Australia’s AML/CTF overhaul

Background & Key takeaways

On 20 April 2023, the Attorney General’s Department (the Department) announced that it would commence a public consultation (the Consultation) on proposed reforms to Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the Act). The date for submissions to stage one of the Consultation (available here) have now closed. The Department is expected to release a second consultation paper on the proposed reforms later this month.

As we discussed in an earlier article (available here), the proposed reforms include expanding the AML/CTF regime to certain high-risk professions, known as ‘Tranche 2’ entities, including real estate agents. At present, Australia is one of only five countries in the Financial Action Task Force (FATF) Global Network (out of nearly 200 members) that has not regulated, or committed to regulating Tranche 2 entities within its AML/CTF regime.

Organisations potentially subject to the reforms should consider:

1. Whether their existing activities may be affected by the proposed reforms to the AML/CTF regime;
2. Undertaking a risk assessment of money laundering and counter-terrorism financing risk and implementing strategies to address areas of potential exposure; and
3. Obtaining legal advice to understand the obligations imposed by the Act and what their organisations can do now to begin to prepare for the proposed reforms.

Risk of money laundering in real estate

Tranche 2 entities, which also includes legal practitioners, accountants, conveyancers and trust and company service providers, provide services that can be exploited to disguise ownership of assets, conceal the origins and purposes of financial transactions, facilitate tax evasion and, ultimately, launder criminal proceeds.

High-value goods, including real estate, have been identified as a significant money laundering channel in Australia. Real estate can be purchased to launder or conceal illicit funds as it allows for the movement of large sums of cash in a single transaction.

In a 2015 Strategic analysis brief of Money laundering through real estate (available here), the AML/CTF regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC), described the elevated AML/CTF risks posed by real estate:

“Compared to other methods, money laundering through real estate — both residential and commercial — can be relatively uncomplicated, requiring little planning or expertise. Large sums of illicit funds can be concealed and integrated into the legitimate economy through real estate.”

The Consultation states that in the past two years, 57.5% of the Australian Federal Police’s (AFP) Criminal Assets Confiscation Taskforce total restraint value was attributable to commercial and residential real estate. Money launderers attempt to circumvent the AFP’s asset restraint and forfeiture practices by concealing the true ownership of property (known as ‘beneficial ownership’) through complex corporate and trust structures, or paying third parties to pose as legitimate purchasers of land.

Cross-border purchases of property carry elevated risks, particularly if the buyer is based in a high-risk jurisdiction and the purpose of the transaction is unclear. For example, where a property is left empty or the purchase price is higher than the property value. In addition, laundering cash through real estate can cause artificial inflation of property prices, causing hardship to genuine buyers.

Types of ‘designated services’

Section 81 of the Act requires regulated entities to develop and maintain a written AML/CTF program before providing a “designated service” to a customer. These designated services are defined in section 6 of the Act and currently include services provided by financial institutions, money remitters, digital currency exchanges, gambling service providers and bullion dealers.

The proposed reforms include expanding the AML/CTF regime to real estate agents and property developers involved in transactions to buy or sell real estate, including both legal and equitable interests in freehold, strata title and leasehold property. The Department has indicated that the number, type and value of properties sold over a given time period may be relevant to whether a person is carrying on a business of selling real estate.

In addition to the above, the Department is also considering extending the regime to include property management and leasing services in light of the money laundering and terrorism financing risks identified by Australian law enforcement agencies.

Existing controls to minimise and mitigate money laundering in real estate

At present, money laundering risks in real estate are primarily addressed through one of two means. First, existing practices undertaken by the real estate industry to comply with other legislative and regulatory requirements. Second, customer due diligence undertaken by other AML/CTF regulated entities involved in real estate transactions, for example, banks and financial institutions.

The real estate sector utilises checks by financial institutions and third party assurances. For example, ASX listing and credit ratings and “AML representation letters” from financing banks. Such letters typically outline the bank’s AML/CTF controls and provide assurances that adequate customer due diligence has been carried out on relevant individuals, business enterprises, corporations, unregulated trusts, partnerships and associations. This second control does not come into play if the property purchase does not involve a mortgage.

Many Australian real estate investments trusts also hold Australian Financial Services Licences under which ‘designated services’ for the purpose of the Act are provided. As such, new investors in some (albeit, not all) Australian real estate investment funds are already subject to customer due diligence in accordance with the existing AML/CTF regime.

As a consequence of the above, steps can be taken to utilise existing controls to avoid duplication where multiple regulated entities are involved in the same real estate transaction. In such circumstances real estate agents could be entitled to rely on the customer due diligence undertaken by other parties. For example, The Australian Registrars’ National Electronic Conveyancing Council (ARNECC) is the body established to facilitate the implementation and ongoing management of the regulatory framework for electronic conveyancing of real property in Australia. Given that the framework developed by ARNECC governs electronic conveyancing this could be utilised by real estate agents, lawyers as well as financial institutions to assist with meeting their AML/CTF obligations.

What steps should real estate agents take?

Real estate agents, property managers and other organisations potentially subject to the reforms need to consider:

1. Reviewing the Department’s Consultation paper (available here) to understand the proposed reforms to the AML/CTF regime;
2. Whether their existing activities are likely to fall within the proposed scope of ‘designated services’ as defined in section 6 of the Act;
3. Undertaking a risk assessment of money laundering and counter-terrorism financing risk to identify potential exposure;
4. Whether an industry wide approach can be adopted to assist with aligning current processes with AML/CTF obligations;
5. Whether their existing policies, procedures, systems and processes are compliant with the potential obligations imposed by the Act and if not, considering how deficiencies can be addressed;
6. Whether technology, additional resource and/or training is required to meet the obligations imposed by the Act, such as customer due diligence; and
7. Obtaining legal advice to understand the obligations imposed by the Act and what their organisations can do now to begin to prepare for the proposed reforms.