Hearings held on the Inquiry into the adequacy and efficacy of Australia’s AML/CTF regime

Introduction

On 9 and 10 November 2021, the Legal and Constitutional Affairs References Committee (Committee) held public hearings and private briefings as part of its Inquiry into the adequacy and efficacy of Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime. The Committee received 41 submissions ahead of time.

The main focus of the public hearings were the “Tranche 2” reforms to Australia’s AML/CTF regime, which includes regulating lawyers, accountants, real estate agents and other Designated Non-Financial Businesses and Professions (DNFBPs) consistent with the Financial Action Task Force (FATF) Standards. As a reminder, Australia is one of three countries globally out of the close to 200 members of the FATF Global Network that has not regulated, or committed to regulating, DNFBPs within the AML/CTF regime. As an outlier, Australia risks being grey listed by the FATF as a country with strategic deficiencies within its AML/CTF regime.

This article summarises appearances by the Department of Home Affairs, AUSTRAC and the Australian Criminal Intelligence Commission (ACIC) and representations made by the peak industry bodies for Australia’s DNFBP sectors. These touch on the following themes:

• The risks associated with the DNFBP sectors
• The cost of meeting AML/CTF obligations
• The existing measures undertaken by the DNFBP sectors that serve the objectives of the AML/CTF regime, and
• The incompatibility of legal professional privilege with certain reporting obligations under Australia’s AML/CTF regime.

Government approach to Tranche 2

AUSTRAC and the Department of Home Affairs jointly appeared before the Committee. Based on submissions received, the Committee queried whether the extension of the AML/CTF regime was justified on account of a lack of evidence that members of these sectors were in fact involved in money laundering and terrorism financing (ML/TF). The Department advised that regulation is not dependent on evidence of wrong-doing by ‘bad actors’ within these sectors. Rather, the impetus for reform is based on the objective vulnerability of certain sectors to ML/TF exploitation, and that the risk associated with DNFBP sectors is well-recognised in the FATF Standards.

Speaking of the professional facilitators of financial crime in Australia, the ACIC acknowledged that Australia’s current AML/CTF regime does not fully reflect the diversity of professional facilitators that act as enablers (whether knowingly or unwittingly) of money laundering, and that this includes lawyers, accountants and financial planners and real estate agents.

The Department affirmed that simplification of the regime is a priority focus for government and that the expansion of the regime should be designed in consultation with industry to achieve the balance of facilitating high value actionable intelligence without introducing excessive regulatory burden and cost. The Department confirmed that cost-benefit analysis work is being done at present, leveraging learnings from its partners in the United Kingdom and New Zealand.

The Committee asked AUSTRAC about its capability to respond to ML/TF activity in Australia, as well as its readiness for the Tranche 2 reforms. AUSTRAC referred to its ‘strong regulatory activity’ in recent years culminating in record civil penalty proceedings against some of its biggest reporting entities, whilst also noting its expectation that more resources will be needed to support the move to Tranche 2 to address an increased reporting volume.

Cost of compliance for industry

The peak industry bodies representing DNFPBs were united in their concerns about the significant compliance costs that will result from their members meeting AML/CTF obligations. It was submitted that members are often small to medium-sized businesses that would be disproportionately burdened if compliance obligations and costs were excessive.

The Real Estate Institute of Australia (REIA), for example, referred to New Zealand’s experience with the Tranche 2 reforms in highlighting the business costs to be met by real estate agencies. These were said to include hiring an AML/CTF compliance officer, creating an AML/CTF compliance program, conducting biannual compliance assessments and submitting annual reports to Government.

This concern was echoed by the professional associations representing accountants and financial planners, in pointing to feedback from the United Kingdom and New Zealand where it was said that the complexity of those frameworks had resulted in significant compliance costs. It was submitted that this had led to increased costs being passed on to consumers, or had caused smaller practices to outsource AML/CTF obligations or cease to provide designated services where compliance obligations were excessive. For this reason, it was requested that Government undertake a cost-benefit analysis of the regulatory options for accountants.

Equally, the Law Council of Australia (LCA) submitted that compliance costs will impact the affordability of legal services, as well as the viability of small firms that are often providing legal services to rural and regional Australia.

These submissions were not unexpected. However, AML/CTF experts appearing at the Inquiry suggested that the cost of compliance has dramatically reduced with the modernisation of AUSTRAC’s reporting function and the use of advanced technology.

Existing requirements imposed on industry

The industry representatives also spoke of the need for Government to consider the existing compliance obligations and regulatory requirements for each sector. The imposition of additional AML/CTF compliance requirements risks introducing duplicative and complex regulation that may lead to ‘compliance blocks’.

As an example, the REIA noted that the industry is already undertaking a form of Know Your Customer rules and engaging with law enforcement where suspicious or criminal activity is observed. Nevertheless, the REIA reiterated its willingness to work with Government on designing cost effective and reasonable reforms to the AML/CTF regime.

This issue was of concern to the representatives of the accounting and financial planning professions. Unlike most other DNFBP sectors, members of these bodies who hold an Australian Financial Services Licence, are already required to comply with certain obligations in Australia’s AML/CTF regime. Each representative emphasised that if the Tranche 2 reforms proceed, it is critical that government consider the impact of existing client and document verification requirements, regulatory reform implemented since the 2016 statutory review of the AML/CTF Act, and technological advances, to ensure the design of the reform is proportionate and efficient. The Committee agreed that collaboration between government and industry will be key to the success of reform measures, as it is important that the regulator has the necessary knowledge and understanding of each sector.

Incompatibility with core principles of the legal profession

The LCA spoke to the unique status of the legal profession amongst DNFBPs in regards to the paramount duty that lawyers owe to the court (and their clients) and to the administration of justice, and submitted that the regulation of lawyers would be incompatible with access to justice principles.

The LCA submitted that certain obligations of reporting entities under the AML/CTF Act are inherently incompatible with legal professional privilege. Namely, the AML/CTF reporting obligations would cause lawyers to inform on their clients in certain circumstances, thereby creating a ‘chilling effect’ on a client’s willingness to provide otherwise privileged information openly and frankly. The concern is that this would transform lawyers from trusted, independent advisers into agents of law enforcement and collectors and disseminators of privileged information, fundamentally damaging legal professional privilege.

The Committee discussed how this concern had arisen in Canada in the context of similar reforms. In 2015, the Canadian Federation of Law Societies brought a constitutional challenge against the application of the legislation to the legal profession. In Canada (Attorney-General) v Federation of Law Societies of Canada [2015] 1 SCR 401, the Supreme Court held that the reporting obligations in the legislation provided inadequate protection for solicitor-client privilege and therefore violated the Canadian Charter of Rights and Freedoms. In response to this judgment, the Federation of Law Societies ultimately imposed bespoke obligations on legal professionals through the regulatory regimes of Canadian law societies and issued Guidance in 2019 to ensure legal professionals do not wittingly or unwittingly facilitate money laundering and terrorism financing.

The Committee also noted that New Zealand has addressed this issue by defining what information is not a ‘privileged communication’. The New Zealand AML/CTF Act provides that legal professional privilege continues to apply, except where the communication or information relates to a dishonest purpose or the aiding or committing of a crime. Further, certain information kept in relation to a lawyers’ trust accounts is not considered privileged.

Conclusion

The Committee hearings provided valuable insights into the views of peak industry bodies and Government agencies about the adoption and implementation of Tranche 2 reforms, which may very well have a fundamental impact on the evolution of Australia’s AML/CTF regime. The Committee is due to publish its report in March 2022.

Norton Rose Fulbright has a leading financial crime practice in Australia and across the Globe. The firm continues to closely track ongoing developments of this Inquiry and looks forward to continuing to engage with clients and the industry more broadly as it progresses.