SYDNEY: 22 May 2014 - The Australian government has handed the country's anti-money laundering agency an unprecedented regulatory "poisoned chalice" in the latest federal Budget. 

The new fees have also raised a bigger policy question for the government and regulated community: should regulatory fees be purely a "cost recovery" exercise, or a potential profit centre? This question poses significant challenges for regulators, which could be saddled with the extremely difficult task of selling regulatory taxes, while still protecting their working relationships with the industries they regulate. This is a difficult proposition for regulators that rely heavily on their relationships with stakeholders, such as AML/CTF agencies or prudential regulators. 

 

To budget-conscious governments, regulated entities may appear to be a captive audience for the imposition of fees. In essence, regulated populations are given two simple choices when it comes to the imposition of new levies: pay, or don't play.

 

Some industry figures have said the latest AUSTRAC levy is a hidden tax on large reporting entities that has been disguised as a "cost recovery" measure. There are widespread concerns that the fees will also breach the government's own Cost Recovery Guidelines, which state that fees should only be used to recover the costs of regulation from the entities that create the regulatory demand. 

 

As disclosed in last week's budget papers, the expanded AUSTRAC cost recovery regime will see the industry paying an additional $79.1 million in fees over the next four years to cover the cost of AUSTRAC's financial intelligence unit (FIU) operations. From 2018 onwards, AUSTRAC will have the dubious credit of being the world's only FIU to be fully funded by levies.

 

The Budget papers said that AUSTRAC recovers around 53 percent of its total expenses from industry. This accounts for the full cost of its regulatory operations. Under the new measure, fees will increase to 70 percent in 2014-15, 90 percent in 2015-16 and 2016-17, and 100 percent in 2017-18.

 

AUSTRAC said in a note to reporting entities that its intelligence unit works with the Australian Taxation Office (ATO), law enforcement and revenue agencies to disrupt serious and organised crime including fraud, drug trafficking and people smuggling. It implied that the FIU's operations benefitted big businesses by ensuring those that operate internationally could "enjoy the benefits of operating from a jurisdiction that complies with international requirements of the Financial Action Taskforce (FATF)".

The new cost recovery policy as announced in the 2014 Budget has failed to distinguish, however, between AUSTRAC's regulatory and intelligence roles. This is despite the fact that this operational distinction was spelled out clearly when cost recovery was first implemented (to cover regulatory costs only) in 2011. 

 

An independent review of the cost recovery model in 2013,  as required by the government that introduced it, stressed the need to draw a line between these costs. It said that AUSTRAC needed to demonstrate to reporting entities that they were only liable for the costs of regulation, as required under the federal Cost Recovery Guidelines. 

 

"The cost model should support a robust and well-documented method of costing that separates regulatory from intelligence-driven costs," the report stated in its recommendations. It noted that AUSTRAC had put systems in place to identify whether costs and assets were used for regulatory or intelligence purposes, or split proportionally between the two. 

 

The Cost Recovery Guidelines require AUSTRAC to "differentiate some activities between supporting regulatory and intelligence functions, with only the former being recovered," the independent review said.

AUSTRAC is an agency that is particularly reliant upon its good working relationship with reporting entities for the collection of intelligence. The regulator has spent more than 20 years developing this relationship, long before the passage of the Anti-Money Laundering and Counter-Terrorism Financing Act in 2006. 

 

In turn, this data is a gold mine for the federal government. To put a dollar value on it, in the last financial year AUSTRAC's intelligence data contributed to 1,428 tax cases, which led to $572 million in new tax assessments. More recently the government has been using AUSTRAC's data for proceeds of crime cases, a strategy that has proved extremely lucrative for the government in the United States. In addition, AUSTRAC's data is used to identify and recover funds associated with, among other things, social security fraud, immigration offences, frauds (such as advance-fee frauds) and intellectual property crimes. Last year alone, reporting entities identified and reported $43.5 million worth of suspicious transactions to AUSTRAC's financial intelligence unit, transactions that in many cases proved to be just the tip of the criminal iceberg.

 

Given the value of this data to agencies such as the tax authorities, social security and law enforcement, most governments view anti-money laundering regulation as having a positive impact on the overall budget. In Australia, however, the regulatory cost recovery model has prevailed, despite concerns expressed in 2011 that this would impair AUSTRAC's relationship with the entities that feed it intelligence.

 

Compliance Complete has spoken with several associations that were taken by surprise with the announcement made in this year's Budget. Even the controversial National Commission of Audit report into Commonwealth government efficiency, which was viewed as preparing the public for a tough Budget, did not recommend such a policy. Instead, the report said a number of law enforcement bodies could be merged to boost efficiency and to coordinate their information-sharing activities more effectively. It said a review should explore whether AUSTRAC could be rolled into the Australian Crime Commission (ACC), along with criminal database provider CrimTrac.

 

AUSTRAC has fallen into line with the government's proposals. Australia's largest 1,029 reporting entities can no doubt afford the impost, which will ultimately average out to around $25,000 each per year. From an independent government agency's perspective, moreover, this would be a far better outcome than making AUSTRAC a division of the ACC.

While the structure of the fees will be a matter for consultation, history indicates that in all likelihood AUSTRAC will tier the fees so that the country's largest institutions carry the lion's share of the burden. This has the added benefit of muting any broader public backlash. 

 

Despite AUSTRAC's proactive stance, sources said the regulator will have a significant fight on its hands. While many had opposed the initial cost recovery measures in 2011, it was structured in a way that skewed the burden towards larger entities. The policy basis for this was debatable, but it muted the dissent from an array of small businesses (such as Post Office franchises and sports clubs) that had secured the ear of their local parliamentarians.

 

The result of the last round of cost recovery consultations has left market officials waiting with bated breath to see what sort of feedback AUSTRAC's consultation receives. Last time there were numerous submissions from small businesses, typed in a clear state of spontaneous rage, over the justification for what they deemed to be another government "hidden tax" on their operations. 

 

As one reporting entity, a publican with gaming machines, stated: "I am absolutely disgusted with another hidden tax !! Yes, I have been paying it and my blood boils everytime I do. I struggle to find time to pour a beer nowadays as we have become fulltime administrators ..."

 

Dr Hugh McDermott, senior lecturer in law enforcement and AML/CTF at Charles Sturt University, said reporting entities in the private sector had borne significant costs in the name of AML/CTF compliance. The money had been spent on consultants, compliance systems, staff training and management time, among other things. 

 

McDermott said the initial round of cost recovery, to cover the cost of AUSTRAC's regulatory work, had been received poorly. To now charge these reporting entities for services that AUSTRAC provides to other government departments, however, could prove very damaging for the FIU's relationship with the private sector.

 

"It puts more strain on the relationship, definitely. It's the criminals who have caused the need for regulation, not the reporting entities. Organisations spend a lot of money on compliance work, a lot of money keeping criminals out of their systems for reputational risk reasons. Now AUSTRAC is being forced to put an impost on them. Reporting entities should be working closely with AUSTRAC, not perceiving the organisation as a revenue collection agency," he said.

 

Associations that represent providers of designated services have given a clear message: "These costs are not ours to bear". AUSTRAC should be charging its partner agencies for the use of its data, they say, which in turn is more than covered by the revenue from new tax collections and various proceeds of crime recoveries. 

 

 

There is an expectation that the fees will be shifted to those entities that will scream the least, and have the greatest capacity to pay. Whether this is fair, equitable or in line with the cost recovery policy set by the federal government is likely to be a secondary concern.

 

The Australian Financial Markets Association (AFMA), which is active in promoting AML/CTF compliance among its members, will be one of the leading voices in this campaign. For years AFMA has been Australia's strongest voice in favour of AML/CTF compliance. Until recently it published the country's leading AML magazine and it still runs a diploma in AML/CTF compliance to help members and third parties obtain the skills to comply with the laws.

 

AFMA was, moreover, a vocal critic of the initial policy to recover regulatory fees. This was due not only to the impact on its members but also over concerns about the impact that these fees would have on the industry goodwill that AUSTRAC had built up over more than two decades.

 

Tracey Lyons, AFMA's director of market operations and retail, said her members were very concerned about the justification for shifting the burden of fees to the 1,029 largest reporting entities. She said it was difficult to reconcile this with the government's own Cost Recovery Guidelines, which make it clear that regulated entities should not be charged for services provided to other government entities.

 

"AFMA has been concerned about the inequity of the levy since it was first imposed. The levy methodology does not relate to the money laundering or terrorism financing risk posed by an entity, or the customers of that entity," Lyons said. 

 

"This latest proposal by the government that just over 1,000 entities be required to fund all of AUSTRAC's activities,  including the financial intelligence unit, only makes that inequity more stark. AUSTRAC's activities are beneficial to society as a whole, and the government should bear some part of the costs," she said.

 

Sources have described the new policy as "unprecedented" and said there was no other Australian government department that used cost recovery to generate income in excess of the cost of regulation. They said that such a move should be labelled for what it is: a new tax on reporting entities that is being used to subsidise the provision of intelligence services to various government departments. 

Some of the major Australian financial associations are also embarking on a round of "soft diplomacy" to urge the government to review its policy. Many are concerned about preserving their working relationship with the new government but are privately stunned by the new proposal, which was not even foreshadowed by the National Commission of Audit. 

 

The banking sector is lobbying the government to encourage it to review the proposal, as are major retail financial services firms. The Australian Bankers' Association and the Financial Services Council declined to comment for this article but are expected to lodge submissions with the AUSTRAC consultation.

 

Lyons said AFMA was unaware of any other regulatory agency in Australia that is fully funded by industry. "[Cost recovery] operates on the basis that entities that have created the need for regulation should bear the costs and entities that receive the benefit of regulation should bear the costs. In this case, financial institutions have not created the need for regulation. Criminals create the need for regulation," she said.

 

McDermott agreed, suggesting it was an abuse of the "user pays" principle for governments to hold businesses responsible for the cost of policing illegal behaviour in the community. 

 

Lyons also noted that there was a broader community benefit associated with the AML regime, in addition to the significant tax and proceeds of crime benefits that flow from the intelligence provided by reporting entities. "Industry already contributes to this process in a way that has gone unrecognised by the government by collecting and reporting transaction information to AUSTRAC, as well as suspicious matter reporting about potential illegal activity that AUSTRAC by itself would not be able to identify," Lyons said.

 

She said that, in its submission to AUSTRAC's consultation, AFMA would argue that for this to be a true user-pays model other government departments such as the ATO and the Federal Police should contribute to the cost of conducting AUSTRAC's intelligence work. 

It is a well-known truism among AML/CTF compliance practitioners that attentive reporting entities are one of the government's greatest assets in the fight against financial crime. In numerous major financial crime cases it has been an attentive and well-trained front-office staff member, or an eagle-eyed back-office employee, who has sensed something "not quite right". It is these small suspicions, and the reports that follow, that are the lifeblood of AUSTRAC's work. 

 

Under the AML/CTF regime the government has effectively co-opted reporting entities as the "front line" eyes and ears of its policing efforts. As every diligent compliance officer knows, there is a big difference between pure compliance and becoming a partner with the government in the fight against crime. The latter often involves going above and beyond the basic demands of regulatory compliance. Good examples of this include the AFP's recent A$7 million insider trading arrests, which were triggered following the work of an eagle-eyed staff member at Pepperstone, the foreign exchange firm, and the A$176 million Trio/Astarra fraud, which was discovered following a regulatory tip-off from an attentive fund manager.

 

Regulatory experts are concerned that AUSTRAC risks squandering two decades' worth of goodwill by alienating its largest reporting entities with an unjustified fee — all for the sake of generating a relatively small contribution to the federal Budget. 

 

McDermott said the government risked undermining AUSTRAC's relationship with reporting entities by creating the perception that it is just another arm of revenue collection. He said the data that reporting entities provide to AUSTRAC is critically important to the government departments that use this information. 

 

"If it's the government departments that are using this information then it's the government departments that should be paying for it — not the industry. It is as simple as that. The fact that they have turned AUSTRAC into a tax collector is ridiculous," McDermott said.

 

AFMA stressed that the fee regime would not affect its members' commitment to compliance with their AML/CTF obligations.

 

"It's in everyone's interests for AUSTRAC and industry to work together to ensure that the AML/CTF regime works as efficiently and effectively as it can. The funding issue is a complication but it won't derail the ongoing dialogue about implementation of the regime," a spokeswoman said.

The efficiency of turning the FIU and regulator into a revenue collection agency has also been a bone of contention within AUSTRAC itself — especially during a time when the government is forcing it to cut staff. Some staff members have questioned whether the additional workload of chasing up levies is appropriate when the regulator faces an ever-increasing regulatory and intelligence workload.

 

The Cost Recovery Guidelines make it clear that cost recovery should only take place where it is efficient to do so. The independent review of the existing cost recovery regime in 2013 found that AUSTRAC was losing 6 percent of its fee revenue in collection costs. The small size of the agency and its lack of expertise in this area arguably means that AUSTRAC is simply not efficient as a revenue collector. 

 

"AUSTRAC has a small budget as it is, far less than it should have. Its staff should be spending all their time doing the regulatory work and the intelligence work — not worrying about having to collect revenue from the industry. You're taking away from what AUSTRAC's real role is, which is to build relationships with the industry, build intelligence to regulate reporting entities and make sure that people don't launder money," McDermott said.