What next after FATF's mixed review of Australia's anti-money laundering and counter-terrorism financing regime?

In brief

The Financial Action Task Force has released its report on the effectiveness of Australia's anti-money laundering and counter-terrorism financing regime, focusing on the extent to which it complies with international standards. The report's findings and recommendations come at a key stage in the evolution of Australia's anti-money laundering and counter-terrorism financing framework, and are likely to guide future developments. Partner Peter Haig, Senior Associate Edward Martin, Associate Andrew Shetliffe and Lawyer Glyn Ayres consider the potential impact of the report on the regulatory and enforcement landscape.

A guide to future reform?

Earlier this year we reported in our Focus article, The year to come for Australia's Anti-Money Laundering and Counter-Terrorism Financing regime, that we saw the FATF report as a key milestone in what promised to be a significant year for Australia's AML/CTF regime. We noted that FATF's recommendations have previously been a reliable pointer to AUSTRAC's priorities and the future direction of the AML/CTF regime it administers.

With the exception of the CDD rules, discussed below, the FATF report in some respects sets the agenda for the AG's Review, which will be expected to address each of FATF's criticisms and recommendations. To the extent that FATF's recommendations align with submissions made by reporting entities and industry groups as part of the AG's Review consultation process, they are likely to add further weight to those calls for reform. Two key submissions that found support from FATF are as follows.

1) 'Tranche 2': Regulating additional sectors

• Predictably, the FATF report reiterates FATF's long-held position that Australia should extend its AML/CTF regime to cover DNFBPs – the so-called 'tranche 2' entities that have so far been spared this compliance burden. The FATF report recommends that DNFBPs should be 'required to effectively implement AML/CTF obligations and risk mitigating measures in line with FATF Standards'.¹
• A majority of submissions to the AG's Review favoured such an extension of the AML/CTF regime to DNFBPs, in part driven by a desire to ease the regulatory burden on current reporting entities.
• FATF expressed some sympathy with the reporting entities upon whom the compliance burden has fallen to date, noting that the exclusion of DNFBPs from the Australian regime results in reliance being placed on the banking and financial sector as gatekeepers.² Submissions from DNFBPs themselves have, however, called for any implementation of 'tranche 2' reforms to be appropriately targeted and precisely tailored to the risks sought to be mitigated.
• Given the Government's aversion to creating 'red-tape' and the substantial compliance burden that full implementation of 'tranche 2' reforms would involve, it is perhaps unlikely that the AG's Review will recommend more than a partial implementation. Any expansion of the operation of Australia's AML/CTF regime will likely require significant further consultation.

• FATF was receptive to what it stated was reporting entities' unanimous desire for greater feedback on reported suspicious matters, recommending that AUSTRAC enhance the 'utility and timeliness' of such feedback. Any such enhancement would be welcomed, facilitating an increased understanding of the real money laundering and terrorism financing (ML/TF) risks faced by reporting entities.³

The FATF report did not, however, endorse the submission made by some reporting entities to the AG's Review⁴ that the 'tipping off' offence be amended to allow greater information-sharing within business groups and with foreign regulators. While noting that reporting entities consider that the restrictions of the offence have impeded the efficiency and effectiveness of their group-wide AML/CTF controls, FATF found that Australia's tipping off provision is in line with the FATF standard.⁵

AUSTRAC supervision and enforcement

AUSTRAC's supervisory practice received a far-from-glowing report card from FATF. The predominant theme was that more robust application of AUSTRAC's formal enforcement powers is likely to promote further compliance by reporting entities with AML/CTF obligations. It is not clear whether this accords with the agenda of the new AUSTRAC CEO, Paul Jevtovic, who has articulated a collaborative approach with industry, having been reported as saying:⁶

We want to work with reporting entities to safeguard our economy. Industry has a role to play in this. In the first instance we look to see if they are in breach because of ignorance or wrongdoing. That is important.

When the evidence supports action using the full force of our powers we will use them. But we also have to use industry as the first line of defence. Most are doing the right thing and meeting their obligations.

 

It remains to be seen whether FATF's observations spur AUSTRAC to pursue a more aggressive enforcement agenda than it has in the past.

The FATF report indicated that AUSTRAC may have insufficient visibility of the ML/TF risks facing individual reporting entities within designated business groups, with an over-reliance on unverified compliance reporting by those entities.⁷ FATF sees this as calling into question the adequacy of AUSTRAC's selection of individual reporting entities for compliance assessments. These observations may lead to a more 'granular' approach to AUSTRAC's considerations of the risks facing members of designated business groups, in order to better target its investigations.

In relation to the jurisdictional reach of Australia's AML/CTF regime, the FATF report encourages AUSTRAC to extend its supervisory activities to the offshore branches and subsidiaries of reporting entities headquartered in Australia.⁸ Many of those entities are technically captured by the Australian regime, but may not be subject to AUSTRAC supervision.

A recurring theme in the FATF report was whether the Australian regime is sufficiently calibrated to identified ML/TF risks. In the FATF assessors' view, AUSTRAC was unable to demonstrate that its exemptions policy was sufficiently determined by those risks, with criticism directed at AUSTRAC's consideration of 'regulatory burden' in determining whether to grant an exemption.⁹ Rather than relying on AUSTRAC's discretion, many reporting entities have stated a preference for common exemptions to be legislated, removing uncertainty and reducing the compliance burden. However, it is difficult to envisage the FATF report being interpreted as a prompt for reducing compliance obligations.

Customer due diligence

The FATF report recognises that a key current focus for reporting entities is ensuring they are fully compliant with the new CDD rules by 1 January 2016. Given that FATF sees these new CDD rules as being overdue, it is unsurprising that its report now encourages AUSTRAC to adopt a 'robust' position on the enforcement of the new CDD requirements following the expiry of the 'assisted compliance period'.¹⁰

Given, however, that 'Australia-based reporting entities generally responded [to FATF] that they were unlikely to be able to comply with the new requirements ahead of 1 January 2016',¹¹ AUSTRAC's willingness to implement the enforcement powers at its disposal may be tested.

Through submissions and consultation processes, AUSTRAC is aware of the difficulties reporting entities have confronted in implementing processes and procedures to ensure compliance with the new CDD Rules. A particular area of difficulty surrounds the identification and verification of beneficial ownership information, with FATF acknowledging that '[t]here is no clear process for the obtaining or recording of companies' beneficial ownership information'.¹² 

The FATF report recommends that Australia should ensure:

• 'that minimal information on the creation of legal arrangements, including those that are not registered with the ATO, is publicly available'; and
• 'that information on the beneficial owner of legal persons and legal arrangements is maintained and accessible to competent authorities in a timely manner'.¹³

While such recommendations are welcome, they fall short of what was sought in a number of submissions to the AG's review.¹⁴ These recommendations, if implemented, would also arguably fall short of what was contemplated by last year's G20 commitment to consider the establishment of central registries of beneficial ownership of legal entities, which has already gained some traction in the United Kingdom and elsewhere.

The FATF report does not comment on other obstacles reporting entities face in applying other CDD concepts in practice, such as the issues surrounding the 'beneficial ownership' of trusts. Indeed, the FATF assessors appear to have accepted that recent amendments to AUSTRAC's Compliance Guide rectified concerns reporting entities have expressed regarding the complexity and utility of AUSTRAC's guidance.¹⁵

Nor does the FATF report comment on the inconvenience of the requirement under the AML/CTF Rules that certain information be collected 'from the customer'. This requirement arguably goes beyond international standards and has been identified as problematic in submissions to the AG's Review by the Australian Financial Markets Association, the Australian Bankers' Association and the Australian Finance Conference.¹⁶

Great uncertainty still surrounds aspects of the new CDD Rules. These uncertainties appear unlikely to be addressed in the AG's Review, the terms of reference of which exclude their consideration. In light of this, and despite FATF's urgings, it is to be hoped that AUSTRAC takes a pragmatic approach to enforcement in this area upon the expiry of the 'assisted compliance period'. Ultimately, it is to be hoped that these uncertainties are addressed by amendment to the AML/CTF Rules or by further guidance from AUSTRAC.