FATF Mutual Evaluation Report on Australia’s AML/CTF Regime – hould it be Expanded to Include Lawyers and Real Estate Agents?

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The recently released Financial Action Task Force (FATF) report on Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) measures provides both positive and critical feedback on the measures put in place within Australia since the regime began (almost 10 years ago now!).

In terms of credibility, the FATF sets the regulatory and operational standards and measures for combating money laundering (ML), terrorist financing (TF) and other related threats to the integrity of the international financial system.

The FATF has developed a series of Recommendations (40) that are recognised as the international standards for combating ML/TF.  Between July 2012 and August 2014 FATF spent some time analysing the level of compliance with these Recommendations within Australia.

The output from this FATF visit is a lengthy report spanning 198 pages. However, the findings are extremely useful for existing reporting entities within Australia, providing a good marker in terms of current expectations which may ultimately become the expectations of the domestic regulator, AUSTRAC.

In addition, the FATF report is also critical of the level of effectiveness of Australia’s AML/CTF system in several areas, providing recommendations on how the system could be strengthened. Forward thinking reporting entities should be aware of this constructive feedback, as should those entities currently not subject to existing AML/CTF requirements, but who should expect to be over the coming years through a second tranche of AML/CTF regulation.

In particular, the proposed second tranche of legislation could catch accountants, lawyers, jewellers, real estate agents, trust and company service providers and other designated non-financial businesses and professions (DNFBPs) as reporting entities.

Executive Summary

  • Let’s be clear from the outset, the report shows a fair bit of room for improvement. After the adoption of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (Act), the creation of an ever expanding list of additional AML/CTF Rules (71 Chapters and counting), annual compliance reporting, internal/external Independent Review requirements and a very active regulator, FATF still found that Australia was Compliant or Largely Compliant in only 24 of its 40 Recommendations.
  • FATF had no problem addressing the elephant in the room, highlighting the fact that Australia has failed to implement the second tranche of AML/CTF regulation covering non-financial businesses and profession sectors (apart from gaming and bullion) referred to as DNFBPs. In particular, lawyers and real estate agents have been identified as posing a high ML risk in Australia’s National Threat Assessment with FATF also acknowledging Australia as an attractive destination for corruption related proceeds flowing into real estate from the Asia Pacific region. This second tranche of regulation has been mooted since the Act commenced in 2006, but we still have not seen its implementation and the FATF don’t like it.
  • FATF highlighted the fact that not-for-profit (NFP) organisations ‘are particularly at risk’ of being misused for terrorist financing but that Australia has not implemented a targeted approach nor has it exercised oversight in dealing with those NFPs that might be at risk from the threat of terrorist abuse. A thorough review of the terrorist financing risks the sector is facing and the potential vulnerabilities of the sector to terrorist activities are recommended ‘priority actions’.
  • AUSTRAC got a pat on the back in terms of its supervision of what is considered to be a vast amount of reporting entities, although FATF felt that AUSTRAC is not being given enough acknowledgement due to a lack of national metrics demonstrating how well risks are being addressed by the AML/CTF regime, and the work of the regulator.
  • Rather ominously, however, was the FATF suggestion that Australia should focus more on effective supervision and enforcement of individual reporting entities’ compliance with AML/CTF obligations within the various sectors. Indeed, a priority FATF action is to ‘consider opportunities to further utilise its formal enforcement powers to promote further compliance by reporting entities through judicious use of its enforcing authority’.  It is interesting to note that since the FATF visit to Australia last year AUSTRAC has already issued two infringement notices, cancelled six remittance registrations and issued fines across the bookmaking and remittance sectors.
  • Whilst acknowledging that most legal persons or entities are registered with ASIC, with information on these entities being available through sources such as ASIC online, very little is being done with this information by reporting entities. In particular, FATF found that there was a lack of focus on addressing risks from the abuse of complex corporate structures. It should be noted, however, that the FATF visit coincided with the introduction of detailed Customer Due Diligence (CDD) requirements within Australia, as discussed in our previous blogs, where enhanced identification and verification requirements now exist with respect to beneficial ownership of legal persons.
  • Finally, the big banks scored well, although they can only really play with what is in front of them. Whilst acknowledging that the top four domestic banks have a good understanding of their AML/CTF risks and obligations, some of their controls were not in line with FATF standards, but were compliant with Australian obligations! As highlighted, detailed CDD requirements were introduced in 2014. However, many of the outstanding FATF issues have still not been addressed by the AML/CTF regime within Australia, regardless of these updated CDD changes, so there is still work to be done, particularly in terms of meeting FATF customer identification and verification standards.

The findings of the FATF report will ultimately trickle down to existing reporting entities, as well as new reporting entities who should be prepared for the adoption of the second tranche of AML/CTF regulations, such as real estate and legal services.

James Cozens, Director, Commercial, will be conducting a series of workshops over the coming weeks focusing on these findings, as well as practical guidance on the implementation of the updated CDD requirements.

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