Introduction
The Australian real estate sector is on the verge of a significant regulatory shift due to the Tranche 2 reforms of the nation’s anti-money laundering and counter-terrorism financing (AML/CTF) regime. Commencing on 1 July 2026, these reforms will officially classify real estate agents as “reporting entities” regulated by the Australian Transaction Reports and Analysis Centre (AUSTRAC), a change prompted by the high risk of property transactions used to launder illicit funds and finance terrorism. Understanding these new obligations is crucial for real estate professionals and their compliance officers, as Know Your Customer (KYC) procedures are central to this new framework. This guide offers a comprehensive walkthrough of the customer due diligence (CDD) requirements, providing practical guidance on verifying client identities, identifying beneficial owners, and confirming the source of funds for any designated service or transaction.
Understanding Your Tranche 2 AML Obligations
Why AML Laws Now Cover the Real Estate Sector
The extension of AML/CTF laws to the Australian real estate sector directly responds to the significant financial crime risks within the industry. AUSTRAC, Australia’s financial intelligence agency, has identified the real estate sector as having a “very high” vulnerability to money laundering for several reasons:
- Property transactions often involve high-value assets
- Transactions can be structured through complex legal entities, such as companies and trusts
- These structures can effectively obscure the actual owners of illicit funds
These Tranche 2 reforms are designed to close a critical regulatory gap and align Australia with international standards established by the Financial Action Task Force (FATF).
By designating real estate professionals as reporting entities, the government positions them as essential gatekeepers in the financial system. Agents are often the first point of contact in a property transaction and are uniquely placed to observe red flags that other parties may not see, such as a client’s lack of interest in the property’s price or condition. This strategic position makes real estate agents a crucial first line of defence against money laundering and terrorism financing.
Key Compliance Deadlines & Your Role as a Reporting Entity
Under the Tranche 2 reforms, any real estate agent or developer providing a “designated service,” such as brokering a property sale or selling directly to a buyer, will become a reporting entity. This new role comes with legally binding compliance obligations and critical deadlines that all real estate professionals must meet.
Key dates for your compliance journey include:
- 31 March 2026: Enrolment with AUSTRAC opens for real estate agents
- 1 July 2026: The new AML/CTF obligations officially commence
- 29 July 2026: Deadline to register with AUSTRAC if you provide a designated service on the commencement date
As a reporting entity, your core obligations will shift your agency’s focus from sales to surveillance and risk mitigation. You will be required to:
| Core Obligation | Requirement |
|---|---|
| Enrol with AUSTRAC | Enrol your business with the Australian Transaction Reports and Analysis Centre (AUSTRAC). |
| AML/CTF Program | Development, implementation, and maintenance of a tailored AML/CTF program to identify and manage your specific financial crime risks. |
| Customer Due Diligence (CDD) | Conduct CDD on all clients. |
| Reporting | Report suspicious activities, cash transactions over $10,000, and international funds transfers to AUSTRAC. |
| Record-Keeping | Maintain detailed records of transactions and compliance activities for at least seven years. |
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Your Step-by-Step KYC & Customer Due Diligence Process
Verifying Individual Customers & Sole Traders
As a real estate agent, your CDD process begins with verifying the identity of your clients and sole traders. Before you provide any designated service, you must collect and verify specific KYC information to reasonably satisfy that they are who they claim to be. This is a foundational step in your AML/CTF compliance.
For all individual customers, you are required to collect, at a minimum:
- Their full name
- Residential address
- Date of birth
For sole traders, you must also collect:
- Their full business name
- ABN, if applicable
Once you’ve collected it, you’ll need to verify the customer’s full name and their residential address or date of birth using reliable and independent sources.
Verification can be achieved through two primary methods:
| Verification Method | Description |
|---|---|
| Documentation-Based Verification | Involves examining original or certified copies of government-issued documents. For low or medium risk customers, ‘safe harbour’ procedures can be used, such as sighting a primary photographic ID (e.g., passport) or a combination of a primary non-photographic ID (e.g., birth certificate) and a secondary document (e.g., utility bill). |
| Electronic-Based Verification | Uses at least two separate and reliable electronic data sources to confirm customer details, such as cross-referencing information with credit reporting agencies or government databases like the Australian electoral roll. |
Your AML/CTF program must outline how you will handle any discrepancies found during verification, such as a name on a passport not matching a utility bill. This usually involves collecting further information to resolve the inconsistency.
Verifying Companies & Trusts
When your customer is not an individual, such as a company or a trust, your KYC obligations require you to be satisfied that the entity is real and exists. This involves collecting and verifying key information about the entity’s structure and registration status before you provide a designated service.
For corporate customers, the verification process is essential for AML compliance. The specific information you need to collect for an Australian company includes:
- The company’s full name as registered with the Australian Securities & Investments Commission (ASIC)
- Its Australian Company Number (ACN) or Australian Registered Body Number (ARBN)
- The address of its registered office and principal place of business
- Its registration status (i.e., whether it is a public or proprietary company)
For trusts, you must collect information such as:
- The full name of the trust
- The names and addresses of all trustees
This information is typically verified by reviewing a certified copy of the trust deed. It is important to remember that verifying the entity is just one part of the process; identifying and verifying its beneficial owners is a separate, critical step in CDD.
Simplified verification procedures are available for certain lower-risk entities. For example, if your customer is a company listed on an Australian stock exchange or a government body, the verification requirements are less stringent. Confirmation can often be achieved by publicly searching the relevant stock exchange or an ASIC database.
Identifying & Verifying Beneficial Ownership
Defining a Beneficial Owner & Why Verification is Important
A beneficial owner is the individual or natural person who ultimately owns or controls a customer, directly or indirectly. Under the AML/CTF framework, this is typically defined as someone who:
- Owns 25% or more of an entity
- Exercises significant control over its decisions
For a real estate agent, verifying the beneficial owner is a critical component of CDD. The primary importance of this verification lies in preventing the misuse of complex legal structures like companies and trusts to conceal identities and launder illicit funds through the real estate sector.
As a reporting entity under the Tranche 2 reforms, your KYC obligations require you to look beyond the immediate customer to understand who truly benefits from the transaction. This process serves two essential purposes:
- Protecting your real estate agency from being exploited for financial crime
- Ensuring you meet your compliance duties with AUSTRAC
Uncovering Beneficial Owners of Companies & Trusts
Uncovering the ultimate beneficial owner (UBO) requires a methodical approach to peel back the layers of ownership. Your AML/CTF program must outline how you will take reasonable measures to identify and verify these individuals.
Your first step should be to ask your client to provide a clear picture of their ownership and control structure, which can often be clarified with a company structure chart. Following this, you must independently verify the information provided using reliable documentation.
For different entity types, specific documents are required:
- For Companies: You should obtain official documents such as:
- A recent ASIC company extract
- The company’s constitution
- Shareholder agreements to identify individuals with significant ownership
- For Trusts: A certified copy of the trust deed is essential. This document will help you identify:
- The settlor
- Trustees
- Appointors
- Specific beneficiaries who may qualify as beneficial owners
If the owner of your customer is another legal entity, you will need to continue tracing the ownership chain until you identify the individual or individuals at the top. For instance, imagine your customer is ‘Coastal Properties Pty Ltd’, and an ASIC search shows it is 50% owned by John Smith and 50% by ‘Investment Holdings Pty Ltd’. You would then need to search ‘Investment Holdings Pty Ltd’, which might reveal that its sole shareholder is Jane Doe. In this scenario, the beneficial owners are John Smith and Jane Doe, and you must complete identity verification for both.
In situations where, after taking all reasonable steps, you cannot identify a beneficial owner holding 25% or more, you must determine the person who holds the position of senior managing official, such as the company’s CEO or managing director. For a trust, this would be the individual who has the power to appoint or remove the trustee, often referred to as the ‘appointor’ or ‘principal’.
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How to Verify Source of Funds & Wealth
Distinguishing Between Source of Funds & Source of Wealth
As a real estate agent, a critical part of your CDD obligations involves understanding where your client’s money comes from. It is essential to distinguish between two key concepts: the Source of Funds (SoF) and the Source of Wealth (SoW).
SoF refers to the origin of the money used for a particular property transaction. This could be:
- Funds from savings
- Proceeds from a previous property sale
- A loan
In contrast, the SoW is a much broader concept, referring to the origin of a person’s entire collection of assets and financial resources, such as:
- Business interests
- Investments
- Inheritance
Your AML/CTF program must outline when and how you will conduct these checks based on your transaction risk assessment. Verifying SoF and SoW is particularly important when dealing with high-risk customers, such as Politically Exposed Persons (PEPs), or when a transaction is unusual or inconsistent with what you know about the client.
Acceptable Documentation for SoF & SoW Verification
The level of scrutiny and the specific documentation you need to request will depend on the client’s risk profile and the transaction. Using reliable and independent documentation, you must take reasonable measures to verify the client’s SoF and SoW for any high-risk transition.
Examples of acceptable evidence for different scenarios include:
| Source of Funds / Wealth Scenario | Acceptable Documentation |
|---|---|
| Savings from Employment | Recent payslips, a letter from the client’s employer, or bank statements showing the regular accumulation of funds over time. |
| Sale of a Property | A copy of the contract of sale, the settlement statement from the conveyancer, or bank statements showing the deposit of the sale proceeds. |
| A Gift from a Family Member | A signed declaration from the donor confirming the gift is unconditional. It may also be necessary to be satisfied as to the donor’s own source of wealth and verify their identity. |
| Inheritance | A copy of the will or grant of probate, or a letter from the solicitor or executor of the estate confirming the distribution of funds. |
| Sale of a Business | A copy of the business sale agreement, company financial statements, or a confirmation letter from an accountant or solicitor. |
| Loans or Credit | Loan agreements, mortgage approval letters, or bank statements showing the disbursement of the funds. |
Common KYC Pitfalls & Red Flags
Incomplete Customer Due Diligence & Poor Record-Keeping Pitfalls
A primary pitfall for any real estate agent is conducting an incomplete CDD. This often involves failing to identify all parties to a transaction, or not digging deep enough to uncover the UBOs, especially when dealing with complex structures like companies and trusts. Overlooking these details can expose your real estate agency to significant compliance risks.
Another common mistake is inadequately documenting the SoF, such as relying solely on a client’s verbal statements without obtaining verifiable evidence. Your AML/CTF program must include robust procedures for these checks.
Ignoring high-risk indicators, such as a client from a high-risk jurisdiction or using unusual payment methods, also constitutes a severe compliance failure.
Poor record-keeping is a critical vulnerability that can lead to severe penalties during an AUSTRAC audit. All records related to customer identification, due diligence, and transactions must be securely retained for at least seven years after the business relationship ends. Unfortunately, it’s not possible to prove your compliance efforts.
Red Flags Related to Client Behaviour & Transaction Structure
Vigilance is essential for identifying suspicious activities indicating money laundering or terrorism financing. Real estate professionals should be aware of red flags related to client behaviour and the transaction structure.
Suspicious client behaviours that should prompt further scrutiny include:
| Category | Red Flag Examples |
|---|---|
| Client Behaviour | Reluctance to provide identification documents or information about their SoF or SoW. Providing information that is false, inconsistent, or difficult to verify. Unusual nervousness, secrecy, or an unwillingness to meet in person without a reasonable explanation. Appearing to act under the instruction of a third party who is not officially part of the transaction. A lack of concern about the property’s price, condition, or location. |
| Transaction Structure | The use of large amounts of physical cash, especially if structured to fall below the $10,000 reporting threshold. Complex or opaque ownership structures designed to obscure the beneficial owner. A purchase price that is significantly above or below the market value without a clear justification. Funds originating from multiple, unrelated sources or from high-risk offshore jurisdictions. Last-minute and unexplained changes to the parties involved, the funding source, or other key transaction details. A rapid resale of the property, often at a significantly different price, with no logical explanation. |
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Conclusion
The Tranche 2 reforms, commencing on 1 July 2026, will fundamentally transform the Australian real estate sector by requiring real estate professionals to become reporting entities and implement robust AML/CTF programs. This new regulatory landscape mandates a comprehensive KYC process, which includes verifying client identities, identifying beneficial owners, confirming the SoF, and recognising transactional red flags to mitigate financial crime risks.
To navigate these complex obligations and ensure your real estate agency is prepared for the changes, you can contact our experienced team at AML House today. Our specialised AML compliance services are designed to help real estate professionals comply with AML/CTF laws, ensuring your business achieves full compliance with confidence.
