Australia: Major AML/CTF regulatory reform is back on the cards

As AUSTRAC continues taking enforcement action against non-compliance with Australia’s existing AML/CTF laws, there are strong indications that the Australian Government will press ahead with the long-anticipated expansion of the anti-money laundering/counter-terrorist financing regime over the next 12-18 months.

In April, the Attorney-General’s Department released an extensive consultation paper, covering both the modernisation of the existing AML/CTF framework, as well as the introduction of Tranche 2 reforms which will see an expansion of the AML/CTF regime to cover gatekeeper professions, including lawyers, accountants, trust and company service providers and real estate agents. 

In its May Budget, the Government committed $14.3 million over 4 years from 2023-24 to support the necessary policy and legislative reforms.

Consultation kicks off…again

On 20 April 2023, the Attorney-General’s Department (AGD) announced a public consultation on proposed reforms of Australia’s AML/CTF regime and requested input by 16 June 2023.

The current round of reforms is driven by the age and current limitations of Australia’s existing regime, increasing international pressure for Australia to extend its regime to Gatekeeper Professionals, heightened scrutiny through parliamentary processes, and the reality of significant breaches having been identified and prosecuted by AUSTRAC against regulated entities in the gambling and banking sectors.

The reforms proposed in the consultation paper aim to:

• modernise and clarify the regime in line with international standards and best practice
   
• reduce complexity and regulatory burden on industry
   
• ensure the regime remains fit for purpose, and
   
• harden Australian businesses and sectors against exploitation by serious organised criminals.

There are two key parts to the consultation:

Part 1 focuses on the simplification and modernisation of Australia’s AML/CTF regime. It picks up on recommendations made in the 2016 Report on the Statutory Review of Anti-Money Laundering and Counter-Terrorism Financial Act 2006.

Part 2 deals with the extension of Australia’s AML/CTF regime to certain professions which are considered to be high-risk, including lawyers, accountants, trust and company service providers, real estate agents and dealers in precious metals and stones (Gatekeeper Professionals).

A short overview of some of the key proposals for each part is set out in the table below:

Part 1 - Simplification and modernisation	Part 2 - Extension to Gatekeeper professionals
Streamlining the Part A and Part B requirements for an AML/CTF program into a requirement to have a single AML/CTF Program that is effective in identifying, mitigating and managing money laundering and terrorism financing risk.	Introduction of a regime to cover lawyers, accountants, conveyancers, and trust and company service providers when they prepare or carry out transactions for clients, relating to the following: 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.
Inclusion of a specific requirement for a regulated entity to identify, assess and understand money laundering and terrorism financing risks.	New regime to also cover trust and company service providers when they prepare for or carry out transactions for clients, relating to the following: acting as a formation agent of legal persons  acting 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 a trustee of an express trust or performing the equivalent function for another form of legal arrangement, and  acting as a nominee shareholder for another person.
Realignment of obligations in the AML/CTF Act, the Rules and Guidance materials on each of the core customer due diligence obligation.	As a general rule, services provided for non-commercial purposes will not be covered.
Extending the regulation of digital currency exchanges to cover exchanges between one or more other forms of digital currency; transfer of digital currency on behalf of a customer; safekeeping of digital currency; and provision of financial services relating to an issuer’s offer and/or sale of digital currency	Consideration to be given as to how legal professional privilege will be protected if lawyers are included in the regime.
Amending the tipping-off offence and providing a statutory exemption for assisting an investigation of a serious offence.

To put the current round of consultation in context, we set out below a short background of Australia’s AML/CTF regime, key areas of concern that have been identified for reform and the enforcement landscape.

Australia’s current AML/CTF framework

Australia’s anti-money laundering and counter-terrorism financing regime was introduced in Australian in 2006 and aims to ensure that Australia implements the most effective and proportionate measures to deter, detect and disrupt money laundering and terrorism financing. The aim is to disrupt financial processes that may be used by criminals to conceal the fact that money has been obtained illegally, and to prevent funds being transferred to criminals.

The Australian Institute of Criminology estimates that serious and organised crime costs the Australian community up to A$60.1 billion in 2020-21, with illicit financing at the centre of most crime types.

Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the AML/CTF Act) reporting entities that provide designated services have various obligations to carry out risk assessments, due diligence customer checks, and report suspicious transactions to AUSTRAC.

Australia’s international standing on AML/CTF

Australia was a founding member of the Financial Action Task Force (FATF), an inter-governmental body established in 1989 with a mandate to set global standards and to promote the effective implementation of legal, regulatory, and operational measures for combating money laundering, terrorist financing and other related threats to the integrity of the international financial system.

The FATF sets out 40 recommendations which form a framework for countries to follow to implement measures to combat money laundering and terrorist financing, as well as the financing of proliferation of weapons of mass destruction.

While Australia has implemented many of these recommendations, it has not yet implemented Recommendation 22 which sets out customer due diligence and record keeping requirements that should apply to designated non-financial businesses and professions, and Recommendation 23 which deals with the applicability of Enhanced Customer Due Diligence (ECDD), suspicious transaction reporting and tipping off offences, to designated non-financial businesses and professionals – i.e. Gatekeeper Professionals.

In 2015, the FATF conducted a national assessment or mutual evaluation report (MER) of Australia, which found that while Australia had a well-established system to combat ML/TF, there were key areas that needed to be addressed, including the regulation of Gatekeeper Professionals. In a 2018 follow up, the FATF found that Australia remained non-compliant its recommendations.

Australia remains one of only 5 countries out of 200 member states not to legislate Gatekeeper Professionals, alongside Haiti, Madagascar, China, and the United States.

Review of Australia’s AML/CTF regime

Although it has been foreshadowed for over 15 years that Australia’s AML/CTF regime may be expanded, reform in this area has been very slow moving.

The 2016 Statutory Review of the AML/CTF Act (the Statutory Review) and the 2022 Report by the Senate Legal and Constitutional Affairs References Committee (the Senate Inquiry), both recommended changes to Australia’s AML/ CTF regime.

2016 Statutory Review

A statutory review of the AML/CTF Act is required by law every 7 years. In 2016, the Statutory Review was conducted by the Department of Home Affairs in conjunction with AUSTRAC. 
Key findings included:

• the AML/CTF Act and Rules are too complex;
   
• Industry requires more assistance to understand and comply with its obligations;
   
• Other services that pose high ML/TF risk should be captured under the AML/CTF regime;
   
• AML/CTF program requirements should be consolidated and streamlined; and Reporting obligations are onerous and should be streamlined.

Senate Inquiry 

As part of the Senate Inquiry, the adequacy and efficiency of Australia’s AML/CTF regime was considered.  In particular, the impact of non-compliance with the FATF recommendations on Australia’s international reputation was highlighted, noting the risk of being grey-listed by the FATF could impact Australia’s ability to do business in other FATF member states. Australia’s non-compliance may also impact law enforcement capabilities and Australia’s ability to assist partner states. 

The Senate Committee recommended that the Government:

• consult with stakeholders be accelerated to consider the timely implementation of tranche 2 reforms in line with the FATF recommendations;
   
• consider the impact of regulatory burdens on small businesses, as well as the opportunities and efficiencies that might be gained from technological innovation which could streamline regulatory processes; and
   
• amend the AML/CTF Act to ensure the proper operation of legal professional privilege.

While some submissions recognised that it is a matter of when, not if – the reforms occur, with a cautious focus on the method of implementation, other submissions expressed robust opposition due to the alleged operational burden that the changes may impose.

Recent enforcement activity

In our view, another key driver of the latest round of reforms has been significant incidents of non-compliance with the existing AML/CTF regime. AUSTRAC’s investigations have resulted in numerous enforceable undertakings with banks and other financial service providers and a number of prosecutions.

 Since 2017, AUSTRAC has commenced proceedings against various banking institutions and casinos for serious and systemic breaches of the AML/CTF legislation. It has been highly successful in its efforts and significant civil penalties have resulted. For example:

• Commonwealth Bank of Australia (CBA) was fined $700 million for 53,750 breaches of the AML/CTF Act;
   
• Westpac was fined $1.3 billion for over 23 million breaches of the AML/CTF Act.
   
• Crown Melbourne and Crown Perth (Crown) have agreed to a penalty of $450 million (still subject to Court approval) in relation to systemic non-compliance with AML/CTF laws.

Cases are ongoing against The Star Pty Limited and The Star Entertainment QLD Limited and SkyCity Adelaide Pty Ltd.

The non-compliance of these entities largely arose due to a failure to ensure that a risk-based approach was adequately and proportionately implemented. The Consultation paper recommends that the Act could be amended so that regulated entities can better understand what steps are needed to mitigate risks by improving their understanding of the nature and extent of the risks they face. The explicit requirement to assess risk is absent from the current regime, with the obligation to assess risk implied from several provisions.

These cases suggest there is a need to establish a clear overarching requirement that a regulated entity must take appropriate steps to identify, assess and understand the money laundering and terrorism financing risks it faces prior to the implementation of an AML/CTF program.

Increased role Gatekeeper Professionals in money laundering

In February 2023, nine alleged members of a significant money laundering organisation were charged with offences including money laundering and conspiracy to deal in the proceeds of crime. The AFP’s investigation into the organisation’s activities revealed reliance on legal, accounting and migration professionals in enabling it to move hundreds of millions of dollars globally without detection. Members of the organisation also made significant purchases of Australian residential and commercial real estate. An accountant and a migration lawyer were amongst the nine arrested individuals, suspected of providing advice relating to avoidance of detection by law enforcement.

What next?

We expect that many existing regulated entities will support the reforms proposed to simplify and modernise the current AML/CTF regime. The rules are extremely complex and require a great deal of compliance measures to be embedded into an organisation.

Although we anticipate that there will be pushback from the legal and accounting professions and the property industry regarding the proposal to extend the AML/CTF framework to Gatekeeper Professionals, it seems inevitable that these reforms will be rolled out.

AUSTRAC has already indicated that feedback from the initial round of reforms will be used to inform subsequent drafting of the reforms over the course of the 2023. In the May 2023 budget, the Government announced funding of $14.3 million dollars from 2023-2024 to support policy and legislative reforms to harden Australia against illicit financing and evaluation of Australia’s anti-money laundering framework.

The next round of consultation, presumably with draft legislation, will be in September 2023.

If you would like to actively participate in the consultation process, we would be happy to assist with any review or preparation of submissions.

As the reforms roll out, we will keep you updated as to further developments and provide you with practical guidance as to how the reforms will affect your business.