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‘Tranche two’ anti-money laundering rules require action from lawyers
Compared with Europe, the UK, and even New Zealand, Australia has been somewhat of a laggard in updating existing anti-money laundering legislation to apply to so-called tranche-two entities, writes Aynsley Vaughan.
Aynsley Vaughan
Global action to tackle money laundering, terrorist and proliferation financing is led by the Financial Action Task Force, which covers more than 200 jurisdictions. Of this network, Australia is one of only a handful – alongside China, Haiti, Madagascar, and the US – that does not yet regulate tranche-two entities.
Along with aligning Australian law with global standards, reforms are directed at reducing complexity and regulatory burden on industry and generally hardening Australian businesses against exploitation by serious organised criminals looking to integrate illegal funds into the legitimate financial system.
A public consultation process on the proposed tranche-two reforms has been in train since mid-2023 and is expected to be finalised around June this year.
Based on that, regulated entities will be required to comply with the new rules by the end of 2024 or early 2025.
Compliance with the legislation as administered by AUSTRAC will be enforced via civil penalties (non-compliance could lead to large penalties).
Who the new rules impact
Until now, the AML/CTF Act regulated those in the financial, gambling, remittance, and bullion sectors that provide designated services.
The updated legislation will apply to other high-risk professions and industries that can play a critical role in detecting, preventing, and reporting money laundering activities – specifically, lawyers, accountants, trust and company service providers, real estate agents, and dealers in precious metals and stones.
The focus is, in particular, on the real estate industry. Real estate investments offer an attractive avenue for money laundering, with purchase and subsequent resale seen as an easy way to launder criminal proceeds, especially as the sums of money involved can be large and often appreciate over time.
If you are a lawyer or other tranche-two entity, you will need to act to comply.
AML compliance – what’s required
Compliance with the updated legislation, once enacted, will require impacted tranche two entities to upgrade their risk management practices.
Risks are not the same for every business. Recognising this, AUSTRAC adopts a risk-based approach in assessing compliance with the AML/CTF Act.
This means that the onus is on the regulated entity to identify the money laundering and terrorism financing threats the business faces and to assess which are greater and which are lesser.
This allows for resources to be targeted at where they will have the biggest impact in terms of mitigating and managing risk.
In-house counsel and lawyers practising in commercial and corporate law would be well-advised to review their AML clauses in template and client contracts to ensure terms are comprehensive and risk mitigation is embedded in the relevant clauses.
Mitigating practices include having the right initial client due diligence to understand who the ultimate beneficial owner(s) is, along with a range of other measures such as:
- Adopting an AML policy and structuring an appropriate implementation program. This will lead to a requirement for an ongoing due diligence/customer monitoring program. Part of that program will result in the investment in tools for reporting suspicious transactions as well as monitoring changes to the ultimate beneficial owners.
- Assigning key responsibilities and appointing a local compliance officer.
- Employee training to raise awareness and help staff identify red flags.
However, taking a proactive approach is important, not just for compliance and to help combat financial crime but also to protect businesses themselves against financial and reputational risks.
Preparing for the enactment of the new legislation mid-year is probably a good idea.
Aynsley Vaughan is the global head of global entity management at TMF Group.
