Australia consults on simplification of AML CTF laws and Tranche 2 reforms

What you need to know

• Australia is currently one of only a handful of countries that have committed to international best practice standards  that does not require accountants, lawyers or real estate agents to make reports under its Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) laws.
• The Attorney-General's Department recently published a consultation paper seeking submissions on the simplification and modernisation of the AML/CTF regime, including the extension of the regime to cover so called 'gate-keeper' professions, including lawyers, accountants, trust and company service providers, real estate agents and dealers in precious metals and stones.
• If the proposal to include these gate-keeper professions proceeds, they will be required to undertake customer due diligence, report certain matters to AUSTRAC, develop and maintain an AML/CTF program, keep certain records, and enrol with AUSTRAC.
• The proposed simplification phase includes streamlining the requirement to have an AML/CTF program, greater guidance around customer due diligence obligations, lowering the reporting threshold for the gambling sector to $4,000, amendments to the tipping-off offence, expansion of regulation of digital currency services, modernising the travel rule, and standardising exemptions for assisting the investigation of a serious crime.

What you need to do

• Submissions to the consultation close on 16 June 2023. If you are interested in making a submission, further details are available on the Attorney-General's Department's website.

The case for including gatekeeper professions 

In 2003, the Financial Action Task Force (FATF - an intergovernmental organisation which develops policies to combat money laundering) recommended that accountants, lawyers, dealers in precious metals and stones, and real estate agents be subject to customer due diligence and record keeping requirements. This was because, according to the FATF, professionals were increasingly being used to facilitate the laundering of criminal funds.

The FATF's work on gate-keeper professions has continued since and on 16 February 2012, it adopted standards seeking to include these professions in customer due diligence and suspicious transaction reporting requirements. Standards are not legally binding but they are accepted international best practice, and member countries of the FATF (of which Australia is one) and countries who have committed to implementing them are assessed against their implementation. 

Including these professions in Australia's AML/CTF laws has been a charged issue for some time. FATF criticised Australia for not having done so. The Australian government's current consultation makes the case that lawyers, accountants, real estate agents, trust and company service providers, and dealers in precious metals and stones, are 'particularly vulnerable to misuse and exploitation by transnational, serious and organised crime groups and terrorists due to the nature of the services they provide.'

So why hasn't it been done? 

Inclusion of gate-keeper professions in Australia has stalled for two main reasons. The first is pragmatic and relates to the burden that will be placed on AUSTRAC and the gate-keeper professions, with AUSTRAC giving evidence during a 2021 Senate inquiry that the reporting entity population would go from about 16,000 to over 100,000.

The second relates to concerns of the legal, accounting and other professional services industries that the obligations would conflict with their fundamental duties of protecting legal professional privilege and client confidentiality.

Which professions are targeted? 

The consultation paper proposes extending the AML/CTF regime to legal, accounting, conveyancing and trust/company service providers when they carry out transactions including:

• Buying and selling of 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 (e.g. trusts); and
• buying and selling of business entities. 

Trust and company service providers would also be subject to the requirements when:

• 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. 

The proposal currently excludes services provided for non-commercial purposes, and services provided when representing a client in litigation.

Proposed obligations for customer due diligence and transaction reporting

If the listed gate-keeper professions are included in the AML/CTF regime, they will be required to implement what are referred to as the 'six pillars' of regulatory obligations:

• Customer due diligence – verifying a customer's identity before providing service;
• Ongoing customer due diligence – undertaking due diligence on the customer throughout the provision of services;
• Reporting – reporting suspicious matters, cash transactions over $10,000, and annual compliance to AUSTRAC;
• Maintaining a risk based AML/CTF program;
• Record keeping – retaining certain records that can assist with the investigation of a crime or demonstrate compliance with AML/CTF laws, for seven years; and
• Enrolment with AUSTRAC.

What about legal professional privilege and client confidentiality? 

The consultation paper notes the importance of legal professional privilege as a fundamental and important long-standing principle, but notes that the privilege can be abrogated by statute and does not apply where the communication was in furtherance of a crime or as part of a criminal or unlawful proceeding.

Simplification reforms

Apart from the proposed inclusion of gate-keeper professions in the AML/CTF regime, the consultation paper also outlines a range of simplification measures (although not all are strictly speaking 'simplification').

Amongst these are a reform to the requirement to have an AML/CTF Program. Currently, entities are required to have a two part program (Part A and Part B). The proposed reforms would require only a single program with greater guidance on how to manage AML/CTF risks. 

The reforms also propose simplifying customer due diligence requirements, away from a standardised procedure towards core obligations of know your customer, ongoing customer due diligence, enhanced customer due diligence, and simplified due diligence. The Rules would provide more granular guidance on when each form of customer due diligence is required.

For the gambling sector, there is currently an exemption on conducting due diligence on some customers where the provision of gambling services involves an amount less than $10,000. The reforms propose lowering that to $4,000 to align with international standards.

The tipping-off offence, which is the offence of disclosing the existence of a Suspicious Matter Report (SMR) to another person, would be amended to recognise greater business needs in sharing SMRs.

As it stands today, AUSTRAC is the only regulator of Digital Currency Exchanges (DCEs), and the proposed reforms would expand regulation to a broader set of services, including:

• 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 a digital currency (e.g. Initial Coin Offerings where start-up companies sell investors a new digital token or cryptocurrency to raise money for projects).

The Travel Rule as prescribed by FATF requires information about both the payer and payee to accompany the transfer of value as it is transmitted along the payment chain. Currently Australia only requires inclusion of payer information on electronic funds transfers (for example, bank to bank funds transfers through the New Payments Platform). The reforms propose requiring payee information to be added, and implementing the travel rule for businesses transferring value on behalf of customers, including remitters and digital currency exchanges.

The AML/CTF Act currently allows case-by-case exemptions to be granted where granting the exemption would assist in the investigation of a serious offence. The proposed reform would introduce a standard exemption where law enforcement agencies would issue a form to entities without needing to seek an exemption.

During COVID-19 a number of temporary rules were put in place, including allowing entities to conduct customer due diligence remotely and relying on uncertified copies of documents. The consultation paper asks which of those rules could be maintained or enhanced while effectively mitigating AML/CTF risks.

Finally, the reforms propose consolidating the AML/CTF Act and the lesser known Financial Transaction Report Act 1988 (Cth) into one Act. It's not widely known but that Act, which pre-dates the AML/CTF Act, continues to exist today and imposes obligations on cash dealers and solicitors to report significant cash transactions, and in the case of cash dealers, submit reports of suspect transactions. 

The way forward for Australia

FATF was due to evaluate Australia in 2024/25 but that evaluation is now not expected until 2026. The new Labor Government appears to be seeking to avoid a report critical of Australia for failing to implement key recommendations, and a possible "grey listing" which would impact Australia's reputation and inbound international investment.

The reforms proposed, particularly in respect of gate-keeper professions, are ambitious although not unprecedented. As the paper notes, Australia is one of only five jurisdictions, of those who have committed to implementing the FATF Recommendations, yet to do so. 

The simplification proposals are likely to be welcomed by industry, although as we have noted not all of the proposals are in fact simplifications. Some in fact would expand the regulatory perimeter of the AML/CTF Act.

Authors: Rani John, Partner and Edward Elliott, Senior Associate.