CARF

Treasury has released a consultation paper on Australia’s implementation of the Crypto Asset Reporting Framework and related amendments to the Common Reporting Standard. 

 The paper 'seeks stakeholder views on options for Australia’s approach to implementing the OECD-developed rules for the Crypto Asset Reporting Framework (CARF) and associated amendments to the Common Reporting Standard, or CRS'. 

It comments

 The OECD CARF is a new tax transparency framework which provides an international standard for the automatic exchange of crypto related account information between revenue (tax) authorities. In general terms, crypto assets are a digital representation of value that an entity can transfer, store, or trade electronically – common examples include Bitcoin, investment tokens, and non-fungible tokens. 

The OECD developed the CARF to address the rapid growth of the crypto asset market globally. The CARF is intended to be a global minimum standard in tax information exchange and builds on the existing CRS (outlined below), which enables participating tax authorities to exchange (traditional) financial account information on foreign tax residents, serving as a deterrent on tax evasion. In this regard, the CARF preserves the gains in global tax transparency achieved under the CRS and is a key component of the International Standards for Automatic Exchange of Information in Tax Matters (a multilateral tax framework first endorsed in 2014 and implemented by Australia in 2015). 

In November 2023, Australia joined with 47 jurisdictions signalling an intention to implement the CARF by 2027. As noted in that announcement, the widespread, consistent and timely implementation of the CARF will improve the ability of jurisdictions to enforce tax compliance and clamp down on tax evasion. This will help to protect tax revenues by creating a fairer tax system. As at July 2024, 58 jurisdictions had since signalled their intention to implement the CARF by 2027. 

Implementing the CARF would complement the Government’s efforts to strengthen tax transparency. It would also ensure Australia contributes to the effective global implementation of the CARF and play our role in deterring tax evasion, via the exchange of crypto account information with other countries. ... 

The paper explores the following issues, with specific questions included to guide stakeholder input: • The policy merits of transposing the OECD model into our domestic tax law (compared to a bespoke policy approach). • Potential implementation considerations. • The timeline for implementation that would minimise compliance costs on the community. 

Subject to Government decisions and priorities, future consultation will test exposure draft legislation and specific design issues (such as reporting formats to the ATO). 

Implementing the CARF will also require amendments to the CRS, to ensure the CRS remains up to date. These amendments are consequential in nature and outlined on page 10. 

Introduction 

International tax transparency and exchange of tax information 

The automatic exchange of tax related information between tax authorities is one method to address tax avoidance and ensure that all taxpayers pay the correct amount of tax. This typically involves jurisdictions signing up to a global standard to facilitate the sharing (and receiving) of information on accounts held by non-resident individuals and entities. The global standard ensures that information is exchanged in a standardised format, which assists tax authorities (and complying entities) to collect the information. It also recognises that the effectiveness of international exchange of information regimes are dependent on widespread, standardised adoption by jurisdictions. 

In June 2013, the OECD released a 15-point Action Plan on Base Erosion and Profit Shifting as a roadmap for governments to address profit shifting behaviour – i.e. tax planning strategies that exploit differences in tax rules to avoid paying tax. The Action Plan was endorsed at the G20 Finance Ministers’ meeting in July 2013 and established the OECD/G20 BEPS project. 

The BEPS Action Plan included the Common Reporting Standard (CRS) which recognised that international cooperation and sharing of high-quality information between revenue authorities was vital to ensure compliance with local tax laws. In 2014, the CRS was endorsed by G20 Finance Ministers and Central Bank Governors as an international platform for automatic exchange of tax information between multiple countries. The CRS is the OECD version of the United States’ unilateral information exchange mechanism (FATCA, or the Foreign Account Tax Compliance Act). The CRS has since established a common international standard for the collection, reporting and exchange of financial account information on foreign tax residents. Under the CRS, banks and other financial institutions collect and report financial account information to the ATO who exchange that information with participating foreign tax authorities of those foreign tax residents. In return, Australia (via the ATO) receives financial account information on Australian residents from other countries' tax authorities . Australia passed legislation implementing the CRS in 2016. 

Developing the OECD CARF (outlining the problem) 

In April 2021, the G20 mandated the OECD to develop a framework to provide for the automatic exchange of tax-relevant information on crypto assets. The OECD proceeded to develop a set of ‘Model Rules’ to extend automatic exchange of information frameworks to new intermediaries in the crypto asset sector. In August 2022, the OECD approved the CARF. 

The momentum to establish the CARF was in response to the rapid growth of crypto asset markets across the globe, and the challenges it presents for governments when it comes to tax evasion and tax avoidance. 

This reflects that crypto assets can be transferred and held without interacting with traditional financial intermediaries (such as banks) and without any central (tax) administrator having full visibility on the transactions carried out via crypto intermediaries, investor income derived from crypto assets, or the location of crypto asset holdings (such as assets held in offshore accounts). 

This type of information asymmetry creates opportunities for tax non-compliance and offshore tax evasion, particularly as these transactions and investments are occurring increasingly beyond the remit of established exchange of information frameworks, as compared to more traditional financial products. 

That is, crypto intermediaries can serve to aid asset transfers across borders, and as these platforms become more prominent (and relatively less transparent), there is an incentive for economic activity to shift away from traditional financial platforms to more opaque transaction platforms. This can facilitate the non-disclosure of income, leading to tax evasion. 

The OECD’s response to this policy problem is the CARF – the CARF addresses this gap in tax transparency by providing a new multilateral framework for the reporting of tax information on transactions in crypto assets. 

As with the current CRS, the CARF would ensure crypto related information is reported in a standardised manner, with a view to automatically exchanging information between tax administrators. The CARF is intended to build on the success of the CRS, which has improved international tax transparency via the automatic exchange of financial account information. 

The success of exchange of information frameworks are dependent on co‑ordinated international action, to ensure the information exchanged is broad in scope and coverage. This underpinned the group of jurisdictions, including Australia, signalling an intent to implement the CARF by 2027. 

Crypto assets in Australia 

Since Bitcoin was introduced in 2009, the crypto asset industry in Australia has evolved to mainstream use, and now extends beyond Bitcoin exchanges to include many sophisticated service providers . Cryptocurrencies are the most common form of crypto asset. It is estimated that 20 per cent of Australians currently own a cryptocurrency, and that 82 per cent of Australian crypto owners claimed to make a profit. The average reported cryptocurrency profit in the 2023 calendar year was $9,627 . 

Implementing the OECD CARF in Australia (why is government action needed) 

The OECD CARF reflects that global financial markets are evolving and becoming increasingly digitalised, and that coordinated action is needed to ensure revenue (tax) authorities can retain visibility of income derived from crypto assets. Implementing the CARF into Australia’s domestic legislation would create the legal framework to oblige crypto asset intermediaries to collect and report user and transaction data to the ATO. Exchange of information (between tax administrators) on crypto assets would allow the ATO to access standardised data to identify tax non-compliance and ensure taxpayers are meeting their tax obligations for crypto asset income and assets. Exchange of information under the CARF would only take place with jurisdictions who have appropriate confidentiality and data safeguards . 

The CARF would also ensure Australia continues to be a responsible jurisdiction in relation to combating tax evasion at the international level. Australia, along with many other countries, already shares information through automatic exchange, spontaneous exchange and exchange upon request facilitated through a network of tax treaties and tax information exchange agreements. Similarly, widespread implementation of the CARF would ensure a consistent and coordinated approach to the automatic exchange of information across participating jurisdictions regarding crypto assets. 

Legislative interactions with the Common Reporting Standard 

Reflecting the genesis of the CARF (and the evolving financial landscape), jurisdictions implementing the CARF would also be required to implement legislative amendments to the CRS, to ensure the CRS comprehensively covers transactions beyond the traditional financial sector (for which the CRS was initially developed) such as in the crypto asset market. For example, ensuring that indirect investments in crypto assets (such as through derivatives and investment vehicles) and certain electronic money products and central bank digital currencies are brought into scope of the CRS. 

The OECD identified the need for associated CRS amendments as part of the OECD’s review of the current standards, conducted in parallel to the development of the CARF. 

What is the Crypto Asset Reporting Framework (CARF)? 

The CARF is a new tax transparency framework which provides for the automatic exchange of tax information on transactions in crypto assets, between tax authorities. In the Australian context, it will allow the ATO to exchange information with other participating countries, to the extent the information relates to a person who is a tax resident in that jurisdiction. In turn, the ATO will also receive information on Australian tax residents from those tax authorities. The CARF requires information to be reported in a standardised manner. 

The CARF consists of three distinct components: • CARF Model Rules (and related commentary developed by the OECD) that can be transposed into domestic law to collect information from reporting crypto asset service providers with a relevant nexus to Australia (as the jurisdiction implementing the CARF). The rules focus on the: o scope of crypto assets to be covered; o entities and individuals subject to data collection and reporting requirements; o transactions subject to reporting, as well as the information to be reported in respect of such transactions; and o due diligence procedures to identify crypto asset users and controlling persons and to determine relevant tax jurisdictions for reporting and exchange purposes. • A Multilateral Competent Authority Agreement on Automatic Exchange of Information and related Commentary (or bilateral agreement/arrangement) to allow for the automatic exchange of information between participating jurisdictions); and • An electronic format (XML Schema) to be used by tax administrators for purposes of exchanging the CARF information, as well as by reporting crypto asset service providers to report CARF information to tax administrations (as permitted by domestic law) . The CARF would compel crypto intermediaries – for example, exchange platforms and wallet providers used for storing crypto assets – to report to tax authorities on certain crypto payment transfers, such as disposals (gross proceeds) and acquisitions (market value). Under the OECD model, information reported under the CARF would be subject to de minimis thresholds, specifically: • Values exceeding USD 50,000 or above would require specific customer data. The customer in this instance is identified as a user, and their details are exchanged. • Transaction amounts less than USD 50,000 are still reported, but done so as a ‘platform/merchant’ payment – effectively treated as an aggregate figure (with no specific customer user data). 

Australia’s implementation approach: Options 

The OECD’s CARF provides for a multilateral framework, establishing a common international standard for the exchange of information on transactions in crypto assets. Amendments to Australia’s tax legislation would be required to implement the CARF (along with legislative amendments to existing CRS rules, outlined further below). 

This paper considers two options – under either option, Australia would need to enter into a Multilateral Competent Authority Agreement (MCAA) or a bilateral information exchange agreement to enable the automatic exchange of information between tax authorities. 

The status quo option (no change) is not considered given that crypto use in Australia has become mainstream, and that the CARF is a global minimum standard developed to help deter tax evasion. 

Option 1: adopt the OECD CARF Model 

The OECD CARF Model Rules would be used as the basis for the enabling legislation within Australian law. This would adopt the same defined terms, concepts, due diligence procedures, de minimis thresholds, exclusions, and impose the same obligations on crypto intermediaries (reporting crypto asset service providers), as identified by the OECD. 

This approach would have the benefits of: • receiving information from other jurisdictions who have signed up to the OECD CARF model, assisting with tax compliance and enforcement. • avoiding duplication and deviations from international norms, supporting efficient reporting (by entities) and information exchanges (by tax authorities). • minimising compliance costs on some entities (e.g. if an in-scope entity has nexus with more than one jurisdiction). Similar to how the CRS was implemented in 2016, under this option, Australia would reserve the right to make some adjustments to adapt the OECD model to fit within Australia’s law (noting the above benefits are predicated on consistency with the OECD model). 

Option 2: bespoke approach 

Australia implements a bespoke set of rules. This would have the same policy intent as Option 1, with crypto asset service providers required to collect information on crypto asset transactions they facilitate, and report this data to the ATO to aid with its compliance activities. The information could be exchanged unilaterally with other jurisdictions where the taxpayer is resident, for use by those tax authorities, to ensure assets and income have been appropriately declared for tax purposes. Under a bespoke approach, Australia could more specifically target the reporting obligations to those service providers in the crypto industry whose customers’ information is seen as providing the most useful information to assist the ATO with its compliance activities. This could also include bespoke de minimis thresholds. A bespoke regime could have the same reportable information as captured under the OECD CARF but could offer the flexibility to exclude or add certain fields of information and types of transactions captured. It could also prescribe bespoke timing and frequency of reporting to the ATO. However, under this option many of the benefits of consistent reporting to minimise duplication and enable exchange globally would be lost and likely result in increased compliance costs for affected entities. The ATO may also receive less information compared to the OECD-developed CARF model, as bespoke regimes may not be considered compliant with the OECD standard. 

Who is required to report under the CARF? 

The CARF would apply to Reporting Crypto Asset Service Providers. The OECD defines (Section IV (B)) this term as: • Any individual or entity that, as a business, provides a service effectuating Exchange Transactions for or, on behalf of customers, including by acting as a counterparty, or as an intermediary, to such Exchange Transactions, or by making available a trading platform. 

The term “Exchange Transaction” is further defined to mean any exchange between: • Relevant Crypto-Assets and Fiat Currencies; and • One or more forms of Relevant Crypto-Assets (defined below). 

A Reporting Crypto Asset Service Provider would therefore apply to crypto asset exchanges and wallet providers, brokers, dealers, and automated teller machine providers. These types of entities (and individuals) are in scope given their central role in the crypto asset market in facilitating exchanges between Relevant Crypto-Assets, as well as between Relevant Crypto-Assets and Fiat Currencies. 

Reporting Crypto Asset Service Providers (connection to Australia) 

Under the OECD model, there would be five points of connection establishing a Reporting Crypto Asset Service Provider’s nexus to Australia, thus subjecting them to the CARF rules. These include if the provider is: (i) tax resident in, (ii) both incorporated in, or organised under the laws of, and have legal personality or are subject to tax reporting requirements in, (iii) managed from, (iv) having a regular place of business in, or (v) effectuating Relevant Transactions through a branch based in Australia. 

The OECD’s CARF model includes rules to avoid duplicative reporting where a Reporting Crypto Asset Service Provider may have nexus to more than one jurisdiction. 

Reportable information under the CARF 

The CARF will require reporting crypto asset service providers to report information about in-scope crypto assets and transactions to the ATO. These core definitions are outlined below to assist readers, noting the CARF related commentary has a complete set of defined terms and reporting requirements.

• Crypto-Assets (Section IV (A)) are defined as a digital representation of value that relies on a cryptographically secured distributed ledger or similar technology to validate and secure transactions. This includes assets transferred in a decentralised manner outside the traditional financial sector such as stablecoins, derivatives issued in the form of crypto assets and certain non-fungible tokens (NFTs). Blockchain is an example of distributed ledger technology. 

• Relevant Crypto-Assets refers to all crypto assets that can be used for payment or investment purposes. It excludes crypto assets that pose limited risk to tax compliance (i.e. crypto assets which cannot be used for payment or investment purposes, Central Bank Digital Currencies, and Specified Electronic Money Products). 

• Fiat Currency is the official currency of a jurisdiction, issued by a jurisdiction or by a jurisdiction’s designated Central Bank or monetary authority, as represented by physical banknotes or coins or by money in different digital forms, including bank reserves and Central Bank Digital Currencies. The term also includes commercial bank money and electronic money products. 

• Relevant transactions (Section IV(C)) refer to: - exchanges between relevant crypto assets and fiat currencies; and - exchanges between one or more forms of relevant crypto assets; and Reportable Retail Payment Transaction refers to transfers of relevant crypto assets for payment of goods or services above USD 50,000 (including where an intermediary processes payment on behalf of a merchant accepting crypto assets). 

• Reporting requirements (Section II of CARF) specify the general information to be reported with respect to crypto asset users (and controlling persons), including jurisdiction(s) of residence, taxpayer identification number, information on the reporting crypto asset service provider (such as its name, address and any identifying number), and information on the relevant transactions (such as reportable relevant transactions and transfers to external wallet addresses). 

Timing of reportable information under the CARF 

The success of global exchange of information frameworks are dependent on co‑ordinated international action. A collective group of jurisdictions, including Australia, have signalled an intent to implement the OECD’s global tax transparency framework for the reporting and exchange of information with respect to crypto assets by 2027. Once operational, reporting of CARF information by crypto asset intermediaries is proposed to occur on an annual basis relating to data collected over the previous year. 

Subject to a final decision of Government, it is envisaged that CARF reporting requirements would commence from 2026, to ensure the first exchanges between the ATO and other tax authorities could take place by 2027. This timeframe would also be subject to future legislative priorities. 

This timeframe is intended to provide adequate lead time for reporting crypto asset service providers and intermediaries to update their systems. 

It is anticipated the ATO would also undertake public consultation on the CARF reporting format, such as the XML schema. 

Due diligence requirements 

Under the OECD CARF, the reported information must ensure the ATO has a reasonable level of assurance of: • the crypto asset user’s identity, • the possible tax obligations that may arise from trading or accepting crypto assets as payment, where the user is a non-resident for exchange of information purposes with partner jurisdictions. 

Reporting crypto asset service providers would therefore be subject to due diligence procedures which they must apply to identify their users (including controlling persons) and determine the relevant tax jurisdiction and beneficial owners of crypto assets held in certain entities. The due diligence procedures (explained at Section III) may vary depending on whether the customer is an individual or an entity, but in general, would include: • the collection of self-certifications from their customers as to their tax residency and their Tax Identification Numbers (TINs); • Reasonableness checks that those self-certifications reconcile with other information the entity holds to ensure validity (for example checking against documentation obtained in relation to Anti-Money Laundering / Know Your Customer (AML/KYC) purposes); and • Signing off on and submitting the data to the tax authorities. 

Additionally, reporting entities will need to have regard for ‘change of circumstances’ requirements regarding crypto asset users. This imposes obligations on reporting entities to ensure the original ‘self-certification’ remains valid. That is, if a reporting crypto asset provider has reason to know that a self-certification is unreliable, incorrect, or incomplete, the reporting entity is required to undertake procedures to ensure the self-certification is updated. 

In the case of pre-existing users, the CARF Model Rules stipulates that reporting crypto asset service providers must obtain a valid self- certification (and confirm its reasonableness) within 12 months after a jurisdiction introduces the CARF.

AML/CTF, proof and the legal profession

The report by the Senate Legal and Constitutional Affairs Legislation Committee on the Anti-Money Laundering and Counter- Terrorism Financing Amendment Bill 2024 features the following recommendations 

1 The committee recommends that the bill be amended to move the commencement of the ‘tipping off’ offence to 31 March 2025. 

2   The committee recommends that the bill be amended to include a note that reflects the policy intent for the AML/CTF regime to not capture barristers acting on the instructions of a solicitor. 

3 The committee recommends the bill be amended to ensure entities providing custodial, depository or safe deposit box services without associated transaction elements are not unintentionally captured by the AML/CTF regime. 

4   The committee recommends that the bill be amended to ensure uniform exemptions for item 54 entities from governing body requirements. 

5   The committee recommends that the bill be amended to move the criteria for ordering institutions and beneficiary institutions to the AML/CTF Rules to increase flexibility and allow for further consultation with industry. 

6 The committee recommends that the bill be amended to ensure that where a civil penalty is being considered, there is a clear connection to the customer that should have been subject to customer due diligence, by amending s28 and s30 to read ‘the customer’ instead of ‘a customer’. 

7 The committee recommends the bill be amended to ensure that where a reporting entity has previously provided delayed verification in a defective way, it can provide a designated service to a customer once any non- compliance has been remedied. 

8 The committee recommends the bill be passed, subject to the above amendments.

 The report states

The bill’s purpose is set out in the Explanatory Memorandum as follows: Australia’s AML/CTF regime establishes a regulatory framework for combatting money laundering, terrorism financing and other serious financial crimes. At its core, the AML/CTF regime is a partnership between the Australian Government and industry. Through the regulatory framework, businesses play a vital role in detecting and preventing the misuse of their sectors and products by criminals seeking to launder money and fund terrorism. The reforms in the Bill would ensure Australia’s AML/CTF regime continues to effectively deter, detect and disrupt illicit financing, and protect Australian businesses from criminal exploitation. The reforms would improve the ability of Australian national security and law enforcement agencies and the Australian Transaction Reports and Analysis Centre (AUSTRAC), as the AML/CTF regulator and Financial Intelligence Unit, to target illicit financing. This will impact the ability of transnational, serious and organised crime groups to invest their illicit funds into further criminal activities in Australia and our broader region. 

1.4 In addition, the Explanatory Memorandum states that the bill would bring Australia’s AML/CTF framework into line with international standards set by the Financial Action Task Force (FATF), the global financial crime body, of which Australia is a founding member: The FATF Standards...are a comprehensive framework of measures to combat money laundering, terrorist financing and proliferation financing. These standards set an international benchmark for countries to implement and adapt to their legal, administrative and operational frameworks and financial systems. The FATF Standards are regularly revised to strengthen requirements and adapt to emerging crime trends and threats. 

1.5 According to the Explanatory Memorandum, the three key objectives of the bill are:  to extend the AML/CTF regime to certain high-risk services provided by lawyers, accountants, trust and company service providers, real estate professionals, and dealers in precious metals and stones—also known as ‘tranche two’ entities  to improve the effectiveness of the AML/CTF regime by making it simpler and clearer for businesses to comply with their obligations, and  to modernise the regime to reflect changing business structures, technologies and illicit financing methodologies.5  

1.6 In his second reading speech, the Attorney-General, the Hon Mark Dreyfus MP, stated that the bill would make significant and timely reforms to the AML/CTF Act that was established in 2006. The Attorney-General commented that in introducing this AML/CTF framework, the then-Coalition government committed to undertaking a second tranche of reforms, which were not subsequently delivered, and that: [The bill] delivers on the Albanese government's commitment to protecting Australians from the serious harm caused by criminals. The bill will bolster Australia's anti-money laundering and counter-terrorism financing regime to prevent criminals from hiding their illicit profits and funding illegal activities. It will also stop funds from falling into the hands of terrorists and disrupt activities of authoritarian and corrupt regimes. The reforms in this bill are long overdue. The former government's inaction has led to significant regulatory gaps and vulnerabilities. We are acting now to make sure that Australia stops being an attractive destination for illicit financing. 

Inclusion of new high-risk services 

1.7 The bill would introduce new designated services into the AML/CTF Act, so that lawyers, accountants, real estate agents, precious stone dealers and other professionals that provide such services are required to comply with AML/CTF obligations. 

1.8 The Attorney-General’s Department (AGD) submitted that money laundering strategies are constantly evolving to take advantage of changes, both in Australia and internationally. It stated that current regulatory gaps left certain services and products unregulated, including ‘tranche two’ entities: ...such as lawyers, accountants, trust and company service providers, real estate professionals and dealers in precious metals and stones. Such services are globally recognised as being high-risk for money laundering. 

Improving the AML/CTF framework and meeting our international obligations 

1.9 As well as providing regulators and law enforcement with more information for their oversight and investigation work uncovering criminal activity, the AGD noted that the bill’s reforms would ‘better protect Australian businesses, communities and the economy from criminal exploitation’, and provide them ‘with the necessary tools to identify and report suspicious behaviour’. 

1.10 The AGD noted the bill would improve Australia’s compliance with FATF standards in other ways, including:  clarifying risk assessment requirements  aligning with the FATF principles for foreign branches and subsidiaries  clarifying the availability of simplified CDD where the money laundering or terrorism financing risk of the customer is low  better aligning the requirements for politically exposed persons in the AML/CTF Act and AML/CTF Rules with international standards  updating the CDD exemption for gambling services to align with FATF’s threshold, and  enhancing the transparency of value transfers involving virtual assets. 

1.11 The Explanatory Memorandum stated that the bill’s reforms would bring Australia’s AML/CTF frameworks into line with the international standards of the FATF, of which Australia is a founding member. 

1.12 The FATF is an intergovernmental group that sets and oversees the quality of implementation of AML/CTF and proliferation standards. Australia has been a member of the FATF since its inception in 1989, and currently takes on a leadership role, including as the chair of the Asia-Pacific Group on Money Laundering. 

1.13 FATF assesses the compliance of members with the mutually agreed standards. The Explanatory Memorandum states that these: ...are a comprehensive framework of measures to combat money laundering, terrorist financing and proliferation financing. These standards set an international benchmark for countries to implement and adapt to their legal, administrative and operational frameworks and financial systems. The FATF Standards are regularly revised to strengthen requirements and adapt to emerging crime trends and threats. 

1.14 The FATF assessment process includes ‘grey listing’ jurisdictions that have strategic deficiencies. The AGD submitted that the reforms in the bill would bring Australia into line with international best practice and improve compliance with FATF standards in certain areas where it is currently rated as ‘non-compliant’ (regulation of tranche two entities), or only ‘partially compliant’ (regulation of virtual asset services and value transfer transparency). 

1.15 The next FATF assessment of Australia’s compliance with these standards will be conducted over 2026-2027. 

Overview of the bill 

1.16 The bill contains 12 schedules, which this section will discuss briefly in turn. 

Schedule 1—AML/CTF programs and business groups 

1.17 The Explanatory Memorandum states that the current Act requires reporting entities to have programs that identify, mitigate and manage AML/CTF risks that they may face when providing a designated service. 

1.18 Schedule 1 of the bill would replace Part 7 of the current AML/CTF Act with: ...a set of outcomes-focused obligations that will ensure reporting entities undertake appropriate measures to mitigate and manage risk. This includes:  introducing new, flexible concepts for reporting entities that organise themselves into groups to manage risks more efficiently  clarifying the roles and responsibilities of a reporting entity’s governing body and its AML/CTF compliance officer, and  clarifying obligations for Australian companies operating overseas through a foreign branch of an Australian reporting entity, or a foreign subsidiary of an Australian parent company. 

Schedule 2—Customer due diligence 

1.19 Customer due diligence (CDD) is a foundational aspect of the AML/CTF regime, which requires reporting entities to identify and verify customer identity and associated persons, and understand and mitigate any risks associated with providing services to the customer. 

1.20 Schedule 2 would ‘reframe and clarify core requirements’ for initial and ongoing CDD–including enhanced CDD processes, and streamline where a simplified CDD may be used. 

Schedule 3—Regulating additional high-risk services 

1.21 This schedule expands the AML/CTF regime to certain services that are ‘recognised globally as high risk for money laundering exploitation’, including certain services: ...provided by gatekeeper professions: real estate professionals, dealers in precious metals and precious stones, and professional service providers, including lawyers, conveyancers, accountants and trust and company service providers (also known as ‘tranche two’ entities). 

Schedule 4—Legal professional privilege 

1.22 The Explanatory Memorandum states that: Schedule 4 would clarify the treatment of information subject to legal professional privilege for the purposes of the reporting and information disclosure obligations in the AML/CTF Act. Existing section 242 already provides that the AML/CTF Act does not affect the law relating to legal professional privilege. The Bill provides stronger protections for the disclosure of information or documents subject to legal professional privilege once legal practitioners are brought into the AML/CTF regime, in response to stakeholder feedback. These amendments preserve the core intention of the doctrine of legal professional privilege in both common law and statute, and ensure that regulated entities who handle client information that is subject to legal professional privilege can comply with their reporting and information disclosure obligations under the AML/CTF Act. 

Schedule 5—Tipping off offence and disclosure of AUSTRAC information to foreign countries or agencies 

1.23 Schedule 5 would make reforms to: ...the current prohibition against reporting entities ‘tipping off’ their customer about the formation of a suspicion. The new offence will focus on preventing the disclosure of suspicious matter report (SMR) information or information related to a notice issued under section 49 or 49B of the AML/CTF Act where it would or could reasonably prejudice an investigation. The new offence framework would be more flexible for reporting entities seeking to share information for legitimate purposes, including within reporting groups to manage risk and prevent further crime. 

Schedule 6—Services relating to virtual assets 

1.24 Schedule 6 would extend the AML/CTF regime to digital and virtual assets, which are ‘an increasingly popular conduit to represent, store and move value’, and have been identified as a money laundering framework vulnerability by AUSTRAC. 

1.25 This provision would also amend the current terminology of ‘digital currency’ to ‘virtual asset’, in line with FATF recommendations, to ‘ensure that the rapidly growing virtual asset sector is hardened against exploitation by criminals’. 

Schedule 7—Definition of bearer negotiable instrument 

1.26 Schedule 7 would clarify which monetary instruments are captured by the definition of a ‘bearer negotiable instrument’ and its subsequent reporting requirements. The Explanatory Memorandum states this is in response to industry concerns the current definition is too unclear and broad, and to maintain compliance with FATF standards. 

Schedule 8—Transfer of value and international value transfer services 

1.27 The Explanatory Memorandum states that: Schedule 8 would simplify and modernise the framework for electronic funds transfer instruction obligations, designated remittance arrangements and international funds transfer instruction (IFTI) reporting purposes. The amendments in Schedule 8 replace the previous funds transfer chain concept with an updated and simplified value transfer chain. Streamlining value transfer chains would reduce undue regulatory burden on industry. The value transfer chain concept will provide a framework for key AML/CTF reporting obligations for certain entities that transfer value on behalf of customers, like the travel rule and IFTI/international value transfer service reporting obligations. 

Schedule 9—Powers and definitions 

1.28 According to the Explanatory Memorandum, Schedule 9 introduces a number of new information gathering powers for AUSTRAC to monitor, investigate and enforce compliance with the AML/CTF regime. This includes: ...an examination power, an important investigatory tool to enable AUSTRAC to obtain relevant information needed to make enforcement decisions and obtain evidence to be used in proceedings, and additional notice to produce powers allowing AUSTRAC to gather information to assist with its financial intelligence functions. [and] updates to a number of definitions to respond to issues identified by the 2016 Statutory Review of the AML/CTF Act, AML/CTF Rules and the Associated Regulations, or where updates are otherwise required to modernise and simplify the AML/CTF regime. 

Schedule 10—Exemptions 

1.29 Schedule 10 would move exemptions from certain AML/CTF obligations (which can currently be made by the AUSTRAC CEO) from the AML/CTF Rules into the Act. This will allow for greater parliamentary scrutiny of appropriate exemptions from designated services.26 Schedule 11—Repeal of the Financial Transaction Reports Act 1988 1.30 This schedule repeals the FTR Act in its entirety, and makes consequential minor amendments to other Acts. According to the Explanatory Memorandum, this would streamline the AML/CTF regime by establishing a single source of obligations for industry. 

Schedule 12—Transitional rules 

1.31 According to the Explanatory Memorandum: Schedule 12 would provide a power for the Minister to make rules concerning any amendments introduced by this Bill. This modification power is limited to 4 years to address any unforeseen issues that may arise after the reforms commence and to accommodate the extensive time needed for industry to effectively implement each measure. 

Financial and human rights implications 

1.32 The Explanatory Memorandum states that the bill would have no financial impact. 

1.33 The Explanatory Memorandum comments that the bill is compatible with the human rights and freedoms recognised or declared in the international instruments Australia is a party to, listed in Section 3 of the Human Rights (Parliamentary Scrutiny) Act 

Consideration by other committees 

1.34 The bill was considered by the Senate Committee for the Scrutiny of Bills (Scrutiny Committee), and the Parliamentary Joint Committee on Human Rights (PJCHR). 

Concerns raised by the Senate Committee for the Scrutiny of Bills 

1.35 The Scrutiny Committee raised a number of concerns with the bill, namely:  Significant matters in delegated legislation;  Abrogation of privilege against self-incrimination;  Reversal of the evidential burden of proof; and  Strict liability offences. 

Significant measures in delegated legislation 

1.36 The Scrutiny Committee noted the current AML/CTF framework empowers some heads of Commonwealth agencies and bodies to share AUSTRAC information with foreign governments and agencies.31 

1.37 Noting, that the bill would amend this existing limited list with a power prescribed by rules, the Scrutiny Committee expressed a preference that ‘significant matters should be included in primary legislation unless a sound justification for the use of delegated legislation is provided’, so as to assure more robust Parliamentary scrutiny. Moreover: Allowing the rules to designate the Commonwealth, State and Territory entities which can disclose AUSTRAC information to foreign governments is a significant delegation of legislative power over matters that are more appropriate for Parliament to consider. While noting this explanation, the committee has generally not accepted a desire for administrative flexibility to be a sufficient justification, of itself, for leaving significant matters to dele gated legislation. Noting that these matters are being removed from their existing status in primary law, the committee expects that a stronger justification should have been provided. Further, it is unclear to the committee why flexibility may be needed in this instance given the list of Commonwealth, State and Territory agencies who can disclose such information is necessarily limited and not liable to frequent change. This issue has not been sufficiently explored in the explanatory materials. 

Abrogation of privilege against self-incrimination 

1.38 The Scrutiny Committee noted that provisions of the bill would override, or expand ‘the common law privilege against self-incrimination which provides that a person cannot be required to answer questions or produce material which may tend to incriminate them’. 

1.39 The Scrutiny Committee noted there may be certain circumstances in which this privilege can be overridden, but that abrogating the privilege ‘represents a serious loss of personal liberty’. Moreover, it noted the bill does not provide for any use or derivative use immunity in this context, which may mitigate the abrogation of privilege against self-incrimination. 

Reversal of the evidential burden of proof–significant measures in delegated legislation 

1.40 The Scrutiny Committee made comment on the bill’s addition of the new ‘tipping off’ offence into the AML/CTF Act, which is discussed earlier in this chapter, and noted that two exceptions for this offence reversed the evidential burden of proof ‘due to the operation of the Criminal Code’. 

1.41 The Scrutiny Committee found this was not justified and explained in the Explanatory Memorandum: At common law, it is ordinarily the duty of the prosecution to prove all elements of an offence. This is an important aspect of the right to be presumed innocent until proven guilty. Provisions that reverse the burden of proof and require a defendant to disprove, or raise evidence to disprove, one or more elements of an offence, interferes with this common law right. The committee expects any such reversal of the evidential burden of proof to be justified and for the explanatory memorandum to address whether the approach taken is consistent with the Attorney-General’s Department’s Guide to Framing Commonwealth Offences, Infringement Notices and Enforcement Powers which states that a matter should only be included in an offence-specific defence (as opposed to being specified as an element of the offence) where:  it is peculiarly within the knowledge of the defendant; and  it would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter. 

Strict liability offences 

1.42 The Scrutiny Committee observed that: The bill provides that persons required to appear for examination in accordance with a notice given under the bill may be required by the examiner to take an oath or give an affirmation that the statements made will be true. The bill proposed that this be an offence of strict liability to fail to comply with these requirements, which would carry a sentence of up to three months imprisonment. 

1.43 The Scrutiny Committee noted that there may be some discrepancy between penalties included in the bill (including three months imprisonment), and the Commonwealth Guide to Framing Offences, and that there was no justification made for this in the Explanatory Memorandum: As the imposition of strict liability undermines fundamental common law principles, the committee expects the explanatory memorandum to provide a clear justification for any imposition of strict liability, including outlining whether the approach is consistent with the Guide to Framing Commonwealth Offences. The committee notes in particular that the Guide to Framing Commonwealth Offences states that the application of strict liability is only considered appropriate where the offence is not punishable by imprisonment and only punishable by a fine of up to 60 penalty units for an individual. 

1.44 The committee requested an explanation from the Attorney-General for the bill’s inclusion of strict liability offence, and why it was necessary to impose a period of imprisonment in relation to a strict liability offence. 

Attorney-General’s response to Scrutiny Committee 

1.45 The Attorney-General responded in detail to the concerns raised by the Scrutiny Committee. A summary of the response is as follows. 

Significant matters in delegated legislation 

1.46 Following 2022 machinery of government changes, responsibility for administering the AML/CTF Act moved from the Minister for Home Affairs to the Attorney-General. This led to an error in subsection 127(3) listing the AGD twice and omitting the Department of Home Affairs from coverage. 

1.47 The proposed amendments aim to increase flexibility and efficiency in response to government changes and agency name updates, enhancing timely information-sharing to combat financial crime. Safeguards in subsection 127(2) ensure information protection and purpose-driven use. 

1.48 Moving the agency list to AML/CTF Rules would reduce legislative updates and enhance Parliamentary efficiency. 

1.49 AML/CTF Rules are legislative instruments, subject to Parliamentary oversight and disallowance, with proposed amendments restricting AUSTRAC information sharing to Commonwealth, State, or Territory agencies. 

1.50 Amendments would grant the AUSTRAC CEO the authority to update agency names under the AML/CTF Rules, enhancing regulatory agility and addressing outdated legislative listings. 

Abrogation of Privilege Against Self-Incrimination 

1.51 The privilege may be overridden for public benefit if justified. Expanding section 169 ensures information provided to authorised officers under section 167 can be used in criminal proceedings related to money laundering, terrorism financing, and proliferation financing offences. 

1.52 This expansion supports AUSTRAC’s role in investigating and prosecuting serious crimes, enhancing compliance and effectiveness under the AML/CTF regime. 

1.53 Removal of self-incrimination privileges typically includes ‘use’ immunity but not necessarily ‘derivative use’ immunity for serious offences, aligning with regulatory norms for agencies like ASIC and ACCC. 1.54 The provisions would ensure evidence can be used to prosecute serious offences uncovered during compliance activities without undermining AUSTRAC’s regulatory duties. 

1.55 Section 172K’s ‘use’ immunity prevents self-incriminating evidence use but allows necessary prosecution of serious offences. 

Reversal of the Evidential Burden of Proof 

1.56 Subsection 123(4) and (5) would create exceptions to the tipping-off offence for disclosures made in good faith for deterring criminal activity or detecting serious crimes, placing the evidential burden on the accused. 

1.57 The reversal of the burden of proof is appropriate, as evidence regarding the accused’s intention of disclosing the information in good faith and for the purposes of dissuading the prohibited conduct, or for the purposes of detecting, deterring, or disrupting money laundering, the financing of terrorism, proliferation financing, or other serious crimes is particularly within the defendant’s knowledge, and would be significantly more difficult and costly for the prosecution to disprove than for the defendant to establish the matter. It follows then that evidence to this effect could be readily and more easily provided by the accused. 

1.58 The Attorney-General indicated that an addendum to the Explanatory Memorandum containing this justification will be tabled in the Parliament as soon as practicable. 

Strict Liability Offences 

1.59 Strict liability should apply only where necessary, with appropriate constraints. Subsection 172C(3) would impose strict liability for failure to comply with examination requirements under subsection 172A(2). 

1.60 The penalty is limited to three months imprisonment, aligning with criteria for strict liability offences. This supports AUSTRAC’s enforcement capabilities without imposing unnecessary regulatory burdens. 

1.61 Similar strict liability provisions exist for other regulators, like ASIC, reflecting consistency and necessity for effective regulatory enforcement. Consideration by the Parliamentary Joint Committee on Human Rights 

1.62 The PJCHR identified several issues of concern, regarding:  the abrogation of privilege against self-incrimination, and the right to a fair trial;  significant civil penalties; and  sharing AUSTRAC information internationally. 

The abrogation of privilege against self-incrimination and the right to a fair trial 

1.63 The PJCHR noted that the bill would expand the existing section 169 of the Act, which abrogates the privilege against self-incrimination for the purposes of giving information or producing a document under existing information gathering powers. 

1.64 The committee expressed concern that these measures may engage and limit the right to a fair trial and related criminal process rights, and recommended: ...that consideration be given to the inclusion of a derivative use immunity in proposed section 172K. [and] ...that the statement of compatibility be updated to provide information in relation to a derivative use immunity. 

Significant civil penalties 

1.65 The PJCHR noted that the bill’s amendments would introduce numerous civil penalty provisions, and amend existing penalties. It noted that the maximum civil penalty under the Act is 20 000 penalty units (or $6.26 million). It considered that there may be a risk these penalties could be regarded as criminal, under international human rights law and, that if this were the case, ...they must be shown to be consistent with the criminal process guarantees, including the right to be presumed innocent until proven guilty according to law. The committee notes that as they are characterised as civil penalties under Australian law, those requirements would not be met. 

1.66 The PJCHR concluded: The committee recommends that the statement of compatibility be updated to provide a more fulsome assessment of the compatibility of each civil penalty created (or otherwise amended) by the bill, in particular whether any of those penalties may operate in relation to persons who are not direct participants in the scheme this Act seeks to regulate (for example, proposed section 49B). 

Sharing AUSTRAC information internationally 

1.67 The PJCHR noted that the bill’s provisions relating to the sharing of AUSTRAC information internationally may, in some cases, provide information to a foreign government or entity that could ‘expose a person to a risk of the death penalty or to torture or other cruel treatment’. 

1.68 The PJCHR concluded that: The committee recommends that the statement of compatibility be updated to assess whether and how this measure is compatible with the right to life and freedom from torture and other cruel, inhuman and degrading treatment or punishment, including information as to whether there are guidelines to assist decision-makers in identifying and considering any risks that a person may be exposed to the death penalty or to torture as a result of the sharing of particular information, and if so, how those risks are managed. The committee recommends that, in the event compatibility cannot be assured, that amendments to the bill be considered to address this.

Laundries

The 93 page 'Impacts of money laundering and terrorism financing: Final report' (Australian Institute of Criminology, 2024) by Alicia Schmidt comments 

This report outlines a conceptual model of the social and economic impacts of money laundering and terrorism financing. Drawing on a comprehensive literature review and stakeholder interviews, it identifies possible economic, societal and sectoral impacts. Economic impacts are those that affect the economy at a macro level and include reductions in economic growth and foreign direct investment and the distortion of exchange and interest rates. Societal impacts include changes in crime levels—predicate offences which generate illicit proceeds that are then laundered, crimes financed using laundered funds and crimes attracted to areas where money laundering occurs—and the associated costs to the community. They also include the consequences of terrorism enabled by terrorism financing, including the costs of terrorist attacks and the impact on national reputation. Sectoral impacts include damage to the reputation of the financial sector and other regulated entities, the crowding out of legitimate competitors, artificial increases in prices (eg real estate prices), and lost tax revenue. Importantly, not all impacts are harmful; potential benefits of money laundering include the recovery of proceeds of crime from the enforcement of the anti-money laundering and counter-terrorism financing (AML/CTF) regime, the profitability of certain sectors that facilitate or enable money laundering, and the growth of the AML/CTF industry. Having identified these impacts, this report assesses their significance in the Australian context and sets out a path towards quantifying the impacts identified as both relevant and measurable.

Golden Passports

'Escaping the Exchange of Information: Tax Evasion via Citizenship-by-Investment' by Dominika Langenmayr and Lennard Zyska (CESifo Working Papers, 2021) comments 

 Over the last decade, the OECD and G20 countries launched various initiatives to promote international tax transparency. In the wake of these activities, countries have signed more than 3000 bilateral tax information exchange treaties; more than 100 countries have committed to automatic exchange of tax information. The exchange of tax information between countries has become the main policy instrument to enforce the taxation of capital income across borders. 

Several recent papers show that while tax information exchange decreases offshore tax evasion at the bilateral level, a large share of tax evaders does not repatriate their funds, but instead finds other ways to hide their money (see e.g. Johannesen and Zucman, 2014; Miethe and Menkhoff, 2019). However, previous literature did not identify how tax evaders circumvent tax information exchange. Our paper fills this gap by suggesting that one such strategy is the use of citizenship-by-investment programs. 

Citizenship-by-investment (CBI) programs offer citizenship rights in return for a financial investment in the country or for a donation as low as US$100,000. If a tax evader uses the acquired citizenship to open a bank account in a tax haven, the tax haven will exchange tax information with the country of acquired citizenship, not the true country of (tax) residency. Thus, CBI programs enable tax evaders to escape tax information exchange. 

We first illustrate the interplay between tax information exchange and citizenship- by-investment programs in an analytical model. The model frames tax evasion as a rational decision. Individuals can evade taxes by transferring money to a tax haven. The risk that the home country detects this tax evasion depends on whether the tax haven exchanges tax information with it, and on whether the individual has acquired a foreign citizenship. We model the agreement to exchange tax information as a Nash bargain between the individual’s home country and the tax haven. We show that high- income individuals evade taxes and the richest evaders acquire a new citizenship to lower the detection probability when evading taxes. The existence of CBI programs has two effects on tax evasion: First, these programs decrease individual detection probabilities (and thus, from the high-tax country’s point of view, expected fines). Second, they make it less likely that countries exchange tax information, as part of the potential revenue gain from information exchange is siphoned off by the CBI country. 

We then provide indirect empirical evidence that CBI programs are indeed (mis)used to circumvent tax information exchange. To do so, we use bilateral, quarterly information on cross-border bank deposits provided by the Bank for International Settlements (BIS). Consider the example of a German who acquires Dominican citizenship for US$100,000 and uses her new passport to open a bank account in Switzerland. With the new citizenship, her deposits in Switzerland will appear in the BIS data as a deposit from Dominica (instead of Germany), even though she continues to live in Germany and is still tax resident in Germany. We thus expect that the deposits in tax havens originating from countries offering CBI programs increase after such programs have been installed. Using regressions with country-pair fixed effects and an event study approach, we find that tax haven deposits from CBI countries increase by about half after the introduction of CBI programs, compared to deposits from countries not offering CBI. Our results are robust to using a large number of country-level control variables and different samples. We find no effect for residency-by-investment programs, potentially because they are less suited to circumvent tax information exchange. 

Our paper adds to two strands of literature. First, it contributes to the literature on individual tax evasion (see Sandmo, 2005; Slemrod, 2007; Alm, 2012, for reviews). Recently, several papers in this literature have evaluated the success of tax information exchange as an instrument to fight offshore tax evasion. TIEAs (Johannesen and Zucman, 2014; Hanlon et al., 2015; Heckemeyer and Hemmerich, 2020; Ahrens and Bothner, 2020), the EU Savings Directive (Johannesen, 2014; Caruana-Galizia and Caruana-Galizia, 2016), the U.S. Foreign Account Tax Compliance Act (FATCA, De Simone et al., 2020), and the OECD’s Common Reporting Standard (Miethe and Menkhoff, 2019; Casi et al., 2020) all decreased offshore tax evasion at the bilateral level. However, several of these studies have found that many tax evaders did not repatriate their funds, but relocated the money to other, non-compliant countries (Johannesen, 2014; Johannesen and Zucman, 2014; Casi et al., 2020) or invested in alternative assets not subject to reporting, such as residential real estate and artwork (De Simone et al., 2020). Overall, there is no evidence that information exchange led to a transition to legality. Our paper contributes to this literature by pointing out a novel way in which tax evaders can circumvent information exchange. 

Closest to our paper, Ahrens et al. (2021) analyze whether tax evaders engage in regulatory arbitrage to circumvent tax information exchange from a political science perspective. They study citizenship- and residency-by-investment programs as well as anonymous trusts and shell corporations as options for such regulatory arbitrage. In contrast to our paper, they find little evidence that CBI programs are used to circumvent tax information exchange. The fundamental difference in the results can be explained by several factors: First, Ahrens et al. (2021) look at over forty citizenship-and residency-by-investment programs together, while we focus on a subset of “high- risk” CBI programs defined by the OECD. Second, they use a smaller sample, focussing on investments in twelve major financial markets, while we focus on investments in tax havens. Thus, while the overall topic is similar, our paper is more narrowly focused on the use of CBI for offshore tax evasion and reaches rather different conclusions. 

As a second contribution, our paper also adds to the small literature studying the economic implications of CBI programs. Xu et al. (2015) discusses recent developments and implications of such programs for the real economy, i.e. risks to macroeconomic and financial stability for the mostly small countries offering such programs. Konrad and Rees (2020) focus on CBI programs in the European Union. Because of free movement in the EU, these programs automatically give a right to settle in any country within the EU. The authors argue that individual EU countries sell their citizenship at prices lower than what would be optimal from an EU perspective, as they do not consider the effect of their CBI programs on other European countries. Parker (2017) points out that such a conflict is inherent in the idea of ‘post-national’ citizenship championed by the EU. Our analytical model argues that the proliferation of tax information exchange made it attractive to offer CBI for tax reasons, and points out that individuals acquiring citizenship do not necessarily relocate to their new country. This idea complements the literature above, which mostly focused on the implications of people relocating after acquiring the new citizenship. 

Section 2 provides some background information on tax information exchange and citizenship-by-investment programs, and Section 3 illustrates their interplay in a simple model. Section 4 presents the empirical setting, including some descriptive evidence. Section 5 discusses the results, and Section 6 concludes.

A study of Vanuatu is noted here. 

The new OCCRP 'Passports of the Caribbean' report notes that Dominica, with a population of around 70,000, appears to have sold upwards of 7,700 passports since 2007.

Intel Review

The 2024 Independent Intelligence Review dealing with Australia’s National Intelligence Community (NIC) will prepare findings and recommendations on the NIC and related issues, for completion in the first half of 2024. 

The focus will be on the ten agencies of the NIC:

• Australian Criminal Intelligence Commission, 
• Australian Federal Police, 
• Australian Geospatial-Intelligence Organisation, 
• Australian Secret Intelligence Service, 
• Australian Security Intelligence Organisation, 
• Australian Signals Directorate, 
• Australian Transaction Reports and Analysis Centre, 
• Defence Intelligence Organisation, 
• Department of Home Affairs and 
• the Office of National Intelligence). 

The Review will consider:

• The impact of the implementation of the recommendations of the 2017 Independent Intelligence Review and the 2019 Comprehensive Review, including the benefits of the establishment of the Office of National Intelligence, the expansion to create the NIC, and the effectiveness and outcomes of the Joint Capability Fund; 
• How effectively the NIC serves, and is positioned to serve, national interests and the needs of Government, including in response to the recommendations of recent reviews relevant to defence and security, and the evolving security environment; 
• The status, risks and potential mitigations of major investments in the NIC since 2017; 
• Topics identified by the 2019 Comprehensive Review for consideration by future reviews, and whether further legislative changes are needed; 
• Whether workforce decisions by the NIC at both the agency and community levels reflect a sufficiently strategic response to current and future workforce challenges, anticipate future capabilities of other states so we are best positioned to counter threats, are in line with the Australian Public Service commitments to diversity and inclusion and offer options if recruitment targets cannot be met; 
• NIC preparedness in the event of regional crisis and conflict; 
• Whether the use of the classification system by the NIC achieves the right balance between protecting sensitive information and providing decision making advantages to policy makers and operators; and 
• Whether current oversight and evaluation mechanisms are effective and consistent across the NIC. 

The Department of the Prime Minister and Cabinet will establish a secretariat for the review and provide logistics support. The review team is to consult widely, including seeking submissions publicly.

The 2017 Review report stated

This Report sets out the conclusions we have drawn from an extensive, wide-ranging study of the Australian intelligence community conducted from November 2016 to June 2017. We engaged intensively with the leaders of Australia’s intelligence agencies. We also met with Ministers and Parliamentarians, with present and former members of the Australian and allied intelligence communities, and with senior officers of the operational and policy agencies that represent the primary customers of the intelligence agencies. Our Report draws heavily on the insights we derived from these meetings (which numbered over 150) and from our detailed analysis of the 34 Submissions we received from agencies and departments as well as the wider community. 

 

It is clear to us that the Australian intelligence agencies are highly capable and staffed by skilled officers of great integrity. They have performed strongly since the most recent review of the intelligence community in 2011, particularly in the areas of counter-terrorism, support to military operations and assistance in addressing the issue of people smuggling. Our agencies have a strong positive culture of accountability under law and to responsible Ministers. Individually, the agencies feature world-class tradecraft and very high levels of professionalism. They are held in high regard by their international partner agencies. 

 

A central theme of this Report is to provide a pathway to take those areas of individual agency excellence to an even higher level of collective performance through strengthening integration across Australia’s national intelligence enterprise. The aim is to turn highly capable agencies into a world-class intelligence community. 

 

In our view, progress towards this objective will require changes to the co-ordinating structures of our intelligence community, new funding mechanisms to address capability gaps, the streamlining of some current legislative arrangements, and measures to further strengthen the state of trust between the intelligence agencies and the Australian community of which they are part. This Report addresses each of these priorities. Our national intelligence community is facing imposing challenges that, in our view, will intensify over the coming decade. Some of these challenges derive from new forms of rivalry and competition among states, the threat posed by extremism with global reach, particularly Islamist terrorism, and the implications of accelerating technological change for Australia’s national security outlook. Other challenges reflect the changing nature of twenty-first century intelligence, and especially the new frontiers of data-rich intelligence and the risks to comparative technical advantages. 

 

These forces of change are challenging the structures in place for co-ordinating the activities of our intelligence agencies. Those structures were established some decades ago on the basis of principles set out in the landmark Royal Commissions into the intelligence agencies conducted by Mr Justice Hope in the mid to late 1970s and early 1980s. The clear dividing lines he highlighted – between foreign and security intelligence, intelligence and law enforcement, intelligence collection and assessment, and intelligence assessment and policy formulation – continue to provide the foundations of Australia’s intelligence community. We assess those delineations have broad enduring relevance. They capture, in particular, the essential requirements for a relationship of trust between government and the wider community in Australia about the legitimate uses of intelligence, and therefore the legal framework within which the agencies need to operate. At the same time, Australia’s future security environment will demand greater levels of collaboration across traditional dividing lines and more cross-over points. 

 

The intelligence co-ordination arrangements recommended by Mr Justice Hope have undergone only minor change over the past 40 years. In our view, they need to reflect the contemporary and future challenges that our intelligence agencies face as a result of transforming geopolitical, economic, societal and technological changes. 

 

We consider there are important conclusions Australia can draw from the recent experiences of our most important intelligence partners. All our Five Eyes partners have a single point of co-ordination for their intelligence communities. Australia’s co-ordination arrangements are not as clear. 

 

The United States and the United Kingdom, in particular, have taken practical steps to build synergies among their agencies in response to the demands of twenty-first century intelligence. Australia is doing the same in particular areas but it needs to do much more. It is notable that both the United States and the United Kingdom took steps after the attacks of 11 September 2001 and 7 July 2005 respectively to strengthen the co-ordination and integration of their intelligence communities. They have continued to do so in the intervening period and the result in both countries is strong, strategic-level management of intelligence as a national enterprise built on the specific attributes of individual agencies. This has enhanced both effectiveness and efficiency, even against the tragic backdrop of terrorist attacks over recent years. 

 

We strongly recommend that Australia learn from these experiences of our Five Eyes partners. We have not recommended that Australia simply replicate the measures our allies have taken, but rather we have sought to apply the principles to the Australian context in a way that is consistent with the Australian system of Ministerial responsibility and the statutory powers of agencies. 

 

With an annual budget approaching $2 billion and about 7,000 staff spread across 10 agencies, it is clear to us that on size alone the Australian Government’s intelligence activities supporting national security are now a major enterprise. They would benefit from being managed as such. Our major recommendation is that an Office of National Intelligence (ONI) be established in the Prime Minister’s portfolio. This Office would be headed by a Director-General who would be the Prime Minister’s principal adviser on matters relating to the national intelligence community. The Director-General would not be empowered to direct the specific activities of agencies, but should be able to direct the co-ordination of the national intelligence community to ensure there are appropriately integrated strategies across the suite of agency capabilities. 

 

ONI would be responsible for enterprise-level management of the national intelligence community, leading the development and implementation of national intelligence priorities, undertaking systematic and rigorous evaluation of the performance of the agencies, implementing strategic workforce planning and facilitating joint capability planning including for the development of an environment for enhanced data sharing and collaborative analysis. ONI would subsume the Office of National Assessments and undertake the intelligence assessment function in an expanded way that includes greater contestability and more extensive engagement with external expertise. 

 

The theme of establishing strong, enterprise-level management of the national intelligence community to complement the strengths of individual agencies runs through our recommendations. It is particularly evident in our recommendations for new funding arrangements. A key recommendation we make in this context is to establish a Joint Capability Fund. This Fund would support technological innovation and the development of shared capabilities designed to be used across the different agencies of the national intelligence community. A further recommendation is to complement the Joint Capability Fund with a comprehensive, forward looking Intelligence Capability Investment Plan. This Plan would enable government to make better-informed decisions on the inevitable capability trade-offs that will be needed in future years, and to provide agencies with a greater degree of certainty about their future budgetary outlook to assist forward planning. 

 

The theme of stronger integration also informs our recommendations on changes to the legislative framework in which the agencies operate, many of which are designed to create more cross-over points between agencies and to allow the full suite of Australia’s intelligence capabilities to be used more readily in support of national intelligence priorities. 

 

In addition to the establishment of ONI, we also recommend a significant change to the structure of the intelligence community in regard to the Australian Signals Directorate (ASD). This is presently within the Department of Defence, with the Director reporting to the Minister for Defence through a Deputy Secretary and the Secretary of the Department. Given its increased national responsibilities especially in relation to cyber security and also mindful of the critical operational capabilities it provides to the Australian Defence Force (ADF), we recommend that ASD become a statutory authority within the Defence portfolio. We also recommend that ASD’s priority role of supporting ADF capabilities be clearly reaffirmed and strengthened in new legislation. We further recommend that ASD’s legislative mandate be amended to explicitly recognise its national responsibilities for cyber security, including the provision of advice to the private sector, and that it take formal responsibility for the Australian Cyber Security Centre. 

 

Our Report addresses current arrangements for oversight and accountability of the intelligence community. We consider that those arrangements are appropriately rigorous. They constitute a well-structured set of arrangements that provide independent assurance about the legality and propriety of intelligence operations and the management of resources. But the demands in this area are growing due to the increase in the size of the national intelligence community and the greater powers it has been given to address contemporary threats. Accordingly, we recommend that the remit of both the Inspector-General of Intelligence and Security (IGIS) and the Parliamentary Joint Committee on Intelligence and Security be expanded to cover the ten agencies which we consider now properly constitute the national intelligence community. We also recommend a significant strengthening of the Office of the IGIS through a substantial increase to its authorised staffing level. We further recommend an expanded set of functions for the Parliamentary Joint Committee. 

 

In this Report, we have sought to identify likely strategic trends over the coming decade, to identify the issues they pose for our intelligence agencies and to make recommendations designed to address them. Those trends and issues will continue to evolve over coming years, and responses to them need to be kept under review. 

 

We consider that Australia is well served by its intelligence agencies. But the challenges they face are significant and over coming years their capabilities, as well as the effectiveness of our intelligence community as a whole, will be significantly tested. The changes we recommend in this Report are designed to ensure that Australia is as well placed as it possibly can be to meet those challenges.