Government consultation on tranche-two reforms

Consultation paper and proposed designated services

The Consultation Paper is divided into two parts. Part 1 proposes reforms to simplify and modernise the operation of the AML/CTF regime. This was recommended by the 2016 Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, which found that the regime was too complex and made it difficult for reporting entities to comply with their obligations. To address this, the Consultation Paper proposes to, among other things:

1. streamline the risk management (Part A) and the customer due diligence (Part B) components for AML/CTF programs
2. rationalise the customer due diligence obligations
3. rationalise the ‘tipping off’ provisions that restrict sharing of suspicious matter information reported to the Australian Transaction Reports and Analysis Centre (AUSTRAC). Currently, reporting entities are limited in their ability to share information within their corporate group, with their customers and with other reporting entities. This can inhibit the implementation of risk mitigation strategies, particularly relating to scams and fraud
4. repeal temporary measures introduced to enable flexible processes during COVID-19, and
5. repeal the remaining transitional provisions in the Financial Transaction Report Act 1988 (Cth).

Part 2 of the Consultation Paper proposes to extend the regime to Tranche-Two Entities. As the Act regulates particular services rather than types of entities, the Consultation Paper proposes a list of services that could be inserted into the Act. These include the preparation or carrying out of transactions for clients which relate to the following:

1. buying and selling of real estate
2. managing of client money, securities or other assets
3. management of bank, savings or securities accounts
4. organisation of contributions for the creation, operation or management of companies
5. creation, operation or management of legal persons or legal arrangements (for example, trusts), and
6. buying and selling of business entities.

It also proposes to amend the Act to cover the preparation or carrying out of transactions for clients by trust and company service providers which relate to the following:

7. acting as a formation agent of legal persons;
8. acting as (or arranging for another person to act as) a director or secretary of a company, a partner of a partnership, or a similar position in relation to other legal persons;
9. providing a registered office, business address or accommodation, correspondence or administrative address for a company, a partnership or any other legal person or arrangement;
10. acting as (or arranging for another person to act as) a trustee of an express trust or performing the equivalent function for another form of legal arrangement; and
11. acting as (or arranging for another person to act as) a nominee shareholder for another person.

The Consultation Paper proposes that as a general rule, services provided for non-commercial purposes will not be covered. It also proposes to exclude representing a client in litigation, unless during the course of such representation, the litigator also engages in one or more of the services listed above.

What does this mean for insolvency practitioners?

Some of the proposed designated services have the capacity to apply to services provided by insolvency practitioners. In particular, questions arise over whether the following could be captured under the services outlined in the Consultation Paper:

• The services listed at 2 and 3 above involve managing client money, securities or other assets, as well as the management of bank, savings or securities accounts. This may potentially capture insolvency practitioners where they are managing or distributing funds on behalf of creditors;
• The service listed at 4 above appears to potentially capture voluntary administrations, liquidations and other insolvency-related activities. This occurs by virtue of the role of insolvency practitioners in both the management of companies and their assets, which are in financial distress, as well as through any contribution or distribution of funds when acting in this capacity, and
• the service listed at 9 above may apply to an administrator or liquidator given that the registered office will typically be changed to the person acting in such a capacity.

The Consultation Paper does not clearly articulate whether it is government’s intention to capture insolvency practitioners when they provide services such as these. Nor is it clear from the Consultation Paper what the potential money laundering or terrorism financing risk might be with respect to services provided in the context of administration or liquidation. Engagement with the Attorney-General’s Department is recommended to:

• clarify the intended scope of the reforms;
• make submissions on whether or not money laundering risks are material for the insolvency industry;, and
• make submissions on whether any possible exemptions should be provided for insolvency practitioners.

Engaging with the consultation

While initial submissions and feedback on the Consultation Paper closed on 16 June 2023, this is only the first stage of public consultation for reform. A second consultation paper, informed by industry submissions on the first Consultation Paper, is expected to be released around September 2023. The Attorney-General's Department will also conduct roundtable discussions with key stakeholders and engage with industry on sectoral-specific issues as required.

It is important that the reforms be informed by insolvency practitioners’ understanding and insight into the application of the proposed regime, including their international experience in jurisdictions that have already implemented regulation of Tranche-Two Entities. These insights, which may be provided by way of submissions on the second consultation paper and/or by coordinating and participating in direct consultation with government or industry roundtables, will be necessary to shape Australia’s AML/CTF regime.

It is also important for insolvency practitioners to be aware of the new obligations that may be imposed on them by these changes, and to prepare policies, procedures and guidance in advance of their implementation.

This is an abridged version of an article that is due to be published in the next edition of the Australian Restructuring Insolvency & Turnaround Association Journal, with permission of the Australian Restructuring Insolvency & Turnaround Association.