Future of reporting groups under the draft AML/CTF Rules

You are probably familiar with the current notion of a designated business group (DBG) under the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (Cth) (AML CTF Act). Related companies can form a DBG which adopts one common AML CTF Program and each member of the DBG can share compliance information with other members of the DBG. When a DBG is established it also simplifies reliance by each member of the DBG on customer identification carried out by any other member of the DBG. In practice it therefore allows for one compliance function within a corporate group to serve all members of the DBG.

This concept of a DBG will be replaced with effect from 31 March 2026 by a new concept defined as a "reporting group" which is established by a new section 10A of the AML CTF Act. Section 10A is inserted by paragraph 19 of Schedule 1 to the Anti-Money Laundering and Counter Terrorism Financing Amendment Act 2024 (Amendment Act). Forming a reporting group will have benefits similar to those applying to a DBG. From 31 March 2026 the difference will be that a reporting group can be formed by some types of reporting entity that are not related companies.

Introducing a unique group concept

A reporting group will include any "business group" in which at least one person provides a designated service. A business group will not depend on each of its members being related companies. A business group will exist where one person in the group "controls" each other person in the group. Under a new section 11 inserted by paragraph 19 of the Amendment Act, where proposed group members are bodies corporate, control will exist where those proposed group members have a common parent. That is determined by tests similar to those for related companies under the Corporations Act 2001 (Cth). We elaborate below on the wider meaning of "control" for these purposes.

As presently drafted any business group will automatically be a reporting group. The AML CTF Rules may impose additional conditions and exclusions and this is the subject of a consultation by AUSTRAC. This may include a right for a member of a business group to opt out of a reporting group but that remains to be seen. However, it is clear that any DBG under current rules will qualify as a reporting group.

Control of entities

Where an entity is not a body corporate, it will be subject to control by a person which has the capacity to:

a. control the composition of the person's board or governing body; or

b. determine the outcome of decisions about the entity's financial and operating policies.

When looking at the capacity to determine the outcome of decisions, we must take into account:

i. the practical influence that can be exerted (rather than rights that can be enforced); and

ii. any practice or pattern of behaviour affecting the entity's financial or operating policies (whether or not it involves a breach of an agreement or a breach of trust).

You will recall that the AML/CTF Act applies to a "person" which provides a designated service. The term "person" is defined in section 5 in a manner which includes a partnership or a trust (thus characterising the trust as if it was a legal entity).

The new idea of a business group is therefore recognising that a conventional investment vehicle in the market usually takes the form of a trust, a fund, or a partnership (typically a limited liability partnership). In practice that investment vehicle is managed by a professional trustee, manager or general partner who is responsible for management of its operations (and will now be treated as controlling the investment vehicle). In some circumstances this could apply even where there is an investor who is a beneficial owner of the vehicle. Often it may make commercial sense for some investment vehicles under common management to form a reporting group. Presumably any conditions or exclusions imposed by the AML/CTF Rules will not create any obstacle to this desirable outcome.

Electing to form a reporting group: Other circumstances

Apart from a business group there will be another category (or set of categories) of entity which will be permitted to form a reporting group. This is provided for in the new section 10A(2). Each member may elect to form part of a reporting group but the reporting group must be in a category which satisfies conditions to be specified in the AML/CTF Rules. Those conditions are presently the subject of a consultation by AUSTRAC which is being conducted on the terms of a consultation paper issued on 11 December 2024 and which requires submissions by 14 February 2025. AUSTRAC asks a number of questions aimed at identifying the types of reporting group which should be considered. We discuss below some potential examples which are likely to be considered by AUSTRAC in formulating the AML/CTF Rules that will touch this subject.

Franchises

One class which will be considered is a franchise arrangement. Typically, a franchisor owns intellectual property and possesses a distribution model for supply of goods and services which it licenses to franchisees. A franchisee is not a related company of the franchisor and in most cases the franchisee is not controlled by the franchisor by means that would satisfy the test of control that we discuss above. Nevertheless the franchisor does impose contractual obligations on the franchisee concerning the manner in which the franchisee conducts its business. This ensures consistency of style and content across the franchise.

A franchisee supplies goods or services to a customer in its own right. If designated services are provided it is the franchisee that will supply them but often on terms dictated by the franchisor. It is likely that on a matter as fundamental as AML CTF compliance a franchisor may wish to provide compliance support as a service.

One relevant example of a franchise arrangement might be a smaller AFSL holder which provides a financial advice service as a franchisee of another AFSL holder. It is the small AFSL holder with the direct customer relationship which arranges for a customer to receive a designated service (such as an issue of securities) from a third party. It is therefore the small AFSL holder which provides the designated service in item 54 of Table 1 of section 6(2) of the AML/CTF Act. But the franchisor has reputational and other considerations if the franchisee does not comply with its AML/CTF obligations. It may be commercially beneficial for the franchisor and franchisees to form a reporting group, for the franchisor to support compliance, and for information to be shared within the reporting group.

Remittance service providers

Another business type which could be considered for eligibility to form a reporting group is in the area of remittance arrangements. Remittance services are already the subject of different treatment under current laws. Typically, a remittance affiliate is a franchisee of a remittance network provider. Under Chapter 61 of the AML/CTF Rules a remittance network provider is obliged to perform reporting obligations that would ordinarily have applied to the remittance affiliate. By contract a remittance network provider can impose obligations on a remittance affiliate at a tactical level in its dealings with customers. In practice a remittance network provider will support a remittance affiliate with many aspects of its AML/CTF compliance. Existing remittance network models demonstrate the efficacy of a franchisor performing this type of role.

Real estate agencies

Yet another example will be real estate agents which will provide the designated services in the new Table 5 in section 6(5A) of the Act and potentially also some of the designated services found in the new Table 6 in section 6(5B). These real estate agencies are small businesses offering complex services and frequently as franchisees. It may be more effective for the franchisor to form a reporting group with its franchisees, and to impose obligations on the franchisees by contract to facilitate compliance.

Next steps in the AML/CTF consultation

As part of its consultation on the AML/CTF Rules AUSTRAC is asking industry sectors and their participants to respond to questions about the formation of reporting entities.

These questions include:

• Where you or your sector use group structures that do not involve ownership or control, what are these structures? Are there any impediments to sharing customer and compliance information within such groups for AML/CTF purposes?
• Within reporting groups, what are the circumstances in which a reporting entity members of a reporting group would want a non-reporting entity to discharge an AML/CTF obligation? Would this extend to discharging reporting obligations (threshold transaction reports, suspicious matter reports etc.)? What benefits would this provide to you?
• Are there circumstances where reporting groups formed automatically under law would want to combine with other reporting groups and/or reporting entities? Why?

Industry groups which want flexibility for their industry participants to form a reporting group, will be responding to the consultation by AUSTRAC.

Please contact us if you would like to discuss any of the potential benefits of this change for your business.