Focus: Anti-money Laundering – November 2006
A summary of the key changes under the AML/CTF legislation
In brief: The
Anti-Money Laundering/Counter-Terrorism Financing Bill 2006 and accompanying
Anti-Money Laundering/Counter-Terrorism Financing (Transitional Provisions and
Consequential Amendments) Bill 2006 may be passed by the end
of the year and implemented in early 2007. Partner Peter Jones
How does it affect you?
- The Bill will commence operation in stages over two years.
- Industry will need to move quickly to plan and resource the substantial system changes that will be necessary to meet this deadline.
- Many of the criminal offences in the Bill have been removed and replaced by civil penalty provisions, breaches of which can attract a penalty of up to $11 million for a body corporate and $2.2 million for individuals.
Background
As we reported this month, the Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) Bill 2006 (the Bill) has finally been released. The Bill, which forms part of a legislative package of AML/CTF reforms that will bring Australia's AML/CTF regime into compliance with international standards, in particular those set by the Financial Action Task Force, was introduced to Federal Parliament on 1 November 2006. The Bill has been referred to the Senate Legal and Constitutional Committee, which is expected to report by 29 November 2006. It is the Government's intention that the Bill be passed by the last parliamentary sitting date in 2006 (7 December).
Transition and timing
The Bill will commence operation in stages over two years.
The requirement to identify and verify customers (and keep records of customer identification procedures) will come into effect 12 months after the commencement of the Act. Industry, which was looking at a two-year transition period to implement its Customer Due Diligence (CDD) procedures, will need to move quickly to plan and resource the substantial system changes that will be necessary to meet this deadline.
Reporting entities will also need to set up their AML/CTF programs within 12 months.
AML and CTF compliance reporting obligations and the correspondent banking provisions (and records about correspondent banking) will take effect six months after Royal Assent.
Ongoing CDD and suspicious matter and threshold reporting obligations will take effect after 24 months.
Other parts of the Bill dealing with electronic fund transfers (and records about electronic fund transfers), reporting cross-border movements of currency, registration of designated remittance providers and those record-keeping requirements which deal with transaction records, customer provided transaction documents and transferred ADI accounts, will take effect immediately the Bill receives Royal Assent.
The Federal Government has indicated that a 12-month amnesty period will follow after each stage commences, during which enforcement action will only be taken if the reporting entity is making no reasonable attempt to move towards compliance.
The Rules
Critical details remain in the Rules. However, no new Rules have been released with the Bill. References in the Bill are to the Draft Rules which were released with the Second Exposure Draft Bill in July 2006. The difficulty is that these are now misaligned with the Bill and will need to be augmented and edited.
We expect the existing Draft Rules to be revised and new Rules, as necessary, to be prepared by the Australian Transaction Reports and Analysis Centre (AUSTRAC) in consultation with industry. Problems will arise if particular Rules are not finalised in sufficient time before the relevant part of the Bill takes effect.
Regulations and guidelines also need to be formulated as soon as is practicable.
What's new
The remainder of this publication highlights some of the main differences between the Bill and the Second Exposure Draft Bill. Our earlier publications provide details of the Second Exposure Draft and its predecessor.
Penalties
Many of the criminal offences in the Bill have been removed and replaced by civil penalty provisions, breaches of which can attract a penalty of up to $11 million for a body corporate and $2.2 million for individuals, making the Australian AML/CTF regime amongst the toughest in the world.
The lower civil standard of proof will apply to these penalties, making it easier to establish that a breach has occurred. Any person who attempts to breach a civil penalty provision or aids, abets, counsels, procures or induces such a breach, or is knowingly concerned in or conspires to effect such a breach will themself be in breach of the Act and liable for a civil penalty.
Designated services
Some services (such as providing or guaranteeing loans, acquiring or disposing of securities and derivatives, providing custodial services) will only be 'designated services' if they are carried out in the course of a business of providing that service.
Dealings with life insurance policies are only regulated where the policy has a minimum surrender value, an annual premium of more than $1500 or a single premium of more than $3000.
Generally, customers of super funds (excluding self-managed funds) and pension or annuity holders will be subject to an applicable customer identification procedure on pay out.
There is a new designated service (an item 54 designated service) described as:
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in the capacity of a holder of an Australian financial services
licence, making arrangements for a person to receive a designated service
(other than a service covered by this item) |
This is broadly defined in that it appears to contemplate that any Australian Financial Services Licence (AFSL) holder (even if it does not itself carry out any other designated service) will be a reporting entity (an item 54 reporting entity) if it arranges any of the other 69 designated services specified under the Bill.
Item 54 reporting entities are not subject to all of the requirements of the Bill. Customer identification, verification and record keeping requirements do apply. In contrast, the ongoing customer due diligence and suspicious and threshold matter reporting requirements do not apply.
Although an item 54 reporting entity can be a member of a designated business group (DBG), they are excluded from sharing joint AML/CTF programs. This could present difficulties for those financial services businesses that have relationships with AFSL holders who are item 54 reporting entities because they must exclude them from any group-wide AML/CTF program. It also seems unnecessary given that reporting entities can adopt such parts of a joint AML/CTF program as suit them.
Agents
It is no longer necessary to identify the agent of a customer.
Third parties
The provisions covering third parties have been simplified.
Reporting entities can now appoint agents to carry out their customer application procedures although, as general agency principles apply, they will remain responsible for the acts of their agents. This is tempered by the reasonable precautions and due diligence defence provisions in the Bill (section 236). Reporting entities however will still have to identify, manage and mitigate any risk posed by the use of third parties in order to comply with requirements of their AML/CTF program.
The inclusion of a specific reference to the use of agents in connection with customer identification requirements begs the question whether (as was indicated by the Government prior to the release of the Bill) agents can be used to carry out other AML/CTF functions, for example record keeping.
Reporting entities can also rely on customer identification procedures undertaken by other reporting entities (a section 38 customer identification procedure), but this is subject to conditions to be set out in the Rules.
Reverification
If a suspicious matter reporting obligation arises for an existing or low-risk service customer, the Bill now says that a reporting entity must take such an action as is specified in the Rules.
The prohibition against providing a designated service pending satisfactory verification has been removed. It is not clear what further action (if any) a reporting entity will need to take regarding the provision of the designated service.
The designated business group
The definition of a DBG has been extended to cover groups of two or more persons of any type, not just companies. Although not specified in the Bill, the Explanatory Memorandum released with the Bill refers to members of a DBG as 'associated business entities'. This implies that there may have to be some relationship between members. Membership is not restricted to reporting entities but a member of a DBG cannot also be a member of another DBG at the same time. The Rules may specify other conditions as to membership.
Members of a DBG (except item 54 reporting entities) can enter into joint AML/CTF programs, but can adopt some systems and controls to suit their individual needs.
Members of a DBG can discharge ongoing CDD, record keeping and compliance reporting requirements for other members and can, in some circumstances, share suspicious matter information. The Explanatory Memorandum indicates they can also share customer identity information within the DBG, although there is no specific provision to this effect in the Bill.
Suspicious matter reporting
Certain sections of the Bill relating to the suspicious matter reporting obligation have been amended and more closely align it with the current language of the Financial Transaction Reports Act 1988. If a reporting entity suspects, on reasonable grounds, that information concerning the provision or possible provision of a designated service may be 'relevant to investigation or prosecution' of a person for tax evasion, a criminal offence or a money laundering or financing of terrorism offence, they must make a suspicious matter report.
The obligation to make a report within 24 hours now only applies where the suspicion relates to financing of terrorism. Otherwise, the report must be made within three business days. Usefully, the Explanatory Memorandum indicates that the relevant time period will only start to run when a 'responsible officer' forms the relevant suspicion.
Reporting a suspicious matter now provides a defence to financing of terrorism offences as well as money laundering offences.
AML/CTF programs
A reporting entity that provides a designated service without putting in place and maintaining an AML/CTF program will be liable for a civil penalty of up to $11 million.
There are three types of programs:
- a standard AML/CTF program which applies to individual reporting entities (but not to item 54 reporting entities);
- a joint AML/CTF program which applies to reporting entities who are members of a DBG (but not to item 54 reporting entities); and
- a special AML/CTF program (which only applies to item 54 reporting entities and is restricted to customer identification procedures).
Every standard or joint AML/CTF program is divided into two distinct parts.
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:
- money laundering; or
- financing of terrorism.1
Failure to comply with Part A of its program renders a reporting entity liable to a civil penalty of up to $11 million.
If a reporting entity has reasonable grounds to believe that a customer has information that is likely to assist it to comply with Part A of its AML/CTF program it can request the customer to give it such information and decline to provide a designated service to the customer (or restrict the provision of the designated service) if the customer does not comply.
Part B of a standard or joint AML/CTF program (and the special AML/CTF program applying to item 54 reporting entities) sets out customer identification procedures. The Rules may make different provision for different types of customers, services and circumstances and include provisions on the identification of a customer's agent, 'associates' of non-individual customers and the use of disclosure certificates.
Record keeping
The Rules can require reporting entities to make records of information for specified types of designated services or in particular circumstances.
Where a reporting entity (the first RE) is relying on a section 38 customer identification procedure it must request a copy of the procedure from the reporting entity that carried out the procedure and retain the copy for seven years after the first RE's relationship with the customer ceases.
ML/TF risk assessment
Although there is no specific requirement in the Bill to carry out an ML/TF risk assessment, AUSTRAC has the authority (where it is satisfied that a reporting entity has not carried out an ML/TF risk assessment or that it has and it is inadequate or out of date) to compel the reporting entity to carry out a risk assessment and provide a written report of the risk assessment to AUSTRAC.
The Bill and explanatory material can be found at http://www.ag.gov.au/aml.
If your business operates in the financial services sector you need to
consider whether your activities would be regulated under the Bill. They
probably would be. In that case, you need to assess your AML/CTF risk and start
planning now for compliance with the Bill. AAR's team of AML experts will
provide you with clear advice on the Bill and its ramifications for your
business.
Footnotes
For further information, please contact:
- Peter JonesPartner,
Sydney
Ph: +61 2 9230 4987
Peter.Jones@aar.com.au - Anna LenahanPartner,
Sydney
Ph: +61 2 9230 4132
Anna.Lenahan@aar.com.au - Catherine ParrPartner,
Sydney
Ph: +61 2 9230 4994
Catherine.Parr@aar.com.au - Judy MaguireSenior Associate,
Sydney
Ph: +61 2 9230 4835
Judy.Maguire@aar.com.au - Stephen SpargoPartner,
Melbourne
Ph: +61 3 9613 8861
Stephen.Spargo@aar.com.au - John BeckinsalePartner,
Brisbane
Ph: +61 7 3334 3520
John.Beckinsale@aar.com.au
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