What do the latest developments in AML/CTF mean for the funds management industry?

By Vince Battaglia and Taylor Green

There have been strong headwinds both globally and nationally in relation to anti-money laundering and counter-terrorism financing (AML/CTF) laws and the identification of ML/TF risk. We outline recent developments affecting the current and future AML/CTF regulatory landscape in Australia and highlight what they mean for the funds management industry. One key theme emerges – namely, the need for Australia to extend AML/CTF obligations to professional services providers such as lawyers, accountants and trust and company service providers.

What do you need to know now?

• The Australian Transaction Reports and Analysis Centre’s (AUSTRAC’s) recently published national risk assessments (NRAs) should be considered by reporting entities and integrated in the risk assessments of customers.
• We recommend ML/TF risk assessments and AML/CTF programs be reviewed in light of the NRAs.
• Given the extension of the AML/CTF regime to lawyers, accountants and trust and company service providers, the money laundering risks identified in the money laundering NRA relating to structuring investment funds and company structures will become important in the development of risk ratings, formulating risk assessments and preparing AML/CTF programs.
• Second stage consultation is underway on reforming Australia’s AML/CTF regime, which is expected to lead to significant reforms. The next step will be draft legislation.
• Keep watch for the release of the draft legislation which will require reporting entities to revisit their entire AML/CTF risk management function, including the content of and processes described in their AML/CTF programs.

National Risk Assessments

On 9 July 2024, AUSTRAC released NRAs on money laundering and terrorism financing. These risk assessments examine current money laundering and terrorism financing threats and vulnerabilities in specific parts of Australia’s financial sector and are intended to be a resource for reporting entities to use to refine internal controls and to meet reporting obligations, particularly in relation to suspicious matter reporting.

The two NRAs bring together insights from across Australia’s national intelligence community, law enforcement and regulatory agencies, private sector stakeholders and international financial intelligence units to assess risk associated with money laundering, and the methods and channels used to finance and support terrorism activity. The NRAs are completed by AUSTRAC, as Australia’s financial intelligence unit.

Below is a summary of the key takeaways from these NRAs for those in the funds management industry.

Money laundering NRA

The Money Laundering in Australia National Risk Assessment 2024 makes the following assessments of risk and key findings:

• Primary threats for the Australian financial sector are the predicate crimes of drug offences, tax and revenue crime, and defrauding government-funded programs. Identity crime and scams are noted as increasing threats.
• Managed investment schemes, and custodians and asset custody services, are considered by AUSTRAC to be ‘low’ risk with a ‘stable’ outlook (ie their risk is not increasing).
• Non-bank lenders and financiers are considered to be ‘low’ risk but AUSTRAC rates the outlook for them as ’emerging’ (ie there is potential growth in the area). As a low risk assessment, AUSTRAC has not made a new assessment of non-bank lenders, and instead refers readers to their 2021 risk assessment of that sector.
• Superannuation fraud is assessed as posing a ‘medium’ and ‘stable’ money laundering threat.
• Criminal use of digital currency, digital currency exchanges, unregistered remitters and bullion dealers is increasing.
• The use of professional service providers (such as lawyers, accountants and trust and company service providers), either witting or unwitting, to establish, advise on or operate corporate and financial infrastructure reduces visibility of the ultimate beneficial owner and creates money laundering vulnerabilities for Australian authorities and industry. Legal structures (such as various types of companies and trusts) are assessed as posing a ‘high’ and ‘stable’ money laundering vulnerability. AUSTRAC states that the lack of AML/CTF obligations for some designated non-financial businesses and professions means professional service providers are not subject to the due diligence, transaction reporting and supervision requirements outlined in the AML/CTF Act. In a domestic context, AUSTRAC states that legal structures are generally highly accessible, easy and cheap to establish, can be exploited to move significant volumes of funds domestically and offshore and can limit or obscure visibility of the ultimate beneficial owners of corporate entities, assets and financial infrastructure. Further, AUSTRAC acknowledged that Australia does not have comprehensive mechanisms for the systematic collection, verification and release of beneficial ownership information.

Terrorism financing NRA

The Terrorism financing in Australia national risk assessment 2024 considers financing risks associated with all forms of violent extremism and acts of terrorism, regardless of whether the activity meets Australia’s legal threshold for terrorism financing.

The domestic terrorism threat in Australia has decreased in recent years, and AUSTRAC assesses Australia’s terrorism financing environment is small scale and low value.

When terrorism financing does occur in Australia, it usually does so on the ‘online funding ecosystem’, such as on social media forums, or through readily available methods such as bank transfers or cash. AUSTRAC notes there is an increase in the use of digital currencies to finance terrorism, but there is no evidence to suggest it will soon overtake simpler methods.

The most ‘at-risk’ financing channel is fundraising under the guise of charitable giving. AUSTRAC noted it is difficult for organisations to distinguish between legitimate transfers and fraudulent fundraising or illicit activities.

Further, terrorism financing can be difficult to detect. AUSTRAC observes that the increased speed of financial products in recent years has also made it harder for reporting entities to identify and freeze suspicious transfers before funds leave an account, and that funds can also be raised or moved via less visible channels such as cash or unregistered remittance dealers.

Ordinary retail banking and remittance services remain the most affected in this space and continue to be rated as ‘high’ risk channel for moving funds for terrorism financing. Non-bank online payment service providers are also rated as a ‘high’ risk of being used to move funds for terrorism financing and the outlook is rated as ‘increasing’, given their increasing uptake by the general community.

Financial Action Task Force report on gatekeepers scores Australia 0%

On 8 July 2024, the Financial Action Task Force (FATF) released a review of its global assessment of the FATF membership’s compliance with requirements applied to non-financial professionals who (in FATF’s view) as gatekeepers play a role in preventing and detecting money laundering and predicate offences, including corruption, and who could knowingly enable corruption and related money laundering: real estate agents, lawyers, notaries, other independent legal professionals and accountants, and trust and company service providers.

FATF’s report, Horizontal Review of Gatekeepers’ Technical Compliance Related to Corruption (Report), gives three jurisdictions – Australia, the United States and China (excluding Hong Kong) – a 0% score in its assessment of FATF member compliance with the FATF Recommendations relating to gatekeepers. This is because these jurisdictions have not implemented any of the preventative measures that have been required by the FATF Standards since 2003 in relation to the gatekeeper sectors. The Report states the average FATF member score was 74%, despite more than 20 years elapsing since the FATF members committed to adhering to the FATF Standards.

In response to the release of the Report, the Attorney-General acknowledged the Report has ‘singled out Australia for our continued non-compliance with global [AML/CTF] standards’.

We expect the outcome of the Report will greatly inform and motivate the proposed legislative reforms in the Australian AML/CTF legal landscape, particularly in relation to bringing gatekeepers into Australia’s legislative regime, as discussed below.

Update on proposed amendments to the AML/CTF legislation and ‘tranche-two’ reforms

On 2 May 2023, the Attorney-General’s Department (AGD) announced the second stage consultation on reforming Australia’s AML/CTF regime, which is expected to lead to the most significant reforms to the AML/CTF regime since its inception. Second-round consultation papers were released in May 2024, and the second stage of consultation closed on 13 June 2024.

In brief, the proposed reforms are designed to simplify and modernise the current AML/CTF regime, and to apply the AML/CTF regime to lawyers, accountants, conveyancers, trust and company service providers, real estate agents and dealers in precious metals or precious stones (known as ‘tranche-two entities’ and referred to above as professional service providers or gatekeepers). For further information on the initial consultation paper, see our earlier article, and for information on the round two consultation see this earlier article.

The AGD is now reviewing the submissions to the second-round consultation. Based on our participation in industry consultation on these reforms, we understand that the next step will be to prepare draft legislation as soon as possible. The Commonwealth Attorney-General recently spoke about the urgent need to bring in legislation to implement the FATF Recommendation on tranche-two entities to avoid being ‘grey listed’, and further stated that Australia cannot afford further delay in implementing these reforms.

Developments in public-private partnerships enabling information sharing

Fintel Alliance

The Fintel Alliance was created in 2017 as a public-private partnership led by AUSTRAC with representatives from government, law enforcement and industry to address risks across the financial sector and implement government intelligence priorities. It has 29 member agencies and a working group.

The terrorism financing NRA states that the Fintel Alliance National Security Working Group has enabled national security agencies and members of Australia’s largest financial reporting institutions to share classified information in near-real time, which will help deal with the problem of detecting financial crime given the speed of transmission of funds in Australia’s financial sector.

On 11 July 2024, AUSTRAC released the Fintel Alliance’s priorities for the next two years. Of particular note is its focus on a ‘public-private data-sharing hub’ and ‘national security threats’. It will be interesting to observe whether the data-sharing hub may include an initial discovery into a central KYC database, such as in other jurisdictions.

Australian Financial Crimes Exchange

The Australian Financial Crimes Exchange brings together businesses, government, law enforcement agencies and industry groups to coordinate the intelligence and data-sharing activities for the investigation and prevention of financial and cyber crime. It is also a collaboration platform, allowing the public and private sectors to share and access secure information and intelligence.

On 5 July 2024, the Assistant Treasurer and Minister for Financial Services announced that the Australian Taxation Office will become the first government agency to become a full member of the Australian Financial Crimes Exchange in an effort to help the fight against scammers and fraudsters.

What do these developments mean for you?

The national risk assessments should be considered by reporting entities and integrated in its risk assessments of its customers. In particular, we recommend that ML/TF risk assessments and AML/CTF programs be reviewed in light of the NRAs. The NRAs will become important too in the implementation of the proposed reforms to the AML/CTF legislation, particularly where it is proposed that each customer needs to be assigned a risk rating.

Going forward, given the political will to extend the AML/CTF regime to lawyers, accountants and trust and company service providers (among other professional service providers), the money laundering risks identified in the money laundering NRA relating to structuring investment funds and company structures will become important in the development of risk ratings, formulating risk assessments and preparing AML/CTF programs.

More generally, we recommend that reporting entities keep watch for the release of draft legislation which will amend the current regime. New legislation will require reporting entities to revisit their entire AML/CTF risk management function, including the content of and processes described in their AML/CTF programs.