16 Feb Overview of Australia’s AML/CTF Regime
It is important to understand what is currently required under the AML/CTF regime in order to ensure you are currently compliant and able to prepare for the likely changes in 2016/17.
AUSTRAC has become increasingly focused on the level of compliance with existing requirement.
Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime is also under reform, which will bring changes to the current regime and widen the scope of those businesses captured by AML/CTF obligations.
The Anti-Money Laundering/Counter-Terrorism Financing Act 2006 Tranche I targeted the financial sector and other industry sectors identified at the time as posing a higher money laundering or terrorist financing risk, such as the gambling sector and remittance providers.
Tranche II, soon to be introduced, is expected to focus on certain businesses and professions, including accountants, legal practitioners, and real estate agents.
These are known as Designated Non-Financial Businesses Professions (DNFBPs), who act as “gatekeepers” and are key to a fully effective AML/CTF regime.
The Australian AML/CTF regime imposes obligations on businesses that engage in one or more of the designated services.
The provision of a designated service results in being a reporting entity under the AML/CTF Act. The obligations on reporting entities include:
Developing and maintaining an AML/CTF program – reporting entities must introduce into their businesses, and comply with, AML/CTF programs which are designed to identify, mitigate and manage money laundering, terrorist financing and other risks that the reporting entity might reasonably face in its business.
Identification and verification – reporting entities must identify and verify a customer’s identity before providing the customer with a designated service and also carry out ongoing due diligence on those customers.
Reporting – reporting entities must register and report to AUSTRAC suspicious matters, certain transactions above a threshold amount and international funds transfer instructions. AUSTRAC provides information to domestic regulatory, national security and law enforcement agencies and certain international counterparties.
Record keeping – reporting entities must make and retain certain records, and retain certain documents given to them by customers.
The Commonwealth agency, AUSTRAC, which has responsibility for administering the Financial Transaction Reports Act 1988, is also the regulator for obligations under the AML/CTF Act.
Businesses offering or engaging in designated services should already have in place risk sensitive arrangements to address their existing obligations.
Obligation for Reporting Entities
The Anti-Money Laundering and Counter-Terrorism Financing Rules (AML/CTF Rules), which run to some 325 pages, provide further clarification on specific AML/CTF program requirements that reporting entities should have, including:
- systems and controls for ongoing assessment of money laundering or terrorism financing risks;
- a process for governing board or senior management approval of the AML/CTF program;
- the designation of a person at managerial level as the ‘AML/CTF Compliance Officer’;
- Customer identification;
- a transaction monitoring program aimed at identifying money laundering or terrorism financing.
- identifying suspicious transactions;
- reporting of transactions and suspicious matters;
- an AML/CTF risk awareness training program for employees;
- an employee due diligence program; and
- regular independent reviews of Part A of the AML/CTF program to assess effectiveness, compliance and implementation of the program;
Reporting entities should already have in place an appropriate AML/CTF program, which covers their obligations, that has been fully implemented and they can demonstrate compliance with.
The AML/CTF regime also contains sanctions as a result of non-compliance with obligations.
Sanctions for reporting entities
The AML/CTF Act takes two approaches to sanctions including both criminal offences and civil penalty provisions.
Criminal offences in relation to money laundering and terrorist financing activity are set out in the AML/CTF Act.
Civil penalty provisions also exist for failure to put in place appropriate compliance arrangements, including failing to:
- conduct money laundering and terrorism financing risk assessments;
- have an anti-money laundering and counter-terrorism financing program;
- carry out the applicable customer identification procedures before the commencement of the provision of a designated service;
- conduct ongoing customer due diligence;
- retain records of customer identification and transactions; and
- report a suspicious transaction.
Breaches of the civil penalty provisions contain various tariffs within the AML/CTF Act with a maximum pecuniary penalty of 100,000 penalty units for a body corporate and 20,000 for individuals.
The current value of one penalty unit under the AML/CTF Act is $180, which equates to up to $18 million for a reporting entity and $3.6 million for individuals.
Civil penalty regimes are not new. Other regulators, including the Australian Securities and Investments Commission (ASIC) and the Australian Competition and Consumer Commission (ACCC), have been successful in obtaining court orders for substantial pecuniary penalties.
A History of Legislative Development
The Financial Transaction Reports Act 1988 (FTRA) established Australia’s first AML regime.
The FTRA required the reporting of transactions that involve certain cash threshold amounts. The reporting requirements of the FTRA were introduced at a time when the international focus was on tackling drug trafficking, which is still predominately a cash business.
Internationally in 1989, the Financial Action Task Force (FATF) was formed to try to address concerns about money laundering in the illicit drug trade.
FATF (now comprising 34 member countries) developed standards, commonly known as the Recommendations on Anti-Money Laundering and Counter-Terrorist Financing
In 2005 the 3rd round mutual evaluation of Australia’s implementation of the FATF Recommendations found the Australian systems were well behind international best practice.
In response, in December 2005 the Australian Government released the Anti-Money Laundering and Counter-Terrorism Financing Bill for consultation, which became the AML/CTF Act on 12 December 2006.
Supporting the AML/CTF Act where Rules and Regulations, which were implemented in phases between 2007 and 2008.
Each phase of Rules had an assisted compliance period, where so long as REs could demonstrate they were making progress toward compliance no regulatory action would be taken. The initial assisted compliance periods concluded in 2010.
In February 2012, the FATF published revised recommendations which deal with risks relating to money laundering, terrorist financing, the financing of the proliferation of weapons of mass destruction and others.
Significant amendments to the customer due diligence provisions within the Australian AML/CTF Rules commenced on 1 June 2014.
- Reporting entities are also now obliged to identify and verify not just their customers, but any beneficial owners of a customer (corporate or trust).
- Beneficial owners are defined as natural persons who ultimately own or control the customer (whether directly or indirectly).
- The changes to the AML/CTF Rules expanded the definition of Politically Exposed Persons (PEPs) to include Australian politicians and officials, as well as foreign officials.
- The enhanced due diligence measures within the AML/CTF Rules now apply to domestic PEPs.
These changes also had an assisted compliance period which concluded on 1st January 2016.
In December 2013, the Attorney-General’s Department and AUSTRAC launched Australia’s first statutory review of Australia AML/CTF regime.
Completion of the statutory review was delayed in order to incorporate any recommendations from the FATF’s 4th Round mutual evaluation of Australia’s AML/CTF regime which was conducted in August 2014.
This review was not only based on technical compliance, but also included an assessment of the effectiveness of Australia’s AML/CTF regime.
The results of the FATF review were mixed, suggesting the need for significant changes to the current AML/CTF regime and its effectiveness.
The Statutory Review Report, which incorporates recommendations from the FATF’s 4th Round mutual evaluation was published in April 2016.
The commitments made within the Statutory Review Report signal a program of significant change for Australia’s AML/CTF regime in 2016/17.