GAMBLING, MONEY LAUNDERING AND THE PROCEEDS OF CRIME: A TRIFECTA? Elizabeth Montano AUSTRAC, NSW

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1 GAMBLING, MONEY LAUNDERING AND THE PROCEEDS OF CRIME: A TRIFECTA? Elizabeth Montano AUSTRAC, NSW Paper presented at the conference Gambling, Technology and Society: Regulatory Challenges for the 21 st Century, convened by the Australian Institute of Criminology in conjunction with the Australian Institute for Gambling Research and held in Sydney, 7-8 May

2 Thank you for the opportunity to speak to you today. Some of you may be questioning AUSTRAC's place in a conference such as this. What has a Commonwealth (mainly) financial sector regulator and financial intelligence unit got to do with gambling? Well, AUSTRAC has a role to play in Australia's risk management of a number of activities, including gambling. Societies have a range of interests. For some of us our jobs are to pursue a particular societal interest. Often the various interests we pursue appear to be contradictory. When taken to the extreme they can be. But in a pluralist society, practical compromises and solutions are essential. Gambling must surely be one of those activities where society has a number of objectives and there will be other speakers who will talk about some of those objectives in greater detail in the course of this conference. Moral judgements aside, our society has determined that certain types of gambling are legitimate and legal activities. We have decided that gambling is an activity that our society should not deny its participants. But we also want to ensure that gambling isn t used in other activities which our society is not so keen on, like the easy disposal of the proceeds of crime through that activity known as money laundering. May I say that, in this respect, gambling as a societal objective (as it were) is no different to many of the other objectives where AUSTRAC has a role. One of those objectives is to foster open markets and the free flow of capital. But at the same time we want to deter criminals using our financial systems and intermediaries to disguise and hide from authorities the proceeds of crime. If one of those two objectives was to be pursued to its ultimate conclusion, then the other could not be achieved. If Government s number one objective was to stop money laundering there would be no free markets, there would be no ability to move capital from one jurisdiction to another without rigorous examination of transactions to ensure that this is not the flight of proceeds of crime. Similarly, if we were to pursue economic objectives on the basis that all money was good money there would be no attempt to stop money moving even if the money was tainted. The approach our society has taken to deal with these particular competing objectives is to put in place measures to detect and analyse activity looking for abnormalities and illegalities whilst not impeding the general flow. The emphasis is therefore on reporting and analysis leading to action when needed rather than control of all transactions. That leads me to a short discussion on what AUSTRAC does. AUSTRAC was established under the Commonwealth Financial Transactions Report Act 1988, formerly known as the Cash Transaction Reports Act. The change in name in 1992 reflected a change in our level of sophistication in fighting money laundering, moving away from suitcases of cash to more complex ways in which value can be transferred. AUSTRAC is both a regulator and a financial intelligence unit. It is Australia s primary antimoney laundering agency. We regulate by monitoring and enforcing compliance with customer identification and reporting obligations by a wide range of organisations in our community. We regulate all financial institutions including banks, building societies, credit unions, insurance companies, securities dealers, futures brokers and bureaux de change. We also regulate casinos, TABs and bookmakers. 2

3 The FTR Act obliges these organisations to know their customers so as to ensure that anonymous accounts are not used and that there are trails for law enforcement and revenue authorities to follow should the need arise. These organisations are also required to report certain kinds of transactions to AUSTRAC. These are: cash transactions of $10,000 and over; international funds transfer instructions (being the instructions these organisations make and receive to transfer value in and out of Australia); suspect transactions being transactions which the organisation considers suspicious. What is suspicious? Activities such as structuring cash transactions so that they fall just under the reporting limits is a simple example. There are many others and last financial year we received 5,772 reports about a range of activities the reporting institutions considered suspicious. AUSTRAC analyses these and the other reports we receive using software developed in-house to identify patterns and trends: the money trail. That analysis is referred to partner agencies and the reports are available over time to them. It may well be the influence of Hollywood and the fact that everyone likes a good gangster story but there is a perception that gambling establishments, typically casinos, are fronts for organised crime and facilitators of money laundering. There is no doubt that in some parts of the world this has occurred and probably still does. It is also true to say that there is a risk that gambling establishments, whether they be sparkling edifices or dark illegal places, can be used to hide and dispose of the proceeds of crime. However, there are a range of strategies we can use to minimise these risks. AUSTRAC carries out one of those risk minimisation strategies. Requiring patrons to be identified, large cash transactions and international transfers to be reported and anything else which looks odd to be reported as suspicious are all worthwhile tools in the risk management process. Another risk management strategy which is the province of State and Territory Governments, is oversight of the management of the gambling establishments themselves. Detailed records of betting transactions, 24 hour surveillance and ensuring that winnings cheques are only paid to real winners all help. No doubt you will discuss these in some detail tomorrow when State regulatory authorities discuss the ways in which they reduce the risk of crime in and around casinos and other gambling establishments. The complementary strategies undertaken by Governments of all levels contribute to reducing the risk that gambling can be a mask for money laundering. International co-operation amongst regulators and law enforcement agencies is also part of a good regulatory framework. Given that a regulatory framework is only as effective as its compliance levels, it is also of benefit that, in the main, gambling establishment operators are keen to comply with the laws imposed upon them. They know that, in addition to any other sanction which may be placed upon them for non compliance, they would lose the popular support they need if they breached the law. So, lets talk a bit more about the folklore surrounding gambling and criminal behaviour. "People launder money at casinos". A lot of people think that happens and I would certainly 3

4 be a very brave regulator if I said that it never happens. But lets look at the systems put in place to prevent it. As you will no doubt be informed tomorrow, it is pretty hard to walk into a casino with, say, $100,000; to exchange it for chips; to walk around for a few hours and, after placing a few bets, present the remaining chips to the cashier noting one s extremely good luck this evening and ask for a winner's check. The system says it shouldn t happen. Of course there enters our State and Territory regulators to ensure that it doesn t. There are other methods believed to be used; but again, appropriate surveillance and understanding of those techniques by the regulators can reduce the risk. So we could say that in relation to casinos, TABs, bookmakers and other gambling establishments carrying on business in Australia, that the risk management strategies already in place, if properly implemented, are satisfactory. They should ensure honesty and transparency in the way in which business is conducted in and by the establishments. As for illegal gambling establishments, remedies are there to deal with them too; presuming that they are appropriately focused and resourced. But how will technology affect these risk management strategies and how will our society handle gambling which occurs in ways not seen in the past? In many ways the debate over gambling on the Internet is very similar to the debate ongoing regarding electronic commerce generally. Whilst new technologies promise great advances, societies are faced with the prospect of being unable to regulate the way in which their citizens participate in certain activities. Whether it be buying compact discs over the Internet, the publication of obscene material over the Internet or, indeed, gambling over the Internet many of the issues that societies and governments face are the same. In 1996 I chaired an Electronic Commerce Task Force formed by the Commonwealth Law Enforcement Board to examine the law enforcement implications of electronic commerce and in particular internet payment systems. Currently, I am chair of another research group into these issues for the purpose of providing advice to the Attorney-General and the Minister for Justice. Not surprisingly, the issues we have concerns about regarding whether government's law enforcement objectives can be achieved in this new environment are very similar to the concerns gambling regulators have in relation to their ability to deliver the environments that societies and governments desire in relation to gambling. These include the obvious issues of jurisdiction, identification, authentication, payment methods, encryption, security concerns and privacy. One of the questions which concerns both law enforcement agencies and gambling regulators is determining who is on the other end of the internet site. Is it a reputable institution with systems in place to ensure that antisocial practices do not occur? As I will mention later, there are strategies being developed to offer consumers the choice to deal only with such entities. One of the responsibilities I have is to ensure that gambling establishments identify their customers. Whilst this in itself can be a deterrent to criminals seeking to use these establishments to commit crime, a major reason for requiring identification is to allow law enforcement and revenue agencies to identify parties to transactions when the need arises. How can this be translated into the cyberspace environment? We are often told there will be no audit trails to follow. I doubt that, given the business need to know what s happening. They may just be different to traditional audit trails. 4

5 Of course, gambling establishments themselves will want to establish who they are dealing with, at least to the point of being able to ensure payment when a gambler loses. But how will government be able to access that information when it needs to know who conducted the transactions? In respect of a number of those establishments, the task may be nigh impossible, and would they provide identification, as opposed to authentication, details anyway? Underlying all concerns in relation to this issue is the question of enforceability. Some (even some speakers here) argue that the inability to enforce marks the end of government (and for government, read societal) regulation. But is that true? A number of States have introduced or are in the course of introducing interactive gambling legislation based on a national regulatory framework prepared by State and Territory gaming Ministers. That framework promotes approved gaming activities in regulated environments whilst discouraging participation in other illegal activities by banning the advertising and marketing of those illegal activities. Underlying this approach is the view that even though Internet gambling per se cannot be regulated consumers can still be offered the choice of participating in regulated markets. I am sure that this issue will be covered in greater detail tomorrow by State regulators. As you would know, our concerns regarding the enforceability of regulatory frameworks for gambling and many other activities on the Internet are shared by regulators around the world. Given the limitations of traditional enforcement systems, self regulatory codes are becoming increasingly popular. Markets are being called upon to control their own members and consumers are being urged to educate themselves in the ways in which they may be duped by unscrupulous practitioners and then to make informed decisions. The gambling framework I previously referred to is another strategy which will be further pursued in a range of activities and in bigger environments. As to those other unregulated and, perhaps, "unregulatable" services, as we speak, one of my Deputy Directors is attending a three day workshop entitled "Money Laundering Through Emerging Cyberspace Technology". The workshop includes scenarios on internet gambling. This is being run by the Commonwealth of Nations and the Caribbean Financial Action Task Force, a regional anti-money laundering body associated with the other international antimoney laundering movements of which Australia is a major participant. Australia is participating in this workshop at the request of the Commonwealth of Nations and in recognition of the work we have done in evaluating the implications of these new technologies for law enforcement. The Financial Action Task Force, the leading anti-money laundering organisation has identified internet gambling as a major issue for consideration by anti-money laundering regulators and law enforcement agencies. Tomorrow, Rick McDonell of the Asia Pacific Group on Money Laundering will talk about international efforts to find alternate strategies. I anticipate these will include the formation of specialist computer forensic units using new investigative techniques using commercial and specially developed software. It has become clear from our research that there are, at present, no clear answers. As well as being excited by benefits new technologies bring, governments and societies are also being challenged by the opportunities these technologies give to the unscrupulous and the criminal. It may well be that the strategies currently being explored such as peer pressure through selfregulatory arrangements, better educated consumers and viable conventional alternatives will be part of the answer. Only time will tell whether these strategies will be sufficient. We are living in interesting times. 5

Conversations: Jeffrey Owens and Rick McDonell

Volume 75, Number 9 September 1, 2014 Conversations: Jeffrey Owens and Rick McDonell Reprinted from Tax Notes Int l, September 1, 2014, p. 763 Conversations: Jeffrey Owens and Rick McDonell Jeffrey Owens