Australian Watchdog Sounds Alarm on Illicit Financial Networks

The promise of frictionless money has matured into something far more consequential: a liquidity system powerful enough to reorder economies, and elusive enough to escape the laws meant to govern it.

This is an article I recently wrote for The Diplomat with the help of Brett Erickson - who aided immensely in reaching out to and interviewing the AUSTRAC CEO Brendan Thomas. You can find the original link here.

Australia’s top financial-crime official has sounded the alarm on the worrying transformation of his country’s economy. Behind the rhetoric of fintech innovation lies an expanding shadow liquidity network linking Canberra’s financial sector to the grey market capital circuits of Asia and Latin America – a system now testing the limits of regulatory sovereignty itself.

What began as a permissive environment for digital experimentation has quietly evolved into a regional clearinghouse for unregulated money.

“Digital-currency transactions are major financial-crime risks in Australia,” said Brendan Thomas, chief executive of the Australian Transaction Reports and Analysis Centre (AUSTRAC). “We currently have around 450 digital-currency exchanges and a sector characterized by rapid growth and very poor AML [Anti-Money Laundering] compliance.”

Today, Australia has hundreds of registered digital-currency exchanges and crypto-related operators, many of which, regulators say, are at increasing risk of exploitation for money laundering, scams and fraud, offering the potential for large value flows between criminal syndicates, grey market actors, and legitimate institutions. Stablecoins and over-the-counter (OTC) desks offer frictionless dollar exposure to actors evading capital controls and sanctions, while trade-based laundering networks now tie Sydney and Melbourne directly to illicit and semi-licit actors across Latin America, Hong Kong, and Southeast Asia.

This architecture hides in plain sight. Crypto exchanges double as proxy banks for offshore wealth; illicit proceeds from online fraud and cartel operations mingle with speculative inflows; and regulators struggle to distinguish legitimate liquidity from laundered funds. What appears to be fragmented compliance failure is, in fact, the emergence of a parallel financial infrastructure – one eroding the boundary between licit and illicit capital and exposing Australia to systemic risk on a global scale.

The evidence of that erosion is already visible. The same digital corridors that once promised innovation now facilitate narcotics finance, illicit tobacco syndicates, and Southeast Asian scam networks. In the space of a decade, the promise of frictionless money has matured into something far more consequential: a liquidity system powerful enough to reorder economies, and elusive enough to escape the laws meant to govern it.

Drugs, Cigarettes, and Digital Liquidity

Australia is more flush with illicit substances than ever before. A recent study by the Australian Criminal Intelligence Commission (ACIC) found that Australians consumed over 22 tonnes of methamphetamine, cocaine, and MDMA between August 2023 and August 2024, up 34 percent compared to the previous year’s findings. These drugs had an estimated combined street value of US$7.5 billion – making Australia a high-value market for global drug cartels. Meanwhile, Australia’s record high tobacco excise has created an unprecedented surge in demand for underground alternatives, with industry data finding that illegal tobacco sales account for 64 percent of total consumption and 82 percent of total nicotine use.

Mexico’s Sinaloa and Jalisco New Generation (CJNG) cartels have become central suppliers in this ecosystem, embedding themselves through high-volume methamphetamine and cocaine routes that link Latin American production hubs to Australia’s premium end-market.

“Australians pay quite high prices globally for drugs… there is an increasing cocaine problem, especially in Sydney. This indicates significant supply links with cartels in South America, possibly linked through Asian-based money-laundering organizations,” said Thomas.

Indeed, significant overlap exists between cartel operations and entrenched Chinese and Southeast Asian syndicates that dominate the region’s chemical precursors, laundering networks, and scam-derived liquidity – suggesting that cartel drug profits blend with these systems before being injected into Australia’s capital markets at “clean” investments. AUSTRAC has previously noted how laundered funds often intersect with Australia’s high value property market, contributing to unaffordable prices for citizens across the country.

These growing illicit trades have facilitated the rise of an illegitimate financial ecosystem to service them.

“The narcotics and underground tobacco trades trade are the largest drivers of illicit finance in this country,” said Thomas. He also noted that important role digital currencies play in this financial system. “We have a (digital currency) market that isn’t regulated prudentially and therefore exposed to significant risk,” he added.

Thomas also noted that these illicit trades are not distinct criminal issues, but symptomatic of a maturing underground financial system.

“We believe the illicit tobacco and narcotics markets are controlled by the same entities,” he said.

Recent cases already show how digital currencies underpin the same financial circuits that move narcotics and illicit tobacco profits in Australia. In August 2021, Victoria Police seized AU$8.5 million in cryptocurrency from an online drug syndicate — the largest crypto-asset seizure in Australian history at the time — while AUSTRAC later documented a 2022 conviction in which an offender used cryptocurrency to purchase, import, and resell illicit drugs via dark-web markets.

What emerges is a hybrid criminal order: a system in which Latin American supply chains, Asian liquidity networks, and Australian demand converge into a single adaptive organism that mirrors the complexity of the licit economy while feeding off its infrastructure. Illicit proceeds move through offshore businesses and digital corridors before re-entering legitimate markets as investment capital. These convergent flows inflate asset prices — from property to logistics – and distort trade data once seen as reliable economic indicators.

The boundary between organized crime and legitimate enterprise is dissolving. What appears to be foreign investment may conceal criminal liquidity seeking legitimacy – embedding transnational finance and organized crime within the same bloodstream of the Australian economy.

This financial metabolism doesn’t end with narcotics. The same infrastructure now powers the region’s fastest-growing criminal enterprise: Southeast Asian scam centers.

On Australia’s Doorstep: Scam Centers and Massive Capital Outflows

Australia stands at the geographic doorstep of one of the world’s most pressing financial and humanitarian disasters: the vast Southeast Asian scam-industrial complex. As detailed in Rousselle’s recent article for The New Lines Institute, these compounds form part of a broader ecosystem primarily driven by Chinese organized crime – often state-linked – and built on capital outflows from China and neighboring economies. In countries such as Cambodia, Laos, Myanmar, and others, illicit and semi-licit funds are recycled through offshore financial hubs, cryptocurrencies, and digital payment infrastructure.

What began as a fringe phenomenon tied to telecom fraud and online gambling has evolved into a region-wide industry generating tens of billions of dollars annually, intertwined with human trafficking, narcotics proceeds, state-aligned shell corporations, and even armed militants and designated terror groups such as the Houthis.

Australia’s exposure to this ecosystem is twofold: as a lucrative victim market and as a destination for laundered funds. In 2024 alone, Australians reported nearly 495,000 scam incidents and losses exceeding AU$2 billion, according to the Australian National Anti-Scam Centre (NASC). These are not isolated acts of cybercrime but components of a regional financial system that drains consumer capital from high-income economies and reintroduces it into legitimate sectors via offshore layering and crypto-enabled laundering.

“We see crypto used as a source of major narcotic transaction and the source of much scam activity. The scam centers operating in South East Asia are also a major laundering risk for the Australian economy,” Thomas observed.

Australia’s role in this shadow network extends beyond consumer losses. The same digital corridors that move narcotics profits and scam proceeds now intersect with domestic financial infrastructure. As Thomas warned, “These illicit funds are entering the legitimate economy in a number of places and we need coordinated effort to shut that out. We also need coordination to stop the flow of recruitment of people into these centers and block their labor supply – targeting those human trafficking networks would be of great benefit.”

The nexus between financial exploitation and forced labor underscores the human cost of this liquidity system: victims in Australia are connected, through layers of deception and capital transfer, to victims across Southeast Asia whose exploitation sustains the machinery of fraud.

From Cambodia’s scam compounds to Australia’s financial sector, the circuit is closed by liquidity – money stripped of origin, nationality, and moral judgement. What appears as digital crime at the consumer level is, in practice, an extension of the same transnational financial order that Rousselle described: a shadow ecosystem born of unchecked capital outflows, institutional capture, and the global failure to distinguish dirty liquidity from economic vitality.

Coordination, Capacity, and the Enforcement Gap

Australia’s current regulatory architecture was built for an earlier generation of financial crime. The country’s first AML/CTF framework – Tranche 1, enacted under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and implemented in 2007 – was revolutionary at the time. It brought banks, remitters, casinos, and bullion dealers under AUSTRAC’s supervision, embedding risk-based compliance into the financial sector.

Yet nearly two decades later, that framework has atrophied. Successive governments have failed to deliver the long-promised Tranche 2 reforms that would extend AML/CTF obligations to lawyers, accountants, real-estate agents, and company service providers. These extensions are essential: although digital assets such as cryptocurrencies have been regulated since 2018, the professional intermediaries who help conceal these flows remain largely outside enforcement. Tranche 2 is designed to close that gap, but years of delay have allowed those channels to become the principal on-ramps for illicit digital capital.

The rollout of Tranche 2 — which would bring these professional facilitators under the AML/CTF compliance regime — has been repeatedly delayed amid prolonged consultation and industry resistance, creating structural blind spots that now serve as conduits for illicit liquidity. The result is a bifurcated system: highly regulated financial institutions on one side, and semi-formal professional networks on the other, precisely the spaces through which scam proceeds, narcotics profits, and offshore capital outflows can be re-routed into legitimate assets.

The current regulatory gap will not close until July 2026, when Tranche 2 entities are scheduled to come under full compliance. Until then, most are only beginning to familiarize themselves with their new AML/CTF obligations.

As Thomas noted, “They are understanding the law and their legal obligations but still don’t properly understand money laundering – how people actually do it through law firms and accounting practices in particular.”

AUSTRAC and partner agencies are now preparing extensive case studies to build that operational literacy, but the knowledge gap remains profound.

Australia’s enforcement landscape compounds the challenge. AUSTRAC, Australian Securities and Investment Commission (ASIC), the Australian Federal Police (AFP), and state police each bring essential capabilities to the country’s financial-crime architecture, yet their mandates often intersect across complex and rapidly evolving typologies. Coordination has improved through initiatives such as the Fintel Alliance, but information sharing remains largely case-driven rather than systemic. The protracted rollout of Tranche 2 represents a strategic vulnerability, leaving key professional channels open to exploitation in the meantime.

When the reforms finally take effect in mid-2026, they will bring long-excluded gatekeepers into the AML/CTF regime and expand the country’s capacity to trace illicit flows through professional channels that have so far escaped scrutiny. But timing is everything. Every month of delay allows shadow liquidity to entrench itself further within Australia’s legitimate economy, laundered through legal practices, escrow accounts, property holdings, and offshore intermediaries. The effectiveness of Tranche 2 will depend not only on its legislation, but on whether the institutions charged with enforcing it can move from static compliance to dynamic intelligence, matching the speed and adaptability of the networks they seek to contain.

Conclusion

Blockchain analytics and AI-assisted transaction mapping have stripped away much of the mystery that once surrounded digitized illicit finance. The problem is no longer invisibility but inertia. Regulators and enforcement agencies now possess unprecedented data on cross-border fund movements, stable-coin settlements, and the interlocking wallets and shell entities that sustain shadow liquidity. The question is whether they can move fast enough to act on it.

Other jurisdictions already are. Europe’s MiCA framework, Hong Kong’s virtual-asset licensing regime, and the proposed U.S. GENIUS Act each signal a shift from reactive compliance to proactive financial-infrastructure defense. By contrast, Australia’s reforms remain stalled between consultation papers and industry pushback. Every month of delay leaves the country more deeply embedded in the regional circuits of criminal capital that its own analytics can now trace in real time.

Australia’s challenge is therefore strategic, not technical. The data exist; the patterns are visible. What remains undecided is whether the nation will use its visibility to close the enforcement gap – or continue to serve as the Indo-Pacific’s liquidity sink and laundering hub for offshore criminal finance.