By Nathan Lynch, Head Regulatory Analyst for Australia & New Zealand, Thomson Reuters
Australian authorities are “tightening the noose” around money laundering involving real estate, amid concerns that inflows of illicit funds into established residential property may be over-heating some capital city markets. There are growing concerns at the federal government level that Australia’s failure to capture real estate agents, accountants and lawyers under the country’s anti-money laundering regime may have made Australia a soft target for illicit money flows. The government has also identified hundreds of transactions that may have breached foreign property ownership laws, which bar non-residents from buying established houses.
Speaking at a Thomson Reuters risk summit in Sydney yesterday, senior officials from the Australian Taxation Office (ATO) and the Australian Transaction Reports and Analysis Centre (AUSTRAC) said there were significant warning signs around the Australian property market. They said it was extremely difficult to put a figure on the size of the laundering problem, however, due to the fact that Australia has limited visibility over the sources of funds coming in from overseas.
Bradley Brown, acting national manager for strategic intelligence and policy at AUSTRAC, said his agency was limited in what it could do in relation to real estate under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act).
Real estate agents, lawyers, accountants and other gatekeepers are not captured by the Australian legislation despite ongoing international pressure from the Financial Action Task Force (FATF). This means AUSTRAC has to use other forms of financial intelligence, including records of wire transfers and transaction reports from banks, when analysing suspicious property transactions.
“Australia is one of the few countries that collects all of the international funds transfer instructions (IFTIs), or wire transfers, in and out of Australia. So the movements of money that we receive information on via reports to AUSTRAC still may contain information on purchases of real estate if those funds have come in through a wire transfer. So there’s certainly some visibility over the sector,” Brown said.
At the same time, there is no obligation on professional facilitators to report suspicious transactions, unlike banks, casinos and bullion dealers.
The attraction of Australian real estate for money laundering and offshore flight capital was highlighted in the recent mutual evaluation report on the effectiveness of the country’s money laundering regime. The FATF report identified real estate as a “high risk” sector for laundering and said AUSTRAC had little power over several crucial industries, including real estate agents, accountants and lawyers. The assessors found that offshore organised crime groups were using “professional facilitators” to launder their criminal proceeds through Australian real estate. Australian housing is viewed across Asia as an attractive vehicle for parking illicit funds, particularly among corrupt officials, the report found.
The Governor of the Reserve Bank of Australia (RBA) also warned recently that “crazy” property prices in some east coast capital city markets could lead to a host of problems, including financial instability, if there is a sudden fall in speculative demand.
In response to growing public concerns over Australian residential real estate prices, the government has tasked the ATO and the nation’s anti-money laundering agency with cracking down on any suspect property transactions.
Flight or fight?
In the public debate around real estate-related laundering there has been significant confusion over the differences between flight capital and actual laundering. While residents of countries such as China may use money laundering techniques to circumvent the country’s capital controls, this is not a predicate offence under the Australian money laundering legislation. As such, Australian authorities need to make the difficult distinction between purchases that are designed to get legally obtained funds out of countries such as China — often using money laundering techniques — and cases of actual money laundering where there is an underlying predicate offence.
Brown said it was crucial to distinguish between flight capital and money laundering when looking at suspicious property purchases involving foreigners.
“There’s a whole lot of legal, legitimate funds from offshore that are used to purchase property, so I think that’s a fundamental consideration in anything that AUSTRAC does,” Brown said.
“One of the extreme challenges that we face is actually differentiating between what may be capital flight and what may be money laundering. It comes back to a question of what the origin of those funds is. I think that’s one of the greatest challenges for reporting entities and it’s also one of the greatest challenges for us,” he added.
For reporting entities, this underpins the importance of having effective systems and controls in place to identify risks, “know your customers” and implementing strong due diligence and monitoring, Brown said.
AUSTRAC’s surveillance efforts are also being frustrated by the fact that money launderers will often use unregulated entities as a “first point of contact” to help disguise their source of funds. If a criminal makes a suspicious cash deposit into a real estate agent or lawyer’s trust account, for example, the suspicious transaction is not required to be reported to AUSTRAC. Reporting entities, such as banks, are required to report transactions of this type within three business days of forming a suspicion. Lawyers are only required to report threshold transactions under the legacy Financial Transaction Reports Act 1988, not suspicious matters, while real estate agents have no reporting obligations.
“One thing that we consider is that lawyers, accountants and real estate agents are often a first point of engagement for clients — particularly for clients and customers who are looking to establish a company or a trust. They don’t go to the bank first, they go to someone who is capable of setting that up for them,” Brown said.
As part of the government’s scrutiny of the property sector, the ATO has been tasked with overseeing foreign investment in residential real estate and establishing a new register of foreign asset ownership. The ATO is now responsible for policing foreign investors’ compliance with their obligations under the Foreign Acquisition and Takeover Act 1975 (FATA). The legislation bars non-residents from buying established residential property.
The ATO is investigating a surge in cases where offshore buyers are believed to be using nominee purchasers, companies, trusts and other structures to circumvent the rules.
Aislinn Walwyn, assistant commissioner for private groups and high-wealth individuals at the ATO, said her agency was not responsible for identifying money laundering but that it was working closely with other agencies including AUSTRAC and the Australian Federal Police (AFP). She said that if a foreign buyer made a property purchase in cash, for instance, that could be a red flag for further investigation.
“It certainly raises alarm bells with us if we see people with funds that potentially aren’t from legitimate sources,” Walwyn said.
The summit heard about anecdotal reports of people flying into Sydney on private jets with suitcases full of cash to purchase real estate at auction. Walwyn said the ATO had not seen any evidence to substantiate those claims.
“We’ve seen one incident where there was a property sale and it was a cash transaction and there was no AUSTRAC reporting. That is a situation that raises alarm bells. If there’s no mortgage finance and no AUSTRAC report then that would be something we would probe,” Walwyn said.
The Foreign Investment Review Board has referred an initial batch of 195 cases to the ATO for investigation in relation to potential breaches of the FATA legislation. The ATO has found that in a number of those cases the individuals are already Australian residents or have permanent resident status in Australia. At surface level these types of transactions appear to be legitimate. On deeper inspection, however, investigators have found that the individual’s reported income does not match the size of the purchase. The ATO then needs to determine whether this is a case of tax evasion or individuals acting illegally as nominees for foreign buyers.
“We’ve seen some examples where somebody had acquired multiple properties and they were reporting a very low income. That immediately raises questions for us, which we will then be probing to establish the source of this person’s income and whether they are understating their income or, alternatively, if they’re a nominee for some foreign beneficial owner. We need to probe that type of case because that might, in turn, reveal a FATA breach,” Walwyn said.
The FATA legislation is designed to ensure that foreign buyers can legally purchase off-the-plan residential properties. The rationale behind the legislation is that this encourages investment in new housing stock, rather than inflating the price of properties that are already built. Temporary visa holders, meanwhile, can buy existing property but if they cease to be a temporary visa holder they are required to sell their property.
The ATO is also focusing on the role played by professional intermediaries and facilitators, such as lawyers, accountants and real estate agents in relation to FATA breaches.
“If somebody is knowingly concerned with a breach of the FATA obligations they can be exposed to criminal penalties. In the future, once new legislative measures are passed, there will be civil penalties too,” Walwyn said.
In Australia tax evasion is a predicate offence for money laundering. As such, individuals who use property renovations and other property-linked strategies to hide undeclared income can be charged with money laundering. Renovations are a popular laundering strategy for tax evaders as individuals can pay cash directly to tradespeople without arousing any suspicions. In doing so, they are effectively transforming their cash into capital improvements on their property without leaving behind any records of payment or an electronic money trail.
When they sell the property at a profit they can pass off the price increase as passive capital growth or the result of “DIY home renovations”. The illicit profits are potentially tax-free if the property is classified as a principal residence and are taxed at a reduced tax rate, relative to income, for investment properties.
Walwyn said the ATO is heightening its scrutiny of professional service providers who might be complicit in advising on or facilitating these types of illegal activities.
“If we see facilitators or intermediaries being knowingly concerned or having colluded in that then there are potential criminal sanctions under the Criminal Code,” Walwyn said. “With Project Wickenby, for instance, we’ve had a number of facilitators who have been convicted and have received custodial sentences.”
Project Wickenby was wrapped up in June this year and has now been replaced by the Serious Financial Crime Taskforce. The new multi-agency taskforce has a wider remit than Wickenby, with a focus on superannuation and investment fraud, identity crime and the role of professional facilitators.
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