By Chris Douglas
Chris Douglas is the owner of Malkara Consulting, a consultancy firm which provides training and advice in Australia and internationally on crime, money laundering, terrorist financing, corruption and bribery and financial investigations[i].
A fundamental responsibility of any police force in a democracy is upholding human rights. While other groups have a role, police are the primary defenders.
If you suffer violence, the police are responsible for finding and bringing offenders to justice. If your property is stolen you should expect the police to take action to recover the property and return it. When we die, it is the police who are charged with ensuring that our right to life has not been taken away unlawfully. They have a cradle to the grave responsibility to protect victims of crime.
But who defends the victims of crime when police target the victims instead of the real offenders? That question was answered in a recent case involving Ganesh Kalimuthu and his wife Macquelene Dass[ii].
Kalimuthu and his wife live in Malaysia where they operate a successful scrap metal business. In 2015, they considered migrating to Perth WA where other family members lived. Planning to apply for a business migration visa, and in in preparation for a new life, they used a local Malaysian money changer to transfer funds from their business to Australia. The exchange involved a series of transfers to bank accounts they both held in Australia, opened by them before any funds were moved.
Unfortunately for Kalimuthu and Dass, they fell victims to an international money laundering syndicate operating between Australia and Malaysia. The syndicate used a technique known as “cuckoo smurfing” to intercept lawful funds sent by Kalimuthu and his wife, substituting money suspected of originating from crime into their accounts in Australia.
The lawful money they handed over to be sent here was kept and given to organised crime operating outside Australia.
Cuckoo smurfing is not a new money laundering technique. It was first reported in 2008 by AUSTRAC, Australia’s Transaction Reports and Analysis Centre[iii] …but the technique existed in Australia long before then. Cuckoo smurfing is not a legal term, but description of a unique money laundering method[iv].
Cuckoo Smurfing is not to be confused with a money mule scheme. With a money mule scheme, account holders receive funds, they are not expecting, into their account, which they transfer to another account at the request of the people who asked them to receive the funds initially. For their assistance, the account holders receive a commission. And as the funds are derived from a scam, the account holders are involved in money laundering. The account holders in cuckoo smurfing are expecting funds, which remain in their account after transfer and the account holders receive no reward for their involvement.
Banks became suspicious when the funds were deposited not in Perth, where the accounts were, but in Sydney and Melbourne in amounts under the mandatory cash reporting threshold of $10,000. This small-deposit technique is known as structuring[v] and usually involves many people making the deposits – they are known as smurfs, which gives the overall scheme its colloquial name[vi]. (Not all cuckoo smurfing consists of small, structured deposits: many transactions involve significant deposits over the threshold amount).
Proceeds of crime
Once reported to authorities the AFP responded to the money laundering activity by successfully applying for a restraining order under Section 19 of the Proceeds of Crime Act 2002 (“POC Act”) for the accounts operated by Kalimuthu and his wife. The target and objective of the AFP investigation was forfeiture of the $3 million plus held in the combined accounts by Kalimuthu and his wife in Australia. To obtain the restraining orders, the AFP only needed “reasonable grounds to suspect” that the money was an instrument of crime. The AFP’s argument supporting that claim was the structured deposit of the funds into the accounts.
All Kalimuthu and his wife wanted was a better life for themselves and family, and to invest their wealth in Australia. Their dream of immigrating to Australia was crushed by the AFP. It would not be hard for any person to imagine the shock and strain the AFP action placed on the pair.
Since the action against Kalimuthu and Dass started, it is now understood that they are not alone. The AFP has begun similar action in the courts against at least a dozen other victims of cuckoo smurfing in Australia, who have been caught up in similar circumstances.
When AUSTRAC first reported cuckoo smurfing, it identified one of the essential actors in a typical scheme as being an innocent customer seeking to transfer funds from overseas into Australia. And the AFP investigation strategy in response to the threat of cuckoo smurfing was consistent with AUSTRAC’s view. The pursuit by the AFP of the cuckoo smurfing syndicates had resulted in significant drug seizures as evidenced by Operation Inca[vii].
But in 2014 the AFP changed its strategy. It decided to pursue the innocent victims. For reasons as yet unknown.
In the Kalimuthu case, a review of bank records indicated a pattern of deposits made around Sydney and Melbourne while Kalimuthu and his wife were in Malaysia. The deposits coincided with the funds given by Kalimuthu to the Malaysian money exchanger.
There was no evidence tendered by the AFP that Kalimuthu or his wife were involved in crime. It was clear from examining the bank statements that the funds were deposited by an organised group working to a strategy to quickly move hundreds of thousands of dollars through the accounts. The evidence, if acted upon quickly by the AFP, could have identified those responsible for the money laundering and potentially linked them to the proceeds of the offending or the intended purpose of the matching sum of money held offshore. In most similar cases, the funds are used to pay for importing narcotics into the overseas country.
To be able to deposit into the accounts of Mr Kalimuthu and his wife, their personal financial information had been obtained without their consent and communicated and used by those involved in laundering money. Dealing in identification information to commit an offence[viii] and dishonestly obtaining or dealing in personal financial information,[ix] are indictable offences under Commonwealth criminal law.
If the victims had been large Australian banks, given the total sum of money involved, there is no doubt the AFP would have jumped at the chance to investigate the real perpetrators involved in the crime. It is almost certain that the AFP would not have initiated forfeiture action against a bank if the bank was the victim – why then did the AFP take civil forfeiture action against Kalimuthu and his wife (and apparently against many other innocent Australians caught in similar circumstances)?
The other human rights protectors
On 19 April 2017, in the Supreme Court of WA, the Justice Jeremy Allanson, ordered the release of the funds held under restraint following a successful exclusion order filed by lawyers representing Kalimuthu and his wife. Allanson J held, for many reasons, that the money in their respective accounts no longer amounted to an instrument of crime
and was therefore not liable for forfeiture.
Had the AFP been successful, it would have opened the flood gates for the police to pursue victims of crime in other cases. Because sadly, since the identification of cuckoo smurfing in Australia, it is now known that there are thousands of victims of the technique. A loss in the court would have resulted in a new approach to how we treat victims of crime in Australia…punishing them instead of pursuing the real criminals because it is too hard. The skill and tenacity of the legal team involved meant the over-zealous, poorly conceived strategy of the AFP was stopped.
The other important element in the protection of human rights, the legal profession and the courts, stood firm. The legal team clearly understood the importance of this case and the wider implications for all people unknowingly and innocently caught in a sophisticated organised crime scheme. Those powerless to defend themselves had primarily relied on the AFP to protect their rights, not take them away, but justice eventually prevailed and the rights of the victims were defended and recognised by the court.
In my opinion, by targeting Kalimuthu and Dass, the AFP has gone after what it perceives as being low hanging fruit, using the very powerful civil forfeiture provisions in the POC Act. That act was never intended to be used against innocent victims of crime.
The power of that law was intended to be directed against organised crime – the Mr Bigs as politicians said when introducing the law to parliaments. The AFP’s identifying the cuckoo smurfing technique provided a unique opportunity for authorities to follow the money back to the importers of narcotics into Australia.
In the case of Kalimuthu and Dass, the AFP has blown that chance. Organised crime is once again alerted to police methodology and has probably already changed their tactics, methods of communication and counter-surveillance activities.
And the actions of the AFP, could have wider ramifications than just impacting on migrants and family members sending money home to Australia. Their strategy could result in the restraint of funds sent to Australia to pay for university fees by families of international students or for goods or services provided by an Australian company. Is the AFP intending to restrain and seek the forfeiture of funds in accounts held by an Australian university or Australian business that have been structured and suspected of being an instrument of crime? Imagine the damage that action would cause to Australia’s reputation as a provider of education services and as a reliable exporter…and the impact it will have on Australia’s business migration program?
By going after innocent victims of crime, the AFP has not only lost tactical opportunities to fight organised crime, it has breached the faith and trust the Australia Government placed in it, when it granted that agency the power to pursue civil forfeiture matters on behalf of the Commonwealth.
When that happened, independent review and action by the Commonwealth Office of the Director of Public Prosecutions was removed. If the AFP continues to pursue victims of cuckoo smurfing money laundering instead of investigating the real criminals, then the government needs to seriously review the role of the AFP in undertaking civil forfeiture action in Australia.
The AFP has lodged an appeal against the judgement. There are a number of other similar matters on hold around Australia while the AFP awaits the outcome of the appeal in the Kalimuthu matter.
ENDS
NOTE: CLA says the position of Australian banks in these situations is bipolar, to say the least – to whom do they owe prime loyalty, their customer, or the Crown? The banks capture financial intelligence from customers. They report these cuckoo smurfing matters to AUSTRAC and do nothing to protect their customers because, if they do, they are effectively tipping them off which is an offence under Australian AML/CTF laws. Doctors are not required to report to the authorities patients who take illegal drugs: should banks be required to report their customers for (possibly) illegal financial transactions?
* Chris Douglas had over 31 years experience with the AFP and as Director Operations, Perth, managed money laundering investigations. He is the holder of an Australian Police Medal. With the AFP he investigated people smuggling, human trafficking, organised crime and significant fraud upon the Australian Government. Appearing for Kalimuthu and Dass in this case were Perth lawyers Putt Legal and Edward Greaves, Barrister.
[i] Malkara is an Australian Aboriginal word meaning “shield”.
[ii] See Commissioner of the Australian Federal Police v Kalimuthu [No 3] [2017] WASC 108. [on-line]. Available http://egreaves.com.au/wp/wp-content/uploads/2017/04/Commissioner-AFP-v-Ganesh-Kalimuthu-Anor-2017-WASC-108.pdf (2017, April 22).
[iii] AUSTRAC (2008. Typologies and Case Studies Report 2008. [on-line]. Available http://www.austrac.gov.au/typologies-and-case-studies-report-2008 (2017, April 22).
[iv] For a detailed explanation refer to http://egreaves.com.au/cuckoo-smurfing/
[v] Conducting a cash transaction (usually a deposit or purchase of an instrument) for the sole or dominant purpose of preventing a Threshold Report from being made, is an offence against Section 142 of the Anti-Money Laundering & Counter Terrorism Financing Act 2006.
[vi] A US-derived term which refers to the fictional small blue humanoids with a gnome like appearance that live in mushroom-shaped houses. The Chinese refer to them as ants and in other jurisdictions as money mules.
[vii] Rout. M. (2008). The Australian. Innocent bank clients used to launder drug cash via ‘cuckoo smurfing’. [on-line]. Available http://www.theaustralian.com.au/news/nation/innocent-clients-launder-drug-cash/news-story/4a1300b3bd500140b1116ff72277013e (2017, April 22).
[viii] Section 372.1 Criminal Code Act (Cth).
[ix] Section 480.4 Criminal Code Act (Cth).