A proposed change to money laundering laws could flood the stock exchange with dirty cash, experts have warned.
Financial crime authority AUSTRAC has closed public consultation on a key rule about identifying the source of funds used to buy and sell ASX stocks, which could inadvertently make it easier for criminals to move money.
The stockbrokers’ peak body said it’s “absolutely mystified” by the change.
Former AUSTRAC legislative counsel Andrew Fernbach spent a decade formulating rules like the one proposed to change and also cannot understand it.
“This is a matter of life and death,” the principal of GOVLAW said, describing the human toll of drug addiction, bribery, murder and human trafficking by criminal syndicates seeking to wash millions of dollars.
“And then these large syndicates are laundering that money, so we certainly don’t want that showing up in ASX share registries.”
The concerns come as an astonishing leak of secret bank reports show trillions of dollars of suspected dirty money are flowing through major global banks, assisting oligarchs, drug dealers and terrorists.
The investigation led by the International Consortium of Investigative Journalists has revealed JPMorgan Chase, HSBC and other big banks have defied crackdowns on money laundering, moving staggering sums of illicit cash for criminals.
Currently, a new customer must be identified — in the same way as you need to when you open a bank account — before you can start an account with a stockbroker.
There is an exception where the market is moving rapidly, but the account is effectively ‘locked’ until identification is provided.
The proposed changes would mean customers can trade shares and do not have to be identified until five days after.
Experts in the field are concerned the proposals could make it easier for criminals to launder money by buying and selling shares in traded companies — and then getting their money out.
“They [the changes] water down important safeguards, which prevent anonymous funds flowing into the ASX,” Mr Fernbach said.
“Potentially from drug trafficking or global corruption.”
Anti-money laundering expert Neil Jeans helped bring down Wall Street brokers involved in shady trades, including figures put on screen in the film The Wolf Of Wall Street.
When Australia’s biggest bank faced a money laundering case over ATMs that helped crime gangs transfer money, he was the expert witness. The Commonwealth Bank copped a $700 million fine.
“By its nature money laundering and criminal activity seeks to exploit gaps and weaknesses in the system,” Mr Jeans explained.
“As a result, if this does go through, potentially there is an increased opportunity for the laundering of proceeds through the stock market.”
The changes mean a stockbroker can take on a client, trade on the stock exchange for them, but not have to verify who the client is for up to five days.
“Whilst potentially well-intentioned, changes are being proposed that don’t take into account the issues that they will create for the stockbrokers'” he said.
“They will undertake a transaction and receive funds from the customer without knowing their identity.”
AUSTRAC may be trying to align Australian rules with international standards where — in limited circumstances — you can work for a client before “knowing” who they are.
“But I think the devil is in the detail,” Mr Jeans said.
“As a result, it may create a window whereby criminals can exploit the system to be able to launder money.”
Another reason could be a review of Australia’s anti-money laundering laws begun in 2013 that sought to, in its words, “strike a balance between efficient conduct of business and effective regulation”.
The review found due diligence — knowing who your customers are — should be simplified.
Andrew Fernbach saw Australia’s COVID-constrained economy as adding to the risk.
“There is a danger that money launderers who are frustrated and can’t launder the cash from drug trafficking [in the usual ways] will look for other avenues that aren’t closed,” he said.
“Online stockbroking — with this exemption and the new watering down of the safeguards — will be the opportunity they’re looking for.”
Stockbrokers ‘mystified’ by risky change
Normally, the peak bodies representing professions welcome any change that reduces the amount of regulation their members need to work through. Not this time.
“I am absolutely mystified,” said Judith Fox, chief executive of the Stockbrokers and Financial Advisers Association.
Ms Fox said the group, representing 10,000 brokers and financial advisers, had no understanding how the proposal had arisen.
“We’re completely surprised by them and would not support them,” she said.
“We don’t even know where they would have come from and who would have asked for them because of the risk that it introduces.”
The end result, she said, is a potential change that no-one will use for reputable purposes but that creates a greater risk of money laundering.
“I cannot see anyone credible or legitimate actually undertaking this. Why would you? The risk is enormous,” she added.
In a statement, AUSTRAC said industry consultation was important as it sought to “identify opportunities to streamline and simplify the rules” while maintaining their integrity.
“AUSTRAC expects regulated businesses to identify and manage the level of risk posed to their business and their customers, based on the products and services they offer and report on suspicious activities when buying or selling on Australia’s domestic stock exchanges,” the statement continued.
With most stockbrokers’ income relying on fees per trade, Mr Fernbach sees a conflict, and a concern.
“There is a particular risk, where there’s a commission-based business such a stockbroking,” he said.
“If you remove the essential safeguards that are currently in the law and leave it up to those businesses as a matter of their risk management … that’s akin to asking the fox to guard the henhouse.”