Regulatory Regimes and Organised Crime: Report (html)

8. Addressing the use of professional facilitators

8.1 Professionals may perform a key enabling role in organised crime activity, as discussed in Chapter 3. Three regulatory measures may reduce the risk of professionals either wittingly or unwittingly performing such a role:

• professional ethics education and support

• customer due diligence measures

• accessorial liability provisions.

8.2 Where professionals do assist organised crime groups, their behaviour is likely to sit on a continuum, ranging from unwitting facilitators of unlawful conduct, through to wilfully blind facilitators and, at its highest, active facilitators of unlawful conduct.^[1] In respect of money laundering, Smith suggests that the conduct of a professional will fall somewhere along the following continuum:

• being an unwitting participant in a client’s unlawful activity, which may involve genuine misunderstandings about the appropriateness of certain services, inadequate professional standards, and/or complete ignorance of a client’s unlawful activity

• suspecting that a client might be acting unlawfully, which may involve a reckless disregard of risks, wilful blindness and omissions, and/or negligent investigation of a client’s proposals

• having actual knowledge of unlawful activity, which may involve organised criminality in concert with the client, practitioner-instigated unlawful conduct by the client, and/or direct facilitation or acquiescence in unlawful conduct.^[2]

8.3 A regulatory response to the use of professional facilitators should take into account these varying degrees of culpability, whether this conduct relates to money laundering or other activity that enables organised crime (such as services that enable organised investment fraud). The measures outlined below reflect this continuum of culpability, ranging from educative measures that seek to improve risk awareness among professionals who may be unwitting facilitators of organised crime activity, through to accessorial liability measures that address the direct, knowing facilitation of unlawful conduct.

Professional ethics education and support

8.4 As discussed in Chapter 3, there is debate about whether, and the extent to which, professionals such as lawyers, accountants and real estate agents facilitate the activities of organised crime groups. During the Commission’s consultations, there was a recognition on the part of professional bodies that professional ethics measures are a useful means of countering the risk of such conduct, particularly on an unwitting basis. In the view of both the Law Institute of Victoria (LIV) and the Victorian Legal Services Board and Commissioner (LSBC), educative programs are a key measure in guarding against improper conduct by lawyers in this context.^[3] Chartered Accountants Australia and New Zealand also emphasised the importance of professional ethics measures in mitigating such risks in the accounting profession.^[4]

8.5 Any enabling role played by a professional may not necessarily constitute an offence in itself, such as a money laundering offence under Victorian or Commonwealth law.^[5] However, it may involve behaviour that potentially breaches standards of professional conduct and exposes an individual to disciplinary action.^[6]

8.6 The Australian Institute of Criminology (AIC) has conducted qualitative research with lawyers, accountants and real estate agents on the risk of participation in money laundering activity. The AIC concluded that while the incidence of reported cases of money laundering in these occupations is low, ‘[w]hat is needed is for the risk environment in which professionals practice to be publicised and for the dangers of involvement in money laundering to be illuminated and explained’.^[7]

8.7 In a 2014 evaluation of Australian anti-money laundering measures, the Financial Action Task Force (FATF) reported that:

Most designated non-financial business and profession sectors [including lawyers and real estate agents] are not subject to AML/CTF requirements, and did not demonstrate an adequate understanding of their [money laundering and terrorist financing] risks or have measures to mitigate them effectively. This includes real estate agents and lawyers, both of which have been identified to be of high [money laundering] risk in Australia’s National Threat Assessment.^[8]

8.8 In its consultation with the Commission, the Australian Crime Commission (ACC) suggested that there is a significant gap in professional ethics education about the risks of facilitating organised crime activity, including money laundering.^[9]

8.9 Professionals themselves may appreciate improved guidance on the risks to which they may be exposed. In an AIC study of lawyers’ perceptions of money laundering risks, the participating lawyers expressed a need for more frequent distribution of typologies and case studies to improve their understanding of money laundering risks.^[10] In this respect, the Australian Transaction Reports and Analysis Centre (AUSTRAC) has recently published two strategic analysis briefs that identify methods of money laundering through both the legal profession and the real estate sector.^[11]

8.10 Professional associations, and the regulators of individual professions, may also need to provide such guidance.^{[12] [13] [14]}

Example

The Law Council of Australia has published an anti-money laundering guide for legal practitioners that includes information about possible indicators of money laundering.12

In England and Wales, the Solicitors Regulation Authority (SRA) has published a guide that identifies methods of money laundering through law firms,13 while the SRA’s overview of its priority risks for 2015–16 regards money laundering as one of eight priority risks for the legal services market.14

8.11 It is important that any such guidance alert professionals to the broad range of organised crime activity that they may be at risk of facilitating. While the desire for money laundering is likely to be a key reason for which organised crime groups engage professionals, services may also be sought in relation to:

• the implementation of business structures that conceal or obfuscate beneficial ownership of corporate entities, including for the purpose of licence applications^[15]

• organised investment fraud, such as advice about the establishment of such schemes or promotion of the schemes to other clients

• fraudulent tax arrangements.^[16]

8.12 Further, it may be necessary to provide guidance about the particular circumstances in which professionals may be at risk of misuse or corruption by organised crime groups. The Commission heard that organised crime groups can exploit the relationship of confidence that has developed between a lawyer and their client in the provision of otherwise legitimate services, including services relating to the defence of criminal proceedings.^[17] The LIV remarked that ambiguous professional relationships can develop between lawyers and clients where advice is provided on an ongoing basis, such that a lawyer may feel trapped by the relationship or be motivated by altruistic motives to assist the client in respect of potentially improper or unlawful conduct.^[18] The LSBC similarly observed that there is a risk of some lawyers becoming too close to clients and of ‘professional line blurring’.^[19]

8.13 These types of risk are expressly acknowledged in the accounting profession. Under the Code of Ethics for Professional Accountants, an accountant to whom the Code applies is required to identify threats to compliance with fundamental principles of conduct, including a ‘familiarity threat’ (the threat that due to a long or close relationship with a client, an accountant will be too sympathetic to their interests or too accepting of their work) and an ‘intimidation threat’ (the threat that an accountant will be deterred from acting objectively because of actual or perceived pressures, including attempts to exercise undue influence).^[20]

8.14 As an adjunct to educative strategies, the Commission’s consultations suggest that confidential ethics advice services and other support services are particularly important, in the event that a person needs to resolve ambiguities in a professional relationship or exit a compromised relationship.^[21]

8.15 In relation to the accounting profession, Chartered Accountants Australia and New Zealand pointed to the Chartered Accountants Advisory Group, which comprises a panel of senior practitioners who provide confidential counselling and support to members of the association who are ‘faced with undesirable ethical or professional circumstances’.^[22] The LIV similarly noted the importance of its ethics advice service in assisting lawyers who are in compromised relationships, such as those involving blackmail.^[23]

8.16 In order to further mitigate risks in this area, professional associations and regulatory agencies may need to consider the intersection between health and welfare measures and the potential exploitation of professionals by organised crime groups. In a 2015 report on organised crime group cultivation of public sector employees, the Independent Broad-based Anti-corruption Commission stated that:

Many of the issues that heighten employees’ susceptibility to organised crime cultivation can also have adverse impacts upon their welfare. Organisational responses to illicit drug use, problem gambling and relationship breakdowns must account for the welfare of the individual as well as any impact upon the security of the public body.^[24]

8.17 Health and welfare services—such as the LIV’s Vic Lawyers’ Health initiative—may therefore provide a suitable avenue for supplying information about the risk of professionals being corrupted due to illicit drug use or gambling debts, and the support measures available in these circumstances.

8.18 One of the chief obstacles to improved educative and supportive measures is likely to be the lack of consensus about the nature and extent of the risks to which professionals are exposed in this context.^[25] In these circumstances, firms and professional associations may be unsure how to frame educative measures, and may question whether there is a justification for resourcing such initiatives.

8.19 However, there are good commercial reasons to implement professional ethics measures in this area. Where a professional is implicated in conduct that has facilitated organised crime, this may damage the reputation of a firm or an individual practitioner, result in a loss of clients and/or difficulties in retaining new clients, impose costs on a firm where internal reviews or regulatory investigations are required, and expose a firm or an individual practitioner to higher insurance costs. Such conduct may therefore cause significant harm to an individual career, the commercial viability of a firm, or the standing of a particular profession.

Customer due diligence

8.20 Customer due diligence (CDD) measures may assist in deterring or detecting the use of professionals by organised crime groups. The Commission’s consultations also revealed that CDD (and supplier due diligence) measures offer potential in other occupations and industries in this respect (see [ ]–[ ]). CDD measures fit with a growing recognition in crime prevention studies that industry and occupation members and other third parties are well placed to detect unscrupulous or potentially unlawful activity in the course of legitimate business.^[26]

8.21 Occupations/industries that are already subject to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) (banks and other lenders, non-bank financial service providers, gambling and bullion service providers, and money service providers) are required to undertake CDD under the requirements of that Act.^[27] Any suspicious activity detected through this process must be reported to AUSTRAC.^[28] CDD measures also allow an entity to identify and mitigate money laundering risks by terminating a commercial relationship as a result of a CDD process, if this is considered appropriate.

8.22 Lawyers, accountants and real estate agents are generally not subject to the AML/CTF Act, so are therefore not legally obliged to carry out CDD under the terms of that Act. As at the time of delivery of this report, the extension of the AML/CTF Act to lawyers, accountants and real estate agents was under consideration by AUSTRAC and the Commonwealth Attorney-General’s Department.^[29] Independently of any amendments to the AML/CTF Act, it may be necessary to consider whether CDD measures should nonetheless be pursued in these professions on either a voluntary basis (as part of a ‘best practice’ policy, for example), or on a compulsory basis (for example, CDD measures could be expressly incorporated into enforceable professional conduct rules).

8.23 CDD measures are perhaps under-utilised among professions that are not subject to the AML/CTF Act. In a study of 440 lawyers in 2008–09, the AIC found that 60 per cent of lawyers who responded to the survey stated that their practice did not use any CDD measures, although many respondents did not practise in areas that entailed money laundering risks. Nonetheless, relatively low levels of CDD were found in at-risk areas of practice involving the buying and selling of real estate, and the buying and selling of business entities.^[30]

8.24 The FATF publishes recommended CDD measures for the prevention of money laundering.^[31] These recommendations may provide some insight into the areas of professional practice

for which CDD may be desirable, and the types of enquiries that should be made of customers. The FATF recommends that CDD measures should apply to real estate agents when they are involved in transactions concerning the buying and selling of real estate,

and to lawyers and accountants when they are involved in transactions concerning:

• buying and selling real estate

• management of client money, securities or other assets

• management of bank, savings or securities accounts

• organisation of contributions for the creation, operation or management of companies

• creation, operation or management of legal persons or arrangements, and buying and selling of business entities.^[32]

8.25 The FATF suggests that CDD measures should involve:

• identifying the customer and verifying that customer’s identity using reliable, independent source documents, data or information

• identifying the beneficial owner and taking reasonable measures to verify their identity, including acquiring an understanding of the ownership and control structure of a corporate customer

• understanding and, as appropriate, obtaining information on the purpose and intended nature of the business relationship

• conducting ongoing due diligence on the business relationship and scrutinising transactions throughout the course of the relationship in order to ensure that the transactions are consistent with the service provider’s knowledge of the customer, their business and their risk profile.^[33]

8.26 As with the use of CDD measures in other occupations and industries, there may be good commercial reasons for professionals to pursue CDD measures. For example, CDD can assist in reducing the risk of financial crime and identity-related fraud and promote good governance practices.^[34] In respect of the proposed application of the AML/CTF Act to lawyers, the Law Council of Australia (LCA) noted in 2009 that:

The introduction of client due diligence requirements is likely to contribute significantly to the general risk management strategies of legal practitioners. Data from legal insurers shows that higher percentages of claims and complaints could have been avoided if practitioners engaged in more robust client selection and acceptance policies. In addition to conflict of interest considerations, a number of claims arise out of failing to adequately define the [identity] of the client, and from failing to identify the risks associated with specific clients and transactions.^[35]

8.27 As this statement intimates, CDD measures are likely to align with any existing requirements for professionals to determine whether a conflict of interest exists before accepting a client. For example, it is expected that the beneficial ownership of a corporate client would have to be established in the course of a conflict of interest determination.

8.28 In order to manage the financial costs of CDD measures, it may be necessary to permit an individual firm or practitioner some scope in calibrating CDD measures with the level of risk attached to the firm/the practitioner’s areas of practice, and the nature of their client base. In some sectors this may be less warranted; for example, among real estate agents there is relatively little variation in the nature of services provided. In other sectors, there is considerable variation; for example, one legal firm may engage in areas of practice that carry little risk of facilitating money laundering or other organised crime activity, while another firm may practice in relatively high-risk areas, such as property law.

8.29 The management of CDD costs would also be assisted by the development of a public beneficial ownership register that reduces the burden on both the private and public sectors in ascertaining beneficial ownership of corporate entities and trusts (see [ ]–[ ]).

Accessorial liability

8.30 Noting the continuum of professional culpability described at [8.2]–[8.3], policy makers should consider whether a third party—such as a professional—should be held to account under a regulatory regime for knowingly facilitating organised crime activity. Such provisions would operate separately to prohibitions at criminal law on aiding and abetting the commission of an offence by another person.^[36]

8.31 Accessorial liability provisions already operate in some areas of the law in which professionals may be providing services to organised crime groups. Under certain sections of the Corporations Act 2001 (Cth) (including some of those relating to directors’, officers’ and employees’ duties, which have the potential to capture unlawful phoenix activity),^[37] a person who is ‘involved’ in a contravention of the section has themselves committed a contravention.^[38] A person is ‘involved’ in the contravention if, among other things, they have aided or abetted the contravention, or been knowingly concerned in the contravention.^[39] These provisions have potential application to professionals who are knowingly advising organised crime groups in the conduct of unlawful phoenix activity. According to the ACC, there is increasing evidence of organised crime involvement in industries that are susceptible to phoenix activity.^[40] Accessorial liability provisions also operate under the Fair Work Act 2009 (Cth), in almost identical terms to those under the Corporations Act.^[41]

8.32 Within the context of an occupation/industry-specific regulatory regime, accessorial liability provisions could be connected to provisions that require, for example:

• licence applicants to not provide false or misleading information in relation to a licence application^[42]

• licence holders to notify the regulator of changes to information provided in a licence application^[43]

• licence holders to comply with the conditions imposed on a licence.^[44]

8.33 That is, accessorial liability provisions would make professional advisors liable for being involved in the contravention of these ‘primary’ provisions, along with the licence applicant/licence holder.

8.34 Writing extra-curially, Justice Black of the Supreme Court of New South Wales has commented on the value of accessorial liability in the context of the Corporations Act:

Accessorial liability should tend to encourage persons within its reach to seek to identify and prevent any breach of the Corporations Act. To the extent that accessorial liability creates an incentive for other parties to withhold assistance to contravening conduct, it presumably reduces the likelihood of that conduct. There is an overlap between accessorial liability and a focus on the role of ‘gatekeepers’, both within the corporation and outside it, such as directors and officers, legal representatives, investment bankers and auditors, which has received particular emphasis in the enforcement strategy of the Australian Securities and Investments Commission. The ‘gatekeeper’ theory suggests that the extent of contraventions of the Corporations Act is likely to be reduced if company directors and officers (and professionals who provide services to companies) are placed under threat of accessorial liability if they fail to take steps (in the case of directors and officers) to avoid or (in the case of professionals) withdraw their services in respect of contraventions by companies.^[45]

8.35 The same analysis could be applied to contraventions of regulatory regimes governing occupations and industries, where professionals are involved in those contraventions.

8.36 Anderson and Haller argue that phoenix activity may be better deterred by more frequently pursuing professionals—such as lawyers, accountants and insolvency practitioners—who assist directors in devising and implementing transactions that constitute unlawful phoenix activity under the Corporations Act, or contraventions of the Fair Work Act (for example, in relation to the non-payment of employee entitlements).^[46] A similar observation can be made about the provision of advice by professionals in respect of organised crime activity. The pursuit of accessorial liability would likely compel greater discussion within the relevant professions of the boundary between legitimate and illegitimate advice, which may then be used as an educative tool by professional bodies and as a basis for disciplinary action under the regulatory regime of a particular profession.^[47]

1. David Middleton and Michael Levi, ‘Let Sleeping Lawyers Lie: Organized Crime, Lawyers and the Regulation of Legal Services’ (2015) 55(4) British Journal of Criminology 647; Julie Walters et al, Industry Perspectives on Money Laundering and Financing of Terrorism Risks in Non-financial Sector Businesses and Professions, Research and Public Policy Series no. 122 part 2 (Australian Institute of Criminology, 2013) 50–2; Russell G Smith, ‘Anti-money Laundering: The Accounting and Legal Professions’ in David Chaikin (ed), Financial Crime Risks, Globalisation and the Professions (Australian Scholarly Publishing, 2013) 28, 37–9.

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2. Russell G Smith, ‘Anti-money Laundering: The Accounting and Legal Professions’ in David Chaikin (ed), Financial Crime Risks, Globalisation and the Professions (Australian Scholarly Publishing, 2013) 28, 37–9.

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3. Consultations 3 (Roundtable 2), 4 (Roundtable 3).

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4. Consultation 3 (Roundtable 2).

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5. Crimes Act 1958 (Vic) ss 194, 195; Criminal Code Act 1995 (Cth) sch (The Criminal Code) ch 10 pt 10.2.

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6. Victorian solicitors are required to comply with principles of professional conduct established at common law and under the Legal Profession Uniform Law Australian Solicitors’ Conduct Rules 2015, which are made by the Legal Services Council. The Legal Services Council and the Commissioner for Uniform Legal Services Regulation oversee the implementation of the Legal Profession Uniform Law Scheme, which applies in Victoria and New South Wales. A breach of the Rules is capable of constituting unsatisfactory professional conduct or professional misconduct: Legal Profession Uniform Law Application Act 2014 (Vic) sch 1 s 298(b). Accountants are subject to codes of professional conduct and professional disciplinary regimes that are administered through the principal professional associations—Chartered Accountants Australia and New Zealand, Certified Practising Accountants Australia and the Institute of Public Accountants. The main code of professional conduct is the Code of Ethics for Professional Accountants, developed by the Accounting Professional and Ethical Standards Board. Victorian real estate agents are required to act in accordance with the Estate Agents (Professional Conduct) Regulations 2008 (Vic).

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7. Julie Walters et al, Industry Perspectives on Money Laundering and Financing of Terrorism Risks in Non-financial Sector Businesses and Professions, Research and Public Policy Series no. 122 part 2 (Australian Institute of Criminology, 2013) 52.

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8. Financial Action Task Force and Asia/Pacific Group on Money Laundering, Anti-money Laundering and Counter-terrorist Financing Measures—Australia, Fourth Round Mutual Evaluation Report (April 2015) 6.

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9. Consultation 6 (Australian Crime Commission).

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10. Kim-Kwang Raymond Choo et al, Perceptions of Money Laundering and Financing of Terrorism in a Sample of the Australian Legal Profession in 2008–09, Research and Public Policy Series no. 122 part 1 (Australian Institute of Criminology, 2013) 43.

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11. Australian Transaction Reports and Analysis Centre, Money Laundering through Legal Practitioners—Strategic Analysis Brief (2015); Australian Transaction Reports and Analysis Centre, Money Laundering through Real Estate—Strategic Analysis Brief (2015).

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12. Law Council of Australia, Anti-money Laundering Guide for Legal Practitioners (December 2009).

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13. Solicitors Regulation Authority, Cleaning Up: Law Firms and the Risk of Money Laundering (November 2014).

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14. Solicitors Regulation Authority, Risk Outlook 2015/16: An Overview of our Priority Risks (July 2015).

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15. See [ ]–[ ].

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16. See [ ]–[ ].

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17. Consultation 3 (Roundtable 2).

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18. Ibid.

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19. Consultation 4 (Roundtable 3).

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20. Accounting Professional and Ethical Standards Board, APES 110 Code of Ethics for Professional Accountants (December 2010) sections 100.2 and 100.12.

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21. Consultation 1 (Professor Michael Levi).

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22. See Chartered Accountants Australia and New Zealand, Chartered Accountants Advisory Group (CAAG) <http://www.charteredaccountants.com.au/advisorygroup>.

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23. Consultation 3 (Roundtable 2).

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24. Independent Broad-based Anti-corruption Commission, Organised Crime Group Cultivation of Public Sector Employees, Intelligence Report No 1 (2015) 11.

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25. See [ ]–[ ].

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26. See generally Julie Ayling, ‘Harnessing Third Parties for Transnational Environmental Crime Prevention’ (2013) 2(2) Transnational Environmental Law 339.

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27. Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) s 36.

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28. Ibid pt 3 div 2.

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29. See Attorney-General’s Department, Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006

    <https://www.ag.gov.au/consultations/pages/StatReviewAntiMoneyLaunderingCounterTerrorismFinActCth2006.aspx>.

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30. Kim-Kwang Raymond Choo et al, Perceptions of Money Laundering and Financing of Terrorism in a Sample of the Australian Legal Profession in 2008–09, Research and Public Policy Series no. 122 part 1 (Australian Institute of Criminology, 2013) 24, 29.

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31. Financial Action Task Force, International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation:
    The FATF Recommendations (February 2012) recommendation 10.

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32. Ibid recommendation 22.

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33. Ibid recommendation 10.

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34. Kim-Kwang Raymond Choo et al, Perceptions of Money Laundering and Financing of Terrorism in a Sample of the Australian Legal Profession in 2008–09, Research and Public Policy Series no. 122 part 1 (Australian Institute of Criminology, 2013) 31.

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35. Law Council of Australia, Anti-money Laundering Guide for Legal Practitioners (December 2009) 17.

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36. Criminal Code Act 1995 (Cth) sch (The Criminal Code) s 11.2; Crimes Act 1958 (Vic) ss 323–324.

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37. Phoenix activity can constitute a civil penalties breach of ss 181(1), 182(1) and 183(1) of the Corporations Act 2001 (Cth): see Australian Securities and Investments Commission v Sommerville (2009) 77 NSWLR 110. It can also constitute a criminal offence under s 184 of the Corporations Act 2001 (Cth).

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38. See Corporations Act 2001 (Cth) ss 181(2), 182(2), 183(2) (accessorial liability for civil penalties contraventions of ss 181(1), 182(1) and 183(1)).

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39. Ibid s 79.

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40. Australian Crime Commission, Organised Crime in Australia 2015 (2015) 25–6, 66.

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

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42. See, eg, Sex Work Act 1994 (Vic) s 45.

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43. See, eg, ibid s 46.

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44. See, eg, Private Security Act 2004 (Vic) s 32.

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45. Justice Ashley Black, ‘Directors’ Statutory and General Law Accessory Liability for Corporate Wrongdoing’ (2013) 31 Company and Securities Law Journal 511, 511–12.

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46. See Helen Anderson and Linda Haller, ‘Phoenix Activity and the Liability of the Advisor’ (2014) 36(3) Sydney Law Review 471.

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47. See generally ibid 491.

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