May 2006 Top Story:
***MLI ARCHIVE***
BDW finds cracks of logic in the laws:
Two of Blake Dawson Waldron’s anti-money laundering team gave a detailed review of the draft money laundering laws last month, including criticism of the know-your-customer procedures and the lack of guidance on how to implement a risk-based compliance program.
The BDW seminar, which was pitched a week before the consultation period ended, analysed reporting entities’ legal obligations and spelt out areas which were problematic or incomplete.
Stephen Cavanagh, BDW’s partner in charge of retail finance, told delegates that the draft laws threw up some problematic legal interpretations when mentioning designated services’ responsibilities, especially in the area of lending.
Often the laws did not specify whether they applied to business or non-business transactions, he said. It may be possible that a loan made by any company to an employee may be caught by the rules.
“One item catches a guarantor of a loan, who makes a payment to a lender. You could then arguably extend that situation to a parent guaranteeing a loan made to a child and make a payment to a lender based on that guarantee.”
He also criticised the obligation on entities to report suspicious activity if it had “reasonable grounds to suspect that information regarding the provision of service or prospective provision of a service may be relevant to an investigation or prosecution for an offence against the commonwealth, territory or state including anything relevant to the evasion or attempted evasion of taxes”.
“At first glance, that seems onerous,” said Cavanagh. “It requires reporting entities to have extensive knowledge of state, commonwealth and territory laws.
“The question of what is reasonable must surely depend on the state of knowledge of the reporting entity or its relevant employee. It needs clarification.”
Andrew Young, a senior associate at BDW, said the bill offered very little detail on what a risk-based regime entailed. It was not about ascertaining the commercial risk of laundering then deciding whether you deal with it.
“It's about identifying risk of your involvement in laundering or terrorist financing and then doing what is legally required by the AML/CTF rules – which have the force of law,” he said.
Young detailed “the six risks” test that reporting entities should apply to any product or service. The tests included whether a product had access to funds, restrictions on transaction size, whether it allowed cash deposits and if it permitted payments to third parties.
“Super paid into a retail industry fund by an employer or employee may be low risk because access to those funds is limited,” said Young.
“It seems lower risk than a self-managed fund, which may be used as a vehicle for laundering by rolling over money into a retail industry fund.”
“Not all super products will carry the same risk. You need to test the features of all products.”
Young also commented on the “circular logic” involved in assigning risk ratings to customers. The laws stipulated that entities needed to constantly consider if they needed more information about a particular customer, yet in deciding on this they needed to have ascertained the customer’s risk classification.
“So to determine whether you need extra KYC information, you need to assign a risk classification; but to assign a risk classification, you’ll often need additional KYC information. It’s a clear absence of logic,” he said
DelMonte Publications May 2006
