AustLII Home | Databases | WorldLII | Search | Feedback

Journal of Law, Information and Science

Journal of Law, Information and Science (JLIS)
You are here:  AustLII >> Databases >> Journal of Law, Information and Science >> 1993 >> [1993] JlLawInfoSci 22

Database Search | Name Search | Recent Articles | Noteup | LawCite | Help

Jensen, Neil J --- "International Funds Transfer Instructions: Australia at the Leading Edge of Financial Transaction Reporting" [1993] JlLawInfoSci 22; (1993) 4(2) Journal of Law, Information and Science 304

International Funds Transfer Instructions :
Australia at the Leading Edge of Financial Transaction Reporting

by NEIL J JENSEN[*]

Abstract

In this article the Australian legislation dealing with International Fund Transfers is detailed and examined. The need for this type of regime in an era of complex taxation investigations and subsequent law enforcement is justified. As explained the most effective and efficient way to conduct this is by the use of smart technology. The development of this technology so that better analysis of the information can be made is also considered. The author concludes by asking whether the costs of the reporting system justify the benefits. He states that this is an issue that needs to be closely and continually considered and that the benefits must include the deterrent factor associated with the financial transaction reporting regime.

On 6 December 1992, Commonwealth legislation took effect which requires the reporting of international funds transfer instructions to the Australian Financial Reports and Analysis Centre (AUSTRAC). International funds transfer instructions are defined as :

“an instruction for a transfer of funds that is transmitted into or out of Australia electronically or by telegraph, but does not include an instruction of a prescribed kind”.[1]

They are most often referred to as international telegraphic transfers or wire transfers.

This was a very important enactment as it placed Australia at the leading edge of financial transaction reporting for the purposes of revenue and law enforcement use.

In 1988, the Australian Parliament had enacted legislation to assist in the fight against money laundering, particularly in the areas of major tax evasion and serious and organised crime. That legislation was the Cash Transaction Reports Act 1988 (which is now the Financial Transaction Reports Act 1988 [“FTR Act”]) and was predominantly focused on domestic cash transactions but also included provisions for the reporting of cash movements into, and out of, Australia.

The theory behind the original cash transaction reporting legislation is that cash is the basic financial commodity associated with drugs, serious crime, and tax evasion. Although cash is a major component of the financial activities of those associated with criminal activity, the Australian Taxation Office and law enforcement agencies consider that the detection of the major players will involve consideration of non-cash activities in tandem with cash activities, and a major component of those non-cash activities is found in the use of international funds transfer instructions.

In mid-1990, enquiries were made by AUSTRAC with the law enforcement and revenue agencies to assess the likely usage of international funds transfer instructions by criminals generally and by persons evading tax. The report which resulted from those enquiries indicated that there was a trend towards internationalisation of criminal activity and the resultant financial conduct and found that there was an increasing emphasis on international investigations of criminal activity.[2] The report outlined the difficulties in obtaining relevant data from the banks because of the law enforcement and revenue agencies lack of necessary information, such as date, bank, branch, and customer name. Those agencies indicated that without access to international funds transfer instructions they have some difficulty in locating and proving overseas transactions. As a consequence, overseas assets obtained from the profits of criminal activity in Australia were not being discovered, the extent of off-shore rorts were not being accurately gauged, cases were not being pursued and offenders were escaping the judicial system. The agencies indicated that early access to information relating to international funds transfer instructions would facilitate the tracking of off-shore movements of funds resulting from tax evasion and other crime and would therefore assist in the process of revenue collection and the collection of proceeds of crime.

A March 1991 report of the House of Representatives Standing Committee on Legal and Constitutional Affairs into International Profit Shifting activities (the Martin Committee), considered that revenue loss resulting from withholding tax abuse was somewhere in the range of $100 million to $943 million per annum.[3]

In looking for ways to overcome this abuse the Martin Committee highlighted the need for information relating to international funds transfer instructions to be more readily available to the Australian Taxation Office and noted the deficiency in the cash transaction reporting system as it then existed. The committee concluded that :

“It is evident that telegraphic or wire transfers are the predominant means by which funds are channelled from Australia overseas. The cash transaction reporting system which has been established, though, does not monitor such transfers. The committee considers this to be a notable deficiency, as it precludes the ATO from an important source of intelligence in its efforts to combat international profit shifting. The capture and analysis of telegraphic transfer data would add a significant dimension to the ability of the ATO and law enforcement agencies to strike at the major incentive behind international organised crime - financial gain. In addition, the intelligence provided by this data should enhance the ATO’s ability to detect and investigate international profit shifting arrangements ... “[4]

In its report, the committee recommended that :

“... a system for monitoring and reporting telegraphic/wire transfers of funds be implemented, with the Cash Transaction Reports Agency responsible for the establishment and administration of such a system.”[5]

In December 1991, in its report on money laundering, the National Crime Authority also considered the matter of funds moving off-shore when it stated that :

“Australia has recognised that the geographic isolation that once protected it from many international trends has lessened. Modern communications have linked Australia to the world financially and thus to activities such as international money laundering. As evidenced by the case studies of money laundering in Australia examined during this inquiry, the proceeds of crime are regularly transferred overseas.”[6]

A recent investigation into drug related criminal activity highlights the use of international funds transfer instructions by the criminal element. The investigation was explained at a public hearing during the Senate Standing Committee on Legal and Constitutional Affairs review of the Financial Transaction Reports legislation.

“... Operation Elastin ... was an investigation into a well-established and sophisticated narcotics syndicate engaged in international trafficking of heroin between Thailand, Japan and Australia. The investigation was initiated as a result of irregularities detected by the Cash Transaction Reports Agency, as it was known in early 1991, concerning overseas telegraphic transfers of Australian currency to various banks in Japan and south-east Asia. As a result of further enquiries, Operation Elastin subsequently turned the investigation towards a major narcotics importation syndicate. The investigation resulted in the Australian Federal Police arresting the principals in this syndicate for their involvement with importing approximately five kilo’s of heroin. All received lengthy custodial sentences ... As a result of advice to the Japanese authorities concerning this investigation, the Japanese police in Osaka arrested the supplier of heroin ... He presently awaits trial in Japan.”[7]

More recently, in an article in the Australian Financial Review of 3 September 1993 it was reported that, following an investigation by the National Crime Authority, the Australian Federal Police had charged two Chinese residents with money laundering offences involving approximately $57 million. It was noted that funds had been transferred between bank accounts in Melbourne and then transferred to an account in the United States.[8] There are many other recorded instances of criminal activity or tax evasion where the principals in the criminal activity have utilised international funds transfer instructions in the money laundering process.

Internationally it is recognised that telegraphic or wire transfers are being used in the money laundering process. Evan Thompson in an article in the Canadian Banker says that :

“The enemy in this war: the high-volume launderers, headquartered in centres such as Miami or South and Central America, have perfected the electronic wire transfer to shift huge blocks of drug money in seconds”.[9]

Government representatives in the United States have also made many comments on the use of wire transfers in laundering the finances of criminal activity. In August of this year, in its proposed amendment to the Bank Secrecy Act Regulations relating to funds transfers, the US Department of Treasury and the Board of Governors of the Federal Reserve System published the following in the Federal Register:

“Money laundering is a vital component of drug trafficking and other criminal activity throughout the world, and federal law enforcement agencies believe that a significant amount of the money laundered involves wire transfers. Proceeds from illegal activities may be processed through money laundering schemes involving domestic and/or international payments by wire transfers. Such activity has been documented in several recent investigations conducted by Treasury and other federal law enforcement agencies.”[10]

In his article “Investigating Criminal and Corporate Money Trails”, David Chaikin also considers the use of wire transfers in the laundering of money in the US context. He states :

“In the modern world electronic transfers of money constitute the bulk of, and the highest value transactions in, national and international payments. In the United States more than US $1 trillion and over 400,000 transactions pass through the nations clearing houses every day. Billions of dollars are wire transferred into and out of the United States, with little government monitoring. Since wire transfers are the fastest and most efficient way to move funds from one bank to another they have a high potential for abuse. For example, United States bank investigators estimate that over US $100 billion of cocaine money is exported out of the United States by wire transfer each year. The American Bankers’ Association stated in 1989 that ‘wire transfers which are essentially unregulated, have emerged as the primary method by which high volume launderers ply their trade’. Senator John Kerry has called for ‘wire transfer accountability’. ... Once illicit money is deposited into the banking system, it becomes anonymous and its character obscured by the millions of banking transactions that occur daily. Banks do not generally question wire transfers of millions of dollars by established customers. Traditionally they have considered that it is none of their business to examine the use of their customers’ funds, apart from the case where it is patently fraudulent.”[11]

In October 1991 a Bill[12] was introduced into parliament which sought to put into effect the recommendations of the Martin Committee through amendment to the Financial Transaction Reports Act. Debate in the Australian Parliament during the course of the Second Reading speech on the Bill provided what appeared to be a bi-partisan acceptance that the availability of reports of international funds transfer instructions, to the Australian Taxation Office and the law enforcement agencies, was of major importance in combating both tax evasion and the laundering of profits from serious crime. The Commonwealth Attorney General of the time, Mr Michael Duffy, said :

“In conclusion, I stress that the country cannot afford to continue to suffer the vast revenue losses through tax and customs evasion or tolerate the removal offshore of the proceeds of some of our most serious crimes. The average Australian is tired of seeing the high fliers rort the system. The shareholders of this country are tired of seeing their investments moved offshore, seemingly without trace and certainly beyond their reach, often for the personal gain of unscrupulous manipulators. Lack of means to detect and trace such movements is a serious weakness in the system which now must be remedied.”[13]

In response, the shadow Attorney General, Mr Andrew Peacock, commented that :

“In conclusion, it is - bluntly put - an outrage that the withholding tax system has been a source for tax evasion for so long. It is scandalous that the Government has not faced up to the problem. Provision for the reporting of international telegraphic transfers should have been brought in over a year ago, at the time the former tax screening arrangements and foreign currency controls were brought to an end.”[14]

The Benefits of the Consultative Process in the Development of New Legislation

From the time that AUSTRAC was asked to consider the issue of international funds transfer instructions, it had consulted with the Australian Bankers Association, major banks and the revenue and law enforcement agencies.

In its first report on international funds transfer instructions in January 1990[15], AUSTRAC had considered a number of issues as a result of its consultation with bank representatives. The issues outlined in the report included - the type of transfers involved in international funds transfer instructions, information being recorded and stored by the banks, volumes of likely transactions, extent of criminal usage of international funds transfer instructions, Tax Screening, and, the inadequacy of the reports to AUSTRAC of suspicious transactions and significant cash transactions with regard to reporting of international transactions. The report indicated that the international funds transfer instructions are generally transmitted electronically through SWIFT[16], by the use of telex[17], by other proprietary systems[18], or by internal banking systems[19]. It indicated that as the bulk of the data is in an electronic format, that data can be captured, duplicated and reported to AUSTRAC. It was noted that the data is already captured by the cash dealers and would be capable of being reported in its entirety. The banks also considered that electronic reporting of international funds transfer instructions, at least by the major banks, would be possible should reporting of international funds transfer instructions be required by the government.

Further enquiries were also undertaken with a number of the banks and with United States authorities. As a result, AUSTRAC provided a report to the then Australian Attorney General, Mr Michael Duffy recommending the establishment of a working group comprising bank and law enforcement and revenue agency representatives, to consider the methodology of capturing data. That methodology was to include - technical methods of reporting, paper based telexes difficulties, exemptions, parameters for reporting, the necessity for reporting foreign exchange and money market transactions, whether the reporting of international funds transfer instructions would have the desired law enforcement result considering other forms of off-shore movement, and, a timetable for implementation of international funds transfer instructions reporting.

The working group was convened by AUSTRAC and met in November 1990. All representatives who attended the working group indicated that they had a general philosophical agreement with reporting of international funds transfer instructions. At that meeting, a balance was struck between the needs of the law enforcement and revenue agencies and the ability of the cash dealers to provide adequate data to meet those needs. The consensus reached at that meeting was that as the law enforcement and revenue agencies only have access to data which is contained within the records of the cash dealer, or which is actually transmitted by means of the international funds transfer instructions, and that data should be reported.

The discussions also concluded that the types of transactions which are most commonly sought by the law enforcement and revenue agencies are customer related international funds transfer instructions. It was also determined that reporting of international funds transfer instructions would not generally include commercial foreign exchange transactions or bank drafts because of the volumes and complexities of reporting those transactions. The law enforcement and revenue agencies concluded that if they were to be able to review reports of international funds transfer instructions information in their premises, international funds transfer instructions information which was previously only available to them after lengthy searching when they were aware that the transactions had occurred, that would be of such an advantage to override the need for any additional data. The time and resource savings, together with the location of financial transactions resulting from criminal activity which would not otherwise be available, were important factors in reaching the consensus.

The consultative process in respect of this component of the reporting regime was, as has been the case with all issues relating to the FTR Act, an important aspect of ensuring that the reporting requirements were not onerous on the cash dealers in terms of the effect on their commercial activities and in particular in cost and resource usage in reporting. Also, it was of value in determining the information which was necessary for law enforcement and revenue purposes as against that which would be merely useful or “nice to have”. In proposing that international funds transfer instructions be reported to AUSTRAC, the Attorney-General specifically noted the role of the cash dealers in this consultative process :

“The Australian Bankers’ Association and representatives of other major cash dealers groups have worked closely with officers of my Department and the CTRA in the development of this initiative, and I wish to thank them for their co-operation and support. This co-operation is continuing in the development of appropriate technology to permit the monitoring of such transfers to ensure the effectiveness of the scheme and its appropriateness to the practices of the finance industry.”[20]

The International Funds Transfer Instruction Amendments to the Financial Transaction Reports Act 1988 : A Brief Explanation of the Provisions

The amendments provided for new sub-sections 17B, C, D, E, F and G to the FTR Act. Section 17B(1) establishes the requirement to report international funds transfer instructions :

"If :

(a) a cash dealer in Australia is :

(i) the sender of an international funds transfer instruction transmitted out of Australia; or

(ii) the recipient of an international funds transfer instruction transmitted into Australia; and

(b) at least one of the following applies :

(i) the cash dealer is acting on behalf of, or at the request of, another person who is not a bank;

(ii) the cash dealer is not a bank;

the dealer must, before the reporting time, prepare a report of the instruction."

The reporting of international funds transfer instructions transmissions will therefore be required by cash dealers, located in Australia, who are transmitters of international funds transfer instructions transmitted out of Australia, or, who are receivers of international funds transfer instructions transmitted into Australia. That is, it is only the cash dealer at the Australian end of the transaction who must report. There are less than 90 cash dealers in Australia who are involved in transmissions of international funds transfer instructions and they generally comprise Retail Banks, Merchant Banks and Financial Corporations.

In the explanatory memorandum which accompanied the Bill, it was noted that international funds transfer instructions where the bank only acts on its own behalf, such as transfers of funds to effect bank to bank settlements or foreign exchange transactions which simply convert one currency to another, have been excluded from the reporting requirements. The exclusion of banks own transactions and bank to bank settlements was provided as “the banks within the exemption are those caught by the stringent regulatory and supervisory requirements of the Banking Act 1959”.[21]

The Director of AUSTRAC has considered exemption of transactions of other cash dealers where they are of a similar nature to the banks' own transactions.[22] Exemptions were considered on a case by case basis. Exempted international funds transfer instructions are required to be retained by the cash dealer for a period of 7 years.

The international funds transfer instructions which are reported to AUSTRAC are therefore generally those which are customer based for banks and all transactions for other cash dealers, except where they have been exempted as outlined above.

In general, the report is an electronic copy of the international funds transfer instruction and is provided to AUSTRAC in an electronic format. The precise details to be contained in the report are prescribed in regulations[23] which have been determined in consultation with cash dealers.

Put simply, where international funds transfer instructions are electronically processed by the cash dealer, the electronic records are duplicated and transmitted to AUSTRAC in an electronic format. A small number of manually processed international funds transfer instructions are provided on an AUSTRAC paper report form. Approximately 99% of all reports of international funds transfer instructions are being provided in electronic format.

The legislation also allows for the exemption of reporting of manually processed telexes by a cash dealer who conducts large numbers of telex transactions and who will convert to electronic processing of those telexes within the next five years. A small number of exemptions have been allowed. Where exemptions from reporting have been granted, the cash dealer is required to retain those exempted telexes for a period of 7 years.

The development of software to accommodate the reporting of free-format transmissions has removed the need to exempt a large proportion of the manually processed telexes for which exemption may otherwise have been sought by cash dealers. That software has been developed by AUSTRAC and provided to the cash dealers.

Sub-section 17C of the FTR Act has been incorporated in the legislation to ensure that when a bank is acting on behalf of another bank, a report will be required if the second bank is actually acting on behalf of a customer. That sub-section has been included to clarify paragraph 17B(1)(b)(i) which is intended to exclude only those bank to bank settlements which do not involve customers.

An important safeguard is provided under sub-sections 17D, E, and F, which have been included in the legislation to restate the existing private international law principles on extra-territorial enforcement of laws. They are included to ensure that cash dealers have protection from suits arising out of the requirement to report international funds transfer instructions, where that may be contrary to the law of a foreign country. It is however considered that suits should not arise as reporting is only undertaken by the cash dealer located in Australia.

To ensure that all cash dealers comply with the legislation, audit powers have been included in the legislation. Sub-section 17G empowers the Director, or his representative, to gain access to the cash dealer's premises to inspect records and systems for the purpose of monitoring the cash dealers compliance with those provisions.

The International Funds Transfer Instruction Regulations

The regulations made under the FTR Act contain the prescribed details of the data to be reported to AUSTRAC as international funds transfer instructions.

Discussions with cash dealers indicated that the majority of international funds transfer instructions are either transmitted through SWIFT or alternatively transmitted in a format which is similar to the SWIFT format. As a result, the prescribed details contained in the regulations mirror, where possible, the details which are generally contained in SWIFT messages. As SWIFT messages contain both mandatory and non-mandatory fields, those factors have been taken into consideration in developing the regulations. To overcome the difficulties which would be encountered by the cash dealers if they were required to obtain data in addition to that contained in the transmission, particularly where the transmission has been received in Australia from overseas, a number of the fields which have been included in the regulations will only be reported where that information is actually contained in the transmission.

Why Australia is at the Leading Edge of Financial Transaction Reporting

Australia is now at the leading edge of the reporting and use of financial transaction data for taxation and law enforcement purposes through the FTR Act. The objects of the FTR Act are to :

• Facilitate the administration and enforcement of taxation laws.

• Facilitate the administration and enforcement of laws of the Commonwealth and of the Territories

• Make information available to State authorities to facilitate the administration and enforcement of the laws of the States. [24]

The FTR Act was modelled on the United States Bank Secrecy Act which has been in operation since 1970. The Bank Secrecy Act was enacted to:

‘require certain reports or records where they have a high degree of usefulness in criminal, tax, or regulatory investigations or proceedings’ and to assist the government with tracking monies that are being hidden in tax evasion schemes. The BSA is a record keeping and reporting statute whose most frequently cited requirement mandates that financial institutions report all currency transactions involving more than $10,000, to the Internal Revenue Service.”[25]

The US Department of Treasury and Board of Governors of the Federal Reserve System have also stated that the “primary purpose of the Bank Secrecy Act is to identify the source, volume and movement of funds into and out of the country and through domestic financial institutions”.[26] It could be considered that the general purpose and function of both the FTR Act and the Bank Secrecy Act are similar in most respects.

Both the Australian and US statutes also have provisions relating to international funds transfer instructions or wire transfers and these are the only countries to require that this information be readily available for law enforcement and revenue purposes. However, the Financial Action Task Force, which is predominantly focused on money laundering issues throughout the world, has shown an interest in ensuring that appropriate information flows with the international funds transfer instructions through SWIFT. The SWIFT organisation has also acted to ensure that the SWIFT operating instructions are adequately followed by SWIFT members, particularly with regard to customer and beneficiary information.[27]

Although the Australian and US regimes are very similar, I would suggest that there are two very important factors which assist to place the Australian legislation a step or two ahead of the US legislation in their potential effectiveness for law enforcement and revenue usage. Those factors are the actual reporting of international funds transfer instructions to a central authority in real-time, as distinct from merely retaining records at the premises of the financial institutions, and secondly, the technology base of the Australian regime.

Before pursuing these points I will briefly outline the present US position with regard to wire transfers. It should be noted from the outset that the availability of detailed wire transfer information for revenue and law enforcement purposes has been considered by the US authorities since at least 1987. In 1992, the Bank Secrecy Act was amended in the Annunzio-Wylie Anti-Money Laundering Act[28] to authorise the Treasury and the Board of Governors of the Federal Reserve System, to jointly prescribe regulations to be effective by 1 January 1994, which will require financial institutions, as defined, to keep on their premises specific records relating to domestic and international funds transfers. The Bank Secrecy Act, at section 103.33, presently requires the recording of information relating to wire transfers, however a noted deficiency is that it does not specify the actual information to be recorded. The regulations which will result from the Anunzio-Wiley amendments will rectify this deficiency by specifying the information to be recorded. Section 103.33 of the Bank Secrecy Act presently requires that :

“Each financial institution shall retain either the original or a microfilm or other copy or reproduction of each of the following :

• A record of each advice, request, or instruction received or given regarding any transaction resulting ... in the transfer of currency or other monetary instruments, funds, checks, investment securities, or credit, of more than $10,000 to or from any person, account, or place outside the United States.

• A record of each advice, request, or instrument given to another financial institution or other person located within or outside the United States, regarding a transaction intended to result in the transfer of funds, currency, other monetary instrument, checks, investment securities, or credit, of more than $10,000 to a person, account or place outside the United States.” [29]

The US legislation therefore will require that specified information in respect of wire transfers would, for example, be recorded by a transmitting or receiving bank in the US and be retained within its records for use by the Internal Revenue Service, US customs or one of the many law enforcement agencies.

The US legislation also relates to both international and domestic transactions, whereas the Australian legislation only relates to international transactions. It is important to note that, at present the US does not have a system of national banks operating throughout the country; most banks operate in one state only and messages are sent between states through domestic systems. The structure and operation of the financial market in Australia is such that the revenue and law enforcement agencies have less difficulty in pursuing reports of domestic movements of funds than they do in chasing international movements of funds.

As outlined previously, in Australia there are approximately 90 organisations reporting international funds transfer instructions to AUSTRAC, whereas in the US it has been estimated that there will be approximately 60,000 organisations maintaining records in respect of both domestic and international wire transfers.[30]

The inclusion of both the domestic and international wire transfers in the US legislation is of interest both in terms of the reporting/recording argument and the use of technology. I believe that electronic reporting of transactions to a central authority is more beneficial to the law enforcement and revenue agencies than recording and record retention at the premises of the financial institutions themselves.

One difficulty with a system of merely recording the information relating to wire transfers and retaining it at the bank’s premises without any notification to the revenue or law enforcement agencies, as is the case with the US legislation, is that it can only be useful to the revenue or law enforcement agencies in a reactive sense. That is, they need information that a transaction has occurred on a particular day, through a particular bank, otherwise they may never know that the transaction has been undertaken. Even then it is likely that knowledge will come quite some time after the event, thus making it extremely difficult to make effective use of the information. With the Australian legislation, the data is quite often available within 24 hours of the transaction, it is provided on-line to the revenue and law enforcement agencies, and, it can therefore be assessed in a pro-active way to locate transactions of interest to those agencies.

The Australian FTR system is predominantly technology reliant, that is, it seeks to have reports made in electronic format where possible, and to allow computer access to those reports by specified law enforcement and revenue agencies. The US system however, is predominantly paper based, although more emphasis is now being placed on electronic reporting of significant cash transactions. John Byrne, Senior Federal Counsel, American Bankers’ Association, has recognised the benefits of electronic reporting and access. He has commented that :

“the Australian system of money laundering deterrence ... is an ‘on-line’ system which is more effective and efficient than the US paper-based system.”[31]

A possible argument which could be raised in favour of recording over paper based or electronic reporting in the US context, is that relating to the volume of transactions which would need to be reported in respect of domestic and international wire transfers. The numbers of wire transfers in the US, both domestic and international, would likely be in the 100’s millions per year and would no doubt test the abilities of any computer facility. International wire transfers alone would likely be in the 10’s millions. Australia does not have this problem because of its focus only on international transfers and with a much smaller volume to work with than the US authorities. AUSTRAC is finding that the 4 million per year international funds transfer instructions will be easily manageable through the use of its information technology. Also, trying to manage electronic reporting by 60,000 US financial institutions would no doubt create enormous difficulties for the US authorities. Electronic reporting by about 90 Australian cash dealers has been manageable, but not without some difficulties.

I would suggest that the Australian financial environment is therefore much more conducive to electronic reporting and as a consequence provides a much more timely and effective product for law enforcement and revenue use than would the US system.

The use of Information Technology in Reporting and usage of International Funds Transfer Instructions in Australia

Shortly after the commencement of the agency in January 1989, it became apparent that the most efficient and effective means of making the financial transaction reporting system work in Australia was to rely heavily on the use of information technology. This became even more apparent with the introduction of the reporting of international funds transfer instructions which will increase the database fourfold. The need to use advanced technology for the system arose out of a number of discussions with senior representatives of the major cash dealers, revenue and law enforcement agencies and senior government representatives in the US. In the US, the paper based reporting system and the large number of reporting organisations has contributed to substantial time delays in getting the data to users. That system also requires substantial human resource to make the data available. It appears that as a consequence of these difficulties, the data has not been readily available and may not therefore be used to its fullest potential.

As briefly outlined above, the characteristics of the financial system in Australia are quite different to the US. For example, the financial institutions in Australia are of small number compared to those in the US, they are predominantly technology dependant and reasonably up to date, with current technology being employed within their organisations. Also in contrast to the situation in the US, Australia’s financial system, particularly the banks and building societies, is largely branch based across the country, therefore out of necessity relying on information technology to co-ordinate customer transactions. In the case of the credit unions, although they are generally industry or regionally based, they have membership of a national association, with the result that technology advances are co-ordinated and are generally available to them.

The revenue and law enforcement agencies have also become more dependant on information technology particularly in their efforts against revenue evasion and crime. The Australian Taxation Office is in the process of undertaking a substantial modernisation program with much greater emphasis on information technology. Similarly the law enforcement agencies are becoming more technology reliant in pursuing their investigations. At the more serious levels of criminality, such as with organised crime and major revenue evasion, it is likely that the sophistication of the activities is such that it may only be possible through the use of advanced technology to detect those activities.

The whole program of AUSTRAC is directed towards the use of smart technology which must be effective in delivering networked searching capabilities and be able to link to complex AUSTRAC programs for data analysis. An important link in that development has been the consultative process with the cash dealers, as outlined earlier, not only in respect of what was to be reported, but also in terms of determining the most efficient way of reporting that information.

AUSTRAC's Information Technology (IT) facilities are located in Sydney's central North Shore. Those facilities have been upgraded over the past 18 months to accommodate the substantial increase in data which commenced on 6 December 1992 with the reporting of international funds transfer instructions. The IT facility is oversighted by an AUSTRAC appointed IT manager and Computer Power has operated as the prime contractor for IT facilities management.

Development of the system, both in terms of hardware and software, commenced in January 1990 and by September 1990, the basic programs had been set in place and AUSTRAC had commenced on-line networking of its data with the law enforcement and revenue agencies. Refinement of the searching capabilities of the system and a program to remove problem issues, principally associated with the need to enhance scrubbing of data from the banks, were undertaken, and by August 1991 standardised, aggregated searching packages were being developed.

From December 1991 to late 1992 detailed planning and analysis of the redevelopment of the computer system was undertaken to accommodate the reporting of the international funds transfer instructions. AUSTRAC's computing site was relocated in June 1992 and since that time the computing infrastructure has been enhanced and new software has been developed. The database systems have been redeveloped to enhance the capacity of the system to link transactions; to better enable AUSTRAC to prepare summary reports of data; to monitor and screen the data on a regular basis; and, to provide new analytical tools for use by AUSTRAC and representatives of the law enforcement and revenue agencies who specialise in intelligence work.

With the commencement of the reporting of international funds transfer instructions further development took place to accommodate a substantial increase in the volume of data and to obtain that data in an electronic format. As SWIFT and most telex and other computer based transactions are already in an electronic format it was logical to obtain that information in an electronic format. The legislation had been specifically drafted to accommodate electronic reporting and to lessen the difficulties associated with a large paper based reporting system.

To assist cash dealers with electronic reporting of international funds transfer instructions, AUSTRAC developed a software application which enables the direct input of data to the AUSTRAC facility via an IBM PC (or equivalent) and modem. That application referred to as the Electronic Data Delivery System (EDDS) also assists in the ability to create a direct link between the mainframes of the cash dealers and the AUSTRAC facility. AUSTRAC has provided information technology support and consultancy support in the development of software to assist the cash dealers in linking their systems to the EDDS. The EDDS is run by the cash dealers on their equipment at their own premises. AUSTRAC undertook responsibility for the development, distribution and maintenance of the EDDS, and has provided copies of the software without cost to all cash dealers required to report international funds transfer instructions. AUSTRAC has also supplied each cash dealer with a modem. The cash dealer has provided the appropriate PC hardware and a printer. The cash dealer will incur no more than the cost of a local telephone call per transmission of a batch of international funds transfer instructions data to AUSTRAC. This call will include the referral of data by AUSTRAC back to the cash dealer for further action, where necessary. AUSTRAC has therefore provided an incentive to transmit electronically.

The EDDS ensures that the reports are provided in the appropriate format and as a consequence reduces the likelihood of "bad" data being received by AUSTRAC from the cash dealer. It should also therefore eliminate the need to refer reports back to the cash dealers where the data has not been formatted in the appropriate way.

It is possible for cash dealers to report electronically via EDDS even where they do not capture the data electronically. The facility has a manual input into which can be keyed international funds transfer instructions reports, particularly telexes, which are unformatted when they are received from overseas. Those reports will also be capable of being retrieved in a similar way to all other FTR information, by AUSTRAC and the law enforcement and revenue agencies.

As a direct result of its continuing consultation with cash dealers, FTR information has largely been provided to AUSTRAC in an electronic format. By June 1993, AUSTRAC had received in excess of 3 million reports of financial transactions of which more than 95% have been reported in an electronic format. Approximately 90% of the cash transaction reports, which include significant cash transactions (more than $10,000) and international currency transfer reports (more than $5,000) are reported electronically. This comprises about 1.8 million reports. As previously mentioned, more than 99% of all international funds transfer instructions have been reported electronically, comprising 1.2 million reports which have been reported through EDDS.

The technology developments undertaken by AUSTRAC also assist law enforcement and revenue agencies in the way in which they access the data. Until recently, law enforcement and revenue agencies were able to access the data base in a number of ways, for example, directly on-line at their own premises through their own on-site terminals which are linked to the AUSTRAC database, by request to AUSTRAC to undertake enquiries of the database on their behalf, and through provision of summary or macro reports of data, such as reports concerning particular industries or areas.

Experience gained over the past three years has shown that it is not sufficient to only provide a passive database, supplemented by the referral of suspect transaction reports, to law enforcement and revenue agencies as they do not have appropriate resources to maximise the assessment and usage of that data. On-line searching of individual reports is time consuming and automated techniques, such as the summary reports referred to above, have been developed to counter those difficulties. With the introduction of the reporting of international funds transfer instructions and the consequent substantial expansion in the number of reports which are in the financial database, special processing efforts are required to allow activity of interest to be effectively detected.

As a consequence, in consultation with Commonwealth law enforcement and revenue agencies, AUSTRAC has developed a software product referred to as ScreenIT. That product incorporates the investigative and analytical functions of the financial analyst in a software application, to follow the links between international funds transfer instructions reports and other financial transaction reports. By use of a knowledge based application it highlights networks of data worthy of further enquiry. Those networks are then automatically weighted as to their investigative interest. The resultant reports will be provided on-line to selected areas within the law enforcement and revenue agencies on a regular basis.

Given that the bulk of the international funds transfer instructions data are provided on the day of transmission or the day following transmission, the reports are available electronically to the law enforcement and revenue agencies at their premises, shortly after the transmission of the international funds transfer instructions out of, or into, Australia. AUSTRAC considers that there is a need to look quickly at the international funds transfer instructions reports and to react in real time to any information which has been produced by ScreenIT and the linking process. The ability of AUSTRAC to provide that degree of service greatly enhances the benefits which will accrue to the law enforcement and revenue agencies through access to international funds transfer instructions. Those reports will be of value to the law enforcement and revenue agencies in terms of intelligence gathering and as a case selection tool.

AUSTRAC will continue to develop new products and analytical techniques to assist in the most effective usage of FTR information.

Should Australia be at the Leading Edge - The Issue of Cost Justification for International Funds Transfer Instruction Reporting

It is clear that not everyone supports the view that the progression of Australia’s legislation in support of detecting tax evasion and serious criminal activity, to a position where Australia is seen as a world leader, is as clear cut and necessary as some would think. In the Australian Bankers’ Association submission to the review of the FTR Act conducted by the Senate Standing Committee on Legal and Constitutional Affairs, it was stated that :

“Australia is a leader in implementing the recommendations from the Financial Action Task Force but there is a question of whether Australia is doing more than it should to meet its international obligations. The Committee should compare the costs and benefits of the Australian system with systems overseas.”[32]

This raises the very valid point of cost justification for the reporting regime which is in place in Australia. Others have also raised the issue of cost, both in Australia and in respect of the US legislation.

In an article by John Byrne of the American Bankers Association published in 1992 [33], the Association had indicated their commitment to “any workable policy that would hinder the flow of money’s derived from illicit activity”. They considered that it was possible “to establish effective monitoring and controls on international wire transfers originated in the United States” but also added that “an international wire transfer policy may have the side effects of slowing the global payments system, hindering legitimate world trade, and penalising the international competitiveness of United States financial institutions” ...and ... “that international wire transfers regulations must be measured against the industry’s ability ‘to comply with minimal service disruption and costs while addressing the need to stop the flow of illegal moneys’”.

The US authorities have considered the overall effect of the proposed amendments and have in August 1993 commented that :

“Today’s proposed rule would allow many financial institutions to rely upon information systems already in place without diminishing the nature and quality of the information required to be maintained. This modification significantly reduces the resources and effort required of financial institutions to comply with the terms of today’s proposed rule. ... [The proposal] will not have an annual effect on the economy of $100 million or more. Nor will it result in a major increase in costs or prices for consumers; individual industries; federal, state or local government agencies; or geographic regions. It will not have any significant adverse effect on competition, employment, investment, productivity, innovation, or on the ability of United States-based enterprises to compete with foreign-based enterprises in domestic or foreign markets.”[34]

In terms of the possible effect on the payments system the Board of Governors of the Federal Reserve System and the Department of Treasury indicated that they “must take into consideration the usefulness of these records in criminal, tax, or regulatory investigations or proceedings and the effect the record keeping will have on the cost and efficiency of the payment system.”[35].

They considered those issues and issued a joint statement indicating that :

“the records to be retained under this proposed rulemaking will be particularly useful in tracing the proceeds of illegal activities and will assist in the identification and prosecution of individuals involved in such illegal activities. Accordingly, Treasury and the Board believe that maintenance of these records will have a high degree of usefulness in criminal, tax or regulatory investigations of money laundering operations. Further, the Treasury and the Board believe that these record keeping requirements will not have a significant adverse impact on the cost or the efficiency of the payments system.”[36]

David Chaikin has outlined his concerns in the Australian context, in stating that “the usefulness of the reports to law enforcement should be balanced against the effect of any ensuing requirement on the cost and efficiency of the payments system.”[37]

AUSTRAC considers that the benefits resulting from the system clearly outweigh the costs of the reporting component of the Australian financial transaction reporting legislation. The cost/benefit issue is one matter which is presently being considered by the Senate Standing Committee on Legal and Constitutional Affairs which is reviewing the financial transaction reporting regime in Australia.[38]

In its submission to that Senate committee, the Australian Bankers’ Association outlined the results of a survey of its member banks which was conducted in January 1993. The survey provided, inter alia, costings for complying with the requirement to report international funds transfer instructions. The Australian Bankers’ Association estimated that the 1993 Annual Operating costs for the reporting of international funds transfer instructions, aggregated for its thirty members, totalled $0.4 million. It also noted that the aggregated establishment costs of its members for the reporting of international funds transfer instructions amounted to $0.8 million.[39] Thus, the Australian Bankers’ Association estimate that the total cost of the international funds transfer reporting requirements to the banks, who provide more than 90% of all of the international funds transfer reports to AUSTRAC, for the establishment period and the first year of operation, is $1.2 million.

In terms of both the US concerns and those raised in Australia as to the effect on the payment systems resulting from the reporting of international funds transfer instructions, it seems that any effects would be minimal. In Australia, the process of reporting data in an electronic form, where it is commercially retained by the cash dealer in that same or similar form, does not result in substantial costs being imposed on the cash dealers. As the international funds transfer data that is reported to AUSTRAC is that commercial data which is merely duplicated and sent off to AUSTRAC, there should be little, if any, effect on the cost or efficiency of the payments system in Australia or overseas as a result of this legislation. As outlined previously, the legislation was specifically developed to minimise any such effects.

In its 1992-93 Annual Report, AUSTRAC has provided a break down of the cost which it has attributed to international funds transfer instructions. The expenditure for 1991-92 was $3.925 million and for 1992-93 it was $8.76 million. Total cost for the period from 1991 to 1993 has therefore been $12.685 million of which $5.416 million has been for the purchase of equipment and $2.026 million for computing staff.[40]

In contrasting the benefits of the system with its costs, it should be noted that benefits do not only accrue in terms of revenue resulting from the use of the FTR information, but also in terms of making it more difficult for criminals to be active in Australia. The most quantifiable benefit is the revenue resulting from the usage of the information. In its submission to the Senate review, the Australian Taxation Office said that “so far, additional tax and penalties raised as a direct result of AUSTRAC data being used by ATO auditors amount to over $30 million”.[41] The Australian Taxation Office considers the results to be encouraging but say that they will shortly be implementing plans for even more systematic and extensive use of AUSTRAC data. It should be noted that those figures are exclusive of the use of reports of international funds transfer instructions as that data is only now coming on-line to the Australian Taxation Office. Use of that data should substantially increase the revenue results for the Australian Taxation Office.

In terms of other revenue results directly attributable to the FTR reporting regime, AUSTRAC has in its 1992-93 Annual Report briefly outlined Operation QUIT which is a National Crime Authority Task Force investigation. The report states that “the efforts of the task force have resulted in serious criminal offences against 21 persons and raised substantial revenue (approximately $35 million) for both State and Commonwealth Tax Offices”.[42]

In terms of law enforcement results in which FTR information has been of value, there are many recorded instances where criminals have been fined and imprisoned, where the courts have issued other orders, and where there have been asset seizures in respect of the proceeds of crime. All of these results are prior to the introduction and usage of reports of international funds transfer instructions, which the law enforcement agencies have indicated, as I have outlined earlier in this paper, will be of substantial added value to their investigations into serious and organised crime.

One important factor in assessing the value of the reporting regime is the deterrent effect which the legislation has on criminal conduct. It is very difficult to quantify this in dollar terms. At the public hearings of the Senate review of the FTR Act in Australia, the issue of the importance of such financial information being available as a deterrent to overseas money laundering being directed through Australia, was briefly discussed. In the course of his evidence before the committee, Mr Tom Sherman, Chairman of the National Crime Authority and at that time President of the Financial Action Task Force, recounted a comment made at the Financial Action Task Force meeting in Singapore in early 1993 :

“Firstly, it has a deterrent effect upon money launderers throughout the world. If people see that Australia is serious in its mechanisms, they are less likely to use our systems. I am not suggesting for one moment that we live in a perfect world; we have money laundering problems. But I recall, for example, that a couple of months ago in Singapore the task force had a meeting of 23 Asian countries to discuss money laundering with some resultant action being initiated in that region of the world. The US representative on the task force, a Mr Rayburn Hess, who I think many would consider to be a world expert in the field, was describing to the delegates of that conference an example of being a West German with $100 million in money to launder throughout the world, how he would go about it and what areas of the world he would choose in which to do it. One of the first things Mr Hess said was, ‘I wouldn’t go near Australia because they’re now monitoring international telegraphic transfers and that will leave footprints’. That is a very good example of the sort of deterrent effect that these regimes have. If people in the international community and money launderers see that Australia does have mechanisms and is on guard and watching, as Mr Coad describes, it is a very valuable deterrent. It is not perfect but nevertheless, I believe, still valuable.”[43]

Some Concluding Comments

Australia is at the leading edge of financial transaction reporting for the purposes of revenue and law enforcement use. We are there because we have identified the need for the use of financial transaction information in major law enforcement and taxation investigations, and we have identified that the most efficient and effective way to utilise that information is through the use of smart technology.

Electronic reporting by cash dealers and on-line access by law enforcement and revenue agencies to real-time data are the major contributors to the results which they are now achieving. Reporting of international funds transfer instructions has commenced and information technology systems have been developed to enable better analysis of that data together with other FTR information.

The anticipated benefits of opting for the reporting of international funds transfer instructions to AUSTRAC, rather than record keeping by the cash dealers, are becoming evident. The cost of reporting international funds transfer instructions is minimal and the potential results will certainly justify that cost. The ability to minimise those costs, and to readily implement the reporting requirements electronically, is directly attributable to the consultative process involving the cash dealers and law enforcement and revenue agencies.

We should not however put our heads in the sand and proceed without further consideration of the costs of the reporting regime. This is an issue which should be closely and continually considered. In looking at the cost/benefit issue, the benefits should not only be considered in terms of the revenue which can be seen to be directly attributable to the use of the information, but also in terms of other law enforcement results and the deterrent factor associated with the financial transaction reporting regime.


[*] Neil Jensen is the Director’s Representative at the Australian Transaction Reports and Analysis Centre and is located in Melbourne. This article is based on a paper which he presented to the Financial Action Task Force meeting held in Sydney, Australia, on 9-11 September 1992.

[1] Financial Transaction Reports Act 1988 - Section 3

[2] An officer of the Australian Federal Police, Patrick Meyers, was seconded to AUSTRAC to undertake this work. As a result a report titled “Client Agencies Demands For International Telegraphic Transfer Information” was prepared in July 1990 .

[3] Parliament of the Commonwealth of Australia, House of Representatives Standing Committee on Finance and Public Administration, “Follow the Yellow Brick Road - The final report of an efficiency Audit of the Australian Taxation Office : International Profit Shifting”, March 1991, paragraph 2.48

[4] Ibid, at paragraphs 5.27 and 5.28.

[5] Ibid, at paragraph 5.30, Recommendation 17

[6] National Crime Authority report “Taken to the Cleaners : Money Laundering in Australia”, Vol 1, December 1991

[7] Commonwealth of Australia, Senate, Standing Committee on Legal and Constitutional Affairs, (Reference : Financial Transaction Reports Act 1988), Sydney, Tuesday, 8 June 1993, (Official Hansard Report), pages 8 to 9.

[8] See article by Bill Pheasant, “$57 million laundered - police”, in the Australian Financial Review, 3 September 1993, page 9

[9] Evan Thompson, “Dirty Money in Canada: our banks’ proactive stand”, Canadian Banker, Vol. 97, No. 2 - March-April 1990.

[10] US Federal Register, Vol. 58, No. 167, Tuesday, August 31, 1993, Proposed Rules, Proposed Amendment to the Bank Secrecy Act Regulations Relating to Record keeping for Funds Transfers and Transmittals of Funds by Financial Institutions, at 46015

[11] See the article by David A. Chaikin, “Investigating Criminal and Corporate Money Trails” in “The Money Trail - Confiscation of Proceeds of Crime, Money Laundering and Cash Transaction Reporting”, The Law Book Company Limited, Sydney, 1992, at pages 275 and 281.

[12] Cash Transaction Reports Amendment Bill 1991

[13] Commonwealth of Australia, Parliamentary Debates, House of Representatives, Daily Hansard, Tuesday, 15 October 1991, p 1936.

[14] Commonwealth of Australia, Parliamentary Debates, House of Representatives, Daily Hansard, Tuesday, 5 November 1991, p 2330

[15] The AUSTRAC report titled “International Transfer of Funds - Wire Transfers To and From Australia”, was presented to a combined meeting of banking and law enforcement and revenue agency senior executives in February 1990.

[16] SWIFT is the acronym for the Society For Worldwide Interbank Financial Telecommunications which is a worldwide communications network linking member banks and some non-bank institutions into one network. Each interbank message is transmitted over dedicated lines through a switching centre. The network and its connected services enable users to transmit between themselves, international payments, statements and other transactions associated with international finance. The number of member banks and countries to which SWIFT is transmitted are increasing. SWIFT value messages into and out of Australia presently total approximately 4 million per year.

[17] Telex is generally a paper based telegraphic transmission which is increasingly being processed through the electronic information technology systems of the Cash Dealers in Australia. The use of telex is decreasing as new members and countries are linked to SWIFT.

[18] Proprietary systems are similar to the SWIFT networking type system. They are generally systems developed by major international banks where a customer purchases software and leases communications lines from the system proprietor to enable transactions to be transmitted to the head office of the system proprietor overseas, either directly or via the system proprietor 's office in Australia.

[19] Some of the Cash Dealers have local area networks which are accessible by their overseas branches. These dedicated links between a head office and an overseas branch/office operate in a similar way to SWIFT and proprietary systems.

[20] Commonwealth of Australia, Parliamentary Debates, House of Representatives, Daily Hansard, Tuesday, 15 October 1991, p 1936.

[21] Explanatory Memorandum to the Cash Transaction Reports Amendment Bill 1991 at page 7 ff.

[22] Authorised Banks have been excluded by the legislation from reporting transactions conducted on their own behalf. The Australian Prime Minister issued a statement in March 1992 which was referred to as the "One Nation Statement". That statement indicated that non-authorised organisations could apply to the Reserve Bank to be considered for bank branch status thus bringing them within the regulatory requirements of the Banking Act 1959. Those organisations which have indicated an interest in making such application have been licensed foreign exchange dealers and other Merchant Banks. Approval for bank branch status would have the effect of including those organisations in the category of financial institutions for the purposes of the FTR legislation. Some regulatory controls are already in place for foreign exchange dealers in terms of requirements for licensing. Exemptions have therefore been granted by the Director of AUSTRAC to those organisations who will likely apply for such status. Those exemptions have been granted only until 31/12/93 and will be reviewed prior to that date.

[23] Cash Transaction Reports Regulations (Amendment), Statutory Rules 1992, No. 320

[24] Financial Transaction Reports Act 1988 - Section 4

[25] See Alabama Law Review, Vol 44, Spring 1993, No. 3, John J Byrne, “The Bank Secrecy Act: Do Reporting Requirements Really Assist the Government?” at page 801. Bank Records and Foreign Transactions (Bank Secrecy) Act, Pub. L. No. 91-508, 84 Stat. 1114 (1970) (codified as amended in scattered sections of U.S.C.)

[26] US Federal Register, op cit, at 46014

[27] Ibid, at page 46022.

[28] Ibid, at 46014 which refers to the Annunzio-Wylie Anti-Money Laundering Act 1992, Title XV of the Housing and Development Act 1992.

[29] Financial Crimes Enforcement Network (FinCEN), “Trends - A Bulletin of Financial Crimes and Money Laundering”, Fall 1992, page 2.

[30] US Federal Register, op cit, at 46018

[31] Alabama Law Review, Vol 44, Spring 1993, No. 3, John J Byrne, “The Bank Secrecy Act: Do Reporting Requirements Really Assist the Government?” at page 803.

[32] Australian Bankers’ Association, February 1993, Submission to the Senate Standing Committee on legal and Constitutional Affairs Inquiry into the Cash (Financial) Transaction Reports Act 1988, page 1.

[33] See the article by John J Byrne, “Money Laundering Legislation in the United States - A Perspective from The Banking Industry”, in “The Money Trail - Confiscation of Proceeds of Crime, Money Laundering and Cash Transaction Reporting”, The Law Book Company Limited, Sydney, 1992, at page 370

[34] US Federal Register, op cit, at 46017

[35] US Federal Register, op cit, at 46014

[36] US Federal Register, op cit, at 46015

[37] David A. Chaikin, op cit, page 276.

[38] The terms of reference provided to the Senate Standing Committee on Legal and Constitutional Affairs by the Parliament of the Commonwealth of Australia included, inter alia :

“The operation and effectiveness of the Cash Transaction Reports Act 1988 (‘the Act’), with particular reference to :

(e) the cost-effectiveness of the Act, including the possibility or desirability of cost recovery”

[39] Australian Bankers’ Association, February 1993, Submission to the Senate Standing Committee on legal and Constitutional Affairs Inquiry into the Cash (Financial) Transaction Reports Act 1988, page 14.

[40] Australian Transaction Reports and Analysis Centre, Annual Report 1992/93, at page 36.

[41] See “AUSTRAC and the ATO - A Submission to the Senate Standing Committee into Legal and Constitutional Affairs - A review of the operation and effectiveness of the Financial Transaction Reports Act 1988”, May 1993, at page 1.

[42] Australian Transaction Reports and Analysis Centre, Annual Report 1992/93, at page 18.

[43] Ibid, pages 16 to 17. Mr Sherman is the immediate past-President of the Financial Action Task Force on Money Laundering - an international group of the top 26 financial countries in the world formed in 1989 following the G7 Summit in Paris.


AustLII: Copyright Policy | Disclaimers | Privacy Policy | Feedback
URL: http://www.austlii.edu.au/au/journals/JlLawInfoSci/1993/22.html