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Overview: The Australian anti-money laundering and counter-terrorism financing regimeThis site provides an overview of the Australian anti-money laundering (AML) and counter-terrorism financing (CTF) regime, and the proposed reforms contained in the new Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) Updated December 2006.
IntroductionThe Australian Government has progressed its plan to have Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime comply with the global standards of the Financial Action Task Force (FATF), an international inter-governmental body that develops policies to combat money laundering and terrorist financing. These global standards are contained in FATF's Forty Recommendations on AML and its nine Special Recommendations on CTF (the Recommendations).1 The Australian AML/CTF regime contained in the Financial Transaction Reports Act 1988 (Cth) (the FTRA), the Proceeds of Crime Act 2002 (Cth), the Charter of the United Nations Act 1945 (Cth) and the money laundering and terrorist financing offences in the Criminal Code Act 1995 (Cth) (the Criminal Code), has been significantly enhanced by the introduction of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth)2 (the AML/CTF Act) which came into force on 12 December 2006. Change was overdue. A FATF Mutual Evaluation Assessment on the Australian AML/CTF regime released in 14 October 2005 found that the Australian AML/CTF regime was significantly non-compliant with approximately half the FATF Recommendations.3 In 2005, the Australian Government acted to rectify some of the weaknesses identified in the CTF regime by amending the Criminal Code and the FTRA.4 The AML/CTF Act is aimed at reducing the amount of money laundered in Australia from the currently estimated amount of $11.5 billion per year, updating Australian AML/CTF systems in line with international best practice and preserving Australia's financial market reputation.5
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006The AML/CTF Act implements the first tranche of the Government's proposed AML/CTF reforms and covers the financial sector, gambling industry and bullion dealers (as well as lawyers and accountants if they are in direct competition with the financial sector). The Government has said that once implementation of the first tranche has commenced it will start work on extending the reforms to lawyers, accountants, trust and company service providers, real estate agents and jewellers. There has been extensive consultation between the Government and industry on the AML/CTF reforms. The AML/CTF Act (and two previous Draft Exposure Bills) were the subject of public consultation and of two Senate Legal and Constitutional Legislation Committee Inquiries. The consultation process continues in the form of continuing dialogue between industry and the Government. Details of the consultation process, links to all submissions (including AAR's) and the Senate Committee Inquiries can be found at the Consultation process section of this website. http://www.aar.com.au/aml/cons/index.htm. The AML/CTF Act sets out the primary obligations of providers of designated services6 (reporting entities). It is to be supplemented by Regulations (mainly technical in nature), AML/CTF Rules (the AML/CTF Rules) (which will contain the practical and operational detail of the AML/CTF regime and have legislative force), and Guidelines (which will not be legally binding and which are intended to assist reporting entities to interpret their obligations and are anticipated in time to represent a 'best practice' approach for reporting entities). Generally, the AML/CTF Act and AML/CTF Rules implement a risk-based approach to compliance. This approach:
Timing The AML/CTF Act will be implemented in stages over a two-year period. Some substantive requirements are already in force. Other obligations, which the Government has acknowledged will be more costly and complex to implement, will come into effect at various times during the two-year period. The schedule for implementation of obligations is as follows:
The Government has stated that a 15-month amnesty period will follow after each of the stages outlined above is implemented. During that period the Australian Transaction Reports and Analysis Centre (AUSTRAC) will only take criminal or civil penalty action against a reporting entity where the reporting entity has manifestly failed to take steps towards compliance with its obligations. The Government has also indicated that a Technical Amendments Bill will be introduced in the autumn 2007 sitting of Federal Parliament to address some of the amendments arising out of the report of the Senate Scrutiny of Bills Committee and outstanding technical issues. That amending legislation is not intended to address significant policy matters.7 The process of finalising the AML/CTF Rules continues.8 The Government has said that all AML/CTF Rules required for those provisions which commenced the day after Royal Assent (that is 13 December 2006) would be available on that date and that all other Rules necessary for those provisions that will come into effect on 13 December 2007 will be finalised by 31 March 2007. AUSTRAC has also said that it is drafting new rules and that further consultation with industry on the revised and new rules will take place in 2007.9 Core requirements The AML/CTF Act imposes AML/CTF obligations on a wide range of financial service providers (including those in the banking, life insurance, managed funds and superannuation sectors) and on the gambling sector. Core requirements include enhanced customer due diligence, transaction monitoring, threshold and suspicious matter reporting, record keeping, correspondent banking controls and the implementation of an AML/CTF program. AAR has commented in detail on some of these in Focus publications (22 December 2005, 27 July 2006, 3 August 2006, 2 November 2006, 17 November 2006, 8 December 2006 and 14 December 2006). Some of the core requirements are discussed below. Customer identification The customer identification obligations require reporting entities who provide designated services to identify and verify (and in some circumstances re-verify) the identity of their customers before they provide a designated service and carry out ongoing customer due diligence (CDD). Generally, existing customers and customers who receive only low-risk designated services will be exempt from the customer identification requirements. The customer Identification procedures (these are contained in the AML/CTF Rules)10 are implemented by a customer identification program using a risk-based approach. In practice, this means that it will be up to reporting entities themselves to decide what customer identification information is required based on what they assess as their ML/TF risk. Reporting entities can engage agents to carry out any obligations under the AML/CTF Act, including customer identification procedures, but will remain liable for the conduct of their agents subject to the principles of the general law of agency. They can also rely on a customer identification procedure already carried out by another reporting entity.11 Usefully, reporting entities can rely on both electronic verification and documentary verification of customer identification information. Safe harbour rules apply in some circumstances to customer identification for lower- and medium-risk customers. Reporting entities may rely on disclosure certificates by corporations and trustees. AAR's Focus of 27 July 2006 deals with the customer identification obligations in more detail. Designated business group The AML/CTF Act introduces the concept of a designated business group (DBG), which will facilitate sharing of customer identification information and allow for a group-wide compliance program. A DBG is defined as a group of two or more persons, each of whom has elected in writing to be a member of a DBG. Membership is not restricted to reporting entities. The AML/CTF Rules may specify other conditions as to membership.12 Reporting entities can enter into a joint AML/CTF program (see below) with other members of a DBG but can still adopt some systems and controls to suit their individual needs. Members of a DBG can, in some circumstances, share suspicious matter information and can rely on other members of the DBG to discharge their ongoing customer due diligence, record keeping and compliance reporting obligations. The Explanatory Memorandum to the AML/CTF Act indicates members will be able to share identification information. Ongoing customer due diligence A reporting entity must monitor (in accordance with the AML/CTF Rules) its provision of designated services in Australia with a view to:
that it might reasonably face that it might facilitate 'money laundering' or 'financing of terrorism'.13 Elements of an ongoing customer due diligence program14 include risk-based systems and controls to determine whether further 'know your customer' information should be obtained for ongoing due diligence (as opposed to initial customer identification), an enhanced due diligence program and a transaction monitoring program. Suspicious matter reporting Reporting entities who suspect on reasonable grounds (it is assumed this is to prevent defensive and unjustified reporting) that:
must report that suspicion (and the grounds on which it is based) to AUSTRAC within three business days (or, in some circumstances, 24 hours). The Explanatory Memorandum to the AML/CTF Act indicates that the relevant time period will only begin to run when a 'responsible officer' forms the relevant suspicion. The obligation may arise before there is any business relationship between the reporting entity and a potential customer. Tipping off is an offence but some suspicious matter information can be disclosed within a DBG where members of the DBG share a joint AML/CTF program and where the disclosure is made for the purpose of informing the DBG about the risks involved in dealing with the particular customer. AAR's Focus of 3 August 2006 deals with the suspicious matter reporting obligations in more detail. The AML/CTF program A reporting entity must put in place and maintain an AML/CTF program. Providing a designated service without doing so will attract a civil penalty (of up to $11 million) There are three types of programs:
A "licensee arranger" is an entity which, in the capacity of a holder of an Australian financial services licence, makes arrangements for a person to receive a designated service (other than the service of making such arrangements). Every standard or joint AML/CTF program must be divided into two distinct parts - Parts A and B. The primary purpose of Part A (the general part) is to identify, mitigate and manage the risk that a reporting entity may reasonably face that the provision of designated services at, or through, a permanent establishment in Australia might (inadvertently or otherwise) involve or facilitate:
Part B sets out the applicable customer identification procedures which will apply to the reporting entity's customers. Some general principles apply to the implementation of an AML/CTF program:
As part of an AML/CTF Program, a Money Laundering Compliance officer must be appointed. Record keeping Generally, the AML/CTF Act specifies that records (or copies of records) should be retained for a retention period of seven years. The record-keeping obligations apply to:
Enforcement The AML/CTF Act provides AUSTRAC, in its role as AML/CTF regulator, with a number of enforcement tools. These include the power to:
AUSTRAC can also apply to the Federal Court for injunctions in relation to contraventions of civil penalty provisions and, as an alternative to prosecution or litigation, enter into enforceable undertakings with reporting entities. AAR's Focus of 3 August 2006 deals with AUSTRAC's enforcement powers in more detail. Failure to comply with the AML/CTF obligations under the AML/CTF Act can attract civil penalties of up to $11 million for a body corporate or $2.2 million in all other cases. AAR's Focus of 14 December 2006 discusses the civil penalty regime. The AML/CTF Act also sets out various criminal offences, such as disclosing that a suspicious matter report has been made to AUSTRAC, or providing a designated service using a false customer name or where the customer is anonymous.
The international experienceAustralian businesses working within the international financial arena will already be aware of the need to have appropriate AML/CTF systems in place in order to do business with their overseas counterparts. Increasingly, international financial institutions have to consider whether a counterparty with whom they wish to do business comes from, or is affected by, a jurisdiction that applies adequate AML/CTF standards and, if so, what compliance with those standards entails. The extension of the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism (USA PATRIOT ACT) Act 2001 to those who do business with US financial institutions is an example of an extra-territorial regime in practice. AAR's Focus of 30 August 2006 discusses the FATF Mutual Evaluation of the US AML/CTF regime and how it impacts on Australian financial institutions with US parent entities Within the Asia Pacific region, jurisdictions are taking steps to introduce AML/CTF legislation or to improve their existing regimes. Hong Kong and Singapore already have AML/CTF regimes in place and have indicated that they are extending these to comply with the Revised Recommendations. Indonesia was removed from the FATF blacklist in 2005. China has introduced AML legislation and is expected to join FATF as a full member in the near future. As a result of its international presence and expertise in the region, AAR is in a unique position to advise on the implementation of AML/CTF best practice and its impact on our clients throughout the Asia Pacific region. See our summaries of AML/CTF measures in the Asia Pacific region. Details of the Act and the AML/CTF reforms can be found at the Attorney General's Department website http://www.ag.gov.au/aml The AAR AML/CTF website will be updated periodically.
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