On 30 March 2022, the Federal Senate Legal and Constitutional Affairs References Committee (Committee) released its report regarding the adequacy and efficacy of Australia’s anti-money laundering and counter terrorism financing (AML/CTF) regime.
The Committee’s report focused on the implementation of an AML/CTF regime applicable to designated non-financial businesses and professions (DNFBPs) (often described as ‘Tranche 2’ reform). The Committee was highly critical of Australia’s failure to implement Tranche 2 reforms, emphasising that the Commonwealth Government must turn its attention to how to implement such reforms, rather than if.
Background to the inquiry
Australia’s AML/CTF regime is underpinned by a number of legislative instruments, including the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, the Anti-Money Laundering and Counter Terrorism Financing Rules Instrument 2007 (No 1), the Anti-Money Laundering and Counter Terrorism Financing (Prescribed Foreign Countries) Regulations 2018 and the Financial Transaction Reports Act 1988.
Implementation of the regime is a cooperative effort between a number of government agencies and departments, along with industry and the broader community.
At present, the AML/CTF regime applies to designated services provided by financial institutions, money remitters, digital currency exchanges, gambling services providers and gold bullion dealers.
Designated non-financial ‘gatekeepers’
The Parliamentary Committee noted it had received a number of submissions critical of Australia’s failure to regulate DNFBPs, otherwise known as ‘gatekeeper’ professions, under the current AML/CTF regime.
The Financial Action Task Force (FATF) is an inter-governmental, global money laundering and terrorist financing watchdog. The FATF has over 200 member states, including Australia which was a founding member, and since its establishment in 1989 has promoted a co-ordinated global response to prevent organised crime, corruption and terrorism. FATF’s core work has been the development of model regulations that are generally accepted as the ‘gold standard’ of AML/CTF measures.
In its recommendations for combating money laundering and terrorist financing, the FATF has recommended regulation of the following DNFBPs:
- casinos (where customers engage in financial transactions equal to or above the designated threshold);
- real estate agents;
- trust/company service providers; and
- dealers in precious metals/stones.
As highlighted in the Committee’s report, the FATF has assessed Australia as being largely non-compliant or only partially complaint with a number of its recommendations, including in relation to the regulation of DNFBPs.
Over the course of the inquiry, the Committee received 52 submissions, predominantly from three sectors of DNFBPs, being the:
- legal profession;
- accounting profession; and
- real estate industry.
Submissions by these DNFPBs conveyed a number of key concerns over implementation of the Tranche 2 (DNFBP) reforms. In summary, these concerns were:
- a purported lack of evidence to support the need for regulation (although the Committee noted this was disputed by a number of witnesses, including from the Australian Tax Office, Australian Criminal Intelligence Commission, Australian Transaction Reports and Analysis Centre (AUSTRAC) and Arctic Intelligence, and was contrary to a number of submissions);
- a duplication of existing regulatory obligations and practice, which could create an onerous burden that was incompatible with current standards;
- regulatory burdens for small businesses within the gatekeeper professions; and
- possible conflicts with legal professional privilege and the duty of client confidentiality.
Issues with current regime
The Committee considered development of Tranche 2 reforms against the background of certain key challenges in the current AML/CTF framework. These included:
- the complexity of the current framework, with the regime being largely unchanged since its implementation in 2006;
- whether a beneficial ownership scheme, where commercial databases would be used by reporting entities to identify high-risk customers, should be implemented;
- the effectiveness of the current civil and criminal penalties for failure to comply with the regime;
- the lack of protections for whistleblowers who may put themselves at risk by reporting money laundering; and
- the scope of AUSTRAC’s regulatory responsibilities and whether AUSTRAC would be able to discharge the significant increased in regulatory responsibilities that would follow the implementation of Tranche 2 reforms.
The Committee was highly critical of Australia lagging behind on the world stage, noting that it was one of only three states to fail to enact any regulation in relation to DNFBPs, and called into question the government’s commitment as recently affirmed at the G20 summit in Rome in October 2021.
The Committee considered the implementation of Tranche 2 reforms to be essential, in particular noting:
“The Commonwealth Government committed to FATF long ago and has repeatedly voiced its commitment to implementing Tranche 2 reforms. The process now should focus on how to implement these reports, rather than if.”
In conclusion, the Committee recommended that:
- the Commonwealth government accelerate its consultation with stakeholders on the timely implementation of Tranche 2 reforms in line with the FATF recommendations and ensures that AUSTRAC and the Department of Home Affairs have the right resources to adequately and effectively implement and manage the Tranche 2 regime;
- the Commonwealth Government’s acceleration of its consultation with relevant stakeholders be broad, with specific consideration given (but not be limited) to:
- the impact of regulatory burden on small business;
- opportunities and efficiencies that might be gained from technological innovation, especially where it could streamline regulatory processes and lower costs; and
- existing regulatory and professional obligations on Tranche 2 entities, including their effectiveness against the Anti-Money Laundering and Counter-Terrorism Financing Act 2006;
- the Commonwealth government seeks advice as to whether section 242 of the Anti-Money Laundering and Counter Terrorism Financing Act 2006 should be amended to ensure the proper operation of legal professional privilege; and
- the Commonwealth Government pursues a beneficial ownership register.
The Committee’s recommendations place pressure on the Commonwealth government to increase momentum in pursuing Tranche 2 reforms. While Tranche 2 reforms must await consultation and so are not imminent, once introduced, the reforms will have a wide reaching impact, due to the number of professions covered by FATF’s definition of DNFBPs and the wide range of entities utilising services from DNFBPs.
This article was originally co-authored by David Yates.
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