Introduction
The landscape of anti-money laundering and counter-terrorism financing (AML/CTF) compliance is undergoing a critical transformation for Australian law firms. Effectively navigating these evolving obligations and managing the inherent risks of money laundering and terrorism financing (ML/TF) is paramount for legal practices to ensure regulatory adherence and safeguard their integrity, particularly in light of the impending Tranche 2 reforms.
This guide offers a vital AML/CTF risk assessment checklist and outlines crucial red flags, specifically designed for Australian law firms. Its purpose is to furnish legal professionals with essential tools and insights to understand their responsibilities under the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth), enhance their due diligence practices, and effectively mitigate the risks associated with financial crime and designated services, thereby supporting their AML/CTF compliance efforts with the Australian Transaction Reports and Analysis Centre (AUSTRAC).
Client Intake & KYC Red Flags
Identification & Verification Failures
Effective client intake and robust Know Your Customer (KYC) processes are fundamental for Australian law firms to mitigate AML/CTF risks. Failures in identification and verification can expose firms to significant compliance breaches and facilitate financial crime. Law firms must be vigilant for red flags that suggest attempts to obscure identity or circumvent due diligence.
Key indicators of identification and verification failures include:
| Red Flag | Potential Indication / Why It’s a Concern |
| Refusal to provide ID | The client refuses or significantly delays providing the required identification documents necessary for customer due diligence (CDD) without a reasonable explanation |
| Misleading or forged documents | Documents appear misleading, vague, incomplete, forged, or altered. |
| Refusal to disclose beneficial owners | The client fails or refuses to identify a company’s ultimate beneficial owner(s) or trust. |
| Unclear purpose of the relationship | The nature and intended purpose of the business relationship or legal services are unclear or difficult to understand. |
| Contradictory information | Information provided by the client contradicts other details held by the firm or available publicly. |
| Apparent attempt to disguise identity | The client is trying to disguise their true identity or that of the UBO. |
| Unclear authority of the intermediary | An intermediary’s authority to act is unclear, or they are uncooperative or unsuitable. |
| Inconsistent or unverifiable contact info | Addresses or phone numbers provided are inconsistent across documents or cannot be easily verified. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
High-Risk Client Profiles & Structures
Specific client profiles and their corporate or transactional structures inherently carry a higher risk of ML/TF. Australian law firms must be adept at identifying these high-risk scenarios to apply appropriate levels of due diligence and mitigate potential involvement in financial crime. An effective risk assessment process is crucial for spotting these higher-risk indicators.
Law firms should pay close attention to the following high-risk client profiles and structures:
| Red Flag | Potential Indication / Why It’s a Concern |
| Politically Exposed Person (PEP) | The client is a PEP or a close family member/associate of one. |
| The offshore entity in a secrecy jurisdiction | The client is an offshore company/trust from a jurisdiction known for high secrecy or weak AML/CTF rules. |
| Complex or opaque corporate structures | The client uses shell companies, bearer shares, or layered trusts without a clear economic or legal rationale. |
| Links to a high-risk country | The client, business, or transaction links significantly to a higher-risk country. |
| Unjustified cash-intensive business | The client operates a cash-intensive business where the reliance on cash is not adequately explained. |
| Involvement in high-risk industries | The client is involved in sectors like casinos, money services, or dealing in high-value goods. |
| Adverse media reports | The client is the subject of credible adverse media, allegations of corruption, or financial crime. |
| Criminal convictions | The client or their associates have criminal convictions, particularly for financial crimes or drug trafficking. |
| Use of nominees | The client uses nominee shareholders or directors without a clear, legitimate rationale. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Suspicious Client Behaviour & Instructions
The behaviour of a client and the nature of their instructions can often provide crucial red flags indicating potential ML/TF risks. Evasive conduct, unusual requests, or attempts to circumvent standard procedures should prompt heightened scrutiny from legal professionals. Observing and correctly interpreting these behavioural cues is key to a firm’s AML/CTF compliance.
Law firms should be alert to the following suspicious client behaviours and instructions:
| Red Flag | Potential Indication / Why It’s a Concern |
| Evasive or secretive conduct | The client is unusually nervous, agitated, or secretive, especially when questioned about SoF/SoW or UBO. |
| Avoidance of in-person meetings | The client is unwilling to meet in person or insists on remote interactions without a valid reason. |
| Acting for an undisclosed third party | The client appears to be acting under the instruction of an undisclosed person. |
| Lack of concern for fees or risks | The client shows no concern about legal fees or commercial risks, or is willing to overpay. |
| Unusual urgency or last-minute changes | The client demands rapid execution of transactions or makes significant, unexplained last-minute changes. |
| Requests for unnecessarily complex structures | The legal arrangements requested seem designed to obscure ownership or the flow of funds. |
| Attempts to avoid due diligence | The client actively tries to circumvent CDD procedures or makes inquiries about reporting thresholds. |
| Pattern of changing legal advisors | The client has a history of frequently switching lawyers without a good reason. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Source of Funds & Wealth Concerns
Understanding the origin of a client’s funds for a specific transaction (Source of Funds—SOF) and the broader origins of their overall economic resources (Source of Wealth—SOW) is a critical component of CDD and risk assessment. Unclear, inconsistent, or unusual sources can indicate that the funds or wealth may be derived from illicit activities, necessitating further investigation to mitigate financial crime risks.
Law firms should be particularly cautious when encountering the following red flags related to a client’s SOF or SOW:
| Red Flag | Potential Indication / Why It’s a Concern |
| SoF/SoW doesn’t align with the client profile | The client’s stated business or profession does not support the declared source of funds or wealth. |
| Significant or unusual cash transactions | The transaction involves large cash deposits/withdrawals inconsistent with the client’s known profile. |
| Payments using cryptocurrencies | The client uses cryptocurrency, especially if its origin is unverified or from an unregulated exchange. |
| Funds from high-risk jurisdictions | Funds originate from or are routed through jurisdictions known for weak AML controls or corruption. |
| Last-minute changes in the source of funds | There is a sudden, unexplained change in how a transaction is funded. |
| Inability to provide documentation | The client cannot provide a transparent, credible, and verifiable explanation for their SoF/SoW. |
| Funds from multiple, unrelated sources | Funds are received from various seemingly unrelated accounts or individuals without a clear justification. |
| Use of unexplained third-party payments | A third party without an apparent connection to the client or matter makes payments. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Transaction & Matter-Specific AML/CTF Red Flags
High-Value & Complex Transactions
High-value and complex transactions often present significant ML/TF risks, especially when lacking a clear business rationale or involving opaque structures. Law firms should be alert to the following red flags:
| Red Flag | Potential Indication / Why It’s a Concern |
| Unusually large or complex transactions | The transaction size or complexity is unusual for the client’s regular activity. |
| Use of shell companies or trusts | Beneficial ownership is obscured or unclear in property settlements or business deals. |
| Rapid property flipping | A rapid succession of property purchases and sales does not reflect market conditions. |
| Complex financing arrangements | Loans from private or offshore lenders lack clear terms, sources, or legitimate purpose. |
| Structured transactions | The transaction appears deliberately structured to avoid reporting thresholds or scrutiny. |
| Unconventional payment methods | The transaction involves large cash amounts or unverifiable cryptocurrencies. |
| Last-minute unexplained changes | There are sudden changes to transaction parties, funding sources, or terms. |
For example, a transaction involving a newly formed company purchasing high-value assets with funding from multiple offshore accounts without a clear business rationale should prompt enhanced due diligence.
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Corporate Structuring & Trust Management Risks
Legal services involving forming, managing, or restructuring companies, trusts, and other legal entities carry inherent AML/CTF risks. Red flags in this area include:
| Red Flag | Potential Indication / Why It’s a Concern |
| Illogical or overly complex structures | The structure requested lacks a clear commercial, legal, or tax purpose. |
| Use of nominee directors/shareholders | The identity of the nominator is unclear, high-risk, or the nominee is unaware of their role. |
| Frequent or rapid changes in structure | Unexplained changes in directors, owners, or beneficiaries, especially involving high-risk parties. |
| Use of entities in secrecy jurisdictions | The structure involves entities in tax havens without a legitimate business reason. |
| Evasiveness about UBO or SoF | The client refuses to disclose beneficial ownership or the source of funds for the structure. |
| The firm’s address is used for multiple entities | The firm’s address is the office for numerous entities without operational connection. |
| Transactions involving shelf companies | The new beneficial owner of an aged “shelf company” is obscure or high-risk. |
For instance, a client requesting the rapid formation of multiple companies with identical structures and nominee directors from offshore tax havens should trigger enhanced due diligence and risk assessment.
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Legal Sector-Specific Schemes & Red Flags
Common Legal Sector Money Laundering Tactics
The legal sector can be exploited through various tactics unique to its services, presenting specific red flags that Australian law firms must identify to mitigate the risk of ML/TF. Effective risk assessment and ongoing vigilance are crucial for AML/CTF compliance.
Common ML tactics within the legal industry include:
| Red Flag | Potential Indication / Why It’s a Concern |
| “Smurfing” via multiple legal invoices | Issuing multiple smaller invoices to break down a large sum into less conspicuous amounts, potentially avoiding reporting thresholds. |
| Rapid succession of wills/estate changes | Frequent, unexplained changes to wills or estate administration to disguise the ownership or transfer of illicitly obtained assets. |
| Misuse of legal professional privilege | A client may attempt to use privilege to shield communications made in furtherance of a crime from scrutiny. |
| Creation of complex structures without a purpose | Requesting complex corporate or trust structures with no legitimate commercial, legal, or tax purpose, intended to obscure ownership and SoF. |
| Involvement in sham litigation | Facilitating litigation that is not genuine but is designed to transfer funds or create a false paper trail for illicit transactions. |
| Facilitating transactions for unconnected third parties | Using legal services to conduct transactions for third parties without a clear connection to the client distorts the actual ownership of the assets. |
| Advising on transaction structuring to avoid detection | A client seeks advice on structuring transactions to circumvent AML/CTF reporting requirements. |
| Transferring funds through firm accounts without justification | Using the law firm’s trust account to pass through funds unrelated to legitimate legal services, effectively using the firm as a remittance service. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Risks in Acting as Fiduciaries or Nominees
When Australian law firms or their practitioners act in fiduciary capacities, such as nominee directors, shareholders, or trustees, they undertake significant AML/CTF responsibilities and face specific risks. These designated services can be attractive to those seeking to obscure beneficial ownership or control of assets for illicit purposes. Therefore, a thorough risk assessment is vital before accepting such roles.
Key risks associated with acting as fiduciaries or nominees include:
| Red Flag | Potential Indication / Why It’s a Concern |
| Obscured beneficial ownership | The client requests nominee services to hide the identity of an entity’s valid beneficial owner(s). |
| Lack of legitimate purpose | The request for nominee services lacks a clear commercial or legal rationale and appears designed primarily for anonymity. |
| Involvement of high-risk clients or jurisdictions | The person for whom the service is provided is from a high-risk jurisdiction, is a PEP, or is otherwise high-risk. |
| Insufficient transparency from the client | The client is unwilling to provide detailed and verifiable information about the source of funds or assets to be managed by the nominee. |
| Instructions from undisclosed third parties | Instructions for the entity appear to come from an undisclosed person, indicating the client may be a front. |
| Unusual or illegitimate entity activities | The entity undertakes activities inconsistent with its stated purpose, suggesting it could be a shell company used for financial crime. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Solicitor-Client Interaction Red Flags
Behavioural Indicators of Risk
How clients behave during interactions with your law firm can offer crucial insights into potential AML/CTF risks.
Identifying these behavioural red flags is essential to your firm’s due diligence and overall AML/CTF compliance efforts. Moreover, vigilance in this area can help mitigate the risk of exploiting your legal services for financial crime.
Accordingly, Australian law firms should be alert to the following behavioural indicators that may suggest heightened ML/TF risk:
| Red Flag | Potential Indication / Why It’s a Concern |
| Reluctance for direct engagement | The client is unwilling to meet in person or insists on remote interactions without a valid reason, especially for complex matters. |
| Insistence on anonymity or intermediaries | The client insists on anonymity or consistently uses intermediaries, attempting to obscure their true identity. |
| Evasive or secretive conduct | When questioned about their identity, SoF/SoW, or transaction purpose, the client is unusually nervous, agitated, or defensive. |
| Inconsistent or vague information | The client provides details or instructions that are frequently contradictory, vague, or change without a logical explanation. |
| Unusual urgency or pressure | The client demands unusually rapid execution of transactions, indicating an attempt to bypass proper scrutiny. |
| Attempts to influence or bribe | The client offers bribes or disproportionately high fees in return for expedited or less scrutinised service. |
| Acting under undisclosed influence | The client appears to be acting on the instructions of an undisclosed third party not formally part of the engagement. |
| Circumventing AML/CTF obligations | The client inquires about AML/CTF policies in a way that suggests an attempt to structure activities to avoid detection. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Document Integrity & Reporting Red Flags
Document Integrity Issues
Maintaining documentation integrity is critical to Australian law firms’ compliance with AML/CTF. Questionable documents can significantly indicate attempts to deceive or obscure illicit activities, potentially exposing your firm to financial crime.
Vigilance in scrutinising documents is essential for robust due diligence. Law firms should be alert to the following red flags concerning document integrity:
| Red Flag | Potential Indication / Why It’s a Concern |
| Altered or forged documents | Documents appear to have been tampered with, forged, or are counterfeit. |
| Inconsistent notarisation or certification | Document certification is missing, irregular, or suspicious. |
| Discrepancies in details | Inconsistencies in names, dates, or addresses exist across different documents. |
| Suspicious or outdated documents | Documents are unusual for the transaction and are generic templates, expired, or poor-quality. |
| Resistance to verification | The client is reluctant or refuses to allow the firm to verify the authenticity of documents. |
| Unusual document execution | Documents are not properly executed, lack necessary signatures, or contain critical errors. |
| Third-party documents without verification | Documents are provided by a third party whose authority or authenticity cannot be easily verified. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Reporting & Escalation Triggers
Identifying and acting upon red flags is a cornerstone of a law firm’s AML/CTF compliance obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth). Specific triggers necessitate internal escalation to the firm’s AML/CTF Compliance Officer and may require the submission of a Suspicious Matter Report (SMR) to AUSTRAC.
Timely reporting is crucial; SMRs related to Terrorism Financing (TF) must be submitted within 24 hours of forming a suspicion, and within three business days for suspicions related to ML or other serious crimes.
Key red flags that should trigger reporting or internal escalation include:
| Red Flag | Potential Indication / Why It’s a Concern |
| Structured transactions | Transactions appear deliberately structured to avoid reporting thresholds (e.g., below A$10,000). |
| Provision of false or misleading information | The client provides information or documents the firm suspects are false, misleading, or stolen. |
| Suspicious client behaviour | The client exhibits behaviours like extreme secrecy, evasiveness, or attempts to bribe staff. |
| Involvement of high-risk jurisdictions | Transactions involve countries known for corruption or weak AML controls without a legitimate reason. |
| Unusual transactions lacking purpose | The transaction is unusually complex or has no apparent economic or lawful purpose. |
| Suspicion of acting for undisclosed parties | There is a suspicion that the client is acting for an undisclosed third party. |
| Discovery of adverse media or sanctions | Due diligence reveals links between the client/UBO and criminal activities, corruption, or sanctions. |
| Internal staff concerns | Fee-earners or staff raise legitimate concerns about a client’s activities or a transaction’s nature. |
| Failure to comply with AML/CTF obligations | A client persistently attempts to circumvent the firm’s CDD procedures. |
Get Your Free Initial Consultation
Request a Free Consultation with one of our experienced AML Lawyers today.
Conclusion
Vigilance across client intake, trust accounts, transaction types, industry-specific schemes, client interactions, and document integrity is crucial for identifying suspicious activities and meeting AUSTRAC reporting requirements, thereby mitigating financial crime risk.
If you have concerns about potential money laundering risks or need assistance strengthening your firm’s AML program, contact the experts at AML House today for specialised services tailored to your needs and proven solutions to safeguard your practice.
