Government consults on 'tranche 2' reforms to AML/CTF regime

8 minute read  22.05.2023 Richard Batten, Prayas Pradhan, Matthew Clifford, Luke Mezrani

Following years of reviews, recommendations and debate, Government has released a consultation paper to implement 'tranche 2' of Australia's anti-money laundering and counter-terrorism financing regime.

Key takeouts

  • The Government proposes to simplify and modernise the AML/CTF regime and, importantly, expand the regime to 'tranche-two' entities – i.e. lawyers, accountants, real estate agents and, potentially, property managers.
  • The Government has posed a series of questions to stakeholders. Submissions to the consultation paper are due on 16 June 2023.
  • The paper represents significant progression in the process to update Australia's AML/CTF framework to meet international standards set by the Financial Action Task Force.

On 20 April 2023, the Attorney-General's Department released for public consultation a paper on proposals to reform Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime (Consultation Paper).

The Government proposes to simplify and 'modernise' the regime. Most importantly, it proposes to expand it to capture a range of industries who do not currently have obligations under the regime – being lawyers, accountants, conveyancers, real estate agents, trust/company service providers and, potentially, property/leasing managers.

We have set out a detailed summary of the proposed changes further below. A few initial reflections are:

  • We welcome the push to make Australia's AML/CTF framework more streamlined, fit-for-purpose and align with international standards set by the Financial Action Task Force (FATF).
  • This paper proposes a range of reforms but is open-ended and does not contain drafting changes to legislative provisions. Rather, it seems the Government intends to seek reactions and feedback from industry to these headline proposals. We expect to see more details in the second round of consultation, which the Government has said will occur later in the year.
  • It is proposed that the regime be streamlined and a less prescriptive approach be implemented via overarching obligations. This provides flexibility for reporting entities to implement risk-based systems and controls that suit their particular business. It also demonstrates the Government's intention to dissuade tick-a-box compliance behaviour. Instead, it will require reporting entities to invest time and resources to properly consider their risks and implement appropriate controls and procedures.
  • However, there must be a balance between maintaining a principles-based regime with providing sufficient prescription to avoid creating uncertainty for regulated industries. Ambiguity in the regime is likely to create a demand from industry for guidance from the regulator, AUSTRAC. A principles-based regime also means the regulator's enforcement agenda is potentially influenced by community expectations. This shifts over time and can create greater difficulty for reporting entities to identify precisely what actions are required of them at any given time.
  • The Government also proposes to expand the AML/CTF regime to capture a broader range of service providers in the digital currency industry. Feedback is also sought on expanding the definition of 'digital currency' as current definition is focused largely on crypto-currency and not the wider gambit of digital assets.

Part 1: Simplifying and modernising the AML/CTF regime

Consistent with the 2016 Report, the Consultation Paper has proposed to reform the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (Act) to reduce regulatory burden and promote the effective implementation of risk-based AML/CTF measures.

Part 1 of the Consultation Paper has proposed the following changes:

Objective: Streamline requirements for an AML/CTF Program

The Government proposes:

  • to consolidate 'Part A' and 'Part B' requirements within a single program that identifies, mitigates and manages AML/CTF risk; and
  • to maintain the existing exemptions for businesses that are only required to have a 'special AML/CTF program'.

Objective: Changes to the way risk is assessed and mitigated

The proposal is to include:

  • a specific requirement in the Act for reporting entities to take appropriate steps to assess and understand their AML/CTF risk prior to the implementation of an AML/CTF program. This obligation would replace the implied obligation currently in a number of legislative provisions;
  • an overarching risk mitigation obligation in the Act to oblige reporting entities to develop and implement controls to address AML/CTF risk. Reporting entities will also be required to document various risk mitigation measures in their AML/CTF programs and appoint an AML/CTF compliance officer of 'sufficient standing';
  • within the 'designated business group' framework unregulated related entities that provide supporting functions to reporting entities to comply with AML/CTF obligations in order to promote group wide risk management; and
  • a specific requirement for reporting entities to consider and mitigate risks arising from the proliferation financing.

Objective: Customer due diligence

The government proposes to amend the Act to:

  • set out each existing core customer due diligence/KYC obligation, with the Rules specifying how that obligation is to be met;
  • include an overarching obligation to assess and understand the money laundering and terrorism financing (ML/TF) risk of each business relationship on an assessment of various key risk factors;
  • include an obligation for reporting entities to be reasonably satisfied that KYC obligations are satisfied;
  • require reporting entities to apply ongoing customer due diligence in a manner that enables them to be satisfied of various factors, including ensuring that transactions conducted are consistent with a reporting entity's understanding of a customer's risk profile;
  • require reporting entities to apply enhanced customer due diligence when certain situations arise, e.g. there is a suspicion of money laundering and the reporting entity proposes to continue the business relationship; and
  • amend the existing KYC safe-harbour provisions.

Objective: Lowering the reporting threshold for the gambling sector

The regime currently exempts reporting entities from having to undertake customer due diligence when certain gambling services are below $10,000. The paper proposes to reduce the threshold to $4,000.

Objective: Amending the tipping-off offence

Proposed changes include:

  • amending the tipping-off prohibition to better accommodate various business and reporting structures to reduce the circumstances under which an exemption application may need to be made; and
  • adopting an outcome-focussed tipping regime similar to those operative in Canada and the United Kingdom.

Objective: Regulation of digital currency exchanges

The government proposes to expand the regime to regulate the following services:

  • exchanges between one or more other forms of digital currency;
  • transfers of digital currency on behalf of a customer;
  • safekeeping or administration of digital currency; and
  • provision of financial services related to an issuer's offer and/or sale of digital currency.

Objective: Amending the 'travel rule'

The proposal is to amend the electronic funds transfer instructions obligations under the Act. It would now require payer information to be verified and require the inclusion of payee information and extend these obligations to remitters and digital currency exchange providers.

Objective: Streamlined exemption for assisting in the investigation of a serious offence

The government proposes to amend the exemption in Chapter 75 of the Rules to allow various agencies to automatically rely on the legislative exemption by providing a 'keep open' notice to a reporting entity and AUSTRAC. This would remove the requirement to apply to AUSTRAC for an exemption.

Objective: Flexible customer verification measures

The government proposes to repeal various customer identification provisions in part 4.15 of the Rules that were introduced by AUSTRAC in 2020 to enable flexible KYC processes during the COVID-19 pandemic. These provisions would be replaced with alternative, lower risk ways by which a reporting entity could flexibly meet its customer due diligence obligations.

Objective: Repeal the FTR Act

The Financial Transaction Reports Act 1998 (Cth) (FTR Act) will be repealed and the remaining obligations under the FTR Act will be transferred to the AML/CTF Act.

Part 2: Expanding the AML/CTF regime to tranche-two entities

The proposals in Part 2 of the Consultation Paper follows numerous Government enquiries. These include the 2016 Report on the Statutory Review of the AML/CTF Act (2016 Report) and the 2022 Legal and Constitutional Affairs References Committee inquiry into the adequacy and efficacy of Australia's AML/CTF regime (2022 Inquiry).

Consistent with the recommendations from the 2016 Report and 2022 Inquiry (as well as FATF standards), the Consultation Paper proposes to expand the scope of Australia's AML/CTF regime to various additional professions that are vulnerable to misuse and exploitation by organised crime groups.

The Consultation Paper proposes to expand the reach of Australia's AML/CTF laws to the following professions (tranche-two entities):

  • lawyers;
  • accountants;
  • conveyancers;
  • trust / company service providers;
  • real estate agents; and
  • dealers in precious metals and stones.

For tranche-two entities regulated under the Act, the Consultation Paper proposes these entities be required to comply with the following measures:

  • customer due diligence and ongoing customer due diligence;
  • various reporting obligations;
  • developing and maintaining an AML/CTF program;
  • record-keeping obligations; and
  • enrolment and registration with AUSTRAC.

Legal, accounting, conveyancing and trust / company services

For those tranche-two entities involved in professional services, the Consultation Paper proposes to subject these professions to the AML/CTF regime when preparing or carrying out transactions for clients relating to:

  • buying and selling real estate;
  • managing of 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 such as trusts; and
  • buying and selling of business entities.

For trust and company service providers, the Consultation Paper proposes the Act may also apply when they prepare for or carry out transactions for clients, such as acting as a director or secretary of a company or providing a registered office or business address for a company.

The Consultation Paper proposes that services provided for non-commercial purposes will not be caught. That is, tranche-two entities will need to be engaged in a commercial pursuit in order for the Act to apply. This is consistent with the current regime, which requires many designated services to be provided in the course of carrying on a business in order for the Act to apply.

Legal professional privilege

The Government will work with industry to develop a framework that allows lawyers to maintain ethical obligations and protect privileged communications while complying with AML/CTF laws.

Real estate agents

The Consultation Paper proposes the Act be amended to cover real estate agents and developers involved in transactions to buy or sell real estate, including any legal or equitable interest in freehold, strata title or leasehold property.

Property management and leasing services

The Government is seeking feedback on whether to expand the AML/CTF regime to property management and leasing services.

Next steps

The Consultation Paper features a series of questions for interested stakeholders to provide feedback on the principles, objectives and initiatives proposed. Submissions to the consultation paper are open until 16 June 2023. These responses will be considered by the Government in its second round consultation, expected to be delivered in September 2023.

Please contact us if you have any queries or require any assistance with making a submission.