Lagging behind: What's next for AML/CTF reform in Australia

Introduction

The Senate Legal and Constitutional Affairs References Committee (Committee) has released its highly anticipated report on the findings of its inquiry into the adequacy and efficacy of Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime (Senate Inquiry).

The primary focus of the Senate Inquiry was the “Tranche 2” reforms to Australia’s AML/CTF regime, which include regulating lawyers, accountants, real estate agents and other Designated Non-Financial Businesses and Professions (DNFBPs) consistent with the Financial Action Task Force (FATF) Standards.

In our previous update on 24 November, we advocated for the essential implementation of Tranche 2 reforms. The Committee in its Report has unsurprisingly reached the same view. The Committee also found that the delays in pursuing an agenda of reform in Australia, particularly in relation to the Tranche 2 reforms, is exposing Australians and the Australian economy to harm and risking Australia’s credibility.

Below is our initial analysis of the Committee’s Report.

Committee recommendations

The Committee found that Australia is a “laggard” on the world stage when it comes to regulating DNFBPs, and that the process for implementing the Tranche 2 reforms should now be focused on “how to implement the reforms, rather than if.”

The Committee agreed with the Law Council of Australia’s submission that it is important that any future reforms do not abrogate legal professional privilege and the duty of client confidentiality. The Committee was also keenly aware of the need for adequate regulatory resourcing, greater engagement between enforcement agencies, and a mitigation of the burden of regulatory obligations for small businesses.

With the above findings in mind, the Committee made a series of recommendations which we summarise as follows:

1. the Government accelerate its consultation regarding the implementation of Tranche 2 reforms;
2. the Government ensure that AUSTRAC and the Department of Home Affairs are adequately resourced to implement and manage the tranche 2 reforms;
3. that the Government’s consultation process be broad in scope, including a consideration of the regulatory burden on small businesses and any efficiencies that might be gained from the use of technology;
4. that the Government seek advice as to whether section 242 of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 be amended to ensure the proper operation of legal professional privilege; and
5. that the Government pursue a beneficial ownership register.

Key implications

The implications of the Committee’s Report will affect all reporting entities (not just DNFBPs), should they be implemented. We set out below a few preliminary items for consideration:

First, depending on the outcome of the upcoming Federal Election, the timing of any potential implementation of the Tranche 2 reforms will be subject to significant political conjecture. The Committee was composed of primarily Opposition members, meaning that the Coalition minority will need to consider implementation should the Government be re-elected. Moreover, should the Opposition be successful in the upcoming election, we consider it unlikely that the Tranche 2 reforms would feature highly amongst their initial priorities. In the event of a Labor Government being elected, we consider that it is unlikely that the Tranche 2 reforms will be implemented for at least 12 months.

Second, we think that any implementation of the Tranche 2 reforms will be undertaken with a careful emphasis on the reduction of the regulatory burden for smaller reporting entities. Considering the existing widespread calls for the simplification of the AML/CTF regime, we anticipate that the implementation of Tranche 2 reforms would take place at the same time as any amendments designed to achieve the simplification of the regime. This would further push out the timeframe for implementation.

Third, the recommendation to introduce a beneficial ownership register is significant for all reporting entities. Further clarification will need to be sought in relation to how such a register would be implemented, managed and regulated.  

Finally, existing reporting entities will need to consider the impact of Tranche 2 reforms and broader regulatory changes on their compliance programs. The full extent of those considerations will be unique to each sector and will need careful planning.

Takeaways

At this stage, the key items for consideration are how the major political parties will respond to the recommendations, and how the Tranche 2 reforms will correspond with a potential new bill amending the AML/CTF Act.

If the recommendations are implemented, we anticipate that approximately 100,000 new reporting entities will need to take steps to increase their training and adapt their compliance systems to a new regulatory regime.