On 16 December 2005, the exposure draft of the long anticipated Anti-Money Laundering and Counter-Terrorism Financing Bill (Bill) was released for public comment.
The federal government announced on 11 October 2005 that it had agreed to proceed with a package of reforms to strengthen Australia’s AML/CTF system, with the next steps in the reform process being the release of the draft exposure Bill. This announcement followed on from the Financial Action Task Force of Money Laundering’s evaluation of Australia’s current AML/CTF system, which highlighted a number of improvements that Australia could make to assist in strengthening its current system.
There was also a lengthy period of consultation between the federal government, AUSTRAC and industry before the release of the draft Bill. Freehills was involved in the consultations with industry when it hosted two dialogues between industry and AUSTRAC in September 2005. (A summary of those dialogues can be found here.)
As might be expected as a result of FATF’s evaluation, and from our involvement with industry in the consultation process, the matters dealt with in the Bill, as summarised below, have much broader coverage than the current Financial Transaction Reports Act (FTRA).
Released concurrently with the Bill were the following documents:
- an overview of the Bill
- a summary of the Bill
- sample anti-money laundering/counter terrorism financing rules and guidelines dealing with:
- AML/CTF programs
- suspicious matters, and
- customer identification
- various 'frequently asked questions' explaining how the proposed reforms would impact on the operations of the following industry sectors:
- accountants and financial planners
- banks, building societies and credit unions
- bullion dealers
- bureaux de change
- gambling service providers
- insurance sector
- remittance service providers, and
- legal practitioners, securities and derivatives dealers, and
- frequently asked questions in relation to the AML/CTF rules.
The documents are available on the Attorney General’s AML website.
The consultation period on the documents closes on 13 April 2006. Submissions on the Bill are to be sent to the Attorney-General’s department, while submissions on the Rules are to be sent to AUSTRAC.
Threshold issues — to whom does the Bill apply?
The Bill applies to 'reporting entities'. A reporting entity is a person who provides 'designated services'. A table set out in clause 6(2) of the Bill identifies each designated service, and the customer to whom the designated service is provided, in respect of financial services. Similarly, a table in clause 6(3) of the Bill sets out the same information, in respect of gambling services.
It is important to note that a reporting entity is defined by reference to the nature of the services it provides, and not the nature of the underlying business of the reporting entity itself. Accordingly, a financial institution will almost undoubtedly be a reporting entity, because it provides the designated financial services. However, it may be that another organisation also provides designated financial services, and while not a financial institution, will still be a reporting entity for the purposes of the Bill because of the nature of the services it provides. Because of the wide definition of 'stored value card' for example, it might be that the issuer of a gift card might be caught, in some circumstances, by the definition of 'designated services'.
Know your customer … and others
As was widely anticipated, the Bill sets out identification procedures to be undertaken in respect of the customers of the designated financial services. The general rule is that a reporting entity is to carry out a verification procedure before providing a designated service to a customer. However, there are limited exceptions to this rule which cover:
- identification after the provision of the designated service
- certain customers with whom the reporting entity has a 'continuous relationship' not being identified, and
- modified identification procedures for certain categories of 'low risk' customers.
The draft identification rules set out the minimum 'know your customer' information in respect of individuals/natural persons, companies, non-natural persons (other than a company) and natural persons operating as a corporation sole. It is also expected that there will be rules in relation to the customer details which will need to be verified, and the steps to be taken to verify those details. However, not every piece of minimum KYC information will need to be verified.
In addition to customers, there will also be identification procedures for agents with authority to act on behalf of customers.
Due diligence assessment will also need to be carried out in respect of correspondent banking relationships, taking into account certain factors listed in the Bill. Such an assessment will need to be conducted 'regularly'.
A reporting entity must also include an employee due diligence program as part of its AML/CTF program, which includes screening of prospective employees who may be in a position to facilitate the commission of a money laundering or financing of terrorism offence.
A reporting entity also needs to carry out due diligence on any third party whenever a reporting entity proposes to enter into an arrangement with a third party for the provision of services, where those services have a connection with a designated service provided by the reporting entity. Again, there must be risk based systems and controls in place to identify any material AML/CTF risk associated with any task to be allocated to the third party, before entering into any arrangement with that third party.
Ongoing customer due diligence
As widely anticipated, reporting entities will also have ongoing obligations to carry out risk-based customer due diligence.
One of the elements of the customer due diligence program, as set out in the rules on AML/CTF programs, is risk classification and transaction monitoring of customers. Risk classifications are assigned at the outset of the business relationship by the reporting entity, and then reviewed at 'appropriate intervals'—for example, if there has been a material change in the customer’s circumstances (of which the reporting entity is aware) or there has been a material change in the nature of the business relationship with the reporting entity or in the customer’s transaction behaviour. A transaction monitoring program must include systems and controls to monitor a customer’s transactions throughout the course of the reporting entity’s relationship with the customer. Again, the extent to which a customer’s transactions should be monitored is to be determined on a risk basis.
The requirement to undertake ongoing customer due diligence is to be contrasted with the current position under the FTRA, where a customer only needs to be identified once, when they open an 'account' (as defined in the FTRA) with a cash dealer.
Under the Bill, the reporting entity has an obligation to report to AUSTRAC if it has reasonable grounds to suspect that the information that the reporting entity has in its possession may be relevant to the investigation or prosecution of an offence against the law of the Commonwealth or a Territory (including taxation and financing of terrorism offences).
The draft Rules for suspicious matter reporting set out the matters to be taken into account in determining whether there are reasonable grounds for forming a suspicion. These include matters such as the size, complexity, structure or pattern of any transaction, whether any element of disguise is involved in the customer’s dealings with the reporting entity and the customer’s demeanour or behaviour.
The position in the Bill can be contrasted with the current position under the FTRA, where, while there is an obligation to report suspect 'transactions' (as opposed to 'matters'), there has been very little formal guidance given as to what might constitute a 'red flag' for the forming of a reportable suspicion by a cash dealer.
As expected, and set out in the FATF Forty Recommendations, the Bill also makes 'tipping off' an offence, so that it is an offence for a reporting entity to disclose to any person that it has formed a suspicion or reported that suspicion to AUSTRAC.
Threshold transaction reporting is the same as 'significant cash transactions' under the FTRA. Under the Bill, a report must be made on the provision of a designated service that involves a 'threshold transaction'. 'Threshold transactions' involve physical transfer of currency where the total amount transferred is $10,000 or more.
Other reporting obligations
There are also other reporting obligations contained in the Bill in relation to:
- cross-border movements of physical currency
- movements of bearer negotiable instruments into or out of Australia, and
- certain types of funds transfers.
Providers of designated remittance services
AUSTRAC is to maintain a register of providers of designated remittance services. A person providing these services must advise AUSTRAC of certain information in relation to their provision of these services.
As is the position under the FTRA, the Bill contains certain rules in relation to the keeping of records, including records of customer information, customer generated transaction documents, records of identification procedures and of due diligence assessments.
Perhaps the single biggest difference between the Bill and the FTRA is the requirement for reporting entities to develop an AML and CTF program, and then ensure the program is maintained and complied with. This pro-active measure can be contrasted with the FTRA position where, although there are ongoing obligations to report, the 'customer due diligence' component was completed only once, usually at the start of the relationship between the cash dealer and the customer.
Amongst other things, an AML and CTF program is one which:
- is designed to identify and materially mitigate the risk that the provision by the reporting entity of designated services might involve or facilitate an AML or CTF offence
- will also monitor the provision of designated services
- take such action as specified in the AML/CTF Rules in relation to the provision of designated services to PEPs
- include a system directed towards ensuring the reporting entity’s compliance with the AML/CTF Act, and
- complies with other requirements of the AML/CTF Rules.
The draft AML/CTF Rules dealing with AML and CTF programs also address:
- risk identification
- risk mitigation
- customer due diligence
- enhanced customer due diligence
- suspicious reporting—systems and controls
- AML/CTF risk awareness training programs
- employee due diligence
- third party due diligence
- record keeping
- board oversight, and
- independent review.
As the regulator, AUSTRAC will be required to monitor compliance by reporting entities with their obligations under the Bill.
The Bill introduces a civil penalty regime for some breaches (for example, where there is a failure to carry out the applicable customer identification procedure).
The wide application of the Bill presents challenges not just for those organisations that currently do not comply with the FTRA, but also those that currently have procedures in place for compliance with the FTRA. There is no doubt that the proposed changes are extensive and far reaching.
Organisations should consider whether they want to make a submission on the draft Bill, or the Rules, or both.
Organisations should also start giving consideration as to how to comply with the requirements of the new regime. At this stage, it is not clear what the implementation period will be in respect of the Bill, although various periods from 12 months to three years have been proposed. (The implementation period is an appropriate submission point for those organisations with a strong view of the time it will take to ensure compliance with the requirements of the Bill.)
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.