As of Friday 12 December 2008, the next wave of obligations under the Anti-Money Laundering and Counter Terrorism Financing Act 2006 (AML/CTF Act) will take effect. Among other things, reporting entities must be prepared to submit suspicious matter reports and conduct ongoing customer due diligence.
The new requirements represent a significant increase in the obligations of reporting entities under the AML/CTF Act. Reporting entities must begin taking steps to comply immediately, in order to avail themselves of the 'prosecution free period' and to be fully compliant by 11 March 2010.
The new requirements and other recent AML/CTF developments are discussed below.
New obligations as of 12 December 2008
Transaction reporting requirements
The AML/CTF Act includes a series of transaction reporting requirements. The obligations, including the obligation to submit suspicious matters reports, will commence on 12 December 2008.
1. Suspicious matters reports (SMRs)
A reporting entity must submit an SMR where it has a 'suspicion on reasonable grounds' that:
- a person is not who they say they are
- the reporting entity has information which may be relevant to the investigation or prosecution of a person for tax evasion or another offence or may be of assistance in enforcing the Proceeds of Crime Act 2002
- providing services to a person may be preparatory to money laundering or terrorism financing or relevant to investigation or prosecution of a person.
'Suspicion on reasonable grounds' involves both an objective and subjective test – ie the reporting entity must actually have a suspicion and the suspicion must be based on matters or evidence which support the truth of the suspicion.
Relevant factors to the forming of a suspicion include:
- the behaviour of the person requesting the designated service (eg unusual nervousness)
- the known business background of the person
- the use of aliases or a variety of similar addresses
- transactions involving known tax havens, narcotic source or transit countries
- attempts to structure transactions so as to avoid participating in a threshold transaction (ie structuring a series of transactions so that each is less than A$10,000)
- movements of large cash amounts which have no apparent legitimate source
- cashing of unusually large amounts of traveller's cheques
- a customer with an unusually large number of accounts
- a personal account into which a large number of people are depositing cash.
2. International funds transfer instruction (IFTI) reports
Transactions involving transfer of money or property to or from a foreign country must be reported in an IFTI.
Ongoing customer due diligence (OCDD)
The OCDD provisions of the AML/CTF Act commence on 12 December 2008. OCDD involves the following three mandatory elements:
1. Verifying and obtaining additional 'know your client' (KYC) information
OCDD involves verifying KYC information which was collected during initial customer identification and obtaining additional KYC information, in certain circumstances.
An entity's OCDD programs should includes triggers to help it determine when further KYC information should be collected or if existing KYC information needs to be verified. Triggers may include:
- a significant transaction or series of transactions taking place
- a significant change occurring in the way a customer's account is being operated
- doubts being raised about the customer's identity.
In relation to pre-existing customers from whom KYC information was not collected, it may be necessary to collect KYC information, if this is warranted by the circumstances. AUSTRAC has said that this may be warranted, for example, where the account lacks essential name details or where the name details appear to be unreliable.
2. Transaction monitoring program
A reporting entity's AML/CTF program must include a transaction monitoring program, which involves:
- monitoring all customer transactions
- identifying suspicious transactions
- taking appropriate action.
The program should be able to identify complex and unusual large transactions as well as unusual patterns of transactions which have no apparent economic or lawful purpose. Such transactions may include transactions which are unusually large relative to the customer profile or usual behaviour or which reflect an irregular pattern of account activity.
3. Enhanced customer due diligence (CDD) program
A reporting entity's AML/CTF program must also include an enhanced CDD program, however, this is only required to be implemented in relation to customers which the reporting entity determines are high risk.
When an enhanced CDD program is triggered, the entity must consider whether it is necessary to:
- obtain further KYC information from the customer or a third party
- verify or clarify KYC information with the customer or a third party
- clarify the nature of the customer's ongoing business relationship with the reporting entity by seeking information from the customer or a third party
- undertake a more detailed analysis of the customer's past and future transactions
- lodge an SMR.
'Prosecution free period'
After the commencement of each new part of the AML/CTF Act, there is a 15 month 'prosecution free period'. During this period, AUSTRAC will not prosecute a reporting entity for breach of that part of the AML/CTF Act unless the entity has failed to take 'reasonable steps' to comply.
AUSTRAC has commented that 'reasonable steps' involve the making of steady progression towards compliance. AUSTRAC will consider a number of factors to determine if an entity has taken 'reasonable steps', including:
- whether the entity has taken preparatory steps to implement systems and controls relevant to its identified AML/CTF risks
- whether the entity has shown good faith in assessing, preparing and implementing its systems and controls
- how the entity's AML/CTF compliance compares to its industry sector peers
- whether the entity has put into place systems and procedures proportionate to its AML/CTF risks.
In relation to the customer identification provisions which commenced on 12 December 2007, the 'prosecution free period' will end on 11 March 2009.
The 'prosecution free period' in relation to the ongoing customer due diligence and transaction reporting provisions will end on 11 March 2010.
Annual compliance reports
The AML/CTF Act requires most reporting entities to submit annual compliance reports, in which they outline their steps towards compliance with the Act.
The first round of compliance reports were due by 31 March 2008. By 30 June 2008, AUSTRAC had received 7,500 out of an estimated 13,000 entities who should have provided compliance reports
Tranche 2 implementation
The AML/CTF Act represents the first tranche of Australia's AML/CTF reforms. A second tranche has been proposed which will apply to real estate agents, lawyers and accountants. AUSTRAC has indicated that, subject to the legislative process, it is planning to implement the second tranche within the next three years.
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.