Blog

Trade Based Anti-Money Laundering

By Ian Hughes and Hui Ling Dean / 22 June 2022

Russian sanctions – another card in the anti-money laundering deck 

Recent sanctions against Russia, Queensland Alumina Limited’s clash with Russian aluminium producer, Rusal, in the Federal Court of Australia, and seizures of Russian oligarch’s assets such as superyachts and luxury villas, are likely to further encourage wealthy parties with Russian assets to mask their sources and attempt to shift them to ‘safe’ foreign jurisdictions. 

Players routing money or other assets via or to an ultimate destination in Australia will confront our tough anti-money laundering and counter-terrorism financing legislation (AML) and some of the most effective enforcement agencies in the world. 

But the complex and secretive webs used by active players are also potential traps for innocent actors because enforcement agencies can take civil, and criminal action, even where a party is unaware that the funds, assets and/or transaction/s passing through their network emanate from unlawful sources. 

To understand how sanction laws can affect even innocent actors involved in shifting money, and other assets between jurisdictions, it is first necessary to understand the basic AML framework in Australia. 

Trade-based money laundering

The global value of international trade was nearly 28 trillion USD in 2021.1

Modern technology and electronic banking enable instantaneous daily transfers of billions of dollars in trade funds around the world. 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 against North Korea, its dictator, Kim Jong-un enjoys a fleet of sanctioned luxury vehicles including multi-million dollar Maybach S600 Pullman Guards, which he has acquired using several of the 90 or so countries currently known to facilitate trade-based money laundering.2

In this environment, trade-based money laundering and asset transfers have become even more attractive to criminal entities and, considering sanctions against Russia, are more likely to interest parties with Russian assets who may previously have traded lawfully but whose wealth is now at risk of being frozen or confiscated.

What does trade-based money laundering look like?

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

Transactional red flags to be aware of include:

  • the transaction is inconsistent with the usual business of the entities involved, such as a car dealer exporting clothing, or 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 (for example changing shipping routes) that are inconsistent with standard business practices;
  • entities making unconventional use of, or using overly complex, financial products, e.g. use of letters of credit for unusually long or frequently extended periods without any apparent reason, or intermingling of different types of trade finance products for different segments of trade transactions;
  • entities displaying unreasonably low profit margins in trade transactions, e.g. importing wholesale commodities above retail value, or reselling commodities below purchase price;
  • entities purchasing commodities which exceed its financial resources, e.g. the transactions are financed through sudden influxes of cash deposits or third-party transfers to an entity’s accounts; or 
  • newly formed or recently re-activated entities engaging in high-volume and high-value trade activities, e.g. an unknown entity suddenly appears and engages in trade activities in sectors with high barriers to market entry.3

Corporate structures raising red flags include:

  • the corporate structure of the entity appears unusually complex and illogical, such as the 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, e.g. high-density residential buildings, post-box addresses, commercial buildings or industrial complexes, especially when there is no reference to a specific unit;
  • the business activity of the entity does not appear to be appropriate for the stated address, e.g. a trade entity appears to use residential properties, without having a commercial or industrial space, with no reasonable explanation;
  • the entity lacks an online presence, or the online presence suggests business activity inconsistent with the stated line of business, such as the website of a trade entity contains mainly boilerplate material taken from other websites or the website indicates a lack of knowledge regarding the particular product or industry in which the entity is trading; 
  • the entity displays a notable lack of typical business activities, e.g. it lacks regular payroll transactions in line with the number of stated employees, or transactions relating to operating costs, tax remittances; 
  • owners or senior managers of an entity appear to be nominees acting to conceal the true beneficial owners, e.g. they lack experience in business management or lack knowledge of transaction details, or they manage multiple unrelated companies; 
  • the entity, or its owners or senior managers, appear in negative news, e.g. past money laundering schemes, fraud, tax evasion, other criminal activities, or ongoing or past investigations or convictions; 
  • the entity name appears to be a copy of the name of a well-known bona fide corporation or is very similar to it, potentially in an effort to artificially appear to be connected to it; or
  • the entity is non-compliant with regular business obligations, such as submission of BAS and income tax returns.4 

AML agencies 

The Financial Action Task Force (FATF), of which Australia is a founding member, is an international body that sets AML standards, and the Egmont Group of Financial Intelligence Units (FIUs) provides many countries, including Australia, with comprehensive guidance on prevailing AML risk indicators. 

AML is enforced in Australia by various federal government agencies (Agencies) - Australian Federal Police (AFP), the Australian Crime Intelligence Commission (ACIC), Australian Border Force (ABF), the Australian Securities Investments Commission (ASIC), the Australian Taxation Office (ATO) and the Australian Transaction Reports and Analysis Centre (AUSTRAC). 

These Agencies deal with different forms of assets and AML techniques, and each has its own unique and, in some cases, exceptional powers to detect, investigate and prosecute unlawful conduct and to freeze or seize assets.

Examples of the Agencies’ information-gathering powers include covert surveillance of telecommunications and banking transactions, compulsory examinations of individuals where there is no privilege against self-incrimination, the power to seize or demand production of physical and electronic documents from professional advisers, and multi-jurisdictional information-sharing with foreign agencies, such as Scotland Yard and the National Crime Agency in the UK, the FBI and the Department of Justice in the USA, and with foreign embassies through mutual assistance requests. 

AML enforcement

AUSTRAC is responsible for detecting, preventing and responding to criminal financial abuses taking place inside the Australian financial system and by analyses suspicious transactions which designated financial institutions, such as banks, gambling institutions and bullion dealers must report.5

Failure to report a ‘suspicious matter’ to AUSTRAC under section 41 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AMLCTF Act) - for instance lodging with AUSTRAC a suspicious matter report (SMR) related to terrorism within 24 hours or a suspected money laundering transaction within three days – can attract a civil penalty of up to $22.2 million. 

For instance, in 2020, Westpac was ordered to pay AUSTRAC $1.3 billion6 for failing to properly report 19,502,841 international funds transfer instructions on time pursuant to section 45(2) and failing to conduct ongoing customer due diligence pursuant to section 36 of the AMLCTF Act.

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

While fines alone are significant, they may not be commensurate with the true value of a proscribed transaction. Asset seizure and confiscation laws in Australia therefore attempt to capture the overall value of a transaction in order to comprehensively deter offending conduct. 

A number of ‘serious offences’ defined by section 338 of the POCA pursuant to the Criminal Code Act 1995 (Cth) (Code) also give rise to a civil cause of action under the POCA. 

Section 18 of the POCA authorises the restraint of assets suspected of belonging to parties suspected of committing a ‘serious offence’, while section19 deals with property suspected of being proceeds of an ‘indictable offence’.

A Proceeds of Crime Authority’s application to the court is almost always made without notice to the affected party and, provided it gives evidence of ‘reasonable facts supporting the suspicion’, the court has very little discretion to refuse an order to freeze the designated assets.

When applying for a restraining order, the Proceeds of Crime Authority is not required to prove that the assets are directly tainted by the offence. An asset can be frozen as long as some form of ownership or interest in the asset can be linked to the suspect. This can (and often does) result in untainted assets being restrained, as well as the assets of family members or related businesses that may appear to have been combined with designated assets belonging to the suspect. 

Property held, pursuant to a trust, can be restrained pursuant to section 18(c) of the POCA if the Proceeds of Crime Authority can prove it is ‘effectively controlled’ by a suspect. ‘Effective control’ is broadly defined in section 337 of POCA and includes having a legal or equitable right, power, or privilege with respect to property.

Mere possession of funds or assets that may have been derived from the proceeds of crime (including any benefit or profit from engaging in sanctioned activities) can also enliven the POCA so that a Proceeds of Crime Authority can commence civil proceedings to restrain, trace and even confiscate assets pursuant (among others) to section 47 or 49 of the POCA.

There is no need for a concurrent criminal proceeding when a Proceeds of Crime Authority commences civil proceedings against a party allegedly holding or dealing with proceeds of crime. The laws apply equally to an innocent party involved in a trade-based money laundering transaction. 

The key difficulty for the vast majority of Australian businesses is that, although Agencies are likely to be monitoring ‘suspicious matters’ and preparing their cases in the background, an implicated business may only play a small role in the supply chain in which the transaction occurs, and therefore have little experience in the detection of suspicious transactions or any systems in place to determine whether or not they are legitimate. 

Businesses may be totally unaware of their involvement in trade-based money laundering until an Agency knocks on their door or they find their assets or accounts frozen by an ex parte court order.

Sanctions and AML 

Sanction laws form a part of Australia’s AML legislative framework. 

The Autonomous Sanctions Act 2011 (Cth) (Sanctions Act) is used by Australia to enforce the United Nations’ Security Council sanctions. Sanctions restrict or prohibit making a supply, import, providing a service or engaging in commercial activity and dealing with a designated person or entity. 

The Sanctions Act creates strict liability for a serious criminal offence, with penalties of up to 10 years imprisonment and substantial fines.7  

Before its invasion of Ukraine, Russia was already subject to sanctions by Australia8 and further economic sanctions against Russia took effect from 28 March 2022, including additional restrictions on the trade of certain goods and services with Russia, Crimea, Sevastopol and the (separatist) Donetsk and Luhansk regions of Ukraine. 

The current sanctions now prohibit activities involving direct or indirect export to Russia of the following:

  • items suited for use in oil exploration or production projects in Russia;
  • oil exploration and production in waters deeper than 150 metres;
  • oil exploration and production in the offshore area of north of the Arctic Circle;
  • projects that have the potential to produce oil from resources located in shale formations by way of hydraulic fracturing;
  • arms or related material, including military and paramilitary weapons, ammunition, military vehicles and equipment, and any related spare parts and accessories;
  • aluminium ores, including bauxite, alumina, and related products;

There are now sanctions on the imports, purchase, or transport of:

  • arms or related material;
  • oil, refined petroleum products, natural gas, coal and other energy products.

There are also sanctions on certain commercial activities, such as a prohibition on dealing with any financial instrument issued by, or to provide loans or credit to:

  • specified publicly owned or controlled Russian Banks;
  • specified Russian companies predominately engaged in activities relating to military equipment or services;
  • specified publicly owned or controlled Russian companies involved in the sale of transport of crude oil or petroleum products;
  • majority-owned subsidiaries or entities acting as agents for any of the above.

To complement these sanctions, certain services are also now prohibited:

  • any service which assists with, or is provided in relation to the supply and sale of transfer of goods listed under ‘restrictions on the export or supply of certain goods' above, except the items suited for use in certain categories of oil exploration or oil production projects;
  • financial assistance or a financial service which assists with, or is provided in relation to the import, purchase or transport of goods listed under ‘restrictions on the import, purchase or transport of certain goods' above;
  • an investment service which assists with, or is provided in relation to the activities listed under ‘restrictions on certain commercial activities' above;
  • a service to Russia, or to a person for use in Russia, which assists with, or is provided in relation to a military activity or the manufacture, maintenance, or use of arms or related material;
  • certain services to Russia, or to a person or entity for use in Russia, that are necessary for certain types of oil exploration or production projects in Russia, including drilling or well‐testing services.9 

Companies and individuals trading with parties potentially involved in any sanctioned activities or assets or entities now need to be confident they are not unwittingly being used as part of an affected supply chain.10 

A generally unknown example of ‘related material’ is bauxite, which is a critical in the production of aluminium that is used to manufacture military equipment. Australia exports a significant quantity of bauxite to China for refining, some of which (given its trading partnership with and stated links to Russia) may be on-sold to Russia.11 Any direct or indirect role in the sale of bauxite to China which finds its way to Russia is potentially at risk under the Sanctions Act and the AML.

Another example of the effect of trade sanctions on Australian business is oil refining. There are two companies in Australia that refine oil (including Russian oil) and both have recently announced that they will cease refining Russian oil in compliance with Australian sanctions.12
Where breaches of the Sanctions Act and, in turn, the Code, amount to ‘serious offences,’ a Proceeds of Crime Authority may commence civil proceedings under the POCA to seek forfeiture orders for 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 List13 (List) maintained by the Australian Sanctions Office identifies all persons and entities who are subject to targeted sanctions in Australia. The List can include foreigners in Australia as well as Australian citizens and residents here and abroad. For instance, Russian oligarchs on the List include, Alisher Usmanov, Gennady Timchenko, Vagit Alekperov and Arkady Lisin.

A party dealing with an asset that is owned or controlled by a Listed person or entity must freeze it and inform the AFP as soon as possible pursuant to regulation 23 and 24 of the Autonomous Sanctions Regulations 2011(Sanctions Regulations). ‘Asset’ is broadly defined in section 4 of the Sanctions Act and includes funds that have been deposited into Australia to purchase real estate on by, or on behalf of, the person or entity on the List. 

Making an asset available to the person or entity on the List is a contravention of regulation 15 of the Sanctions Regulations, which attracts the penalties in section 16 of the Sanctions Act and, in turn the Code and because the contravention constitutes a ‘serious offence’ - the POCA may also be enlivened.

A recent example of Russian sanctions affecting Australia business is the Federal Court litigation over one of Australia’s largest alumina refiners, Queensland Alumina Limited (QAL). 

QAL is a joint venture between Rio Tinto (holding an 80% interest) and Rusal (holding 20%). A Russian named on the List, Oleg Deripaska, owns 44.95% of a London-listed company called EN+Group which, in turn, has a 57% stake in Rusal.

Mr Deripaska has the capacity to direct influence over Rusal’s activities through EN+Group.

To ensure ongoing QAL operations, following the imposition of sanctions against Russia, Rio Tinto effectively took control of QAL, relying on ‘step-in-rights’ in the joint venture. This appears to have occurred as there was a risk that Rusal may be indirectly sanctioned for indirectly supplying alumina and certain services that may end up in Russia.

In response to Rio Tinto’s relying on the step-in-rights, Rusal offered an undertaking to ‘ring-fence’ its activities and not provide any alumina it received to Russia, Rusal or any of its subsidiaries. Ring-fencing, however, does not legally or financially separate assets from finances, and that undertaking did not ensure the integrity of the strict liability imposed by the Sanctions Act. 

Rusal recently commenced proceedings in the Federal Court of Australia, arguing that Rio Tinto does not have the contractual right to step in as Rusal itself is not directly the subject of Australian sanctions. 

Mr Deripaska has been investigated for money laundering in the past and with his controlling interest in Rusal, it is possible that (despite Rusal’s undertaking to ring-fence its activities and profits) Mr Deripaska could, utilising obscure trade techniques and financial routes, cause benefits derived from Rusal’s interest in QLA to pass to him in breach of the sanctions.

Another interesting aspect of this situation is, even if one accepted that Rusal had ring-fenced its activities, once alumina is loaded onto a vessel, it can switch off its automatic identification system, (which is against maritime law) and then travel to another port to load onto another Russian-bound vessel that is not sanctioned.  

Since the Russian sanctions were recently imposed, research by the maritime intelligence group, Winward, has found a significant increase in Russian ships switching off their automatic identification system to avoid detection. 112 Russian-affiliated oil tankers have not sent an automatic identification signal for more than eight weeks. 

It is therefore unsurprising that Rio Tinto, properly advised about its potential exposure, has relied on the step in provisions of the joint venture to minimise its exposure, not only to a breach of the Sanctions Act, but potential asset/benefit restraint and seizure from an Agency.

Australia is also likely to follow the lead of the United Kingdom (UK) which, on 15 March 2022, in response to the Russian invasion of Ukraine, fast tracked the introduction of a beneficial ownership register for foreign-owned property in the UK (UK Register)14

The purpose of this (public) Register is to stop what has been described as the ‘London laundromat’ for washing dirty money and thereby prevent foreign criminals using shell companies and complex trust structures to acquire high-value properties, such as in the London Belgravia district, which is a renowned location for properties acquired with ‘black’ money. 

Failure to register beneficial ownership of a qualifying interest in property, or submitting false information for registration, is a criminal offence under the Economic Crime Act and may result in an offender being prevented from buying, selling, or mortgaging property in the United Kingdom in the future. 

In Australia, as of 1 January 2021, Part 7A of the Foreign Acquisitions and Takeovers Act 1975 provides for a Register of Foreign Ownership of Australian assets (Australian Register) which is to commence operation by the end of 2024. 

Part 7A requires foreign persons to notify the Foreign Investments Review Board (FIRB) of interests acquired through any of the following:

  • an acquisition of Australian land, including mining or production tenements;
  • an acquisition of exploration tenements; 
  • the taking of certain significant actions, notifiable actions, notifiable national security actions or reviewable notifiable national security actions in relation to entities or businesses.

At this stage, the Australian Register will not be publicly accessible, and the information will only be shared across government departments presumably to identify money laundering and other national security risks. However this may well evolve into a form more similar to the UK Register.

Conclusion

Given the scope of the AML and its potential consequences, it is wise for parties with any potential to become involved in sanctioned activities or with sanctioned parties or assets, to equip themselves to recognise potentially suspect situations. This will allow an understanding of what due diligence is necessary in order to identify and avoid them and how to react if a problem is detected.

We intend to continue to publish articles in relation to trade-based anti money laundering including more detail around the range and remit of Agencies involved in AML and proceeds of crime surveillance and seizures, Agencies’ powers and how they apply them, your rights and obligations if you are confronted by an Agency and how to design and implement an effective strategy to avoid inadvertent AML violations.


 1. https://unctad.org/system/files/official-document/ditcinf2021d4_en.pdf    
 2. https://www.nytimes.com/2019/07/16/world/asia/north-korea-luxury-goods-sanctions.html 
 3. https://www.fatf-gafi.org/media/fatf/content/images/Trade-Based-Money-Laundering-Risk-Indicators.pdf    
 4. See note 3 at page 5.
 5. https://www.austrac.gov.au/business/how-comply-and-report-guidance-and-resources/reporting    
 6.https://www.austrac.gov.au/news-and-media/our-recent-work/westpac-penalty-ordered#:~:text=The%20Federal%20Court%20of%20Australia,(AML%2FCTF%20Act)
 7.A maximum fine of $555,000 for an individual, or a fine of $2.2 million or 3 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.
 8.They were first imposed in 2014, because Russia invade Crimea in 2014, and extended in 2015 and 2022.
 9.https://www.dfat.gov.au/international-relations/security/sanctions/sanctions-regimes/russia-sanctions-regime
 10.https://www.dfat.gov.au/international-relations/security/sanctions/sanctions-regimes/russia-sanctions-regime#:~:text=Why%20are%20sanctions%20imposed%3F,extended%20in%202015%20and%202022.    
 11. https://qz.com/2162256/chinas-alumina-exports-to-russia-surge-after-ukraine-invasion/#:~:text=In%20March%2C%20Russia%20bought%209%2C950,volume%20of%20all%20of%202021. 
 12. https://www.reuters.com/business/energy/australias-viva-energy-cease-purchase-russian-crude-oil-2022-03-08/ 
 13. https://www.dfat.gov.au/sites/default/files/regulation8_consolidated.xls. The Australian Sanctions Office (ASO) maintains the list and updates it regularly. You can subscribe to their mailing list to ensure you are reviewing the current List.
 14. Economic Crime (Transparency and Enforcement) Act 2022 (Economic Crime Act).

Authors
Ian Hughes
Partner
Ian is a Partner in our Dispute Resolution practice with a career spanning more than 30 years.
Hui Ling Dean
Special Counsel
Hui Ling is a Special Counsel in our Dispute resolution and litigation team.

Related articles

Subscribe
Receive email updates of our new publications.