On 11 December 2007, AUSTRAC advised that the wording of Item 35(b) of Table 1 in Section 6 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Act) unintentionally exempts the issue of units in a managed investment scheme from the operation of the Act. This view is at odds with industry's understanding of AUSTRAC's position, which was that AUSTRAC did not concede that the exemption had this effect and that as managed funds are intended to be regulated, industry should treat them as being regulated.
AUSTRAC's view has a number of implications for organisations which operate managed investment schemes. These are discussed in this news alert.
Item 35(b) provides that the issue by a company of a security of the company does not amount to designated service. AUSTRAC has conceded that this paragraph has the effect of excluding managed investment schemes from the operation of the Act. This is because section 92(2) of the Corporations Act 2001 provides that interests in a managed investment scheme are securities of the company which acts as the responsible entity or trustee of the scheme. Consequently, where the issue or sale of units in a managed investment scheme is the only service that the company provides, the company will not be a reporting entity and will not be regulated under the Act.
AUSTRAC has said this was not the intended operation of Item 35(b) and has indicated that the Attorney-General's Department is examining possible responses to this issue. However, there is no timeframe for the resolution of these issues or the date of effect of any amendment. Nor has AUSTRAC indicated whether the 'prosecution free period' will be extended.
Possible responses include:
- amending the Act – as Parliament is not likely to sit before February and Bills are not normally passed in the sitting they are tabled, this could mean the amendment would not occur before May 2008;
- making a Regulation to designate issuing managed investment scheme interests under section 6(5) of the Act – while Regulations must be tabled in Parliament and may be disallowed by either House within 15 days, the Regulation should take effect immediately;
- AUSTRAC may be able to exercise certain Rule making powers, although this may not be ideal given its limited powers in relation to designated services.
Whatever method is used, it is critical that funds that are or will be listed on a financial market or are part of a stapled structure are not caught. These trusts are not commonly used as 'investment products' and can be distinguished from unlisted managed funds or deposit products. A number of businesses have raised with AUSTRAC their concerns that the inclusion of all managed investment schemes within item 35(b) was itself a further unintended operation of the Act.
AUSTRAC's late announcement is likely to cause significant difficulty for affected organisations who were ready to comply, particularly since it has occurred so close to the 12 December 2007 compliance deadline. For organisations that only issue units in managed investment schemes, it may be difficult (and costly) to reverse systems and procedures at short notice. For organisations that provide a number of services, including the issue of units in a managed investment scheme, it may be difficult to apply the systems and procedures to certain services and not others.
Issuers may, of course, decide to implement the requirements of the Act as if they are regulated in any case. There is nothing to prevent issuers collecting additional information. The risk is that in doing so or in refusing to issue units they breach another legal obligation.
The defence contained in section 235 of the Act, which states that criminal and civil proceedings will not be brought against persons acting in good faith purported compliance with the Act, may not be available for the issue of units in a managed investment scheme unless the issuer believes AUSTRAC is wrong. Therefore, affected organisations will need to reassess their obligations under the Act and determine what action they should take in light of this concession from AUSTRAC.
In determining what course of action to take, affected organisations should particularly consider their obligations under relevant discrimination and privacy legislation. They will also need to consider any amendments they may have made to their disclosure documents, such as Product Disclosure Statements and application forms. If an organisation has inserted provisions into disclosure documents which refer to its obligations under the Act, it will need to review these provisions to ensure that they are not misleading or deceptive. In addition, entities that have formed a designated business group (DBG) may need to withdraw any members of the DBG that only issue units in managed investment schemes as they are no longer reporting entities and, therefore, cannot be a member of a DBG.
The concession also has the effect of exempting cash management trusts (CMTs) from the operation of the Act. While CMTs fall within the definition of account in section 5 of the Act, holders of CMTs will only be regulated under the Act if they are ADIs, building societies or credit unions, or are specified in the Rules.
AUSTRAC has not specified CMTs in any Rules (draft or registered) as yet. However, AUSTRAC has indicated in its Guidance Note Opening an Account that it intends to specify in the Rules that CMTs are regulated under the Act.
Please contact us if you have any queries in relation to these recent developments.
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.