Cleaning up your act

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 introduced on December 12, 2006, is not entirely new.

In fact, the main anti-money laundering (AML) provisions of the Act are contained in the Financial Transactions Reports Act 1988 and its associated regulations.

The Act is nevertheless designed to not only strengthen Australia’s AML and counter-terrorism financing (CTF) regime but bring the regime into line with international standards set by the Financial Action Task Force, which is an international organisation established to combat global financial crime.

Accordingly, the Act will have a major impact on the financial planning industry — AustralianFinancial Services Licensees (AFSL) and planners alike — as it creates mandatory obligations of an administrative nature, including:

> verifying the true identity of customers prior to providing the designated service;

> reporting all suspicious matters and threshold transactions to the Australian Transaction Reports and Analysis Centre (AUSTRAC);

> keeping appropriate records; and

> developing and complying with a rigorous internal AML/CTF program.

The Act imposes harsh penalties on those who do not adhere to their obligations.

The Act will be supplemented by the AML/CTF rules, which detail the practical and operational nature of the AML/CTF regime.

The AML/CTF rules were developed by AUSTRAC, which, in addition to operating as the nation’s financial intelligence unit, will act as regulator with supervisory, monitoring and enforcement functions.

Financial planner and licensee obligations

The obligations that arise under the Act are applicable to all ‘reporting entities’.

Reporting entities are not defined under the Act by reference to their nature or structure type, but rather by reference to the services they provide, otherwise known as a ‘designated service’.

The Act details 70 different provisions that constitute a ‘designated service’. These range from:

> opening accounts;

> acquiring or disposing of a security, derivative, or a foreign exchange contract;

> providing life insurance;

> making a payment of a pension or annuity;

> accepting a superannuation contribution, roll-over or transfer; and

> electronic transfer of funds.

Predictably, such an extensive list of services ‘captures’ a vast array of financial service providers, including AFSL, and financial planners.

What you need to do

The core component of the Act is the requirement for businesses to identify, mitigate and manage the risk of money laundering and terrorism financing activities. This can be done by implementing the following provisions:

> customer due diligence;

> suspicious matter and threshold transaction reporting;

> record-keeping; and

> developing an internal AML/CTF program.

Customer due diligence

Reporting entities are required to verify a customer’s identity before providing a designated service to them.

However, in special circumstances, the procedure may be carried out after the designated service has commenced.

In the case of existing customers, where the reporting entity was already providing a designated service before the commencement of the Act, the customer identification and verification requirements are suspended and only ‘reignited’ if a suspicious matter reporting obligation arises in relation to that customer.

The Act exempts licensees from the requirement of identifying and verifying customers, where one of the following services is provided:

> making payments of a pension or annuity;

> accepting a superannuation contribution, roll-over or transfer; or

> accepting a retirement savings account contribution, roll-over or transfer.

Reporting

Reporting entities are required to report to AUSTRAC any suspicious matters, transactions over a threshold amount (over $10,000 in physical currency) and when they receiving or sending an international funds transfer instruction.

Suspicious matters can arise where a reporting entity suspects on reasonable grounds that:

> the customer is not who they claim to be;

> the information that the reporting entity holds concerning the provision of the service may be relevant to an investigation of, or prosecution of a person for, tax evasion, a criminal offence, money laundering or the financing of terrorism;

> the information concerning the provision of service is preparatory to the commission of a money laundering or terrorism financing offence.

In the case of suspicions relating to the financing of terrorism, reporting entities have 24 hours from the time the relevant suspicion is formed to make a report to AUSTRAC. In all other cases, reporting entities have three business days.

Licensees who arrange for a person to receive a designated service are exempt from the threshold transaction reporting.

Record-keeping

The AML/CTF rules provide that reporting entities are required to create records of certain designated services that they provide.

These records must be retained for seven years, together with any documents provided to them by customers in relation to the provision of a designated service.

AML/CFT programs

All reporting entities that provide a designated service are required to establish, implement and maintain an AML/CTF program.

This requirement is central to the operation of the Act, as it involves the adoption of processes and procedures for identifying, mitigating, and managing the money laundering and terrorism financing risks of customers, products and services.

In effect, an AML/CTF program will enable each reporting entity to determine for itself the way it will meet its obligations under the Act.

This is of particular importance because it is intended that reporting entities can develop their own programs with minimal cost to themselves, and minimal disruptions to their customers.

Generally, AML/CTF programs are divided into two parts: Part A (general) and Part B (customer identification).

Part A must be designed to identify, manage and reduce money laundering and terrorism financing risks reasonably faced by the reporting entity in the provision of a designated service.

This may include AML/CTF risk awareness training, employee due diligence and training and monitoring agents and third parties where applicable.

Part B of the program must outline the reporting entity’s customer identification procedures.

This may include establishing a system to identify customers based upon assessments of the risks posed by the customer, ongoing customer due diligence (including ‘know your client’ procedures), and ongoing monitoring of customer transactions.

It should be noted that a licensee who arranges for a person to receive a designated service need not implement Part A into an AML/CTF program. Only customer identification procedures will be necessary.

Further, because the Act has adopted a ‘risk-based’ approach, which in essence means that reporting entities are able to develop and employ their own strategies in assessing and mitigating money laundering and terrorism financing risks, there are certain factors that reporting entities should consider when establishing an AML/CTF program:

> the nature, size and complexity of the business and the type of risk it might reasonably face;

> risk profiles of customers and customer types, whether it be individuals, companies, trusts, partnerships, or government bodies;

> the type and nature of the designated services provided;

> the method by which the designated services are delivered;

> the risk profiles of foreign jurisdictions; and

> the provisions of the services in foreign jurisdictions.

AUSTRAC will assess the reasonableness of the reporting entity’s adopted AML/CTF program and ensure that the reporting entity complies with it.

Implementation

The Act will be progressively implemented in two stages over two years.

Stage one is aimed at the financial sector, the gambling sector and bullion dealers.

Stage two is aimed at accountants, lawyers, real estate agents and jewellers.

This two-year progressive approach is to provide businesses sufficient time to implement the measures and thus minimise the impact the Act will have on businesses, in particular small businesses (see table for implementation schedule).

Penalties

The Act provides AUSTRAC, in its role as regulator, with a number of enforcement tools. These include the power to:

> require reporting entities to carry out a money laundering and terrorism financing risk assessment;

> require reporting entities to appoint external auditors to assess the reporting entities’ risk management and compliance;

> provide remedial direction to a reporting entity that has contravened a civil penalty provision; and

> enter into enforceable undertakings with reporting entities.

AUSTRAC can also apply to the Federal Court for injunctions in relation to contravention of civil penalty provisions.

Failure to comply with the AML/CTF obligations under the Act can attract civil penalties of up to $11 million for a corporation and up to $2.2 million for an individual.

The Act also sets out various criminal offences, including producing false and misleading information, or providing a designated service using a false customer name.

Mary Nicole Ferizis is a solicitor at The Argyle Partnership .