How Australian Law Firms Can Manage UBOs for AML Compliance (Tranche 2 AML/CTF)

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Introduction

Identifying the Ultimate Beneficial Owners (UBOs)—the natural persons who ultimately own or control client entities—is critical to combating financial crime globally. For Australian law firms, understanding and verifying beneficial ownership information is becoming increasingly vital for compliance with the nation’s anti-money laundering and counter-terrorism financing (AML/CTF) framework, helping to prevent the facilitation of money laundering and terrorism financing.

The significance of UBO identification for the legal sector has been amplified by the Tranche 2 reforms to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), which extend regulatory obligations to law firms providing certain designated services. This guide provides essential information for Australian law firms navigating these changes, covering the core concepts of beneficial ownership, the regulatory landscape overseen by the Australian Transaction Reports and Analysis Centre (AUSTRAC), and practical steps for developing effective compliance processes as reporting entities.

What is an Ultimate Beneficial Owner (UBO) for a Law Firm?

Defining UBOs in the Australian Context for Law Firms

For Australian law firms preparing for the Tranche 2 AML/CTF reforms, understanding the definition of a UBO is fundamental. Referred to as a beneficial owner in the legislation, a UBO is the natural person or persons who ultimately own or control a client entity. These entities include:

• Companies
• Trusts
• Partnerships
• Other structures

Your firm’s core task is to identify the individuals behind these structures as part of client due diligence. Under AUSTRAC guidance, a beneficial owner is defined as any individual who:

• Owns 25 % or more of the customer entity, or
• Controls it, directly or indirectly.

This aligns your firm’s compliance efforts with international standards, such as those from the FATF.

Understanding Ownership vs. Control in Beneficial Ownership for Law Firms

Identifying a UBO involves considering both ownership and control, which are distinct concepts under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and associated Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (Cth). It is crucial to look beyond simple shareholding percentages.

Ownership typically refers to holding a specific percentage of an entity’s shares, capital, or equity. Control, however, relates to the ability to influence the entity’s financial and operational decisions significantly.

This control can manifest in various ways, including:

• Holding significant voting rights
• Having the power to appoint or remove key personnel like directors or trustees
• Exercising influence through contractual agreements, trusts, or informal arrangements
• Holding senior management positions that allow for substantial influence over decisions

An individual can exercise control and be considered a beneficial owner without meeting the ownership threshold.

Law firms must distinguish between ownership and control when identifying UBOs under the AML/CTF Act and its Rules. Ownership generally involves holding a specific percentage of shares or equity, whereas control is the practical ability to influence significant financial and operational decisions.

Your firm should recognise control by examining factors such as:

• Substantial voting rights
• Authority to appoint or remove directors or trustees
• Influence from contracts, trust deeds, or informal agreements
• Senior management roles exerting operational influence

Even if an individual falls below the 25 % ownership threshold, they may qualify as a beneficial owner through control.

Explaining the 25% Beneficial Ownership Threshold for Law Firms

A key quantitative measure your law firm will use is the 25% ownership threshold. Individuals meeting this threshold under Australian AML/CTF Rules – whether through direct or indirect holdings—are classified as beneficial owners.

There are two main types of ownership:

• Direct Ownership: This occurs when a natural person holds a 25% or more ownership interest directly in their name. For instance, if an individual personally holds 30% of the shares in a company, they are a direct beneficial owner.
• Indirect Ownership: This involves ownership held through one or more intermediary entities, such as companies or trusts. Calculating indirect ownership requires tracing the ownership chain and multiplying the percentage interests at each level. For example:
  • If Individual A owns 50% of Company X, and Company X owns 60% of the client entity, Individual A’s indirect ownership is 50% of 60%, which equals 30%. This exceeds the 25% threshold, making the Individual an indirect beneficial owner.
  • Ownership interests held through different chains are aggregated to determine the total indirect ownership percentage.

Due to this 25% threshold, an entity can have a maximum of four beneficial owners based solely on ownership stakes. However, individuals exercising control through other means must also be identified.

Documenting your firm’s assessment of this threshold for each client is essential to demonstrate compliance. While pure ownership can yield up to four beneficial owners, you must also identify those exerting control.

Identifying Senior Managing Officials When No UBO Meets Threshold (Law Firm Duty)

There may be situations where, after taking reasonable measures, a reporting entity cannot identify any natural person who meets the definition of a beneficial owner through either the 25% ownership threshold or other means of control.

In such circumstances, the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (Cth) requires the reporting entity to identify and verify the identity of the senior managing official(s) of the client entity. This typically refers to the individual(s) responsible for making executive decisions, such as:

• The Chief Executive Officer (CEO)
• The Managing Director
• Equivalent senior officers responsible for managing the entity

Why UBO Identification is Critical for Your Law Firm

Meeting Your Law Firm’s AML/CTF Obligations Under Tranche 2

Identifying the UBO is a fundamental legal requirement for Australian law firms under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). This obligation has become particularly significant due to the Tranche 2 reforms, which extend AML/CTF regulations to law firms providing specific ‘designated services.’

Key compliance aspects include:

• Classification of law firms as reporting entities from 1 July 2026
• Adherence to detailed requirements set out in the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (Cth)
• Mandatory verification of UBOs according to these rules

Failure to comply with these obligations can lead to severe consequences imposed by AUSTRAC, including substantial financial penalties that can amount to millions of dollars for serious breaches. Therefore, adhering to UBO identification requirements is not optional, but a mandatory aspect of operating within the regulatory framework.

Mitigating Financial Crime & Money Laundering Risks for Your Law Firm

A primary reason for identifying UBOs is to prevent law firms from being inadvertently involved in financial crime, such as money laundering or terrorism financing. Criminals often attempt to conceal their identities and the illicit origins of funds by using complex ownership structures.

These deceptive structures typically involve:

• Multiple layers of companies
• Trusts or nominee arrangements
• Corporate veils specifically designed to obscure the true individuals who own or control the assets

By conducting thorough UBO identification, law firms can penetrate these layers of secrecy and understand who they are dealing with. This process helps uncover individuals hiding behind complex structures, mitigating the firm’s risk of facilitating illegal activities.

Effective UBO due diligence ultimately acts as a crucial defence mechanism against the misuse of legal services for laundering money or financing terrorism.

Protecting Your Law Firm’s Reputation & Integrity

Thorough UBO due diligence is vital in safeguarding a law firm’s reputation and professional integrity. Associating with clients involved in illicit activities, even unknowingly, can have serious consequences:

• Significant reputational damage
• Erosion of client trust
• Negative scrutiny from regulators and the public

Implementing robust UBO identification processes demonstrates a commitment to ethical practice and responsible risk management. By taking reasonable measures to identify the ultimate individuals behind client entities, law firms can avoid becoming linked to financial crime.

This proactive approach protects the firm’s standing in the legal community and marketplace and reinforces its commitment to operating with integrity. Maintaining a strong reputation is essential for long-term success and client confidence.

Understanding Client Structures & Identifying Conflicts A Law Firm Task

The process of identifying UBOs offers valuable benefits beyond pure compliance. Delving into a client’s ownership and control structure gives law firms deeper insights into their operations, governance, and the network of individuals involved. This enhanced understanding supports a more comprehensive risk assessment of the client relationship.

Furthermore, identifying the ultimate individuals who own or control a client entity can help proactively uncover potential conflicts of interest. A UBO identified during customer due diligence (CDD) might have connections to:

• Another client of the firm
• Other matters being handled by the firm
• Relationships that might otherwise remain hidden

This thorough approach allows the firm to manage potential conflicts effectively, aligning with professional conduct rules and contributing to better overall practice management.

Australia’s Legal Framework for Law Firm UBO Compliance

Key Legislation Governing UBO Compliance for Law Firms

The primary legislation governing AML/CTF efforts in Australia is the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). This Act establishes the main obligations for regulated businesses, known as reporting entities, aiming to deter, detect, and disrupt money laundering and terrorism financing. It mandates crucial compliance activities, including CDD, which encompasses identifying and verifying beneficial owners.

Supporting the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) are the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (Cth). These Rules provide the specific, detailed procedures required to meet the obligations set out in the Act. They cover essential areas such as:

• The precise steps for identifying and verifying customers and their UBOs
• Outlining acceptable verification methods and documentation requirements

AUSTRAC’s Role Regulator & Intelligence Unit for Law Firms

AUSTRAC is the government agency responsible for overseeing the AML/CTF regime. AUSTRAC operates with a dual function, acting as a regulator and Australia’s financial intelligence unit (FIU).

As the regulator, AUSTRAC supervises reporting entities to ensure they comply with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (Cth). Its responsibilities include:

• Enrolling and registering businesses
• Providing guidance
• Conducting compliance assessments
• Taking enforcement action against non-compliant entities

Impact of Tranche 2 Reforms on Your Law Firm

Recent significant changes, known as the Tranche 2 reforms, were introduced through the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth). These reforms expand the AML/CTF regime to include designated non-financial businesses and professions (DNFBPs), which previously fell outside its scope.

This expansion specifically includes:

• Law firms
• Accountants
• Real estate agents
• Trust and company service providers

The primary impact for law firms is that those providing specific ‘designated services’ will now be classified as reporting entities under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). This means they will be subject to the full suite of AML/CTF obligations, including:

• Developing an AML/CTF program
• Conducting CDD (including UBO identification)
• Reporting suspicious matters
• Keeping detailed records

These changes align Australia more closely with international standards set by the FATF.

Key Compliance Timelines for Your Law Firm

Law firms affected by the Tranche 2 reforms should know critical implementation dates. Adherence to this timeline is essential for ensuring compliance. Key dates include:

• March 31, 2026: Law firms providing designated services can begin enrolling with AUSTRAC.
• July 1, 2026: The core AML/CTF obligations, including UBO identification requirements, commence for law firms providing designated services.
• July 29, 2026: This is the deadline for law firms captured by Tranche 2 to complete their enrolment with AUSTRAC.

Designated Services Triggering Your Law Firm’s AML/CTF Obligations

The requirement for law firms to comply with AML/CTF obligations is triggered only when they provide specific ‘designated services’. These are activities identified as carrying a higher risk for potential money laundering or terrorism financing.

Based on the amended Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and related guidance, designated services for lawyers include activities such as:

• Assisting clients with transactions involving the buying and selling of real estate
• Managing client money, securities, or other assets, such as operating trust accounts beyond incidental legal work
• Managing bank, savings, or securities accounts for clients
• Organising contributions for the creation, operation, or management of companies
• Assisting with the creation, operation, or management of legal persons (like companies) or legal arrangements (like trusts)
• Acting as, or arranging for another person to act as, a trustee, nominee shareholder, or director
• Involvement in the buying and selling of business entities

Navigating Legal Professional Privilege Compliance in Your Law Firm

A key consideration for the legal profession under the Tranche 2 reforms is protecting legal professional privilege (LPP). The amending legislation includes specific provisions to safeguard LPP, confirming that the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) does not override the common law doctrine of LPP.

This means law firms are not required to disclose information or documents reasonably believed to be subject to LPP. Instead, a specific process allows firms to claim privilege. Rather than providing the privileged information (for example, in a Suspicious Matter Report (SMR) or response to an information request), the firm must submit a dedicated LPP form to AUSTRAC.

How Your Law Firm Can Identify & Verify UBOs

Collecting & Verifying UBO Information Your Law Firm’s Process

Identifying and verifying UBOs requires a systematic approach integrated into your firm’s CDD process. This process ensures compliance with the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and associated Rules.

The practical steps law firms must follow include:

1. Understand the Client Structure:
   • Determine the legal form of your client (company, trust, or partnership)
   • Identify whether it’s domestic or foreign
   • Request an ownership or control structure chart, certified by a director or equivalent
2. Collect UBO Information:
   • Gather identifying information for each potential UBO
   • Include full name, date of birth, and residential address as mandated by AUSTRAC
   • Consider collecting additional details like nationality and organisational role
3. Analyse Ownership and Control:
   • Investigate the ownership structure to identify natural persons holding 25% or more ownership
   • Trace ownership through intermediary layers using shareholder registers or company extracts
   • Assess control beyond ownership by examining:
     • Voting rights
     • Powers to appoint or remove key personnel
     • Other means of influence detailed in constitutional documents
4. Verify UBO Identity:
   • Verify identified UBOs using reliable and independent sources before providing designated services
   • Confirm the accuracy of collected details (name, DOB, address)

Law Firm Considerations for Different Australian Entity Types

As requirements differ, the approach to identifying UBOs must be tailored based on the client’s specific legal structure. Law firms need distinct protocols for various entity types encountered in Australia.

Key considerations include:

• Companies (Private/Unlisted):
  • Identify natural persons owning or controlling 25% or more, directly or indirectly
  • Review Australian Securities and Investments Commission (ASIC) records, company extracts, and shareholder registers
  • If no individual meets the threshold after reasonable measures, identify and verify the senior managing official(s), such as the CEO or Managing Director
• Trusts:
  • These often present the greatest complexity, especially discretionary trusts
  • Meticulously examine the trust deed to identify relevant parties who qualify as beneficial owners
  • Identify:
    • The Settlor (particularly if they retain influence or contributed significantly)
    • The Trustee(s)
    • Any Appointor(s) or Protector(s) with power over trustees
    • Beneficiaries holding a qualifying interest or, for discretionary trusts, the class of beneficiaries if individuals cannot be identified
• Partnerships:
  • Identify all partners holding a 25% or greater interest
  • Identify any partners exercising significant control, such as managing partners
  • Review the partnership agreement to understand profit-sharing and control arrangements

UBO Verification Methods for Law Firms Documentation vs e-Verification

AUSTRAC allows flexibility in verifying a UBO’s identity, permitting reliable documentation, independent electronic data sources, or a combination. The method must be appropriate for the assessed money laundering and terrorism financing (ML/TF) risk.

Verification options include:

• Documentation:
  • Involves sighting original or certified copies of identification documents
  • The Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (Cth) outlines specific combinations:
    • Primary Photographic ID: Such as a current Australian driver’s licence or passport
    • Primary Non-Photographic ID: Including a birth certificate or citizenship certificate
    • Secondary ID: Documents like a utility bill, rates notice, or Australian Taxation Office (ATO) assessment notice
  • Acceptable combinations typically involve one primary photographic ID, or one primary non-photographic ID plus one secondary ID
• Electronic Data (e-Verification):
  • Uses reliable and independent electronic sources to match collected UBO information
  • Requires matching against at least two separate data sources, or matching against specific government databases like the Document Verification Service (DVS)
  • Commercial Regulatory Technology (RegTech) platforms often facilitate checks against credit bureaus, electoral rolls, and other databases
• ‘Safe Harbour’ Procedures:
  • The Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (Cth) provides ‘safe harbour’ provisions
  • If a law firm correctly follows prescribed verification methods, they are deemed to have satisfied the verification obligation
  • This offers compliance certainty for firms following the guidelines

Importance of Documentation & Record-Keeping for Law Firm Compliance

Meticulous documentation and record-keeping are fundamental pillars of AML/CTF compliance. Law firms must maintain detailed records of the UBO identification and verification process to demonstrate their compliance efforts to AUSTRAC.

Key aspects of documentation include:

• Recording the Process:
  • Document all steps taken to identify UBOs
  • Include analysis of ownership and control structures (e.g., ownership charts, calculations for indirect ownership)
• Retaining Evidence:
  • Keep copies of information and documents collected
  • Maintain verification evidence (e.g., certified ID copies, electronic verification reports)
  • Preserve risk assessments performed and communications with clients regarding UBOs
• Documenting Challenges:
  • Record any difficulties encountered, such as dealing with complex structures or uncooperative clients
  • Document steps taken to resolve challenges
  • If a senior managing official was identified because no UBO met the threshold, document this clearly
• Retention Period:
  • Under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth), records related to customer identification must be retained for seven years after the business relationship ends
  • These records must be legible and readily accessible

Common UBO Compliance Challenges & Solutions for Law Firms

Strategies for Law Firms Navigating Complex Structures & Nominees

Identifying the UBO can be significantly hindered by complex ownership structures. These often involve multiple layers of corporate entities, trusts, and intermediary companies, sometimes spanning different jurisdictions, making it difficult to trace the ultimate natural persons who own or control the client entity.

Criminals may deliberately use such intricate arrangements, including shell companies or nominee shareholders and directors, to obscure beneficial ownership information and facilitate money laundering or other financial crime.

To address these challenges, law firms should adopt systematic approaches:

• Visual Mapping: Create visual diagrams or charts of the ownership structure to better understand the layers and relationships between entities. This helps in systematically tracing ownership upwards from the client entity.
• Work Backwards: Start with the client entity and trace ownership and control links through each intermediary until natural persons are identified. Don’t stop at the first company or trust encountered.
• Look Beyond Nominees: Recognise that nominee shareholders or directors may not be the true UBOs. Investigate further to identify the individuals instructing the nominees or benefiting from the arrangement.
• Document Thoroughly: Maintain detailed records of each step taken during the investigation, including the analysis performed and the sources consulted. This documentation is crucial for demonstrating compliance efforts to AUSTRAC.
• Leverage Technology: Consider using technology solutions such as ComplianceGPT that can automate a lot of the KYC process, run sanctions/PEP screening automatically and reduce risk based on data.

Law Firm Challenges with Trusts (Especially Discretionary)

Trusts frequently present unique and significant challenges for UBO identification due to their inherent complexity and varying structures. Identifying the beneficial owners requires carefully examining the trust deed and understanding the specific roles and powers of the different parties involved. This is particularly true for discretionary trusts where beneficiaries may not have fixed entitlements but belong to a broader class.

Key considerations and steps when dealing with trusts include:

• Thorough Trust Deed Analysis: The trust deed is the primary document. It must be meticulously reviewed to identify all relevant parties and understand the control mechanisms.
• Identifying Key Parties: Under the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) (Cth), reporting entities must collect and verify information about specific parties, including:
  • The Settlor, especially if they retain influence or made significant contributions.
  • All Trustee(s), who legally administer the trust.
  • Any Appointor(s) or Protector(s), as these individuals often hold significant power, such as the ability to appoint or remove trustees, making them key controllers.
  • Beneficiaries who meet the definition of a beneficial owner through ownership (e.g., certain unit holders) or control. For discretionary trusts, if individual beneficiaries meeting the criteria cannot be identified, the focus shifts to identifying the class of beneficiaries described in the deed.
• Focus on Control: In many trust structures, particularly discretionary ones, control (e.g., held by the appointor) is often more relevant than ownership for identifying the UBO.

Law Firm Approaches to International Ownership & Offshore Entities

Identifying and verifying UBOs becomes more complex when dealing with clients involving international ownership structures or entities registered in foreign jurisdictions. These situations introduce several hurdles for Australian law firms. Challenges arise from varying legal frameworks, definitions of beneficial ownership, diverse reporting standards, and potential language barriers.

Furthermore, some offshore jurisdictions are known for lower levels of transparency and less stringent disclosure rules, making it difficult to access reliable information and verify UBO identities. This lack of transparency increases the associated ML/TF risk.

Solutions for managing these international complexities include:

• Utilising International Data Sources: Access international company registries and reputable electronic data providers with global coverage where possible.
• Requesting Certified Documentation: Obtain apostilled, certified, or notarised copies of foreign identification and corporate documents to enhance reliability.
• Applying a Risk-Based Approach: Tailor the level of due diligence based on the risks presented by the foreign client and jurisdiction. Entities or UBOs connected to high-risk or low-transparency jurisdictions typically require Enhanced Customer Due Diligence (ECDD).
• Documenting Additional Steps: Keep detailed records of all extra verification measures taken and the rationale behind the risk assessment for international clients.

Law Firm Strategies for Resistant or Uncooperative Clients

Law firms may encounter clients who are reluctant or refuse to provide the necessary UBO information or documentation. While this resistance can sometimes stem from legitimate privacy concerns, particularly for high-net-worth individuals, it often serves as a significant red flag for potential illicit activity or attempts to obscure beneficial ownership.

Managing these situations requires a careful and documented approach:

• Explain Legal Obligations: Communicate to the client that providing UBO information is mandatory under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and associated Rules. Explain the potential consequences of non-compliance for both the firm and potentially the client.
• Document All Attempts: Meticulously record all communications and attempts to obtain the required UBO information from the client. This documentation is vital evidence of the firm’s efforts.
• Assess the Situation: Evaluate the reasons for the client’s resistance. Is it a misunderstanding, a genuine privacy concern that can be addressed, or potentially evasive behaviour?
• Consider Escalation and Reporting: If the client remains uncooperative without a valid reason, follow the firm’s internal escalation procedures. This may involve informing the AML/CTF Compliance Officer. Consider whether the inability or refusal to provide information constitutes reasonable grounds for suspicion, potentially requiring the submission of an SMR to AUSTRAC.
• Evaluate Service Continuation: If the required UBO information cannot be obtained and verified, the firm may be legally prohibited from providing the designated service or may need to consider terminating the client relationship based on the firm’s risk appetite and AML/CTF program.

Conclusion

Identifying the UBO is a critical compliance requirement for Australian law firms under the expanded Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) due to Tranche 2 reforms, necessitating a thorough understanding of ownership and control. Effectively navigating these obligations involves practical steps for verification, addressing challenges like complex ownership structures and trusts, and leveraging technology to streamline CDD processes.

Successfully managing these beneficial ownership requirements under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) requires careful planning and robust systems; contact AML House today for specialised legal and consulting services to help your law firm navigate Tranche 2 regulations and transform these compliance challenges into strategic opportunities.

Frequently Asked Questions (FAQ)