How You Investors Could Turn Dirty Money into Clean Profit

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The ongoing fallout from the Westpac scandal has been fascinating. I’ve seen it in the headlines of most major outlets every day for the past week.

Deservedly so, might I add.

At the end of the day, Westpac should have and could have done more. Now all that matters is how much it will end up costing them in the end.

That, is a matter for AUSTRAC and the courts though. Instead, what I want to talk about is the government.

See, in the wake of this crisis both the Liberals and Labor have condemned Westpac. Who could pass up such a ripe opportunity for point scoring?

Calling out misdeeds is what politicians do best, after all. Except when it comes to their own…

Here is what the PM had to say about Brian Hartzer:

There has to be some understanding of accountability for when these things happen.

I agree with the sentiment, but it’s a bit rich coming from ScoMo. Especially when the current government is committed to furthering a 13-year-long charade.

If you’ve been following the Westpac story, then you’ll know it all rests on AML/CTF laws. That is, anti-money laundering and counter-terrorism financing for anyone curious. Laws that all fall under the broader AML/CTF act of 2006.

The whole point of this act was to provide more oversight to the financial services industry. To keep our economy as free from dirty money as possible.

However, what has been long overlooked is the fact that this act was meant to come in two tranches. Yet to this day, 13 years after the first tranche was ratified, the second set of laws are nowhere to be seen.

And that, is because each and every government since 2006 has done exactly what Westpac did.

They’ve ignored the problem.

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Kicking the can down a dangerous road

Tranche 2 of the AML/CTF act is all about regulating dirty money outside of finance. Providing rules and oversight for other industries impacted by criminal proceeds.

See banks aren’t the only way to launder money. Any sector with liquid cash flow will do.

Like property for instance…

If you walk up to a real estate agent with a suitcase full of cash, you can buy a property and no one will bat an eye. Everyone might think it’s suspicious, but no one is required to say anything.

Hell, AUSTRAC knows money laundering in our housing market is rife. They’ve got an entire fact sheet going over all the different ways it happens. Here’s just a few examples for you:

Method 3 – Manipulation of property values

Method 5 – Rental income to legitimize illicit funds

Method 8 – Use of front companies, shell companies, trust and company structures

AUSTRAC is well aware of the criminal fingerprints in our broader economy.

We’re not talking about small-time crooks here either. In 2015–16 they unearthed $1 billion worth of suspicious property transactions. And that’s just the incidents they know of!

They can’t do a damn thing about it though. All because the government continues to sit on its hands with the tranche 2 laws.

So, why won’t they get on with it?

If the Westpac case is a matter of the ‘highest gravity’ as Turnbull puts it, why have they ignored this avenue for so long?

The answer is, of course, fairly simple. They don’t want to.

No politician is going to commit to Tranche 2 if it means deflating the property market. Even if it is potentially propped up with billions of illicit dollars.

Where is the accountability in that ScoMo?

Governance overhaul

Ultimately, what I think both the Westpac and property cases show is that regulation is hard. It is hard to do it well, and is hard to incorporate properly.

Without it though, businesses open themselves up to even harder repercussions.

All in all, it just winds up seeming like some massive drag. But, it shouldn’t and doesn’t have to be.

The beauty in all of this is that governance is in the midst of a transformation. Much like the broader financial industry itself.

Perhaps you have heard of ‘fintech’ for example. A term used to describe the rise of new, streamlined financial services through data and technology.

But, have you heard of ‘RegTech’?

As you can probably guess, it’s short for regulatory technology. And it is upending the way businesses manage their compliance requirements in new and exciting ways.

Take this insight from Deloitte’s for instance:

In part, this is because Compliance is (or can be) one of the most data- and analytics- rich parts of the enterprise.

Historically, organizations have devoted large investments to capturing and processing the data for which value ends up serving the needs of regulators.

Part of achieving true value creation is the realization that this data can also benefit the business and organization as a whole.

Because of this, RegTech is set to become a US$55.2 billion sector by 2025. Growing by roughly 52.8% each and every year until then.

That’s why it’s a sector that investors should keep their eye on. For instance, just look at how far iSignthis Ltd [ASX:ISX] has come this year.

At the start of the year you could buy shares in the company for 15 cents each. Today they’re worth $1.07 each; granted they are still in a trading halt.

That’s a 613% gain in 11 months. A reflection of the incredible gains to be had in this emerging sector.

So, expect the Westpac saga to drag on. And the property problem too. But don’t dismiss them. It helps prove that RegTech is needed, and soon.

As the saying goes, never let a good crisis go to waste.


Ryan Clarkson-Ledward,
Editor, Money Weekend

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About Ryan Clarkson-Ledward

Ryan Clarkson-Ledward is an Editor at Money Morning.

Ryan holds degrees in both communication and international business. He helps bring Money Morning readers the latest market updates, both locally and abroad. Ryan tackles all the issues investors need to know about that the mainstream media neglects.

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