What are the Tranche 2 AML reforms?

With a government consultation currently underway as of April 2023, Tranche 2 anti-money laundering (AML) reforms may soon come into force in Australia. AML Tranche 2 has already been introduced by countries including the UK, Canada, and New Zealand, and firms in Australia have been preparing for these changes for over a decade.

Once the Tranche 2 reforms are implemented, Australia will align with the Financial Action Task Force’s (FATF) recommendations on international AML standards. This will mean changes for a range of businesses as they must comply with the regulations to avoid penalties.

What is Tranche 2?

The Tranche 2 reforms are a set of proposed regulations that will modernize Australia’s approach to AML and counter-terrorism financing (CTF). It will also give more power to the Australian Transaction Reports and Analysis Centre (AUSTRAC). The suggested reforms are two-fold:

1. Simplifying and modernizing the system.
2. Extending the AML/CTF rules to cover high-risk professions.

The reforms will help fight the evolving threat of organized financial crime, which is estimated to cost Australia up to $60 billion a year. Tranche 2 will also help ensure the country retains its reputation as a trusted financial center after several high-profile money laundering court cases. In April 2023, the Australian government said, “Significant regulatory gaps and vulnerabilities have made Australia an increasingly attractive destination for laundering illicit funds”. 

Under Tranche 2, AML/CTF regulations will extend to non-financial professions, including real estate and law. Australia is one of only three jurisdictions that have not already extended the FATF changes to these professions, also known as non-financial businesses and professions (DNFBPs) or Tranche 2 entities.

Tranche 2 vs tranche 1

Tranche 2 of the AML regime was first proposed in 2007 after Tranche 1 was introduced in 2006. In 2022, limited reforms were introduced across Australia. Known informally as Tranche 1.5, changes included improvements to customer due diligence (CDD) and information sharing.

The key similarities and differences between Tranche 2 and Tranche 1 at a glance include:

What are the main objectives of the Tranche 2 reforms?

The main objectives of the Tranche 2 reforms in Australia are to:

• Modernize Australia’s approach to AML and CTF.
• Level up with international best practice.
• Respond to the growing threat of financial crime.
• Ensure ongoing confidence in Australia’s financial system.
• Include DNFBPs in AML compliance.
• Give AUSTRAC more oversight.
• Close loopholes.

One key change is that AML legislation will now be extended to include DNFBPs, specifically:

• Lawyers.
• Accountants.
• Auditors.
• Trust and company service providers.
• Real estate agents.
• Dealers in precious metals and stones, fine art, antiques, collectibles, yachts, and luxury cars.

How will the changes affect businesses?

Businesses will need to meet the new requirements, including:

• Adopting a risk-based approach to AML/CTF.
• Aligning with best practice for CDD.
• Keeping robust records.
• Setting up clear procedures for suspicious matter reports (SMRs), which are known as suspicious activity reports, or SARs, in other jurisdictions.
• Training employees in CDD, record keeping, and SMRs.
• Increasing knowledge, skills, and record-keeping around ultimate beneficial ownership (UBO), i.e., who controls the customer.

Australia’s approach to UBO and trusts has been called out by the Tax Justice Network and the Australian Taxation Office, who believe more transparency is needed. One recommendation mooted by the Senate is the introduction of a beneficial ownership register.

How can companies comply with the Tranche 2 regulations?

To comply with Tranche 2 regulations, Australian companies need to improve their CDD and approach to UBO and source of funds (SoF). They also need to report suspicious transactions to AUSTRAC. Australian DNFBPs will need to modify their AML/CTF policies and procedures as they will be part of the global battle against money laundering.

Tranche 2 compliance challenges

It’s estimated that financial crime compliance already costs firms in the wider Asia-Pacific region $50.1 billion. As well as cost implications, Tranche 2 compliance challenges may include:

• Lack of time and resources.
• Firms not understanding their obligations.
• A compliance skills and training gap – staff not currently able to spot red flags or know how to report suspicious activity.
• Small businesses and sole traders disproportionately affected by training and cost implications.
• Lack of sufficient sophisticated tech to implement the regime, particularly when it comes to Know Your Customer (KYC).

There may also be challenges for specific sectors. Legal practitioners, for example, have raised concerns about managing the balance between their AML obligations and their commitments to their clients, specifically lawyer/client confidentiality. They have asked for a ‘lighter touch’ to be applied and are keen to see in-house lawyers granted exemptions, for example. Their concerns are not unfounded, as there were some challenges in Canada when Tranche 2 AML regulations were introduced for the legal profession.

As with other DNFBPs, the FATF sees lawyers as gatekeepers who may or may not realize they are facilitating money laundering and terrorism financing. In the Panama Papers leak, over 1,000 legal entities in Australia were found to be involved in disguising financial crime. For these reasons, under Tranche 2, lawyers will need to significantly improve their CDD practices. Recommendation 22 says that legal professionals will need to verify the identity of their clients, ultimate beneficial owners, and SoF, where applicable.

Penalties for non-compliance

AUSTRAC lists enforcement actions for non-compliance with Tranche 2 as:

• Civil penalty orders.
• Enforceable undertakings.
• Infringement notices.
• Remedial directions.

See the full list of AUSTRAC penalties for non-compliance.

Australian police recently uncovered a money laundering network thought to be worth $10bn. The international scheme involved DNFBPs, including real estate agents, accountants, and lawyers. Assets of up to A$150m were seized and nine people were charged.

There are a number of AML tools available to help streamline regulatory processes and make sure your firm is compliant with Tranche 2, including AML customer screening and transaction monitoring software. 

ComplyAdvantage has created sophisticated CDD tools to help ensure your firm knows the true identity of every customer. With our cost-effective AI overlay, customer screening happens in real-time. The tool is flexible and can be adapted to your firm’s risk profile and appetite, thanks to a no-code rule builder. Firms can therefore be agile and adapt their screening rules according to performance.