House of Representatives

Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Hon Mark Dreyfus KC MP)

ATTACHMENT A IMPACT ANALYSIS - REFORMING AUSTRALIA'S ANTI-MONEY LAUNDERING AND COUNTER-TERRORISM FINANCING (AML/CTF) REGIME

Executive Summary

Each year billions of dollars of illicit funds are generated from illegal and harmful activities such as drug trafficking, tax evasion, human trafficking, cybercrime and scams, arms trafficking and other illegal and corrupt practices. Illicit financing is also used to fund activities that harm Australia's national security and efforts to maintain an international rules- based order. The Australian Institute of Criminology (AIC) estimated serious and organised crime to cost the Australian community $60.1 billion in 2020-21. The true total cost of crime is likely much greater, given the illicit nature of the activities and the second order effects on the community and economy. While money laundering is a criminal activity in its own right, illicit financing is a key enabler of these serious crimes with profit being the primary motivation. Criminals must launder their proceeds of crime to enjoy the proceeds of their illegal activities or to reinvest illicit funds in further criminal activity without detection. The amount of money laundered in Australia has been indicatively estimated at up to 2.3 per cent of GDP. ^[5]

Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime establishes a regulatory framework for combatting money laundering, terrorism financing and other serious financial crimes. At its core, the AML/CTF regime is a partnership between the Australian Government and industry. Through the regulatory framework established by the AML/CTF regime, businesses play a vital role in effectively detecting and preventing misuse of their sectors and products by criminals seeking to launder money and fund terrorism.

There are a number of inefficiencies throughout Australia's AML/CTF regime that limit the effectiveness of Australia's response to transnational crime at large. Industry and government stakeholders have consistently called for reforms to key obligations of the AML/CTF regime due to unnecessary complexity.

Currently, businesses internationally recognised as providing high-risk services (including lawyers, accountants, trust and company service providers, real estate agents, and dealers in precious metals and stones) are not regulated as part of the AML/CTF regime. These sectors are known internationally as Designated Non-Financial Businesses and Professions (DNFBPs) or tranche two in the Australian context. Gaps in the regulated population leave legitimate businesses vulnerable to exploitation by opportunistic criminals seeking to obfuscate the origins of their illicit wealth from law enforcement.

These problems impact the quality and breadth of financial intelligence generated to support national security and law enforcement operations, inflate regulatory burden for currently regulated entities and do not adequately harden businesses most at risk of criminal exploitation.

Without reform to address these problems, the AML/CTF regime will become increasingly less effective and more wasteful over time. The costs of inaction are significant, and would likely increase over time with Australia falling further behind continually strengthened international standards set by the Financial Action Taskforce (FATF), heightening the risk of substantial reputational and economic damage and increasing criminal threats to Australia's financial systems and professional services. Without hardening Australia's AML/CTF regime in line with the FATF standards, criminals would continue to exploit legitimate Australian businesses left exposed. Further, currently regulated entities will continue to be subject to an overly complex regime that inflates regulatory costs, ultimately diminishing the extent to which they are able to holistically comply with the AML/CTF regime.

To address these challenges, the proposed reforms have three objectives:

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combatting crime

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improving FATF compliance

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minimising regulatory burden.

In line with the requirements set out in the Australian Government Guide to Policy Impact Analysis, administered by the Office of Impact Analysis (OIA), the Attorney-General's Department (the department) has conducted an impact analysis to assess and accompany proposed reforms to Australia's AML/CTF regime.

The department (with support from Nous Group) has provided a best effort at conducting a robust net benefit analysis. In accordance with OIA guidance, a multi-criteria analysis (MCA) was used as the preferred analytical tool to assess the available information and quantifiable data along with the unquantifiable but equally tangible benefits of the proposed reforms.

The department has identified and analysed four viable policy options to respond to the problems identified, including:

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Option 1: Maintain the status quo

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Option 2: Simplify, clarify and modernise existing legislation

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Option 3: Expand the reporting population to DNFPBs

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Option 4: Both simplify, clarify and modernise legislation, and expand the reporting population to DNFBPs.

Under the analysis, Option 1 does not address the key challenges facing the regime or achieve the reform objectives. Option 2 provides some benefit to crime prevention outcomes and producing higher quality financial intelligence from assisting existing regulated entities to better comply with the regime. However, it does not reduce the risk of 'grey-listing' by the FATF as it does not address the regulation of tranche two sectors. Option 3 does address this issue, as well as supporting crime prevention outcomes and increasing the amount of financial intelligence by covering a larger proportion of the economic activity at risk of exploitation. The quantifiable benefits of this are estimated to be up to $13.1 billion over ten years. However, Option 3 also comes with largest estimated regulatory impact of $15.8 billion to business, as it does not include simplifying and clarifying measures.

Option 4 is assessed to best meet the objectives and showed the highest net benefit through the MCA, by providing the same quantifiable benefits as Option 3 while imposing a lower regulatory burden. Implementing Option 4 is expected to deliver the significant law enforcement benefits and reduction in community harm from the expansion of the regime to tranche two entities, with the additional benefit of improved compliance across regulated entities and tranche two entities due to the reforms to simplify the regime. This is estimated to provide benefits of up to $2.4 billion over ten years. Option 4 will also be most effective in minimising the likelihood of grey-listing and any associated economic and reputational damage, which may be up to $10.7 billion over 10 years. Implementing Option 4 is estimated to result in an additional regulatory burden to businesses of $13.9 billion over 10 years, which is lower than Option 3.

The department notes that there are inherent limitations to the impact analysis, including:

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Difficulty quantifying the value of money laundering globally and in Australia and the financial and societal impacts arising from money laundering. Estimates of benefits therefore reflect the best efforts and understanding of the department and portfolio agencies, supplemented with academic sources and international experience where possible.

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A lack of evidence in the Australian context of the likely impact these reforms will have on the amount of money laundered per year.

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The details of the reforms are not yet finalised as the AML/CTF Rules will build on the principles in the Act and provide further detail on how such obligations may be achieved. As such, the operational impact of the reforms is difficult to quantify, particularly for tranche two entities who have no experience with the AML/CTF regime. Estimates of regulatory burden therefore reflect the best efforts and understanding of the affected stakeholders.

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The department notes there will be an additional public consultation process on the AML/CTF Rules to ensure the reforms are fit-for-purpose. This will provide a further opportunity to reduce regulatory burden through further refinement of the obligations and simplification of the regime.

Average annual regulatory costs

The following table sets out the estimated average annual regulatory cost of each option. This is presented in real terms and combines both upfront and ongoing costs calculated over 10 years.

Average annual regulatory costs by sector (from business as usual) – change in costs ($m) real terms