AML and CTF gatekeeper reform: What could Tranche 2 reforms look like in Australia? - Money Laundering

One of the key messages following the recent Federal Senate Committee inquiry into Australia's anti-money laundering and counter terrorism financing legislation (Federal Senate Committee Inquiry), is that it should no longer be a matter of 'if', but 'how' the current regime should be reformed to introduce obligations for 'gatekeeper professions or businesses', also known as designated non-financial businesses and professions (DNFBP), or 'Tranche 2', reforms.

In this Insight, we consider the lessons learnt from the application of local anti-money laundering and counter terrorism financing (AML/CTF) regimes, to gatekeeper professions or businesses in countries such as Canada, New Zealand and the United Kingdom, and what we could expect to see in Australia if Tranche 2 reforms are implemented.

Legislating AML/CTF obligations for gatekeepers

As we discussed in a previous Insight , the Financial Action Task Force (FATF), the global money laundering and terrorist financing watchdog, recommends regulation of the following gatekeeper professions and businesses:

casinos (where customers engage in financial transactions equal to or above the designated threshold);¹
lawyers and notaries;
real estate agents;
accountants/auditors;
trust/company service providers; and
dealers in precious metals/stones.

Broadly speaking, the FATF recommends DNFBPs be required to comply with certain customer/client due diligence (CDD), record keeping and reporting obligations, as well as introducing compliance oversight for DNFBPs.

Issues faced in Canada regarding legal professional privilege

A major point of concern identified in the Federal Senate Committee Inquiry was the need to ensure the Tranche 2 reforms would not abrogate a client's right to legal professional privilege (LPP). Described as a cornerstone of legal practice by the Law Council of Australia (LCA), the LCA generally contended that AML/CTF legislation cannot adapt to the complexities of LPP and, consequently, has the potential to disturb the client-lawyer relationship of trust, integrity and honesty.

LPP was a major point of contention during the introduction of Tranche 2 reforms in Canada and has regularly been raised as an example of the difficulties of applying AML/CTF legislation to the legal sector.

The controversy centred around the obligations of DNFBPs under the AML/CTF regime to report suspicious and prescribed transactions to the relevant government authority. In 2015, the Federation of Law Societies of Canada challenged the validity of the legislation in the Canadian Supreme Court. A key aspect of the challenge was that the legislation provided inadequate protection for client-lawyer privilege and undermined the ability of lawyers and notaries to comply with their duty of commitment to the client's cause. The Canadian Supreme Court upheld the challenge and struck down portions of the AML/CTF regime that required lawyers to collect and report on suspicious financial activity involving their clients.

A factor relevant in the making of the decision was that the Canadian Law Societies had already instituted appropriate AML/CTF standards. The Court indicated that it was possible for the government to legislate to address the deficiencies in the legislation but, to date, the Canadian Government has refrained from doing so.

Currently, a system of self-regulation exists in Canada where the law societies implement adapted rules that mirror federal legislation, although this has attracted the ire of some in the international community, with FATF describing the regime as a having a 'significant loophole'.

A moderate approach in the UK and New Zealand

In contrast to the position in Canada, the UK and New Zealand took a more moderate approach when introducing AML/CTF obligations on DNFBPs. The approach taken in those jurisdictions was to provide reporting exemptions on the basis of legal professional privilege or where the information is obtained in circumstances where the relevant communication is privileged.

This approach is in line with the current recommendations from FATF, which confirm that lawyers, notaries and other independent legal professionals are not required to report suspicious transactions, if the relevant information was obtained in circumstances where they are subject to professional secrecy or legal professional privilege.

New Zealand's AML/CTF regime mandates compliance with CDD, suspicious activity reporting (SAR) and other obligations, and the Department of Internal Affairs is primarily responsible for ensuring the compliance of DNFBPs and working with the respective professional regulatory bodies.

The regime only applies to lawyers and conveyancers who are undertaking specified activities (in line with FATF's recommendation 22(d)) and provides protections for LPP when a person reasonably believes that the relevant communication is privileged. The regime is activity-based, meaning that the administrative burden that accompanies the legislation only impacts firms completing specific activities.

In the UK, the current AML/CTF regime as it applies to DNFBPs has largely been in place since 2017 and requires DNFBPs to comply with CDD requirements, SAR requirements and many of the same requirements that financial institutions face.

Under the UK regime, each of the respective DNFBPs' professional regulatory bodies are required to be their AML/CTF supervisor(s). Following concerns raised by the UK Law Societies, the AML/CTF legislation includes exemptions from reporting under 'privileged circumstances'.

What might 'Tranche 2' reforms look like in Australia?

Given the newly elected Federal Government's pre-election comments in favour of progressing Tranche 2 reforms - including in calling for an inquiry that ultimately led to the establishment of the Federal Senate Committee Inquiry - we anticipate that peak DNFBP bodies may be consulted further as to the impact of additional Tranche 2 reforms in the coming years.

We anticipate that if Tranche 2 reforms are enacted, should they adhere to the FATF recommendations, they will likely:

extend the existing AML/CTF legislation to the categories of DNFBPs identified earlier in this article (where not already in place);
place certain obligations on these professions and businesses to identify, limit and manage their associated AML/CTF risks; and
provide a reporting exemption on the basis of LPP, including to introduce a regime that is either activity-based or risk-based, as has been implemented in New Zealand and the UK, respectively.

Reform in Australia may include increased CDD requirements (potentially extending to considering politically exposed individuals), risk assessments and increased reporting requirements. It is also likely that DNFBPs will become subject to supervision (in line with FATF's recommendation 28), potentially through both the Australian Transaction Reports and Analysis Centre (AUSTRAC) and their respective professional bodies. While these measures may create a financial burden for organisations, this will likely be applied proportionately through a risk-based approach.

If Tranche 2 reforms are ultimately introduced, all DNFBPs (including non-legal gatekeeper professions or businesses) will need to carefully consider their AML/CTF policies and procedures, if any, and the changes needed to address any new obligations. This includes CDD procedures, setting up clear 'suspicious matter' reporting and record keeping policies and guidelines, as well as introducing training for employees in relation to these changes.

Footnote

¹Unlike the remainder of the list, with the exception of bullion dealers, casinos are regulated under the current AML/CTF regime.

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.