Fundies find a loophole in money laundering law
On the eve of the implementation of the most significant provision of the Anti-Money Laundering and Counter-Terrorism Financing Act the regulator Austrac has conceded that there is a big loophole in the law.
Austrac issued a statement yesterday, saying the issue of units in a managed investment scheme would not fall within the coverage of the AML/CTF Act.
This is an embarrassing about-turn for Austrac which had, until very recently, been dealing with the investment management industry's representative body, the Investment and Financial Services Association, on procedures for implementing the new rules.
A drafting error in the law "gives rise to an unintended effect of exempting an issue of unit(s) in a managed investment scheme from the AML/CTF Act" Austrac said in a statement yesterday.
As a result, "an issue of unit(s) in a managed investment scheme does not fall within the AML/CTF Act."
Fund managers make up the second biggest group, after banks, among the 19,000 entities Austrac has identified as falling under its authority.
IFSA chief executive Richard Gilbert said: "Until yesterday it was full steam ahead. This has been a massive expenditure for our members, who were not covered by the Financial Transaction Reporting Act and have not had these monitoring and reporting obligations before. In terms of time and effort it has been bigger than Y2K."
Austrac has been under fire for most of this year for not being staffed adequately and not being ready to meet its obligations as a regulator. A source said Austrac had received legal advice some time before issuing yesterday's statement.
Alison Deitz, a partner at the law firm Deacons, said she expected that the matter would be clarified when Parliament re-convenes in Feburary.
Deitz said: "This is a last minute reprieve for those in the managed funds industry who have spent months gearing up for compliance with the AML/CTF Act."
AML/CTF covers banks, remittance companies, coin dealers, casino operators and gaming companies. They must develop programs to identify, mitigate and manage risks associated with money laundering and terrorism financing.
The legislation, which brings Australian law into line with international practice in this area, was passed in December last year and is being introduced in a number of stages. Rules relating to electronic funds transfer, registration of remittance service providers and the movement of bearer negotiable instruments took effect in December.
Compliance reporting obligations took effect in June.
From today regulated entities must have their AML/CTF programs in place, or at least be able to show that they are taking steps towards implementation of a program. An important part of these programs is new customer identification rules.
Other parts of the legislation will take effect in March and December next year, and the Government is working on a second tranche of AML/CTF that will cover lawyers, accountants and other professional service providers.
Austrac chief executive Neil Jensen yesterday hosted a function in Sydney where he launched a series of online communication services, educational tools and a regulatory guide for regulated entities. Bob Debus, the Minister for Home Affairs in the new government, was also there.
But discussion about the discovery of the loophole took the shine off the occasion.
Jensen said: "Managed investment schemes were always going to be covered by the Act. In developing a definition of a managed investment scheme there was an exclusion for funds where the entity is raising funds on its own behalf.
"The Attorney-General is looking into it and will take the matter forward."
Deitz said: "This issue was raised some time ago. There has always been uncertainty because AML/CTF is activities-based legislation, not industry based.
"There was an exemption for companies raising capital and there was a debate about whether that exemption also applied to managed investment schemes. Austrac set out its view but my understanding is that it received contrary legal advice and changed its position."