The Need for Tranche 2 AML Reform in Australia

Norton Rose Fulbright’s Jeremy Moller highlights the advantages of regulating legal, accounting and real estate services under Australia’s AML laws, sooner rather than later.

AUSTRAC’s dual function as the Australian anti-money laundering (AML) regulator and financial intelligence unit makes it reliant on the information provided by its 15,000 plus reporting entities. This information has become increasingly important to AUSTRAC in an environment of complexity given the methods in which money can be laundered and in the context of greater regulatory action.

The Mandate for Tranche 2

There have been recent calls for the implementation of ‘Tranche 2’ reforms, a 14-year old planned policy change that aims to regulate lawyers, accountants and real estate professionals under Australia’s AML laws. This includes recent comments by Nicole Rose, the CEO of AUSTRAC, who at Senate Estimates last month stated that Tranche 2 is currently being considered by the Government.

Of particular significance to such regulation is the cost that money laundering and financial crime currently poses to the Australian economy, with the United Nations Office of Drugs and Crime (UNODC) estimating that between two to five percent of global GDP laundered annually. This is only likely to grow in a post-COVID world given the associated economic pressures.

Known as the ‘Gatekeepers’, and given their role in facilitating individuals or companies entering the financial system, lawyers, accountants and real estate professionals play a vital role in preventing money laundering. The Financial Action Task Force (FATF) has made it a priority that these Gatekeepers – otherwise known as designated non-financial businesses and professions (DNFBPs) – be regulated across jurisdictions, but despite numerous reviews and timetables, Tranche 2 has not been enacted in Australia.

It is referred to under this moniker because the introduction of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 only incorporated businesses in financial services, gaming and precious metals (Tranche 1).

Tranche 2 was originally pushed back in the wake of the global financial crisis, but has since been delayed further following changes in government, differing legislative priorities and resistance from elements of these professions. However, many existing reporting entities, including those in the financial sector, would welcome these measures as it would help them in complying with their own obligations, creating greater ease in performing customer due diligence and likely increasing the number of reporting entities by seven fold to in excess of 115,000.

As recently as 12 November, the Australian Greens proposed an amendment to an AML Bill before the Senate to regulate lawyers, conveyancers, accountants, high-value dealers, real estate agents, trust and company service providers. While these sectors themselves cannot be designated services as proposed, the underlying services they provide, such as facilitating the sale of a property could be.

The question remains: is there political will?

Enhancing the AML Ecosystem

 Australian businesses have undoubtedly become more aware of the need to prevent of money laundering in recent years. Initiatives such as Open Banking – which furthers information sharing between financial services companies – also provide an opportunity to reassess how risk is measured and customers are identified.

Increasingly, customers are being identified remotely, providing ease of on-boarding and operational efficiency for banks. However, the provision of legal, accounting and real estate services remains personal, often requiring face-to-face contact or the exchange of large volumes of information to enable these services to be provided. This is exactly the information which is useful to financial institutions and ultimately the regulator. Such examples include:

  • Legal structures, having been set up by a lawyer, enabling identification of beneficial ownership.
  • Audited accounts, allowing a better understanding of source of funds and source of wealth.
  • Documentation about the sale and purchase of property being exchanged, enabling an assessment of how funds are transacted and what assets are held.

Additionally of relevance is that much of this information is already readily available to these Gatekeepers. For example, lawyers need to conduct a conflict check and obtain information to assess a potential client if funds are to be transferred through their trust account. Consequently, regulating Gatekeepers under AML laws, particularly for those with large global operations, would only require an augmentation of existing systems and processes.

Assisted Compliance

The strongest argument against the imposition of Tranche 2 on Gatekeepers is the adverse compliance burden it would have on smaller entities or sole operators who provide these services. This has been of particular concern amid a difficult economic environment as it would undoubtedly lead to some within these professions retiring, merging with others or unfortunately ceasing to trade.

However, there remain avenues open to prevent or at least ease this burden through assisted compliance. One such approach could include limiting the scope of firms subject to regulation to only those law and accounting firms who have in excess of AUD 10 million in revenue. This approach has a number of benefits; notably, these are the entities that have the resources to undertake these processes. It would also give time for the upskilling and investment in personnel, who would become increasingly scarce if all firms were required to comply at once. In addition, it allows for the legal and regulatory framework to be appropriately trialled, without burdening those who would find it most difficult to comply.

Besides limiting the population that would initially be regulated, Parliament could also consider adopting a flexible time period within which firms are required to comply. For example, compliance with Tranche 2 laws could be implemented from a particular date, but not actively enforced for a period of 24 months. This period, which is often referred to as ‘assisted compliance’ provides regulated entities time to ensure that they have appropriate systems and processes in place.

Furthermore, it enables those who become regulated the opportunity to seek external advice and where necessary communicate with the regulator about how AML laws are interpreted and applied. It also enables deeper consideration of the regulator’s expectations and how such processes can be made sustainable within existing business structures. Critical to this will be active engagement with law societies and councils, accounting professional bodies as well as real estate institutes and associations.

 Training and Implementation

AUSTRAC’s recent establishment of an Education Capability and Communication Branch appears to pave the way for Gatekeepers to become regulated. Ms Rose stated at the Senate Estimates on 20 October: “…we’re looking at how we need to improve guidance and education — which is something we are focusing on this year — and if indeed we need to improve legislation.”

These statements by the AUSTRAC CEO have highlighted the role of reporting entities in providing a public good by focusing on crime prevention, which ultimately has benefits to the economy, integrity of institutions and society. Emphasising this approach in the implementation of Tranche 2 is essential.

Of particular importance will be the role that training and education will play in highlighting the need for the imposition of regulation on previously unregulated sectors, and subsequently, the need for compliance. Such steps could include the provision of AML training as part of continuing education in these professions, the publishing of updated risk assessments specific to these sectors, and the release of guidance to aid in the implementation of appropriate systems. Insight should be taken from the Tranche 2 reforms of the last few years in New Zealand and comparative jurisdictions.

Currently, there is a scarcity of available and experienced resources due to the heightened focus on AML in the financial services sector. Industry bodies will also need to consider the role of mentoring professionals early in their career, engagement with the regulator and ultimately the delivery of service to their members.

The current question facing Parliament with respect to Tranche 2 is: if not now, then when? Taking a proactive approach, aided by assisted compliance, training and education will likely provide benefits to all stakeholders and most importantly the public at large.

Jeremy Moller is a Senior Risk Advisor at Norton Rose Fulbright Australia.

 

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