How will proposed reforms to Australia’s AML/CTF regime affect crypto, digital asset and remittance services providers?

In a significant move to bolster Australia’s defences against financial crimes, the Attorney-General has introduced the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2024 (Bill) to Parliament. This proposal follows an extensive consultation and review process that began in mid-2023. The Bill aims to enhance and modernise the existing anti-money laundering and counter-terrorism financing regime, which includes:

• the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act); 
• the Anti-Money Laundering and Counter Terrorism Rules Instrument 2007 (No.1) (AML/CTF Rules); 
• and associated regulations. 

As highlighted in our previous article, the Bill intends to:

• extend the AML/CTF regime to higher-risk services provided by certain professionals;
• improve the effectiveness of the AML/CTF regime; and
• modernise the regime to reflect changing business structures, technologies and illicit financing methodologies. 

The amendments are particularly important for the digital currency sector. The proposed changes will broaden the scope of digital asset services subject to the regime’s obligations. Additionally, the expanded ‘travel rule’ and the updated definition of International Funds Transfer Information will increase reporting requirements for a large number of entities.

Current obligations

Under the current AML/CTF regime, digital currency service providers, when engaging in the exchange of digital currencies with fiat currencies (or vice versa), are subject to AML/CTF obligations (designated service item 50A in table 1 of section 6 of the AML/CTF Act). This concept is known as fiat-crypto on/off ramping, and is considered as the ‘first limb’ in the regulation of virtual asset-related services by the Financial Action Task Force (FATF), an international body that sets standard for AML/CTF.

Expanding the AML/CTF obligations application to new digital asset services

In October 2018, FATF Recommendation 15 was amended to define a ‘Virtual Asset Service Provider’ as someone who engages in any of the following ‘limbs’ involving digital asset transactions: 

• exchanges between virtual assets and fiat currencies (first limb);
• exchanges between one or more other forms of virtual assets (second limb);
• transfers of virtual assets on behalf of a customer (third limb);
• safekeeping or administration of virtual assets (fourth limb), and
• participation in and provision of financial services related to an issuer’s offer and/or sale of a virtual asset (fifth limb).

Accordingly, FATF required countries to incorporate all limbs under their AML/CTF regime(s). To ensure the second through fifth limbs are now captured, the Bill replaces the definition of ‘digital currency’ with new terminology of ‘virtual asset’, aligning with FATF’s definition above. Other relevant amendments are proposed, such as amending the definition of ‘property’ to include ‘virtual assets’ and replacing ‘registered digital currency exchange provider’ with ‘registered virtual asset service provider’. The new section 5B defines a ‘virtual asset’ as ‘a digital representation that functions as any of the following:

• a medium of exchange (including concepts such as non-fungible tokens);
• a store of economic value; 
• a unit of account; or 
• an investment.’

The definition also includes a digital representation of value that grants the right to vote on governance arrangements, including governance tokens, related to the digital representation.

Finally, the definition appears to consider the ongoing innovation of the virtual assets sector, by empowering the AUSTRAC CEO to make AML/CTF rules that account for any emerging virtual assets, ensuring the AML/CTF regime is equipped to respond to any emerging technologies susceptible to money laundering, terrorism financing or proliferation finance exploitation.

‘Virtual asset safekeeping service’ is also defined, as a reference to the fourth limb of FATF’s definition. It covers the scenario where an entity holds a virtual asset, or private keys to the virtual asset of another while carrying on a business.

The amended definition specifically excludes low risk currencies that are digital representations provided by central banks or other government bodies. These will instead be considered ‘money’ for the purposes of the AML/CTF Act. Digital representations of value used exclusively within an electronic game or as customer loyalty or reward points are also excluded.

Reporting entities who offer any ‘registrable virtual asset services’ will be required to register with the AUSTRAC CEO unless an exemption applies. Importantly, the AUSTRAC CEO is also empowered to prescribe rules as to what does not constitute a registrable virtual asset service, so that flexibility is maintained as the sector continues to evolve.

Schedule 8 

Expanded travel rule

Schedule 8 is purported to simplify and modernise the electronic funds transfer instructions obligations, designated remittance arrangements and international funds transfer instruction (IFTI) reporting purposes.

Put generally, the travel rule is a FATF standard (FATF recommendation 16) that requires AML/CTF-regulated entities to obtain and disclose information of payers and payees alongside a transfer of value as it is transmitted from one entity to another. Currently, this only applies to traditional financial institutions, such as banks, and they are only required to include payer information (not payee) for electronic transfers of fiat currency. The payer information doesn’t require any verification either.

Under Schedule 8, all entities that provide a value transfer designated service (financial institutions, remittance service providers and Virtual Asset Service Providers) for domestic and cross-border transfers will be required to conform to the (expanded) travel rule.

The following obligations are set out under Schedule 8 for the relevant institution in the value transfer chain:

• collection of travel rule information and verifying payer details, where not already verified, for the ordering institution;
• transmitting travel rule information for ordering and intermediary institutions; and
• keeping records of travel rule information, screening value transfer messages for missing travel rule information and taking appropriate action for all institutions.

While it was proposed in the Consultation that the information to be included may extend to payee information in line with FATF Recommendation 16, the Bill doesn’t include such obligations. The Explanatory Memorandum, at paragraph 566, provides that this is due to Recommendation 16 currently being reviewed by the FATF. The Schedule doesn’t detail the information to be included with transfers of value, and instead provides the power for the AUSTRAC CEO to establish what information must accompany transfers of value when the changes to Recommendation 16 are concluded. This power extends to creating travel rule exemptions should they be required based on those changes to Recommendation 16.

The Bill also references the limitation on travel rule obligations for virtual asset transfers involving self-hosted wallets. It acknowledges that such transfers can occur unilaterally, both within and outside regulated institutions, without the recipient’s consent. Consequently, the relevant provider of the value transfer designated service cannot obtain the necessary travel rule information.

International Funds Transfer Instruction amendments

Schedule 8 has a further objective – to amend the International Funds Transfer Instruction (IFTI) reporting regime to reduce the obligations’ complexity as payment services become increasingly modern, integrated and diversified.

The proposed amendment will be to repeal the IFTI definition, and replace it with a definition of ‘information about international value transfer services’ (IAIVTS). The IAIVTS is defined as a service:

• in the capacity of ordering institution, accepting an electronic funds transfer instruction from the payer (section 6, table 1, item 29 of AML/CTF Act); or
• in the capacity of beneficiary institution, making money available to the payee as a result of an electronic funds transfer instruction (section 6, table 1, item 30 of AML/CTF Act);

and either:

• the value to be transferred is in Australia and, as a result of the provision of the service, the value will be in a foreign country; or
• the value to be transferred is in a foreign country and, as a result of the provision of the service, the value will be in Australia.

As can be seen, the new definition encompasses a wider range of institutions. As to obligations imposed on those institutions, the amendment proposes that:

• if a person provides an international value transfer service, the person must give the AUSTRAC CEO a report about the provision of that service; and
• if a person provides a designated service involving a transfer of virtual assets to or from an unverified self-hosted virtual asset wallet, the person must give the AUSTRAC CEO a report about the provision of the service.

These changes are to ensure that ‘IFTI reporting obligations lie with the reporting entity closest to the Australian customer’, and the virtual asset obligation encompasses scenarios where the equivalent virtual asset exchange services incidental to an international value transfer service are treated in the same manner as IVTS incidental to currency exchange services.

This article was written with the assistance of Thomas Webster, Law Graduate.