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Financial Crimes

Financial crimes continue to increase in diversity, scale and the level of overall harm they cause to Australia. The modern globalised economy and new technologies create new opportunities for organised crime to exploit vulnerabilities for profit.

Nature of Financial Crimes

Financial crimes can include a wide range of activities from fraud through to active manipulation of the stock market or laundering of the proceeds of crime.

Financial crimes are attractive propositions for serious and organised crime on two fronts. Firstly, serious and organised crime always looks for vulnerabilities to exploit and fraud and the manipulation of markets provide attractive opportunities. Secondly, just as legitimate business requires access to the financial system, so too does organised crime, albeit to launder illicit funds and to facilitate or disguise criminal activity.

The Australian Crime Commission conservatively estimates that serious organised crime costs Australia between $10–15 billion every year. This cost comprises loss of business and taxation revenues, expenditure on law enforcement and regulatory efforts, and social and community impacts of crime. Raising public awareness of crime issues is an important step in minimising the impact serious and organised crime can have on the community.

Extent

Because of the breadth of offences that can be considered to fall under the umbrella of ‘financial crime’ and the ability to intermingle licit and illicit financial transactions, it is difficult to fully judge the extent of these activities.

However, it is generally accepted that opportunities for financial crimes have increased with financial and market diversification, greater levels of economic activity, and a vast array of financial products and services with many delivery channels and technological developments.

The cost of fraud is significant and there are varying estimates on the total financial impact. The total value of fraud reported in KPMG’s 2010 survey of a broad cross-section of public and private sector organisations in Australia and New Zealand was $345.4 million, with an average value for each organisation of $3 million. The survey found that crime committed by organised crime groups cost businesses $57 million.1

According to the Australian Institute of Criminology (AIC), fraud is estimated to have cost the Australian community $8.5 billion in 2005. This is about one-quarter of the total cost of crime to the Australian economy but it may be higher when taking into account investigation and prosecution costs.2

Identity fraud is considered to be one of the primary fraud components, with around $1 billion of crime costs every year attributed to identity fraud.3 A 2007 survey conducted by the Australian Bureau of Statistics also revealed that identity fraud accounted for almost 500,000 victims over the 12 months prior to the survey.4

While private sector firms are often reluctant to reveal exact figures on fraud for commercial reasons, a number of Australian Government agencies report on identity theft and their response measures. Centrelink, for example, reported $19.7 million was recovered in 2007–08 as a result of identity fraud investigations which led to prosecutions.5

A major financial crime concern in Australia is money laundering.

Based on reported proceeds of crime, the AIC estimated that in 2004 between $2.8 and $6.3 billion of crime proceeds were laundered annually.6 The full cost of money laundering to the Australian community is likely to be much higher when lost taxation revenues and the full scope of unreported proceeds of crime is taken into account.

Impact

The consequences of financial crime have a far reaching impact on society.

At a macro level, some countries have entire industries, such as construction and hotels, that are financed because of the short-term interests of money launderers, rather than actual demand.

When these industries no longer suit the needs of money launderers, they abandon them, causing a collapse of these sectors and immense damage to economies.

International Monetary Fund experts have also singled out concerns for privatisation of previously Government-held businesses, saying it is not inconceivable that organised crime could raise the finance to purchase such assets, as occurred following the collapse of the Soviet Union.7

Single businesses are not immune either.

For instance, the private sector is vulnerable to what is known as the ‘crowding out effect’. This is where front companies which derive their main source of income from criminality create unfair competition with legitimate businesses.

These legitimate businesses are eventually forced to close up shop, which also results in unemployment.

In the United States, analysts from the Department of State cite examples where organised crime has used pizza parlors to launder money from heroin trafficking. These front companies have access to substantial illicit funds, and this allows them to subsidise front company products and services at levels well below market rates. It also gives them a competitive advantage over legitimate firms who need to draw capital from legitimate sources.8

Individual citizens also suffer the effects of serious financial crime. Some market frauds have taken in thousands of people, many of whom lose their savings, security and may have their emotional well-being, physical health and relationships affected.

Among other impacts are:

  • increasingly volatile exchange rates and interest rates due to unanticipated transfers of illicit funds
  • damage to individual sectors’ and businesses’ reputations
  • damage to the country’s financial reputation
  • loss of consumer confidence in businesses
  • negative effect on economic growth by diverting resources to less productive activities
  • reduced ability to attract foreign investment
  • increases in the costs of security and regulation.

How Financial Criminals Work

There is no one model for how financial criminals work since their activities cross a broad spectrum of society and can range from the crude to the highly sophisticated.

Criminal tactics do not need to be especially sophisticated or new to succeed. When it comes to fraud not all criminals need to use the latest technology. They may use techniques as simple as looking through rubbish for bank and credit card statements, using pre-approved credit offers and tax information, or even obtaining old gas and electricity bills that can contain personal information which can be used to do something like applying for a bank loan.

An example of more complex fraud is a ‘ponzi’ or pyramid investment scheme where criminals typically offer victims a very high rate of return and then either take the payment and walk away or make payments that cease within a short period. The money they do pay out in this short period usually comes from later investors. These initial repayments to earlier investors gives the impression that the scheme is successful.

Another type of financial crime involves manipulating the stock market. One example is by ‘wash trading’ where there is no change in the beneficial ownership of the securities and the buyer is either also the seller or is associated with the seller. A pre-arranged trade involves two parties trading on the basis that the transaction will be reversed later, or under an arrangement that removes the risk of ownership from the buyer. ‘Pooling or churning’ can involve wash sales or pre-arranged trades executed in order to give an impression of active trading and therefore investor interest in the stock.9

Money laundering is undertaken in a number of ways. Criminals may buy and re-sell real estate or luxury items such as cars or jewellery. They may pass money through a complex and intertwined web of legitimate businesses and ‘shell’ companies. They may use businesses that send money overseas and operate in a similar way to conventional banking systems without being subject to the same level of regulation. They may use a number of people to carry out small transactions or cash smuggling to avoid alerting authorities. They may even gamble.

Links to Serious and Organised Crime

Financial crimes incorporate, run parallel to or fund a number of criminal activities. Among them are:

  • tax evasion
  • embezzlement
  • a full range of frauds including securities fraud, bank fraud, identity fraud
  • insider trading
  • illicit drug trafficking
  • vehicle re-birthing
  • organised theft
  • cyber crime.

Government Response

The Australian Government launched the Organised Crime Strategic Framework in November 2009 to ensure Commonwealth agencies are working together to prevent, disrupt, investigate and prosecute organised crime. As part of the Framework, the ACC has produced two biennial classified Organised Crime Threat Assessments (OCTAs) which identify the highest organised crime threats to the Australian community. The OCTA informed the development of the Government’s inaugural Commonwealth Organised Crime Response Plan (OCRP) in 2010 to help prioritise Commonwealth agencies resources against these threats.

Recognising that organised crime is a national issue that requires a nationally coordinated response, the Commonwealth and the States and Territories agreed to the National OCRP 2010-13 in 2010 to strengthen multi-jurisdictional approaches, coordination, information sharing and joint activities to combat the national threat of serious and organised crime. Preventative partnerships with industry and the community are part of the strategies to respond to organised crime. These organised crime fact sheets describe the breadth and impact of organised crime activities and provide an insight into how industry and the community can help combat organised crime.

Further information on the Organised Crime Strategic Framework and the OCRP can be found here.

This fact sheet was developed in collaboration with Attorney-General's Department , Australian Customs and Border Protection Service, Australian Taxation Office and Australian Transaction Reports and Analysis Centre.

Endnotes

  1. KPMG 2010, Fraud and Misconduct Survey.
  2. Rollings, K 2008, ‘Counting the cost of crime in Australia: a 2005 update’, Australian Institute of Criminology Research and Public Policy Series No. 91.
  3. Cuganesan, S & Lacey, D 2003, Identity Fraud in Australia: an evaluation of its nature, cost and extent, a report by Standards Australia International Ltd (SIRCA), commissioned by AUSTRAC.
  4. Australian Bureau of Statistics 2008, Personal Fraud Survey, 27 June, Australia.
  5. Centrelink 2008, Centrelink Annual Report 2007-08, p. 3, Centrelink, Canberra.
  6. Stamp, J & Walker, J 2007 ‘Money Laundering in Australia, 2004’ Trends and Issues in Crime and Criminal Justice, Australian Institute of Criminology, No.342, August 2007.
  7. Quirk, PJ 1996 ‘Macroeconomic Implications of Money Laundering’, IMF Working Papers 96/66, International Monetary Fund, as cited in Money Laundering and International Financial Crime by George Ferrugia FIAU Malta
    http://www.globalcitizen.net/Data/Pages/1229/Papers/20090331121919533.pdf
  8. Bureau of International Narcotics and Law Enforcement Affairs 2001, The consequences of money laundering and financial crime, United States Department of State.
  9. Australian Securities Exchange.