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Overall summary of the Proposed Tranche Two Reforms

Major AML/CTF Reforms (Reforms) are coming. 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.  Simplifying and Modernising the AML/CTF Regime; and
  2. Extending the regime to additional high-risk professions (known as Tranche Two entities) (to read more about this, click here).

Simplifying and Modernising the AML/CTF Regime

Tranche 2 Graphics

AML/CTF Programs

Currently, AML/CTF Programs must be split into two parts:

Part A

Designed to identify, mitigate and manage money laundering and terrorism financing risks.

Part B

Covers the regulated entity's customer due diligence procedures.

A 2016 Report found that the current requirements in relation to AML/CTF Programs are difficult to follow and at times the provisions of the AML/CTF Act are not consistent or complimentary to the AML/CTF Rules. In response to this, the Reforms will streamline Part A and Part B into one single program and amend the AML/CTF Act to include additional information about assessing and mitigating risks, as well as clarifying and simplifying the obligations relating to Proliferation Financing Risks and Foreign Branches and Subsidiaries. 

Customer Due Diligence

Customer due diligence is a core obligation in the current regime and involves entities carrying out documented procedures to identify and verify customers before they commence providing a designated service. The Reforms have proposed that the AML/CTF Act, Rules and any AUSTRAC guidance be realigned. This would mean that the AML/CTF Act sets out the core obligations, while the Rules specify how that obligation is met. The AUSTRAC guidance will give advice on how these obligations are to be met.

The current regime breaks down customer due diligence obligations into 5 sections, and the Reforms have recommended changes to each of these sections:

1. Understanding Customer Risk

the draft Reform legislation outlines that the AML/CTF Act should provide an overarching obligation to assess and understand the risk for each customer relationship based on a number of risk factors, while the Rules should provide specific risk factors to be considered.

2. Knowing your customer

the AML/CTF Act should require that a regulated entity commencing the provision of a designated service must be reasonably satisfied with a number of factors, whilst the Rules should set high-level standards for risk-based customer due diligence policies and procedures.

3. Ongoing Customer Due Diligence

the AML/CTF Act should require a regulated entity to perform ongoing customer due diligence measures, whilst the Rules should require a regulated entity to have risk-based systems and controls to update and review customer due diligence information, a tailored transaction monitoring program and continue the requirement to re-verify customer information where the regulated entity has doubts of adequacy and authenticity.

4. Enhanced Customer Due Diligence

the AML/CTF Act should require a regulated entity to apply enhanced customer due diligence measures in certain circumstances, where the Rules should set out these specific circumstances.

5. Simplified Due Diligence and Safe Harbour Provisions

the Reforms propose that these provisions be re-written to better comply with international best practice, after the 2015 Financial Action Task Force (FATF) Mutual Evaluation found that the current provisions of the AML/CTF Act and Rules were not sufficient. The Reforms suggest replacing the current Safe Harbour Provisions contained in the Rules by amending the AML/CTF Act to permit regulated entities to apply simplified due diligence measures where the entity has reasonably assessed that the risk associated with the business relationship is low. The Reforms suggest that the Rules require regulated entities to consider specified factors before applying simplified due diligence procedures.

Lowering the Reporting Threshold for the Gambling Sector

Currently in Australia, regulated entities do not need to perform customer due diligence when performing gambling services involving less than 10,000 AUD. According to the standards of the global financial crime watchdog, the FATF, this amount does not align with Australia’s international obligations which requires due diligence checks to be carried out on transactions equal to or above 3,000 USD (approximately 4,500 AUD at current exchange rates). The Reforms recommend lowering the due diligence threshold to 4,000 AUD to align with international standards and allow for exchange rate fluctuations.

Amending the Tipping Off Offence

The Tipping Off offence aims to deter regulated entities from disclosing information that may reveal the existence of a suspicious matter report (SMR) which could compromise a law enforcement investigation. Presently, the current regime allows a number of exemptions to the offence of Tipping Off, however these exemptions have not kept up to date with changes in supporting compliance, the transition to a globalised risk management approach and the increasingly complex business structures of regulated entities.

The Reforms would see the modernisation of the Tipping Off offence to better support entities to comply with their obligations, while balancing the competing interests that the offence aims to protect. This change would reduce the need for multiple exemption applications for varying business structures and provide greater flexibility in meeting the challenges of new business models and risk management approaches to financial crime.

DCE

Regulation of Digital Currency Exchange

The AML/CTF Act regulates digital currency exchange providers when they engage in the exchange of digital currencies such as Cryptocurrency for fiat currencies such as AUD, or vice versa. In 2018 the FATF introduced standards that required countries to impose AML/CTF obligations on four additional high-risk services provided by digital currency exchange providers. To keep in line with these new standards, the Reforms recommend the expansion of the AML/CTF Act and Rules to include these additional high-risk services. The Reforms also suggest that the definitions of some of these services be improved to more clearly integrate digital currency activity.

Modernising the Travel Rule Obligations

The Travel Rule is a requirement to include information about the payer and payee with a transfer of value as it is transmitted through a payment chain. This rule increases the transparency of transactions, allowing entities to identify, mitigate and manage the associated financial crime risk. Currently, only financial institutions such as banks are required to include payer information for electronic transfers of fiat currency, and they do not need to include payee information. Payer information is also not required to be verified. The proposed Reforms would require payer information to be verified and require the inclusion of payee information. The Reforms also recommend the Travel Rule be implemented for remitters and digital currency exchange providers. This would bring Australia’s obligations in line with the FATF standards and reduce the risk of Australian businesses being assessed as higher-risk by overseas entities as an increasing number of countries begin to implement the Travel Rule.

Exemption for Assisting an Investigation of a Serious Offence

The current Regime permits the AUSTRAC CEO to exempt regulated entities from sections of the AML/CTF Act where providing a designated service to a customer would assist in the investigation of a serious offence. AUSTRAC has stated that this process is inefficient and the scope of the exemption is too broad and inconsistent with international standards. The proposed Reforms suggest incorporating the law enforcement exemptions framework into the AML/CTF Act. This would support regulated entities to cooperate with criminal investigations that involve their customers, whilst continuing to comply with their AML/CTF obligations. It would also aid in aligning the regime with international standards. Instead of applying for an exemption from AUSTRAC, eligible agencies would provide a written ‘keep-open’ notice using a form specified in the Rules, directly to regulated entities and copied to AUSTRAC. Receipt of a notice from an eligible agency would provide a sufficient basis for the entity to rely on the exemption. AUSTRAC would maintain oversight of these exemptions by requiring eligible agencies to provide copies of the ‘keep-open’ notices and requiring a periodic report from eligible agencies and regulated entities about the number of notices issued.

Revised obligations during the COVID-19 Pandemic

In 2020, AUSTRAC introduced rules (COVID-19 rules) to support flexible customer verification measures during the pandemic. The COVID-19 rules supported regulated entities to conduct customer due diligence remotely, including by relying on an uncertified copies of documents in accordance with their risk-based systems. The COVID-19 rules were designed to provide temporary relief in extraordinary conditions, however the longer term use of unauthenticated copies of identification documents poses significant money laundering and terrorism financing risks.

Since the pandemic, many businesses have continued providing services online and remotely. The Reforms propose introducing longer-term options for flexibility in how regulated entities meet their customer due diligence obligations that do not pose the same level of risk as the COVID-19 rules.

covid

Repeal of the Financial Transaction Reports Act 1988

The Financial Transaction Reports Act 1988 (Cth) was Australia’s primary AML/CTF legislation until 2006 when the AML/CTF Act was introduced. The Financial Transaction Reports Act continues to operate alongside the AML/CTF Act, imposing restrictions on ‘cash-dealers’ and solicitors. The Reforms would consolidate all obligations into the AML/CTF Act, leaving only one piece of AML/CTF legislation in Australia.

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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