Extending the AML/CTF regime to Tranche Two Entities

With the implementation of the ‘Tranche Two’ Reforms (Reforms) drawing closer, we have put together a summary of each of the changes and how they will impact your business. The Reforms, as outlined in the Attorney General’s Consultation Paper are divided into two major parts:

  1. Extending the regime to additional high-risk professions (known as Tranche Two entities); and
  2.  Simplifying and Modernising the AML/CTF Regime.

Why include these additional entities?

Professional service providers support and provide a wide range of legitimate economic activity by facilitating access to financial services and products. Criminals may seek to exploit these businesses by using them to conceal and launder illegally obtained funds. AML/CTF legislation aims to assist businesses to protect themselves from and identify any potential criminals as well as assist law enforcement agencies to protect the community from more serious crimes including terrorism, child abuse, fraud and the illicit drug trade. The additional entities that will be affected by the reforms are outlined below.

Professional service providers such as lawyers, accountants, trust and company service providers, real estate agents, and dealers in precious metals and stones (Tranche Two entities) are especially vulnerable to exploitation and criminal activity by transnational, serious and organised crime groups, and terrorists due to the nature of the services they provide.

Money laundering and counter terrorism financing (ML/TF) are serious crimes with links to further heinous crimes such as child abuse, drug trafficking, and terrorism. Serious and organised crime has cost Australia up to A$60.1 billion in 2020-21 with illicit financing playing a pivotal role[1]. 

[1] https://www.aic.gov.au/publications/sr/sr38

Lawyers, Accountants, Conveyancers and Trust/Company Services

Lawyers, accountants, conveyancers, and trust and company service providers provide specific services that may be exploited by criminals and criminal organisations. The services provided by these entities can be used to disguise ownership, including the individual who owns or controls the asset, conceal the origins and purposes of financial transactions, facilitate tax evasion, and ultimately, launder the proceeds of crime.

Criminals may choose to engage these providers, as operating through or behind them can provide a façade of legitimacy. They can be used to create complex structures that create distance between criminals and their illegally obtained wealth, by obscuring property ownership, providing ideal opportunities for laundering large volumes of illicit funds.

Real Estate Sector

High-value goods such as real estate have been identified as a significant money laundering medium in Australia. Criminals buy real estate as a way of concealing illegally obtained funds as it allows for the movement of a large amount of funds in a single transaction. In the past two years, 57.5% of the Australian Federal Police’s Criminal Assets Confiscation Taskforce total restraint value has been attributed to real estate[2]. Real estate also offers criminals an opportunity to avoid asset forfeiture by concealing the true ownership of property, by hiding assets behind complex corporate and trust structures or paying another party to pose as the purchaser. Criminals may also purchase property using large amounts of cash, live in the property for a period of time and renovate it using the illicit funds, then sell the property at a later date for a capital gain. The real estate sector facilitates criminals to not only conceal and enjoy the profits from their crimes, but also artificially inflates housing prices placing a constraint on genuine property buyers.

[2] Australian Federal Police Submission to the Inquiry into the Adequacy and Efficacy of Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) Regime – https://www.aph.gov.au/Parliamentary_Business/Committees/Senate/Legal_and_Constitutional_Affairs/AUSTRAC/Submissions

Dealers in Precious Metals and Stones

Currently, only bullion dealers are covered by the AML/CTF Regime. However, precious metals and stones are also effective channels to legitimise criminal proceeds, including storing value, transferring value, and lifestyle consumption. Precious metals and stones are highly valuable and their trade is often conducted in cash and they can be held anonymously, often making ownership untraceable. Jewellery transactions are particularly vulnerable to under or over-valuation, which can disguise the amount of criminal proceeds being laundered. Additionally, individual items may be small and easy to transport, offering criminals the opportunity to transfer value within or between countries in a manner that minimises the chances of detection.

Global Standards

As a founding member of the FATF, Australia recognises the important role that the FATF plays in ensuring that the global response to money laundering and terrorism financing is robust. The FATF’s standards are accepted globally and comprise of 40 recommendations and 11 immediate outcomes with a number of these specifically applying to Tranche Two entities. The FATF monitors compliance with its Standards through a peer review process known as a Mutual Evaluation. These evaluations assess the compliance and effectiveness of legislative and regulatory frameworks, and a poor result may lead to being publicly ‘grey-listed’ and subject to ongoing monitoring. After Australia’s 2015 Mutual Evaluation, it was found that Australia was non-compliant or only partially compliant with 16 of the FATF’s recommendations.

Australia will undergo its next Mutual Evaluation between 2025 and 2027 and if there have been no changes since the 2015 Evaluation, is at great risk of potential grey-listing. Grey-listing could result in economic costs for Australia, such as increased costs of doing business as other jurisdictions apply enhanced measures, reduction in credit rating and foreign direct investment, reduction in incoming capital flows, and the potential loss of international banking connections as Australia will be perceived to be higher-risk. This could have significant impacts on Australia’s GDP.

What Professional Services are proposed to be covered?

Legal, Accounting, Conveyancing and Trust/Company Services

The Reforms would alter the current AML/CTF regime to cover legal, accounting, conveyancing and trust/company services firms that prepare or carry out transactions for clients, relating to the following:

Buying or selling of Real Estate

Organisation of contributions for the creation, operation or management of companies

Managing of client money, securities or other assets

Creation, operation, or management of legal persons or legal arrangements (e.g. trusts)

Management of bank, savings or securities accounts

Buying and selling of business entities

It may also include trust and company service providers when they prepare for or carry out transactions for clients, relating to the following:

Services provided for non-commercial purposes will not be covered e.g.: where an accountant manages their family’s accounts and property without payment.

Real Estate Sector

The Reforms would cover real estate agents and property developers involved in transactions to buy or sell real estate, including any legal or equitable interest in real property, including freehold title, strata title or leasehold tenure. A number of criteria may be relevant to whether a person is carrying on a business of selling real estate, including the number, type and value of properties sold over a given time period.

Dealers in Precious Metals and Stones

The Reforms would cover dealers in precious metals and stones when they engage in cash transactions equal to or above AUD10,000, including in the capacity of an agent or auctioneer. The FATF outlines that dealers in precious metals and stones are any persons engaged in the business of buying or selling precious metals or stones, including:

Tranche 2 Graphics (8) copy

The proposed threshold for the regulation of dealers is a cash transaction equal to or greater than AUD10,000.

The Reforms would only apply to cash transactions of AUD10,000 or more and would not include other forms of funds transfer e.g. electronic funds transfer or payment by cheque. Businesses that do not receive cash of AUD10,000 or more as payment will not be subject to regulation.

What will Tranche Two Entities have to do?

If an entity is defined as a Tranche Two entity they must comply with the AML/CTF regime, and the six key regulatory obligations:

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Customer Due Diligence

Entities must verify a customer's identity before providing a designated service.

Ongoing Customer Due Diligence

Entities must conduct ongoing customer due diligence throughout the course of the business relationship, including transaction monitoring and enhanced customer due diligence.

Reporting

Entities must report to AUSTRAC all ‘suspicious matters’, cash transactions of AUD10,000 or more, all instructions for the transfer of value sent into or out of Australia and annual compliance reports. All persons must report cross border movements of monetary instruments about the AUD10,000 threshold or the foreign equivalent.

Developing and maintaining an AML/CTF Program

Entities must identify the risks they face in providing designated services, and develop an AML/CTF program containing procedures to mitigate and manage those risks.

Record-keeping

Entities must make and retain certain records that can assist with the investigation of financial crime or that are relevant to their compliance with the AML/CTF regime for seven years.

Enrolment and registration with AUSTRAC

Entities must enrol with AUSTRAC if they provide a designated service. Remittance service providers and digital currency exchange providers must also register with AUSTRAC to permit additional checks to ensure criminals are kept out of these sectors.

If you are unsure if you will be a Tranche Two entity, please contact us. Also, sign up to our dedicated mailing list to ensure you receive the latest updates on these Reforms.

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