Round two consultation of AML/CTF reforms – what you need to know

By Vince Battaglia and Peter Jones

On 2 May 2024, the Commonwealth Attorney-General’s Department (AGD) released second-round consultation papers aimed at reforming Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime.

The reforms aim to simplify, clarify, and modernise the regime and bring 'tranche-two entities’ — including lawyers, accountants, conveyancers, trust and company service providers, real estate agents and dealers in precious metals and precious stones (collectively, tranche-two entities) — into the regulatory framework.

The consultation papers respond to feedback received in the first stage of consultation, and seek to outline detailed proposals for reform. For further information on the first stage of consultation, see our earlier article.

In this article we focus on consultation papers 1, 2, 3 and 5. For our analysis of paper 4 (dealing with digital currency exchange providers, remittance service providers and financial institutions) see our other article.

Engagement and feedback on the first stage of consultation

During the first consultation phase, various stakeholders participated in more than 40 targeted consultations, including national roundtables and bilateral meetings. Feedback came from diverse sectors and demonstrated broad support for the reforms, according to the AGD.

Key points identified from the feedback are:

• the need for alignment with other ongoing regulatory initiatives such as scams, payments reform and beneficial ownership initiatives;
• the integration of new technologies such as biometric databases and digital identity into customer due diligence (CDD) processes; and
• the need to simplify current compliance obligations to reduce the administrative burden, particularly for small businesses.

Reforms to affect more entities and more services

The consultation proposes that more entities, providing more services, will be regulated under the AML/CTF framework.

Proposed new classes of persons to be regulated

The categories of persons within ‘tranche-two entities’ has been broadened to include, in addition to those named above, consultants, financial advisors and business brokers. These categories of persons appear to be broader than the persons listed in Recommendation 22 of the Financial Action Taskforce (FATF).

Proposed new activities to be regulated

The list of proposed activities that would be regulated for tranche-two entities previously followed the activities listed in Recommendation 22 of FATF.

The activities to be regulated as proposed new designated services have been expanded in the second-round consultation papers, with more detail provided as to the regulatory intention of the activity descriptions.

For real estate professionals, regulated activities are proposed to comprise brokering sales and purchases of real property (including facilitating auctions or acting as an auctioneer) and the new activity of direct sales of real property by businesses such as property developers (see Paper 1: Further information for real estate professionals).

For lawyers, accountants, trust and company service providers, consultants, financial advisors and business brokers (grouped in the consultation under the title ‘professional service providers’ or ‘PSPs’) the list of activities to be regulated is now substantially broader, comprising the following (see Paper 2: Further information for professional service providers):

• buying and selling of real estate, including:
  • acting for a customer to settle a real property transaction;
  • preparing or reviewing contracts;
  • conducting due diligence, land title or zoning permit searches;
  • preparing for financial settlement; and
  • preparing documents to be provided to a registry authority for transfer of real property;
• buying and selling of legal entities, including:
  • acting on behalf of a customer for a purchase, sale or transfer of ownership of a legal entity;
  • preparing or reviewing of contracts for the purchase, sale or transfer of ownership of a legal entity;
  • conducting or advising on due diligence, valuation of assets and liabilities prior to transfer;
  • obtaining Foreign Investment Review Board (FIRB) approvals, and ASX and ASIC waivers for clients;
  • conducting due diligence on accounts and finances for corporate financial transactions prior to a transaction;
  • preparing for financial settlement; and
  • preparing documents to be provided to an authority (such as ASIC) for transfer of a legal entity;
• receiving, holding and controlling or disbursing:
  • money (other than sums paid as fees for professional services);
  • accounts;
  • securities or securities accounts;
  • digital assets (including private keys); or
  • property,

  on behalf of another person, but excluding:

  • pre-payment for goods and services provided by the business;
  • property management activity; and
  • prescribed disbursement managing client financial assets;

• preparing for, carrying out or organising transactions for contributions for the creation, operation or management of legal entities, where:
  • ‘preparing for, carrying out or organising transactions for contributions’ is intended to describe the work a professional undertakes to assist clients with gaining capital contributions, including structuring, negotiating and documenting these transactions. This may include advising on compliance with listing rules and continuous disclosure in relation to a transaction; and
  • ‘contributions for the creation, operation or management of legal entities’ is intended to capture all capital and debt raising methods, including but not limited to: equity capital raising, for example initial public offerings, share purchase plans, rights issues or block trades; debt financing, including (whether secured or unsecured) instalment loans, revolving loans, cash flow loans, and bonds, bills or notes; and convertible securities including hybrid securities, convertible bonds, etc.;
• formation, creation, operation or management of legal entities (excluding testamentary trusts), including:
  • drafting, reviewing and negotiating corporate agreements and business documents, including partnership agreements, shareholder agreements and insolvency agreements;
  • drafting, reviewing and negotiating documents to support clients’ mergers and acquisitions;
  • obtaining FIRB approvals and ASX and ASIC waivers for clients; and
  • conducting due diligence on accounts and finances for corporate financial transactions prior to a transaction;
• acting as (or arranging for another person to act as) a director, secretary, partner, attorney, trustee, or in a similar role for various legal entities, but excluding as executor or administrator of a deceased estate;
• acting as (or arranging for another person to act as) a nominee shareholder; and
• providing a registered office, principal place of business, correspondence address or administrative address for a legal entity.

For dealers in precious metals and precious stones, accepting or paying $10,000 or more in digital assets is to be added to accepting or paying $10,000 or more in physical currency as a service regulated in relation to transactions involving precious metals or stones (see Paper 3: Further information for dealers in precious metals and precious stones).

Particularly for PSPs, the reforms propose a substantial broadening of the AML/CTF regulatory framework. For lawyers, there are exceptions for litigation matters and pure advisory work where there is no underlying transaction. For all PSPs, the provision of services in-house are also excluded.

No proposed change in primary obligations for tranche-two entities

The primary obligations to apply to tranche-two entities under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the Act) are unchanged by the consultation papers. Those obligations are, in summary:

• customer due diligence – to verify a customer’s identity before providing a designated service;
• ongoing customer due diligence – throughout the course of the business relationship;
• reporting – particularly of ‘suspicious matters’;
• having an AML/CTF program – with systems and controls to mitigate and manage ML/TF risks;
• record keeping – for seven years, available to law enforcement; and
• enrolment with the Australian Transaction Reports and Analysis Centre (AUSTRAC).

Legal professional privilege

For legal practitioners, the reforms propose to introduce a formal definition of legal professional privilege (LPP) in the Act and establish protections to ensure that no aspect of the Act compels the disclosure of privileged information. Entities claiming LPP must provide evidence to support their claims, using a specific form designed to streamline the validation process by AUSTRAC and dissuade spurious claims. Further, the timeframe to report a suspicion of money laundering is proposed to be extended from three to five days, where an entity reasonably considers that it needs to determine whether relevant information may be subject to LPP (see Paper 2).

Reforms affecting all regulated entities

In terms of simplifying, clarifying and modernising the regime, the consultation proposes that (see Paper 5: Broader reforms to simplify, clarify and modernise the regime):

• AML/CTF programs be streamlined by replacing the current two-part programs with a single, clear obligation that emphasises a risk-based approach and explicitly requires each customer to be assigned a risk rating;
• the existing CDD framework be replaced by CDD obligations that are reduced in complexity, focusing on outcome-based measures;
• the tipping off offence be modified to better balance the need for legal disclosures and the protection of ongoing investigations, making it more practical for reporting entities to comply with AML/CTF obligations while maintaining operational efficiency;
• the process for exemptions that allow financial institutions to keep customer accounts open to assist law enforcement investigations be simplified, reducing the administrative burden on AUSTRAC and reporting entities;
• CDD thresholds for gambling service providers be lowered to align with FATF standards and better address the risks associated with this sector;
• certain enduring exemptions be moved from Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) to the Act for greater clarity; and
• the Financial Transaction Reports Act 1988 be repealed, as foreshadowed in the first round of consultation.