Wild card in the AML deck

Wednesday, 01 February 2023


    Trade sanctions on Russia in response to its invasion of Ukraine have exposed another tricky issue for directors to deal with when it comes to anti-money laundering risks, writes corporate asset seizure specialist Hui Ling Dean, outlining essentials for directors to be aware of.

    More than 1000 companies have either withdrawn or curtailed their business operations and involvement in Russia since the invasion of Ukraine, according to Yale’s Chief Executive Leadership Institute. There is evidence that the withdrawal of business and economic sanctions against Russia are beginning to adversely affect its economy.

    A macroeconomic analysis of Russia’s economic activity shows the revenue from pre-sanctioned — versus sanctioned — Russia has been severely and negatively affected through diminishing export revenue and tax that would otherwise be derived from commodity related industries. Sanctions against Russia and any seizures of Russian oligarchs’ assets are likely to encourage operations with Russian assets to attempt to shift them to “safe” foreign jurisdictions, such as Australia, to conceal the true origin of the assets and resources.

    Directors with any potential to become involved in sanctioned activities, or with sanctioned parties or assets, should equip themselves to recognise potentially suspect situations. This includes an understanding of what due diligence is necessary in order to identify and avoid them, and how to react if a problem is detected.

    International businesses routing assets via or to Australia will confront tough anti-money laundering (AML) and counter-terrorism financing (CTF) legislation. But AML is also a potential trap for injudicious directors and executives, because enforcement agencies can take action, even where a director is unaware of a company’s involvement in an unlawful transaction. To understand how, it is first necessary to understand the Australian anti- money laundering framework.

    Trade-based money laundering

    The modern banking system enables the transfer of billions of dollars around the world every day. The global logistics network allows assets such as luxury cars, artwork and gems to vanish, using complex shipping routes and safe haven port transfers. For example, despite UN sanctions, North Korean leader Kim Jong-un owns a fleet of sanctioned luxury vehicles, acquired using several countries that are currently known to facilitate trade-based money laundering.

    Trade-based money laundering can take many forms — the only limit is imagination.

    Transactional red flags include:

    • The transaction is inconsistent with the usual business of the entities involved, such as a precious gems dealer importing seafood
    • Entities engaging in overly complex transactions involving numerous third-party intermediaries with incongruent lines of business
    • Entities engaging in transactions and using modes of dealing that are inconsistent with standard business practices.

    Corporate structure red flags include:

    • The entity appears unusually complex and illogical, such as ultimate ownership by a shell company registered in a high-risk and/or low- transparency jurisdiction
    • The entity is registered at a “mass registration” address, for example, high-density residential buildings or post box addresses, especially when there is no reference to a specific unit
    • Owners or senior managers of an entity appear to be nominees acting to conceal the true beneficial owners, or they manage multiple unrelated companies.

    AML agencies

    AML is enforced in Australia by federal agencies such as the Australian Federal Police (AFP), Australian Criminal Intelligence Commission, Australian Border Force, Australian Securities and Investments Commission, Australian Taxation Office and Australian Transaction Reports and Analysis Centre (AUSTRAC).

    Each agency deals with different forms of assets, and each has its own powers to investigate and prosecute unlawful conduct and to seize assets. The agencies’ information- gathering powers include surveillance of telecommunications and banking transactions, compulsory examinations of individuals, the power to seize documents from professional advisers, and information-sharing with foreign agencies such as Scotland Yard and the National Crime Agency in the UK, and the FBI and Department of Justice in the US.

    Policing the financial system

    AUSTRAC is responsible for investigating and responding to criminal abuses inside the Australian financial system by analysing suspicious transactions, which designated financial institutions must report.

    The AFP and the Director of Public Prosecutions enforce AML through the freezing and potential forfeiture of money or assets under the Proceeds of Crime Act 2002 (Cth) (POCA) which targets the proceeds of money laundering.

    The Autonomous Sanctions Act 2011 (Cth) creates strict liability for a serious criminal offence, with penalties of up to 10 years imprisonment and substantial fines. A maximum fine of $555,000 for an individual, or a fine of $2.2m, or three times the value of the transaction, for a body corporate in breach of the sanction laws, whichever is greater, and/or up to 10 years’ imprisonment pursuant to section 16 of the Sanctions Act. Although fines are significant, they may not match the true value of a transaction. AML confiscation laws attempt to capture the overall value of a transaction in order to comprehensively deter offending conduct.

    Various “serious offences” defined by section 338 of the POCA pursuant to the Criminal Code Act 1995 (Cth) also give rise to a civil cause of action under the POCA. Section 18 of the POCA authorises the restraint of assets belonging to parties suspected of committing a “serious offence”, while section 19 provides for freezing property suspected of being proceeds of an “indictable offence”.

    An authority’s application to the court is almost always made without notice and, provided it gives evidence of “reasonable facts supporting the suspicion”, the court has little discretion to refuse a freezing order over designated assets. An authority does not have to prove the assets were directly tainted by the offence. An asset can be frozen if an interest in the asset can be linked to the suspect. This often results in untainted assets being restrained, as well as the assets of associates that appear to have been comingled with a suspect’s. Property held in a trust can be restrained if the authority can prove it is “effectively controlled” by a suspect. Mere possession of funds or an asset derived from the proceeds of crime (including any benefit or profit from engaging in sanctioned activities) can enliven the POCA so that an authority can commence civil proceedings to restrain and even confiscate them (section 47–49). The laws apply equally to a party innocently involved in a trade-based money laundering transaction.

    Sanctions in action

    Sanction laws are part of Australia’s AML framework. The Sanctions Act is used to enforce the UN sanctions, which restrict or prohibit making a supply or import, or providing a service or engaging in commercial activity and dealing with a designated person or entity.

    Before its invasion of Ukraine, Russia was already subject to sanctions by Australia (following the Russian invasion of Crimea in 2014) and further economic sanctions took effect from 28 March 2022. The current sanctions prohibit direct or indirect import/export to Russia of oil and aluminium, and now also include banking restrictions and gold.

    Directors potentially involved in sanctioned activities or dealing with sanctioned assets or entities need to be confident they are not unwittingly being used as part of an affected supply chain. Where breaches of the Sanctions Act — and, in turn, the code — amount to “serious offences”, an authority may commence civil proceedings under the POCA to claim the entire value of assets involved in the transaction.

    Another aspect of sanctions involves assets owned or controlled by “sanctioned” persons and entities. The Consolidated List maintained by the Australian Sanctions Office identifies parties who are subject to Australian sanctions. A party dealing with an asset controlled by a listed person or entity must freeze it and inform the AFP pursuant to the Autonomous Sanctions Regulations 2011.

    The definition of “asset” is broad and assets can include funds that have been deposited into Australia to purchase real estate. Making an asset available to a party on the Consolidated List contravenes the Sanctions Regulations, which attracts the penalties under the Sanctions Act and the Criminal Code — and may also enliven the POCA.

    A recent example of the effect of Russian sanctions is supplied by the Federal Court litigation concerning one of Australia’s largest alumina refiners, QAL. QAL is a joint venture between Rio Tinto and Rusal. Oleg Deripaska, a Russian who is on the Consolidated List, owns 44.95 per cent of EN+ Group which, in turn, has a 57 per cent stake in — and can exercise influence over — Rusal. Following the sanctions against Russia, Rio Tinto took control of QAL because there was a risk that Rusal could be sanctioned for indirectly supplying alumina that might have ended up in Russia. Rusal then offered an undertaking not to provide any physical alumina to Russia. That offer was rejected because the undertaking did not prevent financial benefits passing to Russia. Rusal has sued Rio Tinto, arguing it had no right to take control of QAL because Rusal itself is not directly subject to Australian sanctions.

    Another example of the effect of trade sanctions on Australian business is oil refining. Two companies in Australia — Viva Energy Group and Ampol — refine oil (including Russian oil). Both have recently announced that they will cease refining Russian oil in compliance with Australian sanctions.

    Australia is likely to follow the UK which, on 15 March 2022, after the invasion of Ukraine, introduced a beneficial ownership register for foreign-owned property in the UK (Economic Crime (Transparency and Enforcement) Act 2022). The register is designed to stop foreign criminals acquiring high-value properties with “black” money.

    Similarly, in Australia, as of 1 January 2021, under Section 130Q of the Foreign Investment Reform (Protecting Australia’s National Security) Act 2020 (Cth), part 7A of the Foreign Acquisitions and Takeovers Act 1975 provides for a register of foreign ownership of Australian assets — which is to begin on or before 10 December 2024.

    Hui Ling Dean is special counsel with HopgoodGanim Lawyers and has a specialist corporate asset seizure and AML practice. She was principal litigation lawyer in the Australian Federal Police Criminal Assets Litigation section for six years.

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