Tranche 2: Modernising and Simplifying Australia’s AML/CTF Regime

About Tranche 2

Tranche 2 refers to the proposal for a second set of Reporting Entities (REs) to be included in the scope of the Anti-money Laundering & Counter-Terrorism Financing Act, 2006 (AML/CTF Act).

Additionally, a set of reforms to the AML/CTF Act are proposed aimed at simplifying and modernising the AML regime.

To advance this proposal, the Australian Attorney General’s office released a Consultation Paper on 20 April 2023.

Details

The Consultation Paper proposes two broad actions:

1. Part 1 proposes reforms to simplify the AML/CTF legislation considering that ‘the existing regime is complex, resulting in regulatory inefficiencies for business and government’.

2. Part 2 recommends expanding the scope of the Reporting Entities to following Tranche 2 entities:

- Lawyers, accountants, conveyancers

- Trust and company service providers

- Real Estate agents

- Dealers in precious metals and stones.

These groups of entities by their nature are considered high risk professions and businesses, and are categorised as ‘Designated Non Financial Businesses and Professions’ (DNFBPs) as per FATF classification.

The Consultation believes that the above group of businesses is particularly vulnerable to exploitation by transnational, serious and organised crime groups and terrorists.

Tranche 2 Expansion and Its Significance

The above Tranche 2 entities were supposed to be included in the scope of the AML/CTF legislation long ago, in response to the Financial Action Task Force (FATF) recommendations. FATF is the global AML/CTF supervisory body requiring all member countries to implement AML/CTF requirements. As a FATF member country, Australia is obliged to follow FATF recommendations.

Australia currently is not complying with 16 of the 40 Financial Action Task Force (FATF) recommendations including covering the Tranche 2 entities. It is thought that Australia’s financial system would remain vulnerable to criminal exploitation through the use of the above professions, weakening the overall integrity of Australia’s AML/CTF regime. Hence implementing the expansion is essential. Not including these DNFBPs could technically also result in FATF grey listing Australia for non-compliance, causing significant harm to our economy.

Key Simplification and Modernising Proposals

The Consultation proposes a series of measures for simplifying and modernising the current AML/CTF regime. These include:

Streamlining separate Part A and Part B of the Program documents into a single document;
Specifically providing an obligation for REs for risk assessment, and trigger events for such an assessment;
Specifying a basic set of minimum risk mitigation measures to be followed by the REs, and minimum categories of internal controls to be included in the Program;
Expanding the scope of Designated Business Group (DBG) - Related entities in a Group which are not REs and performing AML related support activities for REs in the DBG will also be able to join the DBG. This will extend to including foreign branches, subsidiaries and support entities of the Group;
Changes around customer due diligence (CDD) requirements, by aligning the AML/CTF Act, Rules and AUSTRAC Guidance. The Act will specify core obligations, and Rules will prescribe how those obligations will be met;
Amending no-tipping off provisions, to better support the industry than the current strict no-tipping off provisions;
Expanding regulation of in-scope services of digital currency exchanges to also include crypto for crypto transactions, crypto custody services, and provision of financial services related to offer / sale of digital currency.

Tranche 2 Entities - Key AML/CTF Obligations

Tranche 2 REs in principle will have to comply with a range of obligations, as currently applicable (and subject to the changes proposed as above under the simplification process). These include:

Enrolling the entity with AUSTRAC;
Developing and maintaining an AML Program;
Undertaking CDD; verifying a customer’s identity before providing designated services;
Undertaking enhanced customer due diligence, ongoing customer due diligence, and transaction monitoring; Reporting suspicious transactions, in-scope cash transactions, and in-scope cross border movement of monetary instruments;
Record keeping.

Impact for Existing Reporting Entities

Changes proposed under simplification and modernisation measures will impact the current set of Reporting Entities. Their AML program will have to be reviewed and aligned with the revised requirements.
The REs will also have to consider their current risk assessment, and update it considering the change in the risk environment and legislative provisions.

Way Forward

A second consultation paper is expected to be released by the Attorney General's office after considering the suggestions and recommendations received under the first Consultation.

As for the proposed Tranche 2 entities, they should closely track the process, consider the proposed compliance requirements for their business and the broader impact (on their products and services, customers, operational procedures, etc), and start thinking about their AML compliance framework.

It is expected that following the second Consultation, a Bill will be introduced in Parliament to legislate the proposals. Once the Act is passed, the compliance requirements will kick in.

Regulatory References:

- Attorney General’s department – overview of Australian AML/CTF regime: Read here

- First consultation hub and consultation paper: Read here (first consultation is closed)

- AUSTRAC announcement on commencing consultations: Read here

- AUSTRAC update on reforms: Read more here

- Inquiry into the adequacy and efficacy of Australia's AML/CTF regime: Read here

- AML/CTF Act 2006 and AML/CTF Rules Instrument 2007: Read here

- AUSTRAC: Refer here.

Update - May 2024

The Attorney-General's Department, on 2 May 2024, published the second Consultation on the reforms to Australia's AML/CTF regime, comprising Tranche 2 expansion and modernising and simplifying the current AML/CTF regime.

The feedback from the first Round was used to develop detailed reform proposals, that are described in the Overview and five further topic specific Papers, covering the following:

Overview Paper on reform exercise

Tranche 2 expansion

Paper 1 - Real Estate professionals

Paper 2 - Professional Service Providers (covering a range of services, and service providers that will include conveyancers, lawyers, accountants, trust and company service providers)

Paper 3 - Dealers in precious metals and precious stones

Simplification and modernisation measures

Paper 4 - Digital Currency Exchanges, Remittance Service Providers, Financial Institutions

Paper 5 - Simplify, clarify and modernise the regime (both for existing and new reporting entities)

The Consultation has invited public submissions from the stakeholders on the proposals and will close on 13 June 2024.

It is expected that following the second Consultation, a Bill will be introduced in the Parliament to legislate the proposals. Once the Act is passed, the compliance requirements will kick in.

Regulatory Reference: Click here for the AG's note and links to the papers above.

Update - Sept 2024

The AML/CTF Amendment Bill 2024 has been introduced in the Parliament on 11 September 2024 which proposes to extend the AML/CTF regime to Tranche 2 entities discussed in this article. The Bill also proposes several other significant changes to the AML/CTF Act.

Read our article here on the AML/CTF Bill.

Compliense Advisors is an AML and FinCrime compliance and risk management advisory services provider. We provide solutions aligned with your business profile to minimise and mitigate risks associated with money laundering and FinCrime activities, and achieve compliance.

Our experience includes Austrac registration/ enrollment; setting up, implementing, uplifting AML program; risk assessment; preparing and documenting procedures and framework; and a range of other matters including Sanctions, Anti-bribery & Corruption and Privacy compliances.

This article provides overview of the proposal currently under discussion for changes in the AML/CTF regulations, but is not a law currently. The article is for general informational purposes only. You should carefully evaluate your own circumstances, and seek professional advice for your specific needs. You are responsible for your compliance obligations, and for any action taken or omitted. We are not a law firm, and do not provide legal advice.

About Tranche 2

Tranche 2 refers to the proposal for a second set of Reporting Entities (REs) to be included in the scope of the Anti-money Laundering & Counter-Terrorism Financing Act, 2006 (AML/CTF Act).

Additionally, a set of reforms to the AML/CTF Act are proposed aimed at simplifying and modernising the AML regime.

To advance this proposal, the Australian Attorney General’s office released a Consultation Paper on 20 April 2023.

Details

The Consultation Paper proposes two broad actions:

1. Part 1 proposes reforms to simplify the AML/CTF legislation considering that ‘the existing regime is complex, resulting in regulatory inefficiencies for business and government’.

2. Part 2 recommends expanding the scope of the Reporting Entities to following Tranche 2 entities:

- Lawyers, accountants, conveyancers

- Trust and company service providers

- Real Estate agents

- Dealers in precious metals and stones.

These groups of entities by their nature are considered high risk professions and businesses, and are categorised as ‘Designated Non Financial Businesses and Professions’ (DNFBPs) as per FATF classification.

The Consultation believes that the above group of businesses is particularly vulnerable to exploitation by transnational, serious and organised crime groups and terrorists.

Tranche 2 Expansion and Its Significance

Key Simplification and Modernising Proposals

The Consultation proposes a series of measures for simplifying and modernising the current AML/CTF regime. These include:

Streamlining separate Part A and Part B of the Program documents into a single document;

Specifically providing an obligation for REs for risk assessment, and trigger events for such an assessment;

Specifying a basic set of minimum risk mitigation measures to be followed by the REs, and minimum categories of internal controls to be included in the Program;

Expanding the scope of Designated Business Group (DBG) - Related entities in a Group which are not REs and performing AML related support activities for REs in the DBG will also be able to join the DBG. This will extend to including foreign branches, subsidiaries and support entities of the Group;

Changes around customer due diligence (CDD) requirements, by aligning the AML/CTF Act, Rules and AUSTRAC Guidance. The Act will specify core obligations, and Rules will prescribe how those obligations will be met;

Amending no-tipping off provisions, to better support the industry than the current strict no-tipping off provisions;

Expanding regulation of in-scope services of digital currency exchanges to also include crypto for crypto transactions, crypto custody services, and provision of financial services related to offer / sale of digital currency.

Tranche 2 Entities - Key AML/CTF Obligations

Tranche 2 REs in principle will have to comply with a range of obligations, as currently applicable (and subject to the changes proposed as above under the simplification process). These include:

Enrolling the entity with AUSTRAC;

Developing and maintaining an AML Program;

Undertaking CDD; verifying a customer’s identity before providing designated services;

Undertaking enhanced customer due diligence, ongoing customer due diligence, and transaction monitoring; Reporting suspicious transactions, in-scope cash transactions, and in-scope cross border movement of monetary instruments;

Record keeping.

Impact for Existing Reporting Entities

Changes proposed under simplification and modernisation measures will impact the current set of Reporting Entities. Their AML program will have to be reviewed and aligned with the revised requirements.

The REs will also have to consider their current risk assessment, and update it considering the change in the risk environment and legislative provisions.

Way Forward

A second consultation paper is expected to be released by the Attorney General's office after considering the suggestions and recommendations received under the first Consultation.

As for the proposed Tranche 2 entities, they should closely track the process, consider the proposed compliance requirements for their business and the broader impact (on their products and services, customers, operational procedures, etc), and start thinking about their AML compliance framework.

It is expected that following the second Consultation, a Bill will be introduced in Parliament to legislate the proposals. Once the Act is passed, the compliance requirements will kick in.

Regulatory References:

- Attorney General’s department – overview of Australian AML/CTF regime: Read here

- First consultation hub and consultation paper: Read here (first consultation is closed)

- AUSTRAC announcement on commencing consultations: Read here

- AUSTRAC update on reforms: Read more here

- Inquiry into the adequacy and efficacy of Australia's AML/CTF regime: Read here

- AML/CTF Act 2006 and AML/CTF Rules Instrument 2007: Read here

- AUSTRAC: Refer here.

Update - May 2024

The Attorney-General's Department, on 2 May 2024, published the second Consultation on the reforms to Australia's AML/CTF regime, comprising Tranche 2 expansion and modernising and simplifying the current AML/CTF regime.

The feedback from the first Round was used to develop detailed reform proposals, that are described in the Overview and five further topic specific Papers, covering the following:

Overview Paper on reform exercise

Tranche 2 expansion

Paper 1 - Real Estate professionals

Paper 2 - Professional Service Providers (covering a range of services, and service providers that will include conveyancers, lawyers, accountants, trust and company service providers)

Paper 3 - Dealers in precious metals and precious stones

Simplification and modernisation measures

Paper 4 - Digital Currency Exchanges, Remittance Service Providers, Financial Institutions

Paper 5 - Simplify, clarify and modernise the regime (both for existing and new reporting entities)

The Consultation has invited public submissions from the stakeholders on the proposals and will close on 13 June 2024.

It is expected that following the second Consultation, a Bill will be introduced in the Parliament to legislate the proposals. Once the Act is passed, the compliance requirements will kick in.

Regulatory Reference: Click here for the AG's note and links to the papers above.

Update - Sept 2024

The AML/CTF Amendment Bill 2024 has been introduced in the Parliament on 11 September 2024 which proposes to extend the AML/CTF regime to Tranche 2 entities discussed in this article. The Bill also proposes several other significant changes to the AML/CTF Act.

Read our article here on the AML/CTF Bill.

Compliense Advisors is an AML and FinCrime compliance and risk management advisory services provider. We provide solutions aligned with your business profile to minimise and mitigate risks associated with money laundering and FinCrime activities, and achieve compliance.

Our experience includes Austrac registration/ enrollment; setting up, implementing, uplifting AML program; risk assessment; preparing and documenting procedures and framework; and a range of other matters including Sanctions, Anti-bribery & Corruption and Privacy compliances.

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