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Legal Briefings: Scope of Australia’s AML/CTF Regime To Be Widened

BACKGROUND

The terms of reference for the Inquiry, which took place on 9 and 10 November 2021, included, among other things: 

  1. the regulatory impact, costs and benefits of extending AML/CTF reporting obligations to Gatekeeper Professions, often referred to as
  2. the extent to which:
    1. DNFBPs take account of money laundering and terrorism financing risks, and
    2. the existing professional obligations on DNFBPs are compatible with AML/CTF reporting obligations.

Senators Kim Carr (Labor), Raff Ciccone (Labor), Karen Grogan (Labor), Nick McKim (Greens), Deborah O’Neill (Labor) and Paul Scarr (Liberal) presided over the Inquiry.

Since as early as May 1991, the Financial Action Task Force (FATF) has been concerned with ‘non-traditional financial institutions or professions’ (as they were then referred) that might be involved in money laundering practices. At page 79, the Report says that Australia is 1 of only 3 states  that have committed to implementing FATF’s recommendations but which have failed to enact any AML/CTF regulation of DNFBPs. This is despite the fact that Australia was a founding member of FATF, and has reaffirmed its commitment as recently as October 2021 at the G20 summit in Rome.

The proposal to incorporate Tranche Two serves several national purposes including meeting global standards in combatting money laundering (ML) and terrorism financing (TF), enhancing national security and closing the regulatory and intelligence gap.

Senator McKim gave his second reading speech to Parliament concerning the recent AML/CTF Amendment (Increased Financial Transparency) Bill (AML/CTF Increased Transparency Bill) on 8 February 2022 where he stated, among other things, that ‘given recent moves by the United States and China on this issue, Australia is now ignominiously grouped with Haiti and Madagascar as the only three countries in the world not to have acted to, or be acting to, require the [Gatekeeper Professions] to establish who their client is and to report any suspicious matters to the relevant authorities’.

The AML/CTF Increased Transparency Bill does not seek to prescribe the details of the expansion in the scope of the AML/CTF Act. Instead, the AML/CTF Increased Transparency Bill simply sets the parameters and timeframe for the government to bring forward legislation.

Since then, the Senate Committee has released its Report which sets out its four recommendations to the Federal Government. The Senate Committee recommends that the Federal Government:

  1. accelerate its consultation with stakeholders on the timely implementation of Tranche Two reforms in line with the FATF recommendations and ensures that the AUSTRAC and Department of Home Affairs have the right resources to adequately and effectively implement and manage the Tranche Two regime;
  2. be broad in its accelerated consultation with relevant stakeholders and give specific consideration to:
    1. the impact of regulatory burden on small business;
    2. opportunities and efficiencies that might be gained from technological innovation; and
    3. existing regulatory and professional obligations on Tranche Two entities, including their effectiveness against the matters that are the subject of the AML/CTF Act;
  3. seek advice as to whether section 242 of the AML/CTF Act should be amended to ensure the proper operation of legal professional privilege; and
  4. pursue a beneficial ownership registry

    (collectively referred to below as the Recommendations)

Before addressing certain stakeholder’s submissions concerning the Recommendations, we will begin by exploring who is captured by the proposed Tranche Two regime and what that means.

WHO IS CAPTURED?

FATF has recommended that countries who adopt regulations of DNFBPs remain free from prescriptive legislation when defining which types of businesses would be captured by Tranche Two legislation. However, the AML/CTF Increased Transparency Bill proposes to extend relevant regulation to:

  1. lawyers;
  2. conveyancers
  3. accountants;
  4. real estate agents;
  5. high-value dealers; and
  6. trust and company service providers. 

WHAT DOES THIS MEAN FOR DNFBPS?

Simply, a Tranche Two regime implementation will require Gatekeeper Professions to identify, mitigate and manage the ML and TF risks faced by their business. A Gatekeeper Profession can expect to report to AUSTRAC or a peak or regulatory body on AML/CTF matters.

Whilst certain professions, such as lawyers and accountants, are already regulated in respect of their ethical obligations to their respective professions and, in most instances, already have policies and procedures in place and systems and controls for capturing and appropriately dealing with some of the myriad of anti-money laundering (AML) issues that subsist, some affected categories of business have none at all.

A Tranche Two regime may require DNFBPs to create their own programs, or rely on peak (or regulatory) bodies to develop detailed sector specific guidance, which they will be obliged to comply with, that evidence a risk-based approach to the identification, mitigation and management of the real, and not remote, risks those businesses or professions face. Particularly, DNFBPs may be required to consider, among other things: 

  1. employment process requirements including, in particular, employee due diligence obligations;
  2. training of special/relevant employees;
  3. assessing the risks of their products and services and how they may be manipulated for ML/TF purposes;
  4. systems for understanding client/customer typologies;
  5. customer due diligence (CDD), also known as ‘Know Your Customer’ (KYC) obligations;
  6. source of wealth of clients/customers and source of funds reporting;
  7. enhanced customer due diligence reporting in circumstances where a client’s KYC may be insufficient for the value or volume of transactions being conducted or the risks applicable to that class of client or ;
  8. record-keeping obligations;
  9. suspicious matter reporting;
  10. transaction threshold reporting; and
  11. politically exposed person and high-risk customer reporting.

It is difficult to predict the extent to which each of the above obligations will necessarily apply to a particular category of DNFBP due to idiosyncrasies between each industry.

AUSTRAC stated, in its submission to the Inquiry, that it is estimated that extending AML/CTF regulations to the DNFBP sector would result in a six-fold increase in the reporting entity population. If Tranche Two legislation is enacted, AUSTRAC’s current regulatory model may be unsuitable and may benefit from amendments. For example, it may be more suitable (from a compliance and enforcement perspective) for smaller businesses to be regulated by a prescriptive AML/CTF model of general application tailored to that DNFBPs’ sector instead of requiring businesses to conduct individual risk assessments, or for certain DNFBP industries to be regulated by their respective regulatory or peak body, thereby easing the regulatory burden placed upon AUSTRAC.

APPREHENSIONS TOWARD TRANCHE TWO REGULATION

The main concerns expressed from within the DNFBP sector at the Inquiry and in the Report included the:

  1. lack of evidence to support the need for regulation;
  2. potential duplication of existing regulatory obligations;
  3. impact of additional regulatory burden on small businesses; and
  4. abrogation of legal professional privilege.

ACCOUNTANTS

The Chartered Accountants Australia and New Zealand (CA-ANZ) made submissions to the Inquiry, outlining, among other things, that the implementation of Tranche Two could:

  1. lead to a ‘duplication of existing compliance obligations [likely to] exacerbate the compliance burden and red tape costs on [its] small practice members’;
  2. involuntarily cause small practices to cease offering designated services, inadvertently displacing ML and TF risks to service providers that are not members of a professional body or outside the regime; and
  3. result in requirements and obligations beyond the resources of a large proportion of its members in public practice.

CA-ANZ submitted that ‘requirements and obligations should be scaled rather than a one size fits all approach’. It said that ‘it is important to be cognisant that ML/TF risk is proportionate to the size of a business, the number of clients and the value of transactions, so policy responses should be pragmatic’.

LAWYERS

Similarly, the Law Council of Australia (LCA) submitted, among other things, that Tranche Two:

  1. is inherently in conflict with a client’s right to legal professional privilege because:
    1. privilege belongs to the client and ‘a legal practitioner cannot reasonably be asked to make determinations as to whether client legal privilege will or will not apply to communications for the purposes of making a report … to do so exposes that legal practitioner to disciplinary proceedings should they ultimately make the wrong judgment call’;
    2. ‘ The AML/CTF regime cannot adapt to the complexity of privilege in practice’ – section 242 of the AML/CTF Act ‘is not expressed in terms of being an exception from reporting obligations. … even if section 242 was clearly expressed as an exception to reporting obligations, the operative sections of the AML/CTF Act which includes identification verification, ongoing customer due diligence and reporting suspicious matters, act to diminish the unique relationship that exists between a lawyer and client; and
    3.  section 41 of the AML/CTF Act, which sets out the reporting obligations of reporting entities in circumstances where a suspicious matter arises, is ‘cast too wide and the standard for a ‘reasonable suspicion’ is too low’, such that the obligation to report ‘is invoked the moment a person inquires or requests a service from a reporting entity’.
  2. does not account for the ‘fluidity to relationships in legal practice that do not exist within the financial sector which makes application of the AML/CTF Act difficultIf a client is not able to rely on the security of client legal privilege from the very outset of their relationship with their solicitor or barrister, it risks diminishing the effective and proper administration of justice resulting in significant flow on of costs to law enforcement, the legal system, government and the community’.
  3. legislation in Canada was recently characterised, by its Supreme Court, as inapplicable to the legal profession insofar as it related to, among other things, a lawyer’s duty of commitment to the client’s cause because the scheme taken as a whole limits the liberty of lawyers in a manner that is not in accordance with the principle of fundamental justice relating to the lawyer’s duty of committed representation;   and
  4. places a significant burden on legal practices in respect of contingent ‘significant civil penalties if they fail to make reports under the scheme, but also significant professional discipline if they make the wrong decision’;
  5. may overlap with lawyer’s existing obligations to the extent that there already exists (through professional conduct rules) a requirement for lawyers to only act on a client’s lawful and proper instructions, and only providing lawful advice and without furthering unlawful purposes;
  6. places a significant burden on legal practices in respect of establishment and maintenance costs, citing the costs analysis to estimate establishment costs across DNFBPs conducted by Deloitte in 2016 commissioned by the Ministry of Justice in New Zealand.

REAL ESTATE AGENTS

The Real Estate Institute of Australia told the Senate Committee that real estate agents:

  1. are subject to codes of conduct that are managed by real estate institutions at the state level;
  2. already undertake identity verification processes for both vendors and purchasers and because of the large amount of technology used to collect that information, there would exist economies of scale to use that technology through collaboration with the Australian Federal Police;
  3. (should the Tranche Two regime come into operation) will be required to provide AUSTRAC with information it would otherwise obtain through lawyers, conveyancers, banks, accountants in relation to the same transaction; and
  4. roles do not include the transfer of money, ‘so the idea that they’re somehow complicit in criminal activity is an incorrect assumption’.

QUELLING APPREHENSIONS

It was submitted to the Senate Committee that Tranche Two legislation can work in Australia because, among other things:

  1. ethical obligations can be, and are presently, maintained whilst effective AML/CTF regimes regulate DNFBPs in various other countries;
  2. regulatory burdens have been ameliorated through technological advancements and automation; and
  3. costs associated with implementation are substantially cheaper than previously predicted.

Is there in fact a lack of evidence to support the need for regulation?

The Australian Criminal Intelligence Commission (ACIC) is Australia’s national criminal intelligence agency responsible for assessing the serious and organised criminal threat environment and its impact on Australia. At the Senate inquiry on 10 November 2021 Mr Matt Rippon, Deputy Chief Executive Officer of the ACIC, estimated that transnational serious organised crime costs Australia up to an estimated $47.4 billion annually (although the manner of calculating this estimate was not published in the Report, it may include the costs of responding to the consequences of relevant criminal activity).

ACIC submitted to the Senate Committee that ‘Australia’s stable financial markets and valuable real estate market make the country an attractive destination for domestic and transnational criminal groups and individuals looking to invest or launder the proceeds of crime. Australia also continues to sustain very profitable crime markets, such as the illicit drug market, and as a result there is a need to launder the significant proceeds that these crimes generate. Tens of billions of dollars obtained through serious and organised crime are likely laundered in Australia each year’.

The Department of Home Affairs told the Senate Committee that ‘the legal profession had been listed explicitly [as a sector requiring AML/CTF regulation] because of a range of international typologies and collective international experience which has demonstrated that ‘the services they provide are vulnerable to abuse for money laundering’. A similar explanation was provided for the inclusion of real estate agents.’ The Australian Federal Police told the Senate Committee that it had restrained criminal assets totalling $470 million since 1 July 2019. Of that amount, 56 per cent, or $266 million, was real estate.

It is the Senate Committee’s view that ‘[in] order for [Australia’s] economy, financial system and certain industries, such as legal services and real estate, to remain robust, competitive and appealing to legitimate clients and consumers, they must not only withstand but actively seek to prevent money laundering and terrorism financing’. The Senate Committee went on to say, in its Report, that ‘Money laundering is not a victimless crime. The ability of criminals, through the use of lawyers, accountants and real estate agents, to build and maintain the structures required to continue to profit from crime is harming Australians. The [Senate Committee] is of the view that implementing [Tranche Two] reforms will bolster the ability of Commonwealth agencies to keep Australians safe’.

The Senate Committee considers the implementation of Tranche Two reforms essential. Successful implementation will require broad consultation and considered design of an appropriate model, and the committee acknowledges that this will take time. However, the need for action cannot be ignored.

Potential duplication of existing regulatory obligations

In respect of the duplication of reporting that was contended to exist in the real estate sector in respect of the same transaction, the Australian National University Law Reform and Social Justice Research Hub submitted that collecting data of this nature from real estate agents and requiring the industry to conduct certain checks ‘would increase the speed at which [AUSTRAC] can identify and disrupt the chain of money laundering.

Mr Brad Brown, National Manager, Education, Capability and Communications, at AUSTRAC stated: ‘… the nature of the engagement of a realtor versus the nature of the engagement of a banker in terms of the provisions of the loan is obviously different. That’s where the value of different insight provides intelligence’.

AUSTRAC added that ‘there would absolutely be some intelligence value’ that would arise out of suspicious matter reports from the real estate sector.

The Senate Committee is of the view that the way forward, in respect of regulating DNFBPs and avoiding the duplication of existing obligations, especially in respect of lawyers, accountants and real estate agents, is to ensure that comprehensive assessments of existing obligations against the objects of the proposed Tranche Two regime is conducted. 

Regulatory and cost burdens

Issues concerning regulatory burdens and cost of implementation burdens have been mitigated using automation and information technology. Anthony Quinn of Arctic Intelligence spoke at the Inquiry about the cost burden to small law firms (being firms between one and five solicitors). Significantly, Mr Quinn stated that the average cost outlay is approximately $10,000. The LCA, in referencing the Queensland Law Society’s survey, represented that smaller law firms could expect a costs outlay of around $119,000 per annum. Paddy Oliver of AML Experts told the Inquiry that the Queensland Law Society survey, which was conducted in 2017 (Survey), ‘was designed with one goal in mind, which was, in [his] opinion, to heighten the potential cost for implementation’. Mr Quinn submitted to the Inquiry that, since the Survey, there have ‘been massive advances in technology in terms of the KYC space. All these line items [referring to the breakdown of costs contained in the Survey] – in terms of collecting and verifying customer information, doing PEP and sanctions screening, doing individual customer risk ratings, and rescreening notifications – could be done by modern KYC providers for under $3 per client. Neil Jeans of Initialism told the Inquiry that the Survey estimated a law firm’s costs in scoping out and understanding the nature of the prospective client’s work to cost between $50 and $122. Mr Jeans also submitted that such costs are not AML/CTF costs, but, rather, costs in the ordinary course of professional practice.

Legal Professional Privilege

Whilst the recent Canadian Supreme Court decision (discussed above) is being used as a reason why Tranche Two should not apply to the legal profession in Australia, there are a significant number of other countries (England, Wales, Scotland, Ireland, Hong Kong, Singapore and New Zealand included) that have implemented Tranche Two type regulations. Those countries’ DNFBPs appear to be adequately meeting both their AML/CTF obligations and ethical obligations to their clients.

In 2004 the United Kingdom began implementing AML regulatory laws for its DNFBPs. The UK’s approach to AML regulation required each respective profession’s regulatory bodies to be its AML regulator. Guidance relating to operational policies, process and controls were developed for each profession to follow. The relevant guidance functions as a compliance “safe harbour” for A DNFBP which follows it.  The UK law societies also expressed apprehension, or were opposed, to the regulation of their profession citing arguments similar to those made to the Senate Committee by the LCA, such as the effects upon legal professional privilege; existing regulation; and cost of compliance. Those reservations appeared to decline once the legislation was enacted and, through consultation with the UK Government and an acknowledgment that ML and TF activates posed a serious national threat, the legal profession continued to operate effectively in performing its roles. It is helpful to recall in this context that legal professional privilege does not apply to communications made in the furtherance of an offence or an action that would render a person liable for a civil penalty.

The explanatory memorandum sitting behind the AML/CTF Increased Transparency Bill explicitly refers to perceived issues concerning privilege in the legal profession and the Report recommends that the Federal Government seek advice in respect of whether section 242 of the AML/CTF Act requires amendment to ensure the proper operation of legal professional privilege and accordingly, any drafting of amendments that may occur will necessarily be alive to this complex area or law.

For some time now, HSF Australia has had obligations to comply with the UK’s Tranche Two obligations and its requirements have become a standard feature of our firm’s business practices in the UK. Similar legal requirements apply in the firm’s other offices outside Australia.

Article by Tony Coburn and Jonathan Ferraro posted online here 2 May 2022.

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