Ownership Versus Control: When Anti-Money Laundering Programs Miss the Point

It is commonplace for criminals to structure their affairs in a way to control money or other property without owning it, at least according to traditional legal concepts.  

Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act), Part B of an AML/CTF program focuses on beneficial ownership rather than control.  

This article argues that notwithstanding the prescriptive nature of Part B and its focus on beneficial ownership, AML/CTF programs, holistically, ought to incorporate the concept of effective control of money or other property rather than the narrower concept of beneficial ownership. 

Those who overlook ‘effective control’ at grave risk 

The AML/CTF Act is one of a number of Acts enacted in response to the Financial Action Task Force’s (FATF) recommendations or “soft law” against money laundering and terrorism financing. Part A incorporates various elements to identify, mitigate and manage the risk of that entity being used for money laundering or terrorism financing.  It is risk based. Part B of an AML program is focused on identifying customers and beneficial owners. It is prescriptive. The text of the AML/CTF Act, as it relates to a Part B AML/CTF program, focuses on beneficial ownership (except in the case of account signatories – see s 5 AML/CTF Act) rather than the more inclusive term found elsewhere in legal responses to money laundering – effective control. 

Responses to the FATF’s recommendations, insofar as they relate to dealing with the proceeds of crime, however, include the concept of effective control, which is potentially far broader than beneficial ownership itself. For example, s 337 Proceeds of Crime Act 2002 (Cth) provides the inclusionary meaning of effective control in relation to its provisions for the restraint and forfeiture of criminal property:

(1)  Property may be subject to the effective control of a person whether or not the person has:  

                     (a)  a legal or equitable estate or * interest in the property; or  

                     (b)  a right, power or privilege in connection with the property.  

(2)  Property that is held on trust for the ultimate * benefit of a person is taken to be under the effective control of the person.  

Whether or not effective control might be found to exist synonymously with traditional legal consequences of a transaction (such as the creation or existence of a trust), the term is approached as a question of fact (or mixed fact and law).  

The relevant Explanatory Memorandum confirms that the term effective control “extends its reach to property not necessarily owned by the person, but which is under his or her effective control…  proceeds or an instrument of crime will frequently be dealt with so as to avoid it being traced back to its owner; this includes the transfer of all interests in the property to another person”.  

The QLD and NSW Supreme Courts have interpreted effective control consistently with the Explanatory Memorandum. In Director of Public Prosecutions (Cth) v Hart [2005] 2 Qd R 246; [2005] QCA 51 at [21] – [22], per McPherson JA (citing with approval in R v Milne (No 1) (2010) 260 FLR 166; [2010] NSWSC 932 per Johnson J), McPherson JA noted: 

… ‘effective control’… meant control in fact and that what it contemplates is control ‘that is practically effective, in the sense that the person has in fact the capacity to control the possession, use or disposition of the property…

… But to import into ‘effective control’ conceptions of beneficial ownership is to fly in the face of the express provision…

Effective control then, or control in fact, may be found independently of the law of, say, equity or agency.  Moreover, it is a specific legislative response to the design used by criminals to launder money while avoiding traditional notions of property ownership. In a similar vein, the money laundering provisions in Division 400 of the Schedule to the Criminal Code Act 1995 (Cth) (Criminal Code), which criminalise money laundering do so on the basis that they prohibit dealing with money or property that is the proceeds of crime or that is to become an instrument of crime. “Deals with money or other property” is defined in 400.2 Criminal Code to include, for example, “engaging in a banking transaction…”.  Ownership is irrelevant. 

AML programs that are designed around the concept of beneficial ownership (except to the extent they are complying with Part B), it is suggested, are at grave risk of not managing risks associated with those criminals who – consciously – maintain control only of money or other property in order to evade detection. 

– Dr Mathew Leighton-Daly, Commissioned Author of Financial Crime Control and Anti-Money Laundering, Thomson Reuters

Part A of an AML/CTF program, fundamentally, is concerned with resilience against criminal exploitation. In its publication, AUSTRAC Insights Assessing ML/TF Risk, AUSTRAC acknowledges itself that “Criminals are adept at exploiting financial products, services or delivery methods to facilitate their activities”.   

AUSTRAC goes on to say that, key in the defence of criminal exploitation is a compliant AML/CTF program. Unlike Part B, no Part A AML/CTF program can be implemented before a comprehensive risk-based analysis. This assessment must identify and evaluate risks posed to the particular business, take into account customer types and services offered, and assess inherent (or initial) risk.   

Inherent risk is determined by developing an appropriate risk assessment model, populating this model with relevant risks and performing the risk assessment and ensuring that its outputs align with the model.  Only once inherent risks have been ascertained can systems and controls be introduced.  

Again, in the knowledge that money launderers are adept in their methods, which commonly includes divesting themselves of ownership, it is difficult to see how the risk assessment process for an AML/CTF program could discount the concept of effective control or control in fact in its design, in favour of the narrower concept of beneficial ownership, and yet still be compliant. 

Casting the net wider 

Again, it is well known that many criminals structure themselves to be, from the perspective of traditional property ownership notions, “penny-less’’ notwithstanding that they in fact may control – and control considerable – amounts of money and other property.   

This behaviour and its consequences on AML design ought to be considered in relation to an entity’s AML/CTF program. Moreover, the prescriptive nature to Part B of an AML program should not limit Part A to concepts of beneficial ownership.  

In other words, AML/CTF programs should be developed to ensure they incorporate money laundering and terrorism financing risk in the case of criminals and terrorists who control money or other property and not just those who traditionally own it. 

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