AML/CTF tranche two: a massive leap – consultation timetable, finally

By Peter Jones

Far-reaching changes to Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime have been proposed in a consultation paper released by the Attorney-General’s Department.

The Consultation paper is in two parts:

1. Part 1 proposes significant changes to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the Act) and the Anti-Money Laundering and Counter-Terrorism Financing Rules (the Rules) to simplify and modernise the current AML/CTF regime; and
2. Part 2 proposes to apply the simplified AML/CTF regime to lawyers, accountants, conveyancers, trust and company service providers, real estate agents and dealers in precious metals or precious stones (collectively, tranche-two entities).

Submissions on the Consultation paper close on 16 June 2023.

Second round consultation is to commence in September 2023.

The Department will also conduct roundtable discussions with key stakeholders.

Simplification of the AML/CTF regime

It is now seven years since the Statutory Review of the AML/CTF Act and Rules (2016 Review) made 84 recommendations to change Australia’s AML/CTF regime, including recommendations to simplify both the Act and the Rules.

The Consultation paper proposes that this simplification be pursued by doing the following:

1. streamlining AML/CTF Programs by:
   1. combining Parts A and B into a single Program;
   2. clarifying entities’ obligations to assess the ML/TF risks they face;
   3. clarifying entities’ obligations to mitigate their ML/TF risks; and
   4. clarifying entities’ obligations to apply their Programs in their overseas operation.
2. setting out the core customer due diligence obligations in the Act, specifying how each obligation is to be met in the Rules and providing practical, implementable advice in AUSTRAC’s^[1] guidance materials on meeting those obligations. This approach would apply across initial KYC (know your customer due diligence), ongoing customer due diligence, enhanced customer due diligence and safe harbour/simplified customer due diligence;
3. re-framing the ‘tipping-off’ regime to be outcomes-focused;
4. continuing flexible customer verification measures introduced during COVID-19 that are lapsing; and
5. repealing the Financial Transaction Report Act 1988 and transferring any remaining obligations to the Act.

Reforms such as these provide the first opportunity since the introduction of the Act and Rules to clarify and improve them.

The detailed consultation process and the broad scope of reforms outlined in the Consultation paper indicate a willingness on the part of Federal Government to materially improve the effectiveness and operation of Australia’s AML/CTF regime.

Affected entities should make the most of this opportunity.

Extension of the AML/CTF regime to tranche-two entities

The 2016 Review was published soon after the Financial Action Taskforce (FATF) published its own report evaluating Australia’s compliance with FATF’s international AML/CTF standards.

A key finding of FATF was that Australia’s regime did not cover tranche-two entities.

The 2016 Review recommended that options be developed for regulating tranche-two entities.

This is finally being progressed by the Consultation paper, which proposes that the generally applicable obligations under the Act, being:

1. customer due diligence – to verify a customer’s identity before providing a designated service;
2. ongoing customer due diligence – throughout the course of the business relationship;
3. reporting – particularly of ‘suspicious matters’;
4. having an AML/CTF Program – with systems and controls to mitigate and manage ML/TF risks;
5. record keeping – for seven years, available to law enforcement; and
6. enrolment with AUSTRAC,

…apply to tranche-two entities when they provide specified services (see below).

For lawyers, accountants and conveyancers, those specified services are:

• buying and selling of real estate;
• managing client money, securities or other assets;
• management of bank, savings or securities accounts;
• organisation of contributions for the creation, operation or management of companies
• creation, operation or management of legal persons or legal arrangements (eg trusts); and
• buying and selling of business entities.

For lawyers, representing a client in litigation is to be excluded, and the paper notes that the regime will clearly protect legal professional privilege. The New Zealand AML/CTF regime is noted as an example of such a model, along with that in the United Kingdom.

For trust and company service providers those specified services are the above six plus:

• acting as a formation agent of legal persons;
• acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;
• providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement;
• acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another form of legal arrangement; and
• acting as (or arranging for another person to act as) a nominee shareholder for another person.

For real estate agents and property developers, those specified services are transactions to buy or sell real estate, including any legal or equitable interest in real property, including freehold title, strata title or leasehold tenure and potentially property management and leasing services.

For dealers in precious metals or precious stones, those specified services are when they engage in any cash transaction with a customer equal to or above A$10,000, including in the capacity of an agent or auctioneer.

The extension of the AML/CTF regime to tranche-two entities could increase the number of regulated entities under the Act from approximately 17,000 to more than 100,000, with the vast majority of new regulated entities being small businesses.

This dramatic increase in the scale of the regulated cohort necessitates effective simplification of the AML/CTF regime under Part 1 of the Consultation paper.

Even with that simplification, the compliance burden for most of the newly regulated tranche-two entities will be very significant, requiring them to substantially re-design their business systems as well as their compliance systems. The application of technology to uplift those systems is likely to be key to addressing these challenges efficiently.

Lest it be thought that extending the AML/CTF regime to tranche-two entities is a bridge too far, FATF is scheduled to carry out another evaluation of Australia’s compliance with international AML/CTF standards in 2025. Out of more than 200 jurisdictions, Australia is now one of only five, alongside China, Haiti, Madagascar and the United States, which do not regulate tranche-two entities. The Government can be expected to work hard to remove Australia’s name from that list.^[2]

Success for the Government will not only require effective consultation, but also a dramatic uplift in the scale of AUSTRAC’s resources.

Please contact a member of our team (details below) if you wish to make a submission and require assistance.

[1] Australian Transaction Reports and Analysis Centre (AUSTRAC)

[2]  Note: the commencement of consultation on the introduction of a public beneficial ownership register for unlisted entities regulated under the Corporations Act provides evidence of a consistent approach by Government to recommendations made by the Legal and Constitutional Affairs Reference Committee of the Senate in 2022. The Committee also recommended consultation on the timely introduction of tranche two reforms.