Australia’s property money laundering disgrace

By Leith van Onselen

Over the past year, Australia has come under increasing international pressure on to tighten rules around money laundering.

Under Australia’s existing anti-money laundering (AML) regime, financial institutions like banks, casinos and bullion dealers are required to report suspicious activity, whereas other gatekeepers including accountants, lawyers and real estate agents (among other non-financial businesses) are exempted.

This had led to the perverse situation whereby if somebody wants to set up an account to place a $100 bet at Sportsbet, or invest $1,000 into a managed fund, then they must provide sufficient identification under the AML Act. But if they want to launder millions of dollars through an Australian home, few questions are asked.

Last year, the Paris-based Financial Action Task Force (FATF) applied a blowtorch to Australia’s anti-money laundering (AML) regime, releasing a scathing report highlighting that Australian residential property is a haven for international money laundering, particularly from China, and recommending that Australia implement counter-measures to ensure that real estate agents, lawyers and accountants facilitating real estate transactions are captured by the regulatory net.

And at the beginning of this year, FATF voiced its strong disapproval once more, this time warning that the Chinese are also laundering money by snapping-up rare Australian diamonds.

Australia agreed in 2003 to implement comprehensive AML regulations that captured accountants, lawyers, real estate agents and other non-financial businesses (including dealers in precious stones). However, the second tranche of the reform to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 has remained in limbo for a decade, and has yet to be implemented by the government.

This willful neglect has posed particular issues for Australian property, as noted recently by Reuters:

Australia is much more at risk from money laundering or cash smuggling in the property sector, experts say, with cash purchases rampant for most price ranges.

Among Chinese property buyers, about 70 percent pay in cash and fewer than a tenth use bank funding, said Simon Henry, co-CEO of juwai.com, the largest real estate portal that targets Chinese buyers looking abroad…

“I suspect they also use (underground banking). And I also suspect that a number of Chinese imports from Australia are over-valued, thus allowing excess payment to be made to fronts in Australia” [said John Cassara, a money laundering expert and former U.S. Treasury agent].

Today, Fairfax’s Michael West has noted that the second tranche of AML regulations have again been pushed into the never-never, with the Government’s review delayed indefinitely:

Rarely has a finalisation process taken so long to finalise.

The department has been “finalising” this review for some months now, a review which was supposed to have been put before parliament last year; indeed this is a review of laws which were originally supposed to have passed into statute eight long years ago.

Had these laws been enacted for real estate agents, as well as lawyers and accountants as was intended, they may have stemmed the flow of Chinese money into Sydney and Melbourne property markets. Housing might have been more affordable for first home buyers. The market distortion which is the metropolitan real estate bubble might have been tempered.

Now the dithering looks set to continue. It may be too late. House prices have run too high and the government is loath to frustrate the flow of the Chinese billions in case the property bubble is pricked.

Besides, the property lobby is unlikely to let it happen. The “industry consultation” process behind the scenes will no doubt see to that…

What is evident is that, to the detriment of the national interest, successive governments are culpable of high-level pussyfooting on introducing the anti-money laundering laws…

That the Australian Government allows money laundering to occur makes absolutely no sense, and is part of the reason why foreign funds have gushed into Australia’s property market, particularly in Melbourne and Sydney, helping to price-out young Australians and adding to financial stability risks:

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As noted last year by Nathan Lynch, Head Regulatory Analyst for Australia & New Zealand at Thomson Reuters:

AUSTRAC’s surveillance efforts are… 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.

Separately, Lynch noted that “politicians have been conspicuously evasive on their bipartisan commitment to follow through with a second tranche [of the AML legislation]… politicians are happy to turn a blind eye”.

Enough is enough. It’s time to end ten years of neglect and bring Australia’s non-financial gatekeepers into the AML net, as was promised by the government in 2003 and intended when the legislation was first drafted in 2006. The politico-housing complex has protected criminals for long enough.

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Unconventional Economist

Leith van Onselen is Chief Economist at the MB Fund and MB Super. Leith is an economist and has previously worked at the Australian Treasury, Victorian Treasury and Goldman Sachs.

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