The real estate industry has escaped compliance of the Anti-Money Laundering Act so far – but experts predict not for long.
Credit Suisse is forecasting $60 billion in new Chinese investment in Australia's housing market over the next six years, more than double the $28 billion deluge of the past six years.
One question is: how much of this is "clean" money? The likely introduction of further money laundering legislation may crimp the flow of Chinese funds. More broadly, it threatens to impose enormous costs on small businesses already foundering under a mountain of compliance paperwork.
This was brought to our attention last week when a fund manager touched base and bewailed, albeit with good reason, how real estate agents were still excluded from all obligations under Australia's Anti-Money Laundering and Counter-Terrorism Financing Act.
"What this means is that, whereas an investor of $10,000 in the [fund, name withheld], for example, has to experience the financial equivalent of a colonoscopy to prove they are who they say they are and that their money is clean, someone buying a $10 million shack in Vaucluse has to do nothing to show his money is clean, and the real estate agent, unlike the asset manager, has no liability if it isn't," he said.
The reason for this AML (Anti-Money Laundering) apartheid is the reluctance of government to ping other sectors with the cumbersome burden of compliance; not just real estate agents (whose patience would be sorely tested by the cliffs of paperwork) but jewellers, car dealers, lawyers and accountants.
The first tranche of the AML regime was brought in for the financial services and gaming sectors in 2007. It was intended that the second tranche be rolled out the next year – covering what may reasonably be deduced to be higher risk sectors. Let's face it, if you are going to launder money you are more likely to give it to your lawyer or accountant (not presently covered) rather than punt it down at the local tavern on the dogs (presently covered).
While Lamborghini sales are flat in China, a circumstance ascribed to the anti-corruption campaign waged by Chinese President Xi Jinping, Lamborghini dealers in Australia are tipping sales to triple this year. Maserati sales, too, are booming thanks in part to demand from wealthy Chinese.
Imagine if real estate agents and luxury car dealers suddenly had to identify for the regulator AUSTRAC a plethora of their customers' details and transactions. They may not have to imagine for too long.
The draft provisions for the second tranche of AML legislation were released in 2007 for an expected roll-out in 2008. Nothing happened. The global financial crisis then hit and in mid-2009 the Attorney General's department announced it was to make an announcement in December 2009. Again, nothing happened. By April 2010, that announcement was furtively replaced by a Sir Humphreyesque statement about government consultation with stakeholders.
Almost eight years on, nothing has happened though compliance experts say there is little choice but for the second tranche to be introduced. "Politically, they [politicians] are doing everything they can to avoid it," one told Fairfax Media. "It is horrendously complicated and a huge burden for small business but the FATF obligations give them little choice."
FATF is the Financial Action Task Force, the global body which sets the regulatory and operational standards for combating money laundering and terrorist financing. The rub for Australia is that if it is deemed not to comply sufficiently with FATF standards it is likely to lose trading opportunities. If Australia finds itself grouped with Somalia as a laggard on financial integrity, it may cost the country billions in foreign investment.
FATF released a report on Australia's AML progress last month. It was critical, finding we complied or were "largely compliant" with only 24 of 40 recommendations.
So, at the moment we have a system which is a virtual road-map for money launderers. You can do it with your lawyer, car dealer, or even pay the private school fees, but you can't do it down at the TAB, or by investing in the Perpetual Pure Microcap Fund.
Ironically, if the likes of a Perpetual takes a wholesale fund mandate from an Australian Super it involves a heavy bundle of paperwork to establish the bona fides of the Australian Super funds, which is ridiculous as Australian Super would hardly be laundering money through Perpetual, or at all.
Yet the burden of compliance as always falls more heavily on smaller businesses which can't afford compliance divisions. These will be the victims of the AML tangle of red tape, another irony in view of the present drive to reduce red tape.