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Client Update: Anti-money Laundering – 9 May 2008

AUSTRAC updates

In brief: AUSTRAC has recently released some updates to its policy on exemptions from the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 for those issuing and selling securities and has clarified its position on compliance reporting for managed investment schemes. Partner Peter Jones and Senior Associate Judy Maguire report

Application of the AML/CTF Act to issuing and selling securities and derivatives

AUSTRAC has finally clarified the position regarding when the issue or sale of a security or derivative is exempt from the operation of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the AML/CTF Act).

Designated service 35 is provided where a person issues or sells a security (note security includes an interest in a managed investment scheme) in the course of carrying on a business of issuing or selling securities. There are some exemptions, including where the issue consists of an issue by a company of a security of the company (other than an interest in a managed investment scheme) or an option to acquire a security of the company (other than an option to acquire an interest in a managed investment scheme).

The AML/CTF Rules Amendment Instrument 2008 (No 2) dated 24 April 2008 (the Rule ) provides another exemption from designated service 35, where the service is not a disposal of a security or derivative though an agent who is doing so in the course of carrying on a business of disposing of securities or derivatives as an agent (ie the agent is providing designated service 33).

The explanatory statement issued with the Rule indicates that this has the effect that a disposal by a service provider (such as a broker) of a security on behalf of a client (designated service 33), will not also be caught under designated service 35 and that this prevents both the agent and the principal from having to identify the person that acquires the security or derivative.

Note, there is no requirement that the security or derivative must be a listed security or derivative so if an agent disposes of an unlisted security or derivative (eg the transaction does not take place on-market) the exemption still applies.

Additionally the Rule amends section 247(3) of the AML/CTF Act by exempting from the operation of the AML/CTF Act altogether designated services provided in the following circumstances:

  • where a person issues or sells a security or derivative to another person (the transaction) under designated service 35 and the transaction occurs on a prescribed financial market;
  • where a person issues an interest (or an option to acquire an interest) in a managed investment scheme that is quoted on a prescribed financial market; and:
    • the issue is in accordance with the relevant requirements in the Corporations Act 2001 under a distribution reinvestment plan; and
    • the interest is to be quoted on a prescribed financial market.
  • where a person issues an interest (or an option to acquire an interest) in a managed investment scheme that is quoted or to be quoted on a prescribed financial market, and:
    • the issue is in accordance with the relevant requirements in the Corporations Act 2001 under fundraising (including an IPO and a rights issue); and
    • the interest is to be quoted on a prescribed financial market.

The explanatory statement indicates that because of the nature of the markets (ie buy/sell orders are transmitted electronically) then the issuer or seller would have no information on the identity of the purchaser or person to whom the security/derivative is issued and, as such, it is impractical to impose AML/CTF obligations.

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Compliance reporting for managed investment schemes

AUSTRAC has also updated its website to provide more information on compliance reports. In particular AUSTRAC has confirmed that, because the AML/CTF regulations regarding managed investment schemes only came into effect on 31 January 2008 (ie outside the reporting period), that where the only designated service provided by a reporting entity is the issue or sale of interests in a managed investment scheme, that the reporting entity is not required to submit a compliance report for the first reporting period (13 December 2006 to 31 December 2007).

Information on compliance reporting can be found on the AUSTRAC website.

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