House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Justice, the Hon Michael Keenan MP)

Statement of Compatibility with Human Rights

Prepared in accordance with Part 3 of the Human Rights (Parliamentary Scrutiny) Act 2011

Anti-Money Laundering and Counter-Terrorism Financing Bill 2017

10. This Bill is compatible with the human rights and freedoms recognised or declared in the international instruments listed in section 3 of the Human Rights (Parliamentary Scrutiny) Act 2011.

Overview of the Bill

11. The Bill amends the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) and the Financial Transaction Reports Act 1988 (FTR Act).

12. The Bill implements a first phase of reforms arising from the recommendations of the Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Associated Rules and Regulations (the Report). The Minister for Justice, the Hon Michael Keenan MP, tabled the Report on the statutory review in the Parliament on 29 April 2016.

13. The AML/CTF Act and FTR Act provide the basis for regulation of certain businesses by the Australian Transaction Reports and Analysis Centre (AUSTRAC). AUSTRAC is Australia's financial intelligence unit and anti-money laundering and counter terrorism financing (AML/CTF) regulator. The regulatory framework established under the AML/CTF Act and FTR Act provides for the collection of information from the private sector and from in and outbound travellers about the movement of money and other assets. AUSTRAC shares this information and associated financial intelligence with designated agencies in an effort to combat money laundering (ML), terrorism financing (TF) and other serious crimes.

14. The Bill contains a range of measures to strengthen Australia's capabilities to address ML and TF risks, and generate regulatory efficiencies, including amendments to:

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expand the objects of the AML/CTF Act to reflect the domestic objectives of AML/CTF regulation

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close a regulatory gap by regulating digital currency exchange providers

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provide regulatory relief to industry by:

o

clarifying due diligence obligations relating to correspondent banking relationships and broadening the scope of these relationships

o

de-regulating the cash-in-transit sector, insurance intermediaries and general insurance providers

o

qualifying the term 'in the course of carrying on a business', and

o

allowing related bodies corporate to share information

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strengthen AUSTRAC's investigation and enforcement powers by:

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giving the AUSTRAC CEO the power to issue infringement notices for a greater range of regulatory offences, and

o

allowing the AUSTRAC CEO to issue a remedial direction to a reporting entity to retrospectively comply with an obligation that has been breached

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give police and customs officers broader powers to search and seize physical currency and bearer negotiable instruments (BNI) and establish civil penalties for failing to comply with questioning and search powers

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revise the definitions of 'investigating officer', 'signatory' and 'stored value card' in the AML/CTF Act, and

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clarify other regulatory matters, including:

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granting the AUSTRAC CEO a power to perform tasks that are necessary or incidental to his or her functions, and

o

the weight given to ML and TF risk in certain decisions made by the AUSTRAC CEO.

Human rights implications

15. This Bill engages the following human rights:

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the right to privacy in Article 17 of the International Covenant on Civil and Political Rights (ICCPR), and

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the right to the presumption of innocence in Article 14(2) of the ICCPR.

Right to privacy

16. This Bill engages the right to privacy in Article 17 of the ICCPR by:

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closing a regulatory gap by regulating digital currency exchange providers

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allowing related bodies corporate to share information, and

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giving police and customs officers broader powers to search and seize physical currency and BNIs.

17. Article 17 of the ICCPR provides that no-one shall be subjected to arbitrary or unlawful interference with their privacy, family, home or correspondence. Lawful interference with the right to privacy is permitted under Article 17 of the ICCPR, provided it is not arbitrary. In order for an interference with the right to privacy to be permissible, the interference must be authorised by law, be for a reason consistent with the ICCPR and be reasonable in the particular circumstances. The United Nations Human Rights Committee has interpreted the requirement of 'reasonableness' to imply that any interference with privacy must be proportional to the end sought and be necessary in the circumstances.

18. To the extent that the measures in the Bill limit the rights protected under Article 17 of the ICCPR, these limitations are not arbitrary, and are reasonable, necessary and proportionate to the achievement of legitimate objectives by strengthening Australia's AML/CTF framework.

19. The human rights implications of these measures are discussed in turn below.

Close a regulatory gap by regulating digital currency exchange providers

20. Digital currencies largely operate outside the scope of the regulated financial system and are becoming a popular method of paying for goods and services and transferring value in the Australian economy. ^[1]

21. While digital currencies offer the potential for cheaper, more efficient and faster payments, the associated ML and TF risks are well-documented. Key risks include:

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greater anonymity compared with traditional non-cash payment methods

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limited transparency because transactions are made on a peer-to-peer basis, generally outside the regulated financial system, and

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different components of a digital currency system may be located in many countries and subject to varying degrees of AML/CTF oversight.

22. Digital currency exchange providers are not currently regulated under the AML/CTF Act. The regulatory regime under the AML/CTF Act only applies to an 'e-currency' which is backed by a physical thing and excludes convertible digital currencies, such as Bitcoin, which are backed by a cryptographic algorithm.

23. In June 2015, the Financial Action Task Force (FATF) ^[2] released guidance on how countries can apply a risk-based approach to address the ML and TF risks associated with digital currency payment products and services. The guidance provides that countries should consider applying the FATF standards to convertible digital currency exchanges and any other types of institution that act as nodes where convertible digital currency activities intersect with the regulated financial system. This includes:

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requiring convertible digital currency exchanges to conduct customer due diligence, keep transaction records and make suspicious matter reports

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applying registration/licensing requirements to domestic entities providing convertible digital currency exchange services between digital currencies and money, and

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subjecting domestic entities providing convertible digital currency exchange services to adequate supervision and regulation.

24. Based on this FATF guidance and broader international developments, the Report recommends that new regulation should focus on digital currency exchanges, as this is the point of intersection between digital currencies and the regulated financial system.

25. The amendments to the AML/CTF Act in Part 2 of Schedule 1 to the Bill will apply AML/CTF regulation to businesses which exchange digital currencies for money.

26. In particular, digital currency exchange providers will be required to:

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enrol and register on the Digital Currency Exchange Register maintained by AUSTRAC and provide prescribed registration details

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adopt and maintain an AML/CTF program to identify, mitigate and manage the ML and TF risks they may face

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identify and verify the identities of their customers

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report suspicious matters and transactions involving physical currency that exceed $10,000 or more (or foreign equivalent) to AUSTRAC, and

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keep certain records related to transactions, customer identification and their AML/CTF program for seven years.

27. Overall, the measures in the Bill extend Australia's existing AML/CTF regime to close a regulatory gap in relation to a small number of businesses involved in providing digital currency exchange services. Closing this regulatory gap will reduce the ML and TF risks associated with the growth of the digital currency sector and provide vital financial intelligence to AUSTRAC in its ongoing efforts to combat ML and TF.

28. This regulatory gap is also currently having an impact on the standing and public perception of the legitimacy of the digital currency sector, with some businesses choosing not to use or accept this payment method because of concerns about the risks associated with dealing with digital currency. Continued non-regulation of digital currency exchange providers under the AML/CTF regime may impede the development or use of these currencies in the future and the growth of this sector and may also increase the likelihood that the sector could by targeted for nefarious purposes.

29. As a result of the amendments in this Bill, businesses which convert digital currency to money will have to collect and store personal information, and report certain transactions to AUSTRAC. This reporting process will occur in accordance with the existing requirements of the AML/CTF Act. Some of this information may then be compiled, analysed and disseminated by AUSTRAC as actionable financial intelligence to authorised government agencies and international counterparts to aid ongoing efforts to combat and disrupt ML and TF, and other serious crimes.

30. To the extent that these measures limit the rights protected under Article 17 of the ICCPR, these limitations are not arbitrary, and are reasonable, necessary and proportionate to achieve legitimate objectives. This modest extension of Australia's AML/CTF regime is for legitimate objectives - minimising the ML and TF risks associated with the growing use of digital currencies in the Australian economy, strengthening the standing and public perception of the legitimacy of the digital currency sector and fulfilling Australia's ongoing international obligations to combat ML and TF.

31. Similarly, although the amendments will result in the collection and storage of personal information, all reporting entities under Australia's AML/CTF regime are obliged to comply with the Australian Privacy Principles (APP). Disclosure of personal information to government officials will also be subject to strict existing safeguards. In particular, Part 11 of the AML/CTF Act will continue to provide strict controls on the use and disclosure of AUSTRAC information. In essence, the AML/CTF Act prohibits the disclosure of AUSTRAC information, regardless of the type or format, unless a specified exception applies.

Allow related bodies corporate to share information

32. The Report concludes that the definition of 'designated business group' (DBG) is too restrictive, prohibiting the sharing of information within a corporate group to manage the ML and TF risks associated with a common customer. In order to rectify this deficiency, and to ensure that the group construct under the AML/CTF regime better reflects the reality of business structures, recommendation 7.5 of the Report recommends replacing the concept of a DBG with the concept of a 'corporate group'.

33. A DBG is a group of two or more associated businesses or persons who are reporting entities and join together to share certain obligations under the AML/CTF Act. Importantly, reporting entities can share information about SMRs with fellow members of their DBG to manage their ML and TF risks without breaching the tipping-off provisions in the AML/CTF Act. DBGs may include a range of business types, including lawyers, accountants, joint ventures and reporting entities that provide designated remittance services.

34. Items 51-55 in Part 4 of Schedule 1 to the Bill amend Part 11 of the AML/CTF Act to supplement the concept of a DBG with the concept of a 'corporate group', as defined in accordance with the definition of 'related bodies corporate' under section 50 of the Corporations Act 2001. This amendment will allow businesses to share information within a 'corporate group' as well as within a DBG to manage their ML and TF risks associated with common customers - without breaching the tipping-off provisions in the AML/CTF Act. Supplementing, rather than replacing, the concept of the DBG will ensure that businesses that fall within the DBG concept, but may not fall within the definition of 'corporate group' (for example, businesses acting under partnership or mixed arrangements), can continue to share information for the purposes of Part 11 of the AML/CTF Act.

35. The proposed amendments engage the right to privacy in Article 17 of the ICCPR. However, they are introduced for a reason consistent with the ICCPR because they concern the limited sharing of information about potentially criminal or terrorism-related activity, and therefore promote the interests of national security and public order. The measures are proportionate because they merely amend Australia's AML/CTF regime to ensure that it conforms with the realities of modern business structures, do not constitute a radical departure from current information-sharing practices under the AML/CTF regime and assist to ensure that Australia's AML/CTF framework remains robust in the face of the threat of serious crime and terrorism.

36. The measures in Items 51-55 of the Bill are also proportionate, as all reporting entities under the AML/CTF regime are subject to the APPs and are obliged to protect sensitive personal information.

37. For these reasons the measures in Items 51-55 of the Bill represent a reasonable, necessary and proportionate interference with the right to privacy.

Give police and customs officers broader powers to search and seize physical currency and bearer negotiable instruments

38. Police and customs officers do not currently have general search and seizure powers at the border under the AML/CTF Act. Instead, the search and seizure powers under the AML/CTF Act are linked to breaches of the current cross-border reporting requirements, which require travellers to declare physical currency of $10,000 or more and declare, on being questioned, if they are carrying a BNI. This leaves gaps in the ability of police and customs officers to search and seize physical currency and BNIs under the AML/CTF Act where officers have a suspicion that funds or instruments may be linked to ML, TF or other serious crimes, but the person has not breached the reporting requirements in Part 4 of the AML/CTF Act.

39. Recommendation 12.4 of the Report recommends removing this gap and broadening the search and seizure powers under sections 199 and 200 of the AML/CTF Act to allow police and customs officers to search and seize physical currency and BNIs where there is:

(a)

a suspicion of ML, TF or other serious criminal offences, or

(b)

a breach of the cross-border reporting requirements under the AML/CTF Act.

40. Items 67-75 of the Bill amend the AML/CTF Act to implement this recommendation.

41. The proposed amendments engage the right to privacy in Article 17 of the ICCPR. However, the proposed amendments are consistent with the ICCPR because they concern the power to seize physical currency and BNIs that are suspected to be relevant to criminal or terrorism-related conduct and therefore promote the interests of national security and public order. The new powers will also only be exercised by duly authorised police and customs officers in relation to certain persons who are imminently departing or recently arrived in Australia and specified conveyances such as aircraft and ships.

42. The measures are proportionate because they broaden existing powers in order to deter ML and TF, do not constitute a radical departure from current search and seizure powers and assist authorities in ensuring that Australia's AML/CTF framework is robust in the face of the threat of serious crime and terrorism.

43. For these reasons the measures in Items 67-75 of the Bill represent a reasonable, necessary and proportionate interference with the right to privacy, as permitted under Article 17 of the ICCPR.

Presumption of innocence

44. This Bill engages the right to the presumption of innocence in Article 14(2) of the ICCPR by introducing strict liability offences for conduct related to providing a digital currency exchange service. Article 14(2) of the ICCPR provides that a person charged with a criminal offence has a right 'to be presumed innocent until proven guilty according to law.' Strict liability offences engage article 14(2) because, where strict liability is applied to an offence, the requirement for the prosecution to prove fault is removed and a defence of honest and reasonable mistake of fact may be raised. Strict liability provisions will not violate the presumption of innocence so long as they are reasonable in the circumstances and maintain rights of defence.

45. The offences and the strict liability components of the offences in Part 2 of Schedule 1 of the Bill are not inconsistent with the presumption of innocence because they are reasonable, necessary and proportionate in the pursuit of a legitimate objective. The offences will provide an effective enforcement mechanism for the regulation of digital currency exchange providers. Notably, each offence retains a fault element of recklessness regarding the requirements under either subsections 76A(1) or 76A(2) of the Bill. Requiring proof of fault for all the physical elements of the offences would undermine the deterrent effect of these provisions because it would allow for entities to argue that they did not know or were reckless as to whether they had obligations under the Act.

46. Section 9.2 of the Criminal Code allows a defence of honest and reasonable mistake of fact to be raised for strict liability offences. Under this defence, a defendant must turn his or her mind to the existence of the facts and be under a mistaken, but reasonable, belief about those facts. This defence would be applicable to the strict liability provisions in the Bill.

47. The offences and the strict liability components of the offences in Part 2 of Schedule 1 of the Bill contribute to the legitimate objectives of the Bill - namely, to minimise the ML and TF risks associated with the growing use of digital currencies in the Australian economy, strengthen the standing and public perception of the legitimacy of the digital currency sector and fulfil Australia's ongoing international obligations to combat ML and TF. A robust enforcement framework is necessary to ensure that digital currency exchange providers are registered in timely manner so as to reduce the risk of their exploitation for ML, TF and other serious crime.

48. For these reasons, the strict liability offences in Item 20 of the Bill are not inconsistent with the presumption of innocence and are reasonable, necessary and proportionate in pursuit of a legitimate objective.

Conclusion

49. While the Bill engages a range of human rights, to the extent that it limits some rights, those limitations are reasonable, necessary and proportionate in achieving a legitimate objective.