Regulatory Regimes and Organised Crime: Report (html)

7. Regulating post-entry behaviour

7.1 This chapter presents several options for the post-entry regulation of occupation or industry members in order to deter or detect organised crime infiltration. These options reflect the Commission’s research and the key observations made by consultation participants, and are not intended to be exhaustive. The options are:

• ongoing monitoring of the probity and suitability of occupation or industry members

• customer and supplier due diligence measures

• record-keeping requirements

• restrictions on cash-based transactions

• controls on coercive conduct.

The role of post-entry regulation

7.2 In order to address organised crime infiltration, it will be necessary to regulate behaviour within an occupation or industry as either an adjunct or alternative to restrictions on entry.

Adjunct to restrictions on entry

7.3 Where policy makers decide that entry should be restricted through a licensing scheme, some degree of ongoing regulation will be necessary in order to maintain the standards imposed through that scheme, and to detect organised crime groups that have managed to subvert a licensing process or corrupt or acquire an established business.

7.4 While some consultation participants cautioned that ongoing regulation should be appropriately targeted and not unduly burdensome,^[1] there was also strong support for post-entry regulation, particularly where significant costs are incurred in complying with rigorous entry standards and maintaining high standards of conduct.^[2] In addition, the regulation of behaviour within an occupation or industry was regarded as creating commercial benefits. Racing Victoria emphasised that ‘clean’ industries and the maintenance of high standards foster consumer confidence in an industry and in turn support spending.^[3]

Alternative to restrictions on entry

7.5 Policy makers may decide that restrictions on entry are not an appropriate response to organised crime infiltration, such as where:

• the particular form of infiltration does not require entry, or is unlikely to be addressed by restrictions on entry (particularly where organised crime groups use a legitimate business to obtain goods or services for illicit purposes but generally do not seek to own or operate such a business)

• a regulator is not equipped or adequately resourced to conduct a forensic examination of licence applicants in order to prevent organised crime infiltration, including through the use of ‘cleanskins’

• legitimate operators would be unduly burdened by requirements at the point of entry that are designed to prevent organised crime infiltration

• the breadth and complexity of the occupation or industry makes it effectively impossible or excessively costly to regulate the entry of all occupation or industry members.

7.6 In such circumstances, the response to infiltration will rely on post-entry regulation.

Widening the regulatory gaze

7.7 Regardless of whether post-entry regulation occurs as an adjunct or alternative to restrictions on entry, a regulator should consider widening the regulatory gaze by harnessing the capacity of third parties to participate in regulation. Third parties include occupation and industry members, consumers, employees, and service providers with whom businesses interact, such as commercial landlords and professional advisors (lawyers, accountants, and so on). The use of third parties for crime prevention purposes is increasingly being adopted as a regulatory strategy in areas such as environmental crime, crime in waterfront settings, and illicit drug crime.^[4]

7.8 Through routine commercial dealings, third parties are uniquely placed to deter or detect organised crime infiltration. Widening the regulatory gaze may reduce financial burdens on government, reduce reporting and disclosure burdens on legitimate business operators, and improve the flow of information to regulators.

7.9 Third parties may have a commercial incentive to actively participate in regulation. As Braithwaite observes, regulation should aim to transform ‘markets for vice’ into ‘markets for virtue’ by taking advantage of commercial incentives for virtuous business behaviour.^[5] Regulators should identify where commercial and regulatory objectives align and exploit these opportunities. A business may wish to be educated about the risks of unwittingly enabling organised crime in order to prevent reputational and other commercial damage; a business may independently pursue high standards of conduct in order to differentiate itself in the marketplace; or a business may be motivated to engage in supplier or customer due diligence in order to mitigate transactional risks.

7.10 Third parties can be enlisted in three key regulatory activities in this context: the ongoing monitoring of probity and suitability; customer and supplier due diligence measures; and record-keeping requirements, as relevant to the needs of the particular occupation or industry in preventing infiltration.

Monitoring of probity and suitability

7.11 The ongoing monitoring of probity and suitability may enable the discovery of organised crime groups that have:

• evaded detection during any licensing process

• corrupted or acquired a legitimate business

• exploited a lack of restrictions on entry.

7.12 Where restrictions on entry operate, the Australian Federal Police (AFP) observed that any probity testing at the point of entry into an occupation or industry needs to be supplemented by ongoing monitoring of a person’s probity and suitability. Ongoing monitoring may reveal the use of a ‘cleanskin’ in an application for a licence or other form of authorisation.^[6] As previously noted, it can be very difficult to detect the use of ‘cleanskins’ at the point of entry. It may be more feasible to detect the actual owners or operators once a business has begun trading and is exposing itself to scrutiny through interactions with customers, suppliers, competitors, government agencies and other parties. As Darryl Annett observed, hidden control is:

difficult to detect as it is usually dealing with a scenario where there is no apparent link between the licensee and the shadow [controller]. It is particularly challenging because the shadow is likely to have no role at the time of licence application, and to become involved after the licence is in place.^[7]

Monitoring methods

7.13 Broadly speaking, a regulator may engage in two forms of monitoring: reactive monitoring and proactive monitoring.

7.14 Reactive monitoring may be prompted by complaints, ‘tip-offs’ and other information received by the regulator. While police are likely to be a primary source of information about organised crime,^[8] a regulator should facilitate the provision of information by a broad range of sources, including government agencies, occupation and industry members, consumers, employees and other workers, commercial landlords, and the general public (see [ ]–[ ]).

7.15 Proactive monitoring may be performed by conducting periodic business inspections and audits, and/or requiring occupation and industry members to report or disclose information in relation to their probity and suitability to operate (such as any changes in business ownership or operation, the commission of unlawful conduct, changes in financial status, and so on). Continuous disclosure obligations^[9] or periodic reporting obligations^[10] are commonly used for this purpose. The information acquired is then audited for the purpose of targeted surveillance and investigation of particular sectors, entities or types of conduct within an occupation or industry.

7.16 While some consultation participants saw benefits in reporting and disclosure requirements,^[11] they may offer a relatively limited way of detecting infiltration, since organised crime groups will almost certainly refrain from disclosing adverse information and are unlikely to voluntarily comply with reporting obligations.^[12] However, a careful auditing process may identify any deficiencies or unusual gaps in reporting as ‘red flags’ that require further investigation.

7.17 In order to better target surveillance and investigations, it may be useful to offer incentives for compliance with disclosure, reporting and other obligations. The Victorian Commission for Gambling and Liquor Regulation operates a ‘star system’ that rewards liquor licensees for compliance by reducing regulatory fees.^[13] In a similar vein, the National Heavy Vehicle Regulator (NHVR) is considering the introduction of an operator registration scheme that will provide indicators for identifying trusted operators and reward operators who meet high standards. The aim of the scheme would be to create an ‘inner circle of respected companies’.^[14] By identifying reputable operators, incentive measures narrow the field of outlier operators for the purpose of surveillance and investigations.

Costs and benefits

7.18 A regulator will need to consider the most appropriate balance between proactive and reactive measures in seeking to detect organised crime infiltration.

7.19 At a minimum, any regulatory regime should include a capacity for reactive monitoring. Given the clandestine nature of organised crime infiltration, there may be a greater need to facilitate the provision of information by third party sources than in other areas of regulation.

7.20 Proactive monitoring through activities such as surveillance, audits and inspections was encouraged by representatives of the auto-wrecking/recycling and scrap metal dealing industry and the private security industry.^[15] Several regulators emphasised the importance of these forms of field-based regulation, and the reputation this builds about regulatory agencies among occupation or industry members.^[16]

7.21 Proactive monitoring, however, has the potential to be overly broad and mistargeted. Consequently, regulatory agencies in Australia are often encouraged to follow a risk-based approach to compliance and enforcement, including monitoring activities.^[17] The challenge for regulators lies in determining where risks of organised crime infiltration are concentrated in a particular occupation or industry. This process may be assisted by conducting vulnerability studies, facilitating comprehensive information gathering from third parties, and taking steps to improve information sharing among government agencies. Where appropriate to the form of infiltration faced by an occupation or industry, customer and supplier due diligence programs, and record-keeping requirements, may also help to build a valuable body of information that can then be analysed for the purpose of further, targeted investigations.

Customer and supplier due diligence

7.22 Customer and supplier due diligence programs harness the particular ability of third parties—such as public and private procurers of services, and occupation and industry members—to identify suspicious features in a customer or supplier. In some cases, these parties may be better placed than regulatory or law enforcement agencies to detect spurious operators or unusual transactions. Due diligence may deter or detect:

• the ownership/operation of a business by organised crime (for example, by conducting due diligence on bidders for private security or waste management services)

• the distribution of illicit goods through a legitimate business (for example, by conducting due diligence on sellers of vehicles to an auto-wrecker/recycler)

• the diversion of licit goods from a legitimate business for unlawful use (for example, by conducting due diligence on customers of precursor manufacturers and suppliers).

7.23 The Commission was told that customer due diligence is useful in reducing the risk of infiltration.^[18] For example, customer due diligence is carried out in the chemicals industry under the National Code of Practice for Chemicals of Security Concern, a voluntary initiative developed by Australian governments in partnership with the chemical industry (while the Code is more directly applicable to the prevention of terrorist acts than organised crime, it provides an example of a regulatory approach that may be applied in the context of organised crime).^[19] The Code provides guidance to industry members on the detection of illegitimate customers. The Plastics and Chemicals Industries Association (PACIA) praised the Code for fully engaging industry members in the task of identifying suspicious customers.^[20]

7.24 The Commission was also told that supplier due diligence—by both the private and public sectors—has significant potential to hinder or expose organised crime infiltration.

7.25 A study of procurement practices across key government agencies by de Koker and Harwood suggests that such practices are currently under-utilised as a means of detecting organised crime infiltration in the course of public procurement.^[21] In their submission,

de Koker and Harwood stated that:

Taking actions that strengthen the effectiveness of existing regulatory regimes designed to combat organised crime, such as increasing supplier integrity due diligence in public procurement, would seem to be a low cost way to reduce the risk of organised criminal groups entering into lawful occupations and industries. Organised criminals wishing to operate in the legitimate economy will find it harder to do so if AML/CTF-regulated institutions and government agencies have access to reliable beneficial ownership data … and apply appropriate due diligence measures consistently.^[22]

7.26 In respect of the private security industry, Professor Rick Sarre recommended that government agencies and the private sector insist on ‘gold standard’ practices among private security firms tendering for high-value contracts. This, he submitted, would help to drive corrupt operators from the market.^[23]

7.27 Research has found that organised crime infiltration of private security firms can give rise to multiple forms of unlawful conduct, such as fraud and employment law contraventions.^[24] Supplier due diligence measures could be an appropriate response to this type of problem.^[25]

Example

The Australian Security Industry Association Limited (ASIAL) and the Fair Work Ombudsman (FWO) have recently developed a ‘Local Government Procurement Initiative’ that aims to strengthen the security procurement practices of local councils. The FWO advises local councils to consider factors other than price—such as quality and performance—in making procurement decisions. A low-cost quote may signal unlawful or unscrupulous conduct by the service provider. Local councils are advised to assess whether quotes are consistent with the true costs of service provision, such as wage costs.25

7.28 The Environment Protection Authority Victoria (EPA) similarly noted that government procurement processes, particularly in the construction sector, have the potential to disrupt organised illegal waste dumping operations, by establishing the legitimacy of suppliers and enshrining proper practices among suppliers.^[26] The Scottish Environment Protection Agency (SEPA) has produced a good practice guide for waste service procurement that helps public sector bodies detect possible criminal enterprises.^[27] SEPA noted that this guide has potential application to other industries that may be at risk of organised crime infiltration, due to the similarities in methodologies and indicators of criminal activity across industries.^[28]

7.29 Supplier due diligence measures are a key part of regulatory regimes in New York City that seek to address longstanding organised crime infiltration of industries such as construction and waste management. In New York City, ‘Independent Private Sector Inspector Generals’ (IPSIGs) audit private contractors in order to ensure that they are not linked to organised crime groups, concealing criminality, or being corrupted by racketeers or public officials. IPSIGs are used by both regulatory agencies (such as the New York City School Construction Authority) and private businesses in order to establish probity for the purpose of procurement processes. Jacobs describes the IPSIG scheme as:

one of the great contemporary innovations in organized-crime control. It has spawned the formation and growth of private-sector investigation firms run and staffed by former prosecutors, forensic accountants, analysts, and detectives. These firms provide monitoring services for companies that wish to assure clients and government regulators that they are complying with all the laws and regulations.^[29]

Developing due diligence requirements

7.30 Customer and supplier due diligence programs are often termed ‘know your customer’ (KYC) and ‘know your supplier’ (KYS) programs. The specific elements of a KYC or KYS program will vary by occupation or industry.

7.31 Broadly, under a KYC program a business will seek to:

• establish the legitimacy of the proposed customer

• establish the legitimacy of the proposed transaction

• verify the customer’s identity using proof of identity requirements appropriate to either natural or corporate persons.

7.32 The first and second steps involve some overlap. Within the context of organised crime infiltration, these steps may require an enquiry into whether:

• the intended use of goods or services has been identified, and whether that intended use is consistent with the usual practice of customers of a similar size and type

• the quantity of goods or services is consistent with the usual practice of customers of a similar size and type

• the customer has the technical capacity or is otherwise suitably equipped to use the goods or services

• an inflated price is being offered for the goods or services

• the customer’s preferred payment method is consistent with wider industry practice (for example, does the customer insist on cash payment in an industry dominated by electronic payments, or is a payment being made through an unusual source?)

• the customer is acting on their own behalf or on behalf of another person.^[30]

7.33 Under a KYS program, a business or government agency will seek to establish the integrity of the proposed supplier. To some extent, this process may mirror the probity enquiries that are conducted by a regulator in assessing a business licence application. Within the context of organised crime infiltration, a KYS program may require an enquiry into whether the supplier:

• is suitably qualified to supply the goods or services

• has sufficient experience in supplying the goods or services

• has suitable financial standing (which may be ascertained by requesting recent audited accounts)

• has established beneficial ownership of any corporate or trust entity through which

it operates

• has a history of unlawful conduct or appears on an informal or formal ‘blacklist’ of suppliers

• is proposing to supply the goods or services in a lawful and ethical manner (this may involve comparing the quote with the true costs of lawful service provision)

• is prepared to submit to regular monitoring during the term of a contract.^[31]

7.34 Customer and supplier due diligence may be voluntarily adopted through measures such as an industry code of practice, or mandated under legislation. For example, under Commonwealth anti-money laundering legislation, reporting entities (such as financial service providers, gambling service providers, and money service providers) are obliged to conduct customer due diligence.^[32]

7.35 Any requirements for supplier due diligence should take account of the supply chain in the occupation or industry. Some occupations and industries have a straightforward supply chain between the supplier and the customer with no or few intermediaries in between. It is increasingly typical, however, for a supply chain to involve multiple intermediaries and third parties. In the labour hire industry there may be four to five intermediaries involved before the labour reaches the purchaser.^[33] This fragmentation of the supply chain may be exploited by organised crime groups—a gap in due diligence measures at a key point in the chain may enable infiltration.

7.36 It may therefore be necessary to require due diligence at all, or the most critical, points in the supply chain. Such requirements could be enacted under legislation pertaining to a particular occupation or industry, or incorporated into the contractual arrangements between members of the supply chain. For example, a contract between a manufacturer and a distributor may require that any sub-contracting of distribution be subject to due diligence being conducted on third-party distributors.

Costs and benefits

7.37 Due diligence measures potentially offer a cost-effective form of regulation by co-opting occupation and industry members in the task of regulation, and aligning regulatory measures with initiatives that may be undertaken in the public and private sectors independently of any need to prevent organised crime infiltration. There may be strong commercial and organisational reasons to engage in due diligence, including the need to prevent:

• reputational damage in acquiring a customer, or engaging a supplier, who is linked to organised crime

• a contract potentially being unenforceable where it has an unlawful purpose

• difficulties in recovering payment from illegitimate customers

• inadequate service provision from illegitimate suppliers

• accessorial liability (or similar) for the acts of suppliers (for example, non-compliance with the Fair Work Act 2009 (Cth) by a supplier of private security or other services may expose the purchaser of those services to accessorial liability under that Act).^[34]

7.38 Some allowance needs to be made for the capacity of organised crime groups to subvert customer and supplier due diligence processes. An organised crime group may engage in identity fraud, or establish a business front that provides a veneer of legitimacy in purchasing certain goods. On the whole, however, customer and supplier due diligence is likely to make organised crime infiltration more difficult by increasing the effort and risk of conducting illicit transactions through a legitimate business, or operating a business for unlawful purposes.

Record-keeping requirements

7.39 As Cherney, O’Reilly and Grabosky observe, ‘record keeping and disclosure have an important regulatory function by subjecting records to possible public scrutiny and enhancing vigilance on the part of third parties.’^[35] A similar view was expressed during the Commission’s consultations, with the Victorian Automobile Chamber of Commerce (VACC) remarking that organised crime is attracted to industries with lax internal controls in relation to record keeping.^[36]

7.40 Maintaining records about the provision of goods and services creates an audit trail. An audit trail may deter or enable the detection of the distribution of illicit goods through a legitimate business, or the diversion of licit goods from a legitimate business for unlawful use. Potentially, an audit trail may also deter or enable the detection of the provision of unlawful services by a business that is owned or operated by organised crime (such as unlawful debt collection services).

7.41 Record-keeping requirements will often accompany any customer or supplier due diligence programs, or may operate in the absence of such programs.

7.42 The Commission was told of several industries where high-quality record keeping helps to deter infiltration and, conversely, where poor record keeping helps to facilitate infiltration.

7.43 In the experience of the Australian Crime Commission (ACC) and Victoria Police, record keeping measures help to deter the diversion of legitimate chemicals and pharmaceuticals for illicit drug manufacturing.^[37] First, the state and territory precursor control regimes help to curb precursor diversion from legitimate chemical manufacturers and suppliers.

Precursor chemicals are chemicals that can be used to make other chemicals, such as

illicit drugs.^[38]

Example

The Victorian precursor control regime requires that a receiver of precursor chemicals cannot be supplied with chemicals unless they provide sufficient proof of identity to the supplier, have an account with the supplier, and give the supplier an end-user declaration that records the receiver’s personal details, the name and quantity of the chemical, the proposed date of supply, and the intended use of the chemical.38

7.44 Second, precursor diversion from community pharmacies is addressed through initiatives such as the ‘Project Stop’ scheme.^{[39] [40]}

Example

Under Project Stop, pharmacists record details of the supply of pseudoephedrine-based products (including the customer’s identification details and the name and quantity of the product). This information is recorded in a central, real-time database and shared with police. The database helps a pharmacist determine whether a pseudoephedrine-based product is needed for therapeutic purposes, or whether it is being purchased for illicit activity (for example, multiple recent purchases by the same person may suggest it is being diverted for illicit drug manufacturing).40

7.45 The Commission also heard that record-keeping practices in the Victorian second-hand dealing industry have helped to deter organised crime infiltration of that industry. According to Cash Converters Australia and the Victorian Independent Pawnbrokers Association (VIPA), second-hand dealers maintain detailed records of transactions (consistent with their statutory obligations),^[41] and require customers to provide proof of identity (including photographs) when transacting. This information is voluntarily provided to Victoria Police. The VIPA stated that the quality of the data, and its provision to the police, limits the use of second-hand dealers for criminal purposes. There is apparently widespread awareness among customers that transactional data are recorded and shared, which has a deterrent effect.^[42]

7.46 A different experience was reported in relation to the auto-wrecking/recycling and scrap metal industry. The 2013–14 ‘Task Force Discover’ investigation found widespread non-compliance with record-keeping obligations throughout the industry. Seventy per cent of businesses audited by the taskforce were assessed as either not holding the required authorisation to trade, or as being non-compliant with the conditions of their authorisation. Non-compliance included incomplete record keeping in relation to customer identities and vehicle identifiers, and failures to make notifications to the Written-Off Vehicles Register. In the opinion of the taskforce, these record-keeping deficiencies enable ‘vehicle thieves to launder stolen vehicles through motor wreckers or scrap metal dealers with little or no risk their personal details will be retained’.^[43] Similar views were expressed by the VACC.^[44]

Developing record-keeping requirements

7.47 The particular details to be collected under a record-keeping scheme will vary by occupation or industry. Broadly speaking, record-keeping requirements should enable the creation of an audit trail that identifies the supplier and purchaser of goods or services, and the relevant characteristics of the goods or services for the purpose of deterring or detecting infiltration. For example, in the area of hydroponic equipment supply, it may be relevant to record the intended use of the product and the quantity of the product.

7.48 Record-keeping requirements may be mandated under legislation (such as the precursor control regime) or voluntarily pursued by business operators as part of an industry-led initiative (such as Project Stop).

7.49 Legislated record-keeping requirements are typically accompanied by powers for authorised officers (such as a police officer or the officer of a regulatory agency) to compel production and inspection of records.^[45] It may also be necessary to consider whether a more onerous obligation should be placed on business operators to supply data to a regulatory agency or police on a regular basis.^[46] Victoria Police commented that the lack of such an obligation is a weakness of the precursor control regime in Victoria. Nevertheless, Victoria Police acknowledged that the recording and retention of precursor supply information have a deterrent effect in themselves.^[47]

7.50 Record-keeping requirements should comply with the Privacy and Data Protection Act 2014 (Vic). Further, even where compliance is established, regard should be had to any adverse effects on consumers arising from the collection of personal information. For example, the Pharmacy Guild of Australia noted that there was some concern among customers of community pharmacies about the retention of confidential information under Project Stop (although it seems community pharmacies have addressed those concerns).^[48]

7.51 Record-keeping requirements may be supplemented by restrictions on cash-based transactions, as discussed below at [7.59]–[7.68], which may further assist in the creation of an audit trail.

7.52 Finally, a record-keeping scheme should take account of the supply chain in the occupation or industry. The elements of the supply chain are addressed to some extent in the regulatory response to precursor diversion, which seeks to curb diversion at both the wholesale stage (through the precursor control regimes) and the retail stage (through Project Stop). However, gaps remain; third-party trucking companies are not subject to any record-keeping obligations and may therefore provide an avenue for diversion in the delivery of wholesale products.^[49]

7.53 Following an examination of the supply chain, it may be necessary to impose record-keeping requirements at all points in the supply chain, or only at the points of greatest vulnerability to infiltration.

Costs and benefits

7.54 Maintaining records about the provision of goods and services brings transparency to transactions, which may deter organised crime infiltration. Equally, high-quality record keeping may allow infiltration to be detected—the very availability of such information creates an incentive for police and regulators to maintain oversight of an occupation or industry. Cash Converters Australia stated that due to the availability of comprehensive records in the second-hand dealing industry, police have a strong incentive to monitor the industry and draw on those resources for investigations.^[50]

7.55 The record-keeping initiatives discussed in this section seek to counteract the distribution of illicit goods through a legitimate business, or the diversion of licit goods from a legitimate business for unlawful use. Beyond this, record keeping may reveal unlawful activity in a business owned or operated by organised crime. Philip Morris Limited suggested that transaction records could be used to establish evidence of illicit trade, or lack of proof of legitimate trade, as a basis for action under anti-money laundering laws, asset forfeiture/confiscation or unexplained wealth laws, or taxation laws.^[51]

7.56 Record keeping is only likely to be effective if it is backed by robust enforcement or a strong commitment by industry members to the task of maintaining detailed records. The apparent success of the precursor control regime in Australia is partly attributed to the enthusiasm of industry members to participate in the regime.^[52] In this respect, PACIA noted that its members are in part motivated by the need to avoid the reputational damage that would arise from the diversion of their products for unlawful use.^[53] Accordingly, commercial motivations may compel compliance with record-keeping obligations as much as enforcement by regulators.

7.57 In the absence of commercial motivations or a culture of compliance, a regulator will need to enforce legislated record-keeping obligations. A lack of enforcement action may encourage otherwise compliant industry members to neglect record keeping, particularly where the costs of record keeping place them at a competitive disadvantage in relation to non-compliant industry members. A robust enforcement response to non-compliance should serve as the quid pro quo for the effort and cost of maintaining detailed records.

7.58 Victoria Police noted that the success of record-keeping requirements may also rely on a regulator or the police being appropriately resourced to analyse the information it receives.^[54]

Restrictions on cash-based transactions

7.59 Restrictions on cash-based transactions may deter or detect infiltration in a similar way to record-keeping requirements. Unlike cash payments, electronic payments establish an audit trail that identifies the supplier and purchaser of goods or services and certain details of the transaction, such as location and date.

7.60 During the Commission’s consultations, several industry representatives observed that cash-based transactions are used to conceal unlawful dealings in the auto-wrecking/recycling and scrap metal dealing industry and the second-hand dealing industry.^[55] Cash-based transactions are also vulnerable to abuse in the commercial fishing industry (to supply unlawfully caught fish) and in the waste management industry (for example, to illegally dump hazardous waste at landfill sites).^[56]

7.61 In addition, a cash-intensive business may facilitate money laundering by allowing the proceeds of unlawful conduct to be intermingled with revenue from legitimate business activities. In the absence of an audit trail, the source of cash payments may be unknowable.^{[57] [58] [59]}

Example

In England and Wales, scrap metal dealers are prohibited from paying for scrap metal in cash; a scrap metal dealer is only permitted to pay for scrap metal by cheque or electronic transfer. It is an offence to pay for scrap metal by other payment methods, with liability for the offence extending to the scrap metal dealer, a person who makes the payment acting for the dealer, and the site manager.58 These measures were introduced in order to counteract the disposal of stolen metal through legitimate dealers.59

7.62 Victoria Police, the VACC and Sims Metal Management expressed support for these measures in England and Wales, and suggested that similar measures could be introduced in Victoria to help prevent the disposal of stolen vehicles and vehicle parts through auto-wreckers/recyclers and scrap metal dealers.^[60]

7.63 Restrictions on cash-based transactions could involve an outright prohibition on cash payments, or the more moderate option of limits on the quantum of cash payments (for example, a requirement that amounts over $500 cannot be paid in cash). Limits on the quantum of cash payments increase the effort and risk of conducting a transaction for unlawful purposes. For example, where an organised crime group wished to purchase legitimate chemicals for illicit drug manufacturing or other unlawful conduct, a limitation on the quantum of cash payments would force the purchaser to structure its payments over several transactions, possibly at several locations, thereby increasing the risk of detection. Multiple transactions over a short period of time may alert a business operator to suspicious conduct.

7.64 Restrictions on cash payments could be imposed voluntarily by individual business operators or mandated under legislation.^[61]

Costs and benefits

7.65 Restrictions on cash payments—and attendant requirements for electronic payments—create an audit trail that may prevent or expose organised crime infiltration. More broadly, such restrictions may assist the enforcement of taxation laws—an obligation to use electronic payments would make it more difficult to conceal business income.

7.66 Industry members should be consulted before any restrictions on cash-based transactions are introduced. Electronic payment systems may bring additional costs for business operators, such as merchant fees, which may then be passed on to customers. Further, business operators may be concerned about the impairment of trade where their customer base includes groups—such as older and/or low-income consumers—who predominantly, and legitimately, pay in cash.^[62] Some customers may also legitimately prefer cash-based transactions in order to maintain privacy over personal information that would otherwise be collected through electronic transactions (that is, information collected for marketing purposes and not law enforcement/regulatory purposes).

7.67 Alternatively, industry members may have a preference for electronic payments. The VACC remarked that legitimate operators in the auto-wrecking/recycling industry rarely use cash payments because it is more efficient to use electronic payments. The VACC suggested that members of that industry would be likely to support restrictions on cash-based transactions.^[63]

7.68 While cash remains the most frequently used form of payment in Australia, research by the Reserve Bank of Australia (RBA) shows that the use of cash has declined consistently since 2007, falling from a share of 69 per cent of all payments in 2007 to 47 per cent of all payments in 2013, among the population studied by the RBA.^[64] Accordingly, any restrictions on cash-based transactions may simply hasten a shift in consumer and business behaviour that is already well advanced.

Controls on coercive conduct

7.69 Organised crime groups have the potential to use physical force, harassment, intimidation, or other coercive conduct in order to carry out business or repel competitors.^[65]

7.70 A regulatory regime may seek to address such conduct, separately to any action that may be taken under other laws, such as the Summary Offences Act 1966 (Vic) or the Crimes Act 1958 (Vic).

7.71 First, certain practices may be prohibited under a regulatory regime, regardless of whether there are restrictions on entry into the occupation or industry. In the Victorian debt collection industry (which operates under a negative licensing scheme), a debt collector is prohibited from using physical force, undue harassment or coercion, or doing, or threating to do, any act that may intimidate a person or a member of that person’s family. Such conduct may result in exclusion from the industry.^[66]

7.72 Where a positive licensing scheme operates, coercive conduct may be a ground for the suspension or cancellation of a licence. Under the Private Security Act 2004 (Vic), disciplinary action (such as licence cancellation) may be taken by the Chief Commissioner of Police where the holder of a private security licence has engaged in unfair, dishonest or discreditable conduct in carrying on the licensed activity.^[67] Further, it is conceivable that coercive conduct may trigger a loss of fit and proper person status and resulting licence suspension or cancellation.

7.73 A second and potentially more severe means of addressing coercive conduct is to impose wider controls on the operation of the occupation or industry. The regulatory regime for the Victorian tow-truck industry provides a case study. Operators who hold licences for the towing of motor vehicles are only permitted to operate either within or outside designated ‘controlled areas’. VicRoads allocates licensees to specific accident scenes within a controlled area.^[68] These restrictions are intended, in part, to counteract the previous acts of violence between rival tow-truck operators and the harassment of drivers at accident scenes in order to secure business.^[69] Such measures have reportedly been effective in reducing coercive conduct,^[70] but restrict competition within the industry (they are, in effect, a lawful form of market-sharing). At the time of delivery of this report, the regulatory regime for accident towing was under review by the Essential Services Commission.

Costs and benefits

7.74 An occupation or industry may broadly benefit where coercive conduct is prohibited, or triggers the suspension or cancellation of a licence. In the Victorian debt collection industry, the prohibited practices regime is said to be an important influence on good industry practice, and provides an avenue through which consumers may seek compensation for humiliation or distress when a debt collector engages in prohibited practices.^[71]

7.75 However, in the case of organised crime infiltration, enforcement difficulties will likely constrain any attempts to address coercive conduct through the prohibition of certain practices or similar measures. Unlike regulatory contraventions (such as record-keeping or due diligence deficiencies) that may be detected through auditing and largely proved through documentary evidence, enforcement action in response to coercive conduct will more often rely on competitors, consumers and other witnesses making complaints to regulators and being prepared to give evidence. Witnesses may be reluctant to take these steps where organised crime involvement is known or suspected.

7.76 The Australian Tattooists Guild commented that ‘[p]rohibiting practices such as the use of coercion, physical force and undue harassment [is] in theory beneficial. We do however concur strongly that enforcement may be difficult.’^[72] The National Heavy Vehicle Regulator similarly contended that prohibitions on certain conduct would be ‘extremely difficult to enforce/control in the heavy vehicle industry, and would likely rely upon an investigation or whistleblower’.^[73]

7.77 In relation to the Queensland tattoo industry, the Queensland Crime and Corruption Commission has found that legitimate business operators are often unwilling to report acts of intimidation and extortion by ‘criminal motorcycle gangs’ to the police, for fear of repercussions such as assault and damage to property.^[74]

7.78 These limitations should be borne in mind in developing a regulatory response to organised crime infiltration. While measures to address coercive conduct may be justified for other policy reasons (for example, consumer protection), additional regulatory measures may be required to deter or detect organised crime infiltration.

1. Consultation 2 (Roundtable 1); Submissions 20 (Australian Collectors & Debt Buyers Association), 21 (Institute of Mercantile Agents).

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2. Consultations 2 (Roundtable 1), 4 (Roundtable 3); Submissions 11 (Australian Security Industry Association Limited), 17 (Darryl Annett),

   24 (Victorian Automobile Chamber of Commerce), 29 (Australian Metal Recycling Industry Association).

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3. Consultation 2 (Roundtable 1).

   ↑

4. Julie Ayling, ‘Harnessing Third Parties for Transnational Environmental Crime Prevention’ (2013) 2(2) Transnational Environmental Law 339; Russell Brewer, Policing the Waterfront: Networks, Partnerships, and the Governance of Port Security (Oxford University Press, 2014) 49–58, 94–8, 115–33, 149–70; Adrian Cherney, Juani O’Reilly and Peter Grabosky, ‘Networks and Meta-regulation: Strategies Aimed at Governing Illicit Synthetic Drugs’ (2006) 16(4) Policing and Society 370.

   ↑

5. John Braithwaite, Regulatory Capitalism: How it Works, Ideas for Making it Work Better (Edward Elgar, 2008) 50–61.

   ↑

6. Consultation 7 (Australian Federal Police).

   ↑

7. Submission 17 (Darryl Annett).

   ↑

8. Consultation 4 (Roundtable 3).

   ↑

9. See, eg, Private Security Act 2004 (Vic) ss 174–6; Sex Work Act 1994 (Vic) s 46.

   ↑

10. See, eg, Prostitution Act 1999 (Qld) ss 19, 44.

    ↑

11. Submissions 10 (Australian Tattooists Guild), 13 (National Heavy Vehicle Regulator).

    ↑

12. Submission 13 (National Heavy Vehicle Regulator).

    ↑

13. Consultation 4 (Roundtable 3).

    ↑

14. Ibid.

    ↑

15. Submissions 11 (Australian Security Industry Association Limited), 24 (Victorian Automobile Chamber of Commerce), 29 (Australian Metal Recycling Industry Association).

    ↑

16. Consultation 4 (Roundtable 3).

    ↑

17. Australian Government, Regulator Performance Framework (October 2014) 22; Victorian Competition and Efficiency Commission, Smart Regulation: Grappling with Risk, Guidance Note Version 1 (April 2015) 43–8.

    ↑

18. Consultation 3 (Roundtable 2); Submission 8 (Philip Morris Limited).

    ↑

19. Australian Government, National Code of Practice for Chemicals of Security Concern (2013) <http://www.nationalsecurity.gov.au/ChemicalSecurity/Pages/NationalCodeofPracticeforChemicalsofSecurityConcern.aspx#_code>.

    ↑

20. Consultation 3 (Roundtable 2).

    ↑

21. Louis de Koker and Kayne Harwood, ‘Supplier Integrity Due Diligence in Public Procurement: Limiting the Criminal Risk to Australia’ (2015) 37(2) Sydney Law Review 217.

    ↑

22. Submission 5 (Professor Louis de Koker and Kayne Harwood).

    ↑

23. Submission 2 (Professor Rick Sarre).

    ↑

24. Tim Prenzler and Rick Sarre, ‘Developing a Risk Profile and Model Regulatory System for the Security Industry’ (2008) 21(4) Security Journal 264; Australian Crime Commission, Criminal Infiltration in the Private Security Industry (July 2013) <https://crimecommission.gov.au/publications/intelligence-products/crime-profile-fact-sheets/criminal-infiltration-private-security>.

    ↑

25. Fair Work Ombudsman, Local Government Procurement Initiative <http://www.fairwork.gov.au/how-we-will-help/helping-the-community/campaigns/national-campaigns/local-government-procurement-initiative>.

    ↑

26. Consultation 4 (Roundtable 3).

    ↑

27. Scottish Environment Protection Agency, Guidance on Procuring Waste Services for Public Bodies and their Contractors: Good Practice Guidance to Prevent Crime (July 2015) <http://www.zerowastescotland.org.uk/content/good-practice-guidance-prevent-waste-crime-0>.

    ↑

28. Consultation 13 (Scottish Environment Protection Agency).

    ↑

29. James B Jacobs, Gotham Unbound: How New York City Was Liberated from the Grip of Organized Crime (New York University Press, 1999) 227–9.

    ↑

30. See, eg, Australian Government, National Code of Practice for Chemicals of Security Concern (2013) <http://www.nationalsecurity.gov.au/ChemicalSecurity/Pages/NationalCodeofPracticeforChemicalsofSecurityConcern.aspx#_code>.

    ↑

31. See, eg, Scottish Environment Protection Agency, Guidance on Procuring Waste Services for Public Bodies and their Contractors: Good Practice Guidance to Prevent Crime (July 2015) <http://www.zerowastescotland.org.uk/content/good-practice-guidance-prevent-waste-crime-0>; Louis de Koker and Kayne Harwood, ‘Supplier Integrity Due Diligence in Public Procurement: Limiting the Criminal Risk to Australia’ (2015) 37(2) Sydney Law Review 217; Fair Work Ombudsman, Local Government Procurement Initiative <http://www.fairwork.gov.au/how-we-will-help/helping-the-community/campaigns/national-campaigns/local-government-procurement-initiative>.

    ↑

32. Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) pt 2.

    ↑

33. Consultation 2 (Roundtable 1).

    ↑

34. Fair Work Act 2009 (Cth) s 550.

    ↑

35. Adrian Cherney, Juani O’Reilly and Peter Grabosky, ‘Networks and Meta-regulation: Strategies Aimed at Governing Illicit Synthetic Drugs’ (2006) 16(4) Policing and Society 370, 376.

    ↑

36. Consultation 11 (Victorian Automobile Chamber of Commerce).

    ↑

37. Consultations 6 (Australian Crime Commission), 9 (Victoria Police).

    ↑

38. Drugs, Poisons and Controlled Substances Act 1981 (Vic) ss 4(1) (definitions of ‘end-user declaration’ and ‘sufficient proof of identity of receiver’), 80J(1), 80K, 80N(1), 80O; Drugs, Poisons and Controlled Substances (Precursor Supply) Regulations 2010 (Vic) reg 8(1).

    ↑

39. Queensland, Organised Crime Commission of Inquiry, Report (October 2015) 232.

    ↑

40. See Pharmacy Guild of Australia and Attorney-General’s Department, Project Stop <http://projectstop.com/>.

    ↑

41. Second-Hand Dealers and Pawnbrokers Act 1989 (Vic) s 20; Second-Hand Dealers and Pawnbrokers Regulations 2008 (Vic) reg 9.

    ↑

42. Consultation 3 (Roundtable 2).

    ↑

43. Victoria Police, Task Force Discover: Addressing Profit-motivated Vehicle Theft in Victoria’s Separated Parts and Scrap Metal Industries (2014) 4.

    ↑

44. Consultations 3 (Roundtable 2), 11 (Victorian Automobile Chamber of Commerce).

    ↑

45. See, eg, Drugs, Poisons and Controlled Substances Act 1981 (Vic) s 80R; Second-Hand Dealers and Pawnbrokers Act 1989 (Vic) ss 25, 26C.

    ↑

46. See, eg, Pawnbrokers and Second-hand Dealers Act 1994 (WA) s 79; Pawnbrokers and Second-hand Dealers Regulations 1996 (WA) reg 15.

    ↑

47. Consultation 9 (Victoria Police).

    ↑

48. Consultation 3 (Roundtable 2).

    ↑

49. Consultation 9 (Victoria Police).

    ↑

50. Consultation 3 (Roundtable 2).

    ↑

51. Submission 8 (Philip Morris Limited).

    ↑

52. Consultation 6 (Australian Crime Commission).

    ↑

53. Consultation 3 (Roundtable 2).

    ↑

54. Consultation 9 (Victoria Police).

    ↑

55. Consultation 3 (Roundtable 2); Submission 29 (Australian Metal Recycling Industry Association).

    ↑

56. Judy Putt and Katherine Anderson, A National Study of Crime in the Australian Fishing Industry, Research and Public Policy Series no. 76 (Australian Institute of Criminology, 2007) 21; Rob White and Diane Heckenberg, ‘Key Vulnerabilities and Limitations in the Management of Hazardous Waste and its Disposal: A Checklist Assessment Tool’ (2011) 2 Journal of Environmental Protection 1257.

    ↑

57. See Nicholas Gilmour and Nick Ridley, ‘Everyday Vulnerabilities: Money Laundering through Cash Intensive Businesses’ (2015) 18(3) Journal of Money Laundering Control 293.

    ↑

58. Scrap Metal Dealers Act 2013 (UK) c 10, s 12.

    ↑

59. Explanatory Notes to the Scrap Metal Dealers Act 2013 (UK).

    ↑

60. Consultation 9 (Victoria Police); Submissions 24 (Victorian Automobile Chamber of Commerce), 30 (Sims Metal Management).

    ↑

61. See, eg, Gambling Regulation Act 2003 (Vic) s 3.5.33.

    ↑

62. Crystal Ossolinski, Tai Lam and David Emery, ‘The Changing Way We Pay: Trends in Consumer Payments’ (Research Discussion Paper, Reserve Bank of Australia, June 2014) 42.

    ↑

63. Consultation 11 (Victorian Automobile Chamber of Commerce).

    ↑

64. Crystal Ossolinski, Tai Lam and David Emery, ‘The Changing Way We Pay: Trends in Consumer Payments’ (Research Discussion Paper, Reserve Bank of Australia, June 2014) 11.

    ↑

65. Submission 13 (National Heavy Vehicle Regulator); Consultation 3 (Roundtable 2).

    ↑

66. Australian Consumer Law and Fair Trading Act 2012 (Vic) ss 45, 47(1)(a)(vii), 47(1)(b)(vii).

    ↑

67. Private Security Act 2004 (Vic) ss 50(c), 56.

    ↑

68. Accident Towing Services Act 2007 (Vic) ss 42, 46.

    ↑

69. Western Truck Towing Pty Ltd v Douglas [2014] VSC 159 (10 April 2014) [8]–[15].

    ↑

70. Consultation 10 (Victorian Automobile Chamber of Commerce).

    ↑

71. Anteris Consulting Pty Ltd (for the Australian Competition and Consumer Commission), Research into the Australian Debt Collection Industry (May 2015) 82.

    ↑

72. Submission 10 (Australian Tattooists Guild).

    ↑

73. Submission 13 (National Heavy Vehicle Regulator).

    ↑

74. Information provided to the Commission by the Crime and Corruption Commission (Queensland) (5 August 2015).

    ↑