Countdown to Tranche 2: Preparing for Australia's New AML/CTF Regulations
Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) regime is being implemented in stages, starting withTranche 1 in 2007. Based on the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, it focused on financial institutions like banks, credit unions, and building societies, as well as other perceived high-risk sectors like cash-carrying services, bullion dealers, casinos, and stored value card and remittance service providers.
Under Tranche 1, these entities were required to establish Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) programs, conduct customer due diligence, report suspicious transactions, and maintain records.
However, Australia’s AML/CTF laws and subsequent work in this area failed to include various professions that operate outside the traditional financial system. This list included real estate professionals, lawyers, accountants, dealers in high-value, and trust and company service providers.
Collectively, this second grouping is referred to as designated non-financial businesses and professions, or DNFPs. They have also been labelled ‘gatekeeper’ and ‘tranche two’ entities.
Tranche 2 consultation outcomes due
Despite two rounds of public consultation, which concluded in September 2023, Tranche 2 entities remain unclear about when the Australian Attorney General’s Department aims to issue draft regulations to update the country’s AML/CTF regime and bring it in line with global standards and expectations.
Adding pressure to the timeline to introduce updated AML/CTF legislation is the likely evaluation visit by the global Financial Action Task Force (FATF), which is expected in 2026. The heat has been turned up on Australia in a recent FATF report, which has sounded the alarm on gatekeeper professions who are grappling with the pervasive threat of corruption and money laundering.
Lawyers, accountants, trust and company service providers, and real estate agents, are often unaware of their role in facilitating illicit financial flows and have become a focal point for the Financial Action Task Force (FATF).
Australia’s poor scorecard in FATF review
A landmark review by the FATF – the Horizontal Review of Gatekeepers’ Technical Compliance Related to Corruption – has revealed a stark reality: while many nations have made strides in AML/CTF compliance, some countries lag far behind, and Australia is one of them. In its review, FTAF has scored Australia 0% out of the FTAF country average of 74%.
“Australia does not have requirements to cover any of the gatekeeper sectors. In Australia, these sectors are required to implement none of the preventive measures that have been required by the FATF Standards since 2003,” the report states.
These measures include:
- Have all gatekeeper sectors subject to all of the AML/CFT obligations, including CDD and other measures.
- Have a designated competent authority responsible for monitoring compliance (i.e., supervisors) for all gatekeeper sectors.
- The supervisors should have all of the necessary powers and tools to ensure compliance.
- Supervision of gatekeeper sectors should be performed on a risk-sensitive basis.
This poor scorecard will subject Australia to further scrutiny and increase pressure on the country’s Attorney General’s Department to issue draft regulation for Tranche 2 gatekeeper professions soon.
Targeted gatekeeper sectors and their obligations
Under proposed future laws, the following Tranche 2 sectors will be required to implement risk management programs, conduct customer due diligence, monitor customer behaviour and transactions for potentially suspicious activity, and register with Australia’s financial intelligence agency AUSTRAC (Australian Transaction Records and Analysis Centre).
This is due to their vulnerabilities and potential for misuse by criminals who seek to launder money or finance terrorist activities.
Real estate agents
Australia’s real estate sector has long been recognised as a prime target for money laundering for some time, due to the high value of transactions, how easy it is to conceal illicit funds through complex ownership structures, and the potential for inflating property values. The use of shell companies, anonymous trusts, and offshore accounts can further obscure the true source of funds and beneficial ownership.
Under new Tranche 2 laws, real estate agents must perform extensive background checks on buyers and sellers.
Lawyers and conveyancers
Lawyers and conveyancers play a crucial role in property transactions and financial dealings, and they’re often sought out by criminals to create complex legal structures, establish trusts, and provide advice on financial transactions. This makes them potential facilitators of money laundering, particularly when they fail to conduct adequate due diligence or turn a blind eye to suspicious activity.
Tranche 2 demands that they become more vigilant in identifying and reporting suspicious activities, particularly those related to property transactions. Although legal professionals already adhere to stringent regulations, the expanded AML regime means they will have to meet additional requirements to ensure they remain compliant.
Accountants
Accountants are involved in a wide range of financial activities, including tax preparation, financial planning, and auditing. This gives them access to sensitive financial information and the ability to manipulate financial records, which makes them potential facilitators of money laundering.
With the new obligations in place, accountants will have to carefully review their clients' activities, especially if there are any unusual or large transactions.
High-value dealers
High-value dealers are included in expanded Tranche 2AML/CTF laws because high-value items like jewellery, precious stones and metals, antiques and collectibles, fine art, yachts, and luxury cars are attractive to criminals who want to convert illicit cash into tangible assets that are easier to transport and less likely to arouse suspicion.
The anonymity of cash transactions and the subjective nature of valuing these goods make this sector vulnerable to exploitation.
Professional services
Accountants, trust and company service providers, and other professionals can be used to create shell companies, obscure beneficial ownership, and move funds across borders. Tranche 2 of Australia’s AML/CTF laws represent a significant expansion of the regulated sectors. Its objective is to close loopholes that have been exploited by money launderers and terrorists to ‘wash’ illicit funds.
The Tranche 2 regime is likely to aim to mitigate these risks by requiring these professionals to conduct enhanced due diligence on their clients, monitor transactions, and report suspicious activity.
Implications for Australian Tranche 2 entities
The following outcomes are likely to face those in affected Tranche2 sectors because of imminent new AML/CTF legislation:
1. Risk assessment: Affected entities must conduct a thorough risk assessment to identify, analyse, and understand the money laundering and terrorism financing risks they face. This should consider factors like customer types, products and services offered, geographic locations, and delivery channels.
2. Risk mitigation: Based on the risk assessment, those in affected sectors must develop and implement risk mitigation strategies, which should include policies, procedures, and controls to address the risks effectively. These risk mitigation measures should be proportionate to the level of risk and regularly reviewed and updated.
3. Enhanced Customer Due Diligence (CDD). Affected entities will need to do more thorough customer due diligence. This includes verifying client identities, determining the true source of client funds and beneficial ownership, and assessing the potential risks of each transaction.
4. Transaction monitoring: Entities must implement systems and processes to monitor transactions for suspicious activity. This involves analysing transaction patterns, identifying unusual or complex transactions, and investigating any red flags that may indicate money laundering or terrorism financing.
5. Detailed record keeping. Those in affected industries will need to maintain detailed records of their activities associated with CDD to comply with new regulatory requirements, including customer identification information, transaction details, risk assessments, and any suspicious matter reports filed.
6. Increased reporting. Under Tranche 2, affected industries must report certain transactions to AUSTRAC, especially if they raise suspicions about money laundering or terrorist financing. This includes transactions that involve large amounts of cash or display unusual patterns or characteristics.
7. Compliance programs. Another requirement of Tranche 2 laws is that affected sectors must implement robust compliance programs that align with Australia’s AML/CTF laws. This includes establishing internal policies and procedures, appointing a designated compliance officer, conducting regular risk assessments, providing training to relevant staff, and carrying out independent audits.
8. Ongoing compliance and training. Affected industries are also expected to set up and maintain robust AML/CTF compliance programs tailored to their specific business risks. Regular employee training on AML awareness and reporting obligations is also required, to make sure compliance requirements are met.
9. Independent AML/CTF audits: Regular independent audits are required to assess the effectiveness of their AML/CTF program. This will help identify any weaknesses or deficiencies in the program and ensure it remains up-to-date and aligned with regulatory requirements.
Enforcement and penalties
Proposed Tranche 2 AML/CTF laws introduce stricter penalties for non-compliance. AUSTRAC is responsible for enforcing compliance with the AML/CTF Act and its regulations and non-compliance can result in a range of enforcement actions, including:
- Infringement notices: For less serious breaches, AUSTRAC can issue infringement notices, which are fines for specific contraventions.
- Remedial directions: AUSTRAC can issue remedial directions requiring the entity to take specific actions to rectify non-compliance. This may include improving AML/CTF programs, enhancing due diligence procedures, or providing additional training to staff.
- Enforceable undertakings: In some cases, AUSTRAC may accept an enforceable undertaking from the entity, which is a legally binding agreement outlining the steps the entity will take to achieve compliance.
- Civil penalty orders: For more serious or systemic breaches, AUSTRAC can seek civil penalty orders through the Federal Court. These orders can impose significant financial penalties on the entity, with the maximum penalty being millions of dollars.
- Criminal charges: In the worst cases of non-compliance, criminal charges can be brought against the entity and its responsible officers. These charges can result in imprisonment and substantial fines.
The severity of the enforcement action will depend on various factors, including the nature and extent of the non-compliance, the entity's history of compliance, and its cooperation with AUSTRAC.
Affected entities should prepare for upcoming regulatory changes
Entities affected by Australia's new Tranche 2 AML/CFT laws, including lawyers, accountants, real estate agents, and high-value dealers will need to implement robust AML/CFT programs to ensure they comply with the new regulations.
This includes developing comprehensive AML/CFT policies and procedures that cover customer due diligence (CDD), enhanced due diligence(EDD) for high-risk customers, ongoing customer monitoring, suspicious matter reporting (SMR), and record-keeping obligations. These policies should be tailored to the specific risks that each entity faces, and they should be regularly reviewed and updated.
In addition to policies, affected entities must also provide comprehensive staff training on their AML/CFT obligations, including identifying and mitigating money laundering and terrorism financing risks. This training should be ongoing and cover legislative changes, emerging threats, and best practices in AML/CFT compliance.
Entities affected by Australia's Tranche 2 laws can gain significant benefits from working with leading independent AML/CFT compliance serviceproviders like One AML to understand and meet their AML/CFT obligations across all industry sectors.
How One AML can remove the stress from achievingAML compliance
We’re qualified to consult for all Phase 1 and 2 reporting entities across Australia and we can help if you’re impacted by the new Tranche2 AML/CTF regulations. We provide expert guidance to develop, review, and enhance AML/CFT policies and tailor them to cover your specific services and sector.
We also offer comprehensive training programmes to educate your staff on AML/CFT obligations and ensure they’re equipped to identify and mitigate financial crime risks.
By partnering with One AML, you can navigate Tranche 2 effectively and make sure you meet your AML/CFT obligations.
If you want robust, tailored, and cost-effective AML/CTF policies for your business or organisation, book a free 15 minute consultation today.