information Economy

Planning for the future

Primary Output Group Three

Primary Output 3

Identifying change, and adapting to that change are two aspects of a major focus for AUSTRAC. Our environment is experiencing rapid change. This is true of our involvement with the private sector, as it is in respect of government policy and government agency activities. Staying relevant in this evolving environment is essential and is a constant challenge.

The number of cash dealers we deal with is growing, with established players such as banks, diversifying and newcomers entering what used to be the traditional market for banks. We are seeing the growth of remittance dealers, community banks and other organisations as they adapt to the changing markets and take up fresh challenges. In moving into the financial market, these new cash dealers may have incurred obligations under the FTR Act. We must ensure all cash dealers are aware of their obligations and comply with the FTR Act.

While ensuring all cash dealers, including new entrants, comply with the provisions of the FTR Act, we need to ensure that the legislation remains relevant in our changing environment. We have been maintaining our ‘watching brief’ and, where appropriate, advising government on the impact of change.

A review of the FTR Act by a taskforce of officials began last year under the Commonwealth Legislation Review Program. Due to be presented to government early in the coming financial year, the report of the taskforce may have a substantial impact on the work of AUSTRAC and the focus of the FTR Act. We eagerly await the outcome of the taskforce’s deliberations.

Changes in the Australian financial sector

During the past year, there was continuing change in the financial and gambling sectors. Community banking, supermarket banking, and Internet gambling are but a few of those changes that must be looked at in the light of the FTR Act. We consulted cash dealers, law enforcement and revenue agencies, and others in order to understand these changes and consider the implications for the FTR Act.

Technology development continues to be a major area of consideration for AUSTRAC. As outlined in this annual report (see page 96), AUSTRAC has continued to facilitate the work of the Action Group into the Law Enforcement Implications of Electronic Commerce (AGEC).

AUSTRAC initiated a research project as part of our contribution to the AGEC, referred to as, ‘Keeping AUSTRAC Relevant Technologically’ (KART). The objectives of the KART project are to: maximise awareness of financial and business technological change, assess the potential impact of technological change on AUSTRAC operations, and take appropriate action to maintain the effectiveness of the FTR Act and AUSTRAC’s operations.

AUSTRAC’s High Risk Cash Dealer Strategy has also highlighted a significant change in the operation of the financial sector with a growing number of smaller remittance dealers entering the sector. AUSTRAC has approached over 400 remittance dealers and alerted them to their obligations under the FTR Act.

Developments in alternative payment mechanisms, such as stored value cards have been another focus of our attention. We have maintained our relationship with Mondex Australia Ltd, which provided us with several briefings during the financial year.

We continued to facilitate the work of the Proof of Identity steering committee during the financial year. Comprising representatives of Commonwealth and State Government agencies and cash dealers, this group has been reviewing the impact of false identity in both the public and private sectors. The steering committee has drafted a paper with options for action. This is to be presented to government in the coming reporting year. During the year the work of the steering committee was complemented by the efforts of other groups interested in this issue, including the State Police Forces and other Commonwealth and State government agencies. AUSTRAC is facilitating a group representing the HOCOLEA agencies to give further consideration to the matter. International input will be provided to the steering committee early in the coming reporting year.

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Our strategic directions – proposed amendments to the FTR Act

In her 1998 review on the effectiveness of the FTR Act under the National Illicit Drugs Strategy, our Director recommended amendments to the FTR Act. AUSTRAC has continued to work closely with cash dealers, and law enforcement and revenue agencies on the possible amendments. This project is vital if the FTR Act is to maintain its effectiveness in supporting the government’s law enforcement and revenue programs. In consultation with the AUSTRAC Provider Advisory Group and relevant law enforcement and revenue agencies, the need for, and possible effects of the proposed amendments are being closely considered. AUSTRAC will continue to review possible amendments to the FTR Act to ensure the effectiveness of the FTR Act. At the same time, we will continue to consult widely with cash dealers and law enforcement and revenue agencies to ensure all issues of relevance to the proposed amendments are considered. It is essential that any amendments should not impose unnecessarily restrictive burdens on cash dealers.

Regulation review of the FTR Act

A review of the FTR Act and the FTR Regulations is being conducted under the Commonwealth Legislation Review Program, which is part of the National Competition Policy reforms. This program requires legislation which restricts competition, imposes costs, or confers benefits on business, be reviewed and where appropriate, amended.

The review is being undertaken by a taskforce of officials including an AUSTRAC Deputy Director.

The terms of reference for the review are as follows:

The taskforce is to examine and report on:

1. a. whether and to what extent the legislation impacts on business by restricting competition or imposing costs or conferring benefits on business;

b. appropriate arrangements for regulation, if any, taking into account the following:

1. legislation which restricts competition should be retained only if the benefits to the community as a whole outweigh the costs, and if the objectives of the legislation can be achieved only by restricting competition; and
2. effects on: criminal activity, including money laundering; economic and regional development; consumer interests; competitiveness of business, including small business; and efficient resource allocation;

c. whether compliance costs can be reduced, including compliance costs and paperwork burden on small business; and

d. the need to promote consistency between regulatory regimes and efficient regulatory administration, through improved co-ordination to eliminate unnecessary duplication.

2. In undertaking the examination, the taskforce is to have regard to the analytical requirements for regulation assessment by the Commonwealth, including those set out in the Competition Principles Agreement. The taskforce should:

1. identify the problems the Financial Transaction Reports Act 1988 and the Financial Transaction Reports Regulations seek to address;
2. clarify the objectives of the FTR Act and Regulations;
3. identify the nature of any restriction that the FTR Act or Regulations places on competition;
4. analyse the likely effect of the restriction on competition and on the economy generally;
5. consider alternative means for achieving the same result including non- legislative approaches;
6. assess and as far as reasonably practicable, quantify the costs and benefits of the requirements and overall effects of the legislation and alternatives identified in (e);
7. identify the major groups likely to be affected by the FTR Act and Regulations and alternatives, and list individuals and groups consulted during the review and outline their views, or reasons why consultation was inappropriate; and
8. examine mechanisms for increasing the overall efficiency, including minimising the compliance costs and paper burden on small business, of the Financial Transaction Reports Act and Regulations, and where it differs, the preferred option.

In January 2000, the taskforce placed national advertisements and made direct contact with a large number of interested persons and organisations. Its purpose was to receive submissions and comments on the likely effects on business of any legislative restrictions on competition. The taskforce also sought opinions of costs and benefits arising from the FTR Act and whether there are any non-legislative alternatives for improving benefits to Australia.

Submissions were received by the review taskforce secretariat in the Attorney-General’s Department in March 2000. A large number of persons and organisations responded including cash dealers, AUSTRAC’s law enforcement and revenue partner agencies and other interested parties.

AUSTRAC provided an extensive submission for consideration by the taskforce. We discussed many aspects of the legislation and work of AUSTRAC over the past 11 years. We considered issues relating to competition in markets and the costs and benefits of the legislation to the community, cash dealers and the government’s law enforcement and revenue programs. Our submission also commented on future trends and the need to ensure the FTR Act remains relevant in both its domestic and international contexts. We concluded that:

…any possible anti-competitive effect of the legislation is minimal and is clearly outweighed by the substantial benefits accruing to the Australian community through the legislation. The FTR Act and AUSTRAC, as its implementation vehicle, are important parts of the overall regulatory and law enforcement fabric that are necessary for Australia’s social, democratic and economic well being.

The taskforce has met several times and discussed many issues outlined in the submissions. Its report and recommendations to the government will be presented early in the coming reporting year.

In addition to the submission provided by AUSTRAC to the taskforce, (which may be found on the AUSTRAC website), government and private sector bodies made submissions. Below are comments received by the taskforce in relation to the work of AUSTRAC and the implementation of the FTR Act.

The Commonwealth Director of Public Prosecutions states:

A criminal organisation is no different from any large scale commercial enterprise. If the organisation is profitable, it will find it difficult to function without leaving a money trail. If the money trail can be identified, it can often be followed to its source. The data gathered by AUSTRAC, if used properly, can help identify the money trails left by criminals or tax evaders.

This type of intelligence has a marked advantage over more traditional sources of criminal intelligence, like relying on informers. FTR Act data will usually point most clearly to those organisations which are the most successful, and hence the most dangerous to the community, and it holds the promise of allowing the investigators to follow the money all the way to the top of the organisation, which is where prosecution and assets recovery action can do the most good.

The Australian Taxation Office comments:

During the last three financial years, the ATO has conducted approximately 433,000 searches on the AUSTRAC database. Over the last five financial years $160 million in additional tax and penalties have been raised by the ATO that can directly be attributed to FTR information.

As administrators of the tax law, we believe that the Financial Transaction Reports Act 1988 and Financial Transaction Reports Regulations (FTR Act) requirements:

• Act as a deterrent to those who may seek to conceal their income, taxable transactions or the movement of funds;
• Improve the ability of the ATO and other agencies to detect tax evasion, criminal activity and money laundering; and
• Allow the ATO to better target our activities and thereby ensures compliant taxpayers are less likely to be subject to compliance activity.

The NSW Crime Commission states:

FTR information is used in all cases investigated by the Commission. Results of the Commission investigations are summarised below.

⁹ At the request of the New South Wales Crime Commission, the figures provided in this report have been updated from those provided in the submission to the Office of Regulation Review.

The National Crime Authority advises:

Importantly though the FTR Act has brought significant benefits to law enforcement, revenue agencies, and the Australian community. The FTR Act and financial intelligence made available by AUSTRAC plays a key strategic role in much of the work of the NCA and other agencies with responsibilities for counteracting large scale money laundering, related criminal activity and sophisticated tax evasion schemes…

The Agio taskforce is just one example of how FTR information is used by government agencies to improve resource allocation and strategies to counteract the effects of organised crime on the Australian community. This approach would not be possible without the central database maintained by AUSTRAC and its computerised analytical capabilities.

Researching electronic commerce

The Research Group into the Law Enforcement Implications of Electronic Commerce (RGEC) changed its name to the Action Group into the Law Enforcement Implications of Electronic Commerce (AGEC). The name change demonstrates that the law enforcement and revenue arms of government are working with industry, commerce, and government agencies to develop an appropriate legal and regulatory framework for electronic commerce.

This project is consistent with the National Office for the Information Economy (NOIE)’s Strategic Framework for the Information Economy Action Plans which include law enforcement capability and crime prevention as key priorities for action.

As our Director is the chair of the AGEC, in the interests of developing the recommendations of the earlier Report of the RGEC¹⁰, we have created an Action Plan. This plan sets out the AGEC’s approach to:

• establishing a co-operative forum with NOIE and the Internet industry
• raising awareness of IT security issues
• raising awareness of IT skills training and development
• exploring electronic authentication issues
• determining the extent to which telecommunications carriers and internet service providers (ISPs) should be required to maintain records in relation to transactions conducted purely through electronic means
• discussing the need for a commercial system of website identifiers
• exploring the need for a national computer forensics capability
• consulting on the need for a model criminal code in relation to computer based offences
• emphasising the importance of international co-operation, particularly as it relates to mutual assistance in criminal matters
• exploring the possibility for Internet media monitoring.

The AGEC has been working on a second series of Issues Papers. These papers address the very complex issues of national computer forensics capabilities, evidence in the electronic environment, and Internet banking.

AUSTRAC commenced work on the Keeping AUSTRAC Relevant Technologically (KART) project, the aim of which is to assess, and where possible, take action in relation to the extent to which electronic commerce system developments are impacting on the way AUSTRAC does business. The project is also examining whether the FTR Act requires amendment to deal with new payment systems.

The KART project has involved discussions with major financial sector organisations, gaming operators and casinos, universities and others. Areas in which the impact of electronic commerce has been identified include: cash dealer customer identification and FTR reporting in electronic environments, online service delivery by AUSTRAC to the public, and AUSTRAC’s participation and contribution towards the development of the Government Online Strategy. (For further details, see chapter 2.)

The project is due for completion early in the coming reporting year, when a report and recommendations will be finalised. The recommendations will be reviewed by the AGEC and considered for implementation where appropriate. The report will also be given to government for consideration, particularly in relation to any proposed amendments to the FTR Act.

To maintain a current understanding of the global impact of electronic commerce, we continued to confer with US authorities. We again held video conferences with senior officials from the US Financial Crimes Enforcement Network (FinCEN), Federal Deposit Insurance Corporation (FDIC), Department of Justice, and Federal Bureau of Investigation (FBI).

These video conferences provided us with valuable insights regarding important issues including: the establishment of the US National Information Protection and Computer Intrusion Program currently being run by the FBI; the challenges for law enforcement agencies in seeking to prosecute computer crime and computer related offences, and ways of maintaining the ‘know your customer’ approach for financial institutions in electronic environments.

In March 2000, Mr Joel Schwarz, Assistant Attorney General, Internet Bureau, of the State of New York Office of Attorney General gave AUSTRAC a presentation on electronic commerce and technology. The presentation outlined a number of strategies undertaken by the USA in relation to Internet gambling, Internet fraud, and other forms of e-crime. Using case studies, Mr Schwarz explained the investigative powers now available to American law enforcement agencies to obtain evidence from Internet Service Provider (ISP) records. This was helpful in determining the practical tools needed by law enforcement agencies to effectively fight crimes committed via new technologies.

Strategic Framework for the Information Economy

The National Office for the Information Economy (NOIE) prepared a Strategic Framework for the Information Economy in December 1998. NOIE published the 2nd Progress Report on the Strategic Framework on its website in May 2000 www.noie.gov.au. The report states the need for a sound and effective legal and regulatory framework. This is seen as a vital step in building the confidence of business and consumers that online information and transactions are authentic, private, secure and legally sound.

Strategic Priority 5 addresses the need to create a consistent legal and regulatory framework based on the Electronic Transactions Act 1999 and by resolving security and authentication issues, such as: public key infrastructure, privacy and data protection, law enforcement, consumer protection, and intellectual property.

The legal and regulatory action plan, which forms part of the Strategic Framework, includes two performance indicators for our legal systems and law enforcement agencies. They are:

• the extent to which all jurisdictions have co-operative enforcement arrangements that are consistent in dealing with electronic commerce
• the extent to which law enforcement agencies have the capability to detect, investigate, and prosecute crime committed against business and consumers engaged in electronic commerce.

Under the legal and regulatory action plan, NOIE indicates that it will work with the AGEC to determine the most appropriate measures to support the information economy. Through our work in the AGEC, AUSTRAC has been deeply involved in discussions in relation to the role that law enforcement and revenue agencies have to play in implementing the strategic framework.

Planning for the future

AUSTRAC will continue its work in each of the areas outlined in this chapter. In particular, work resulting from technology development will present an increasing challenge to AUSTRAC’s resources. With changes in technology and other changes to the financial services and gambling sectors, we will have to devote more resources to identifying unknown cash dealers and potential areas for money laundering. We must develop our investigation of proof of identity, and will need to apply significant resources to this problem. Our watching brief to ensure the FTR Act remains relevant will not diminish in the coming years. In fact, due to the developments outlined above, it is likely that the relevance of the FTR Act will require much more detailed consideration. All these activities are vitally important to Australia’s anti-money laundering program.

10 Contributions to Electronic Commerce: what law enforcement and revenue agencies can do, is available on the AUSTRAC website along with Volumes 2 and 3 of the RGEC Report.

Primary Output Group 3 – Advice on effectiveness of the FTR Act This Output Group refers to the work done to ensure that the anti-money laundering reporting regime remains effective in the face of rapid change in both the financial services sector and the wider information economy.
Price Performance Measure	Quantity Performance Measure	Quality Performance Measure	Contribution to Outcome
The cost of providing Primary Output Group 3 was $0.426 million.	AUSTRAC has identified many issues that relate to the effectiveness of the FTR Act. Parliamentary committees have also raised issues of relevance.	New technologies, e-commerce, internet gaming and proof of identity, are all significant issues which will continue to be researched and addressed. Most issues require some legislative change.	The research undertaken in this area, involves not only AUSTRAC, but also law enforcement and revenue agencies and the private sector. It is vital to maintaining and increasing the value of the overall program in fostering an environment hostile to money laundering, major crime, and tax evasion.
		Most of the issues are either still undergoing research or are addressed in reports to government.

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