Financial crime in an economic downturn: tracing assets through beneficial ownership

Australia's Anti‑Money Laundering and Counter‑Terrorism Financing Act 2006 (Cth) (AML Act) requires regulated entities to identify and verify customers and their beneficial owners. The rationale for this requirement is that identifying the true owner of an asset enables the regulated entity, Australian Transaction Reports and Analysis Centre (AUSTRAC) and law enforcement, to investigate, confiscate and prosecute the movement of the proceeds of crime.

AML has become increasingly relevant for regulated entities in Australia in the last few years, given the enforcement actions taken against reporting entities for breaches of the AML Act and the associated media scrutiny and reputational damage. As a consequence, methods for conducting due diligence by regulated entities into their customers and counterparties, including who really owns them, is being used in assessing credit risk and, if necessary, tracing of assets.

Asset tracing

Australian entities and persons who may be victims of financial crime have available to them various civil options to pursue recovery of their assets.

Tracing is the process by which the original owner of property can identify assets that may be physically retained or registered in the name of another party because of some kind of misappropriation or misuse of property. The law of tracing determines when one right stands in the place of another for the purposes of being able to bring certain legal or equitable claims. Australian Courts provide a number of remedies to recover money or personal property that is wrongly in the hands of a third party. These include:

• A declaration of a constructive trust
• A declaration of an equitable lien
• An account of profits and damages

These remedies will often be supported by freezing orders (previously known as Mareva injunctions) or search orders (previously known as Anton Piller orders) to ensure misappropriated property is not lost or dissipated pending determination of the ownership dispute in the Courts. Both types of interim orders can be obtained quickly if a court is satisfied it is appropriate.

However, before seeking these orders, which can have very serious consequences for those who are subject to them, a party will typically need to undertake due diligence to identify where property is and who is holding it. This can be time consuming and can deter potential applicants. Yet the methods for obtaining publically available information, when conducting due diligence under the AML Act, can also be used to aid tracing, whist reducing the cost burden of doing so. Increasingly, such information is being used to go beyond traditional KYC (Know Your Customer) to KYT (Know Your Transaction), by assessing who may be the recipient of a payment or asset, enabling Know your Counterparty.

Sources of due diligence

Under the AML Act regulated entities are required to identify and verify customers and their beneficial owners. For some customers, which pose a higher risk of money laundering, this includes a requirement to identify the source of funds and source of wealth of the customer.

Under the AML Act, a beneficial owner is an individual who ultimately owns or controls an entity such as a company, trust or partnership. 'Owns' in this case means owning 25% or more of the entity. This can be directly (such as through shareholdings) or indirectly (such as through another company's ownership or through a bank or broker).

Due diligence can be obtained from multiple sources accessible to the public, some of which may incur a fee:

1. Australian Securities and Investments Commission (ASIC): all companies and other disclosing entities are required to prepare and lodge annual financial reports, which may include some details of the entity's assets. This also includes the directors and shareholders of the company.
2. Australian Stock Exchange (ASX): publically listed companies are required to make market disclosures, including annual reports and other documents detailing financial performance.
3. Land title searches: ownership of land is required to be registered under State title regimes. Various entities can provide searches of these registers.
4. Personal Property Securities Register (PPSR): information may also be available on the PPSR, which is the national register for all security interests attached to personal property.

These are publically available sources of information, which can be utilised to avoid potential privacy issues that can be associated with the use of other sources of information. However, publically available information has limitations in terms of identifying the ultimate beneficiaries of assets. But this may be set to change with the proposed introduction of a beneficial ownership register in Australia and a similar register in the United Kingdom for overseas property owners.

Freezing orders

The Basel Institute on Governance has produced 'Tracing Illegal Assets – A Practitioner's Guide' that devotes a chapter to using the AML for asset tracing. One example detailed in the chapter is the use of freezing orders as a provisional measure applicable to bank accounts and other financial products, which prevents the nominative owner of such products from moving, transferring or converting these assets, including overseas.

In the Australian matter of HPack Investments Pty Limited [2020] NSWSC 1638, the Deputy Commissioner of Taxation (Commissioner) had begun winding up proceedings against HPack Investments Pty Ltd (HPack) in respect of unpaid tax in the amount of approximately AUD$20 million. Based on the Commissioner's investigation into the affairs of HPack and its directors it appeared that:

1. In assessing the underlying bank records, it showed that payments to HPack had substantially reduced in the 36 months prior to March 2020, with the consequence that HPack's assets could not meet a claim by the Commissioner;
2. Its directors may have breached their duties to the company by arranging for the payment of substantial amounts either to themselves or for their benefit; and
3. The directors transferred a large amount of cash by electronic funds transfers to their relatives, in particular their sons, and bank accounts outside of Australia.

Relying on the above, the Commissioner argued that claims which a liquidator of HPack could pursue against its directors may be frustrated, because the directors had transferred the benefit of these payments to third parties and outside of Australia.

The relief sought by the Commissioner was a freezing order in respect of the directors' assets. In making of a freezing order, Black J summarised the relevant principles at paragraph 37: "a freezing order is intended to prevent the abuse or frustration of the processes of the Court by preventing a defendant from disposing of its assets so as to deprive a plaintiff of the fruits of any judgment obtained in the proceeding."

At paragraph 48 Black J concluded the Court does have requisite jurisdiction to make a freezing order that will preserve the claims that may be brought by a liquidator appointed to HPack: "That order is, in my view, directed to preventing the frustration or inhibition of the Court's winding up process by seeking to meet a danger that a prospective judgement that could be obtained by a liquidator consequent on that process will be wholly or partly unsatisfied."

Greater beneficial ownership transparency in Australia

Recently the new Labor Government released its paper regarding 'Multinational tax integrity and enhanced tax transparency' in which it announced that it will implement a public registry of beneficial ownership to improve transparency on corporate structures, in order to show who ultimately owns or controls a company or other legal entity. This follows the Senate Standing Committee on Legal and Constitutional Affairs (Committee) Inquiry into the Adequacy and Effectiveness of the AML/CTF (Inquiry). The Committee made recommendations prior to the May 2022 election, that the Commonwealth Government should pursue a beneficial ownership register.

The Law Council of Australia conveyed to the Inquiry that if ASIC collected beneficial ownership information in the annual statement for Australian companies and made this information available it would reduce the regulatory burden imposed on regulated entities under the AML Act. Additionally, the Australian Taxation Office could perform a similar function for trusts with an ABN, as part of the annual reporting obligation of the trusts.

The Committee in handing down the Inquiry Report acknowledged that the development of a robust beneficial ownership register would both mitigate the burden on small business by enhancing and simplifying KYC searches and at the same time would reduce Australia's vulnerability to money laundering.

United Kingdom Register of Overseas Entities

In order to combat similar concerns, the UK recently introduced the Register of Overseas Entities on 1 August 2022 through the new Economic Crime (Transparency and Enforcement) Act 2022 (UK). The legislation requires overseas entities who want to buy, sell or transfer property or land in the UK, to register with Companies House, including who their registrable beneficial owners or, if there are none, who their managing officers are. Importantly the provisions apply retrospectively to overseas entities who bought property or land on or after 1 January 1999 in England and Wales or 8 December 2014 in Scotland and registration is mandatory by 31 January 2023.

There will be sanctions for those who do not comply, including restrictions on buying, selling, transferring, leasing or charging their land or property in the UK.

In the UK a beneficial owner includes an individual, company, government or public authority or trustee. There is a specific 'natures of control' test, which determines registration. See guidance as to how to apply this test on the UK Government website.

The Register of Overseas Entities is a further publicly available resource to aid parties in tracing of assets. It is particularly helpful in that it can assist with understanding where assets have been moved cross border (outside of Australia), but also where it is owned by foreign nationals. London as a centre for finance and commerce has a greater proportion of foreign owned property so imposing such measures is designed to increase transparency and reduce the likelihood of illicit funds entering the economy. We continue to monitor the introduction of similar sources in other jurisdictions.

Conclusion

Beneficial ownership registers and existing AML due diligence are increasingly becoming a valuable resource to aid asset tracing. Where appropriate, advice should be sought when considering freezing or search orders, assessing potential risks in dealing with the proceeds of crime, or making reports to regulators such as the AUSTRAC and/or law enforcement. Balancing the potential for recovery and regulatory impost are important considerations when tracing assets. A first step is typically to undertake an assessment of existing due diligence to determine the cost-benefit analysis of taking further action.