Are you Prepared For The New AML/CTF Compliance Obligations?

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As we already find ourselves mid-way through May we would have liked to have begun this blog by confirming that the proposed (and quite extensive) changes to the AML/CTF Rules have been registered. However, although the proposed changes contain a 1 June commencement date, these changes are yet to be finalised and registered.

The changes will impact significantly on the way in which many AML/CTF reporting entities deal with their customers, so a bit more notice of the final Rule changes would have been helpful here. There will be a fairly lengthy transition period for those entities who do not feel that they can comply with the new obligations by the beginning of September. However, this is conditional on reporting entities meeting some fairly strict AUSTRAC conditions, including board approval for a transition plan. More on that later.

 What’s driving the change?

Organised crime is big business.  A recent report by the United Nations Office of Drugs and Crime estimates that the annual income of organised crime in Asia and the Pacific at nearly USD$90 billion. In Australia, it is estimated to cost the country between AUD$10–15 billion each year.

It’s not surprising that the Financial Action Task Force (FATF), which sets the international standards on combating money laundering and the financing of terrorism through the FATF Recommendations, updated its Customer Due Diligence (CDD) standards, including the suggested diligence to be applied in the identification of beneficial owners of customers and politically exposed persons (PEPs).

These recommendations are front of mind for the Australian Government as the FATF has identified the Australian regime as not meeting the current standards.

AUSTRAC and the Attorney-General’s Department released a Discussion Paper (Consideration of possible enhancements to the requirements for customer due diligence) in May 2013. The purpose of this was to seek stakeholder views on current practice, and the need for amendments to Australia’s CDD regime.

What are the changes?

Draft Rules have since been prepared and, three attempts later, what appears to be the final draft amendments relating to CDD will be registered (put into force) shortly. As noted, the proposed general commencement date will be 1 June 2014.

Key changes contained within these updated Rules can be summarised as follows:

Chapter 1 – New and amended definitions –

Chapter 1 Consultation

  • Amendments to the definition of ‘beneficial owner’.
  • New definition of a ‘politically exposed person’
  • New definition of ‘senior managing official’
  • New definition of ‘Australian Government Entity’

 Chapters 4, 8 and 9 – Expansion on ML/TF Risk Matters

Chapter 4 Consultation

Chapter 8 Consultation

Chapter 9 Consultation

Additional risk factors will need to be considered by reporting entities under Chapters 4, 8 and 9 of the AML/CTF Rules when considering Money Laundering or Terrorism Financing (ML/TF) risks, including those relating to beneficial owners of customers, PEPs, the customer’s sources of funds and wealth, the nature and purpose of the business relationship with its customers and the control structure of non-individual customers.

Reporting entities will also need to be able to identify significant changes in ML/TF risks arising from changes in the nature of the business relationship, control structure or beneficial ownership of its customers.

Chapter 4 – New ID and Verification Requirements for Trusts

Chapter 4 Consultation

The changes to Chapter 4 include enhanced collection and verification requirements for trusts, with the additional requirement of collecting and verifying (subject to exceptions), the full name of the settlor of a trust.

Chapter 4 – New ID and Verification Requirements for Beneficial Owners

An AML/CTF Program will need to include appropriate systems and controls for the reporting entity to determine the beneficial owner (see new definition in Chapter 1) of each customer, and collect and take reasonable measures to verify the beneficial owner.

There are exceptions to this Rule, and safe harbour provisions for low and medium risk beneficial owners. However, these Rule changes will impact the way in which customer applications are processed, and the amount of time spent during collection and verification of customer and beneficial owner information.

Chapter 4 – New ID and Verification Requirements for Politically Exposed Persons (PEPs)

AML/CTF Programs will also have to include appropriate risk-management systems to determine whether a customer or beneficial owner is a PEP (see extensive new definition in Chapter 1).

Depending on the type of PEP, and also the ML/TF risk associated with each identified PEP, different procedures apply. Where a Foreign PEP is identified, or a PEP is assessed as high risk, specific additional requirements apply.

Appropriate risk-management systems will need to be implemented by each reporting entity to meet these prescriptive PEP requirements, and it will again increase the amount of time spent during the collection and verification of customers and beneficial owners.

Chapter 15 – Ongoing Customer Due Diligence enhancements

Chapter 15 Consultation

Part A must now include risk-based systems and controls to enable a reporting entity to determine in what circumstances further Know Your Customer (KYC) or beneficial owner information should be collected or verified in respect of customers or beneficial owners of customers, to enable the review and update of KYC information and beneficial owner information.

Additional due diligence will also have to be adopted for record keeping, and reporting entities will be required to undertake reasonable measures to ‘keep, update and review’ the documents, data or information collected during customer and beneficial owner identification procedures.

Enhanced Customer Due Diligence (ECDD) must now be applied where a designated service is being provided to a customer who is, or who has, a beneficial owner who is a Foreign PEP.

Also, the range of measures to be applied when the ECDD Program is triggered has also been expanded to include ECDD with respect to beneficial owners as well as specific ECDD procedures which must be applied to Foreign PEPs.

Chapter 30 – Disclosure Certificates

Chapter 30 Consultation

Finally, the list of circumstances where a disclosure certificate may be used has been updated and, where a reporting entity is permitted to use a disclosure certificate, then the information to be included within each certificate has been expanded, which is dependent on the entity type.

What should you do next?

AUSTRAC has indicated that there will be an assisted compliance period from 1 June 2014 to 1 January 2016, where they will not commence civil proceedings for failure to comply with the additional CDD requirements.

However, this supervisory approach is subject to meeting AUSTRAC conditions, including the conditions that a reporting entity must:

  • in respect of a person who becomes a customer between 1 June 2014 and 1 January 2016 and is assessed as high risk, comply with the new obligations as soon as practicable; and
  • establish a transition plan before 1 September 2014 which includes actions and timeframes to comply as soon as practicable and achieve full compliance by 1 January 2016; and
  • obtain Board (or equivalent) approval for the transition plan.

It is clear that both Part A and B of every AML/CTF Program will need to be amended and updated to meet these proposed Rule changes, although those businesses which are subject to FATCA reporting requirements may have already implemented systems and procedures which may assist in the collection of beneficial owner information.

Operational procedures will also have to be reviewed to meet these requirements including the forms and systems used to process new customer applications. The services offered by third party providers, which some reporting entities may use to undertake aspects of CDD on their behalf (i.e customer verification and screening), will also need to be reviewed to ensure that the reporting entity complies with these new Rules.

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This blog is a guide to keep readers updated with the latest information. It is not intended as legal advice or as advice that should be relied on by readers. The information contained in this blog may have been updated since its posting, or it may not apply in all circumstances. If you require specific or legal advice, please contact us on 1300 132 90 and we will be happy to assist.

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