AML Tranche 2 Reforms: Key Changes for Australian Businesses

Reading Time: 8 minutes

Introduction

The Australian Parliament has recently passed the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth) on 29 November 2024. These reforms, known as Tranche 2 reforms, are set to bring significant changes to Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime. These amendments aim to align Australian law with international standards set by the Financial Action Task Force, addressing vulnerabilities to money laundering and terrorism financing.

These reforms will extend the AML/CTF regime to include ‘Tranche 2 entities’, encompassing businesses such as real estate professionals, professional service providers, and dealers in precious metals and stones. This guide will outline the key aspects of the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth) and explain the new obligations for these newly classified reporting entities.

Objectives of AML Tranche 2 Reforms

The Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth) and the Tranche 2 reforms have several key objectives:

• Extending the AML/CTF regime: A primary aim is to broaden the reach of the AML/CTF regime to include certain designated services considered to be of higher risk. These services are typically offered by ‘Tranche 2 entities’ such as real estate professionals, professional service providers (including lawyers, accountants, and trust and company service providers), and dealers in precious metals and stones.
• Improving the effectiveness of the AML/CTF regime: The reforms seek to make the AML/CTF framework simpler and clearer for businesses to navigate and comply with their obligations. This simplification is intended to enhance the overall effectiveness of the regime in combating money laundering and terrorism financing.
• Modernising the AML/CTF regime: Another key objective is to update the regime to reflect evolving business structures, technological advancements, and the changing methodologies used for illicit financing. This modernisation ensures that the AML/CTF framework remains relevant and effective in the face of new challenges.

Who are the New Tranche 2 Entities?

Expansion to High-Risk Businesses and Professions

The Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth) expands the scope of the AML/CTF regime to include specific high-risk businesses and professions, now termed ‘Tranche 2 entities’. These reforms aim to regulate services provided by sectors considered at higher risk of money laundering and terrorism financing.

The newly classified Tranche 2 entities include:

• Real estate professionals and developers: This encompasses agents and developers involved in property sales and transfers.
• Professional service providers: This category includes a range of professionals such as lawyers, accountants, insolvency practitioners, restructuring practitioners, and consultants.
• Dealers in precious metals and stones: Businesses involved in trading precious metals and stones are also now included.

Designated Services Under the AML/CTF Act

The Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth) adopts a ‘designated services’ approach to define which entities fall under the AML/CTF Act. Instead of listing specific business types, the legislation targets particular services that, when provided, bring an entity within the regime’s scope. If a business provides a designated service with a geographical connection to Australia, it will be subject to the AML/CTF Act.

For real estate, designated services include brokering the sale, purchase, or transfer of real estate on behalf of a client, and selling or transferring real estate by developers themselves when not brokered by an independent agent. For dealers in precious metals and stones, designated services involve buying or selling bullion, precious metals, precious stones, or precious products, particularly in transactions of $10,000 or more.

Key Changes: New Obligations for Tranche 2 Entities

Enrolment with AUSTRAC and AML/CTF Program

Businesses providing designated services, now classified as Tranche 2 entities, will face new compliance obligations under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). These obligations include enrolling with the Australian Transaction Reports and Analysis Centre (AUSTRAC), the national financial intelligence agency. Enrolment with AUSTRAC is a mandatory step for businesses offering designated services.

Tranche 2 entities must also develop and maintain AML/CTF programs tailored to their specific operations. These programs are essential for identifying, mitigating, and managing the risks of money laundering and terrorism financing. As part of developing an AML/CTF program, businesses are required to:

• Conduct a thorough risk assessment to understand their unique vulnerabilities.
• Appoint a dedicated AML/CTF compliance officer responsible for overseeing the program and ensuring its regular updates.

Customer Due Diligence and Reporting Requirements

Customer due diligence (CDD) is a critical component of the new obligations for Tranche 2 entities. These entities are required to conduct both initial and ongoing customer due diligence:

• Initial CDD: Involves collecting and verifying a customer’s identity and assessing the customer’s risk profile.
• Ongoing CDD: Requires continuous monitoring of customer transactions and regular updating of Know Your Customer (KYC) information. This process includes looking for unusual behaviours that might signal suspicious activity. Enhanced due diligence is necessary for high-risk customers, including politically exposed persons (PEPs).

In addition, Tranche 2 entities will be required to report certain transactions and activities to AUSTRAC. Reporting obligations include:

• Suspicious Matter Reports (SMRs): Reporting any activity that appears suspicious and potentially linked to money laundering or terrorism financing.
• Threshold Transaction Reports (TTRs): Reporting transactions that meet or exceed specified financial thresholds.
• International Value Transfer Services (IVTS) Reports: Reporting international transfers of monetary value.

Record Keeping Requirements

Under the amended AML/CTF Act, Tranche 2 entities must adhere to strict record-keeping requirements:

• Record Retention: Businesses must maintain detailed records of customer KYC information and transaction details for up to seven years after the conclusion of a transaction.
• Documentation of Designated Services: Records of all designated services provided to customers must be systematically stored and readily accessible for regulatory scrutiny.

These new obligations are designed to enhance transparency and accountability, ensuring that businesses maintain rigorous compliance practices in the fight against money laundering and terrorism financing.

Key Changes for Existing Reporting Entities

Existing reporting entities are subject to significant reforms under the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth). The changes focus on enhancing oversight and governance, redesigning customer due diligence and value transfers, and updating the framework for group reporting and information sharing.

Enhanced Oversight and Governance

Governing bodies, including boards and senior management, must now take reasonable steps to ensure that their organisations:

• Appropriately identify, assess, manage, and mitigate the risks related to money laundering, proliferation financing, and terrorism financing.
• Implement robust internal controls and regular risk assessments that address evolving financial crime risks.

This change reinforces accountability at the highest levels of the organisation, ensuring that strategic oversight effectively supports compliance efforts.

Redesigned Customer Due Diligence and Value Transfers

Existing reporting entities will experience substantial changes in their customer due diligence obligations:

• Initial Customer Due Diligence:
  • Must be conducted before providing any designated services.
  • Involves comprehensive verification of customer identities and risk profiling.
• Ongoing Customer Due Diligence:
  • Requires continuous monitoring of customer activities throughout the business relationship.
  • Involves updating KYC information and reviewing transactions for any suspicious patterns.

Additionally, reforms include changes to the reporting of value transfers. Previously reported as international funds transfer instructions to AUSTRAC, the new approach aligns with a more integrated risk management framework.

Reporting Groups and Information Sharing

Key changes in this area include:

• Transition to Reporting Groups:
  • The concept of ‘designated business groups’ is replaced with ‘reporting groups’.
  • The ‘lead entity’ within a reporting group will now have expanded obligations and liabilities.
• Enhanced Information Sharing:
  • Amendments to the tipping off offence are designed to encourage improved information sharing among entities.
  • Any discretionary disclosure is permitted only if it does not, or is not expected to, hinder law enforcement investigations.

These adjustments aim to foster better collaboration across the group, ensuring a unified and proactive response to financial crime risks.

Changes to AML/CTF Rules and Consultation

AUSTRAC’s Consultation on New AML/CTF Rules

In December 2024, AUSTRAC initiated its first consultation regarding the proposed new Anti-Money Laundering and Counter-Terrorism Financing Rules. This consultation process is structured around two rounds of exposure drafts, namely ‘Exposure Draft 1’ and ‘Exposure Draft 2’. The first round of consultation, focusing on Exposure Draft 1, was open for submissions until 14 February 2025. These exposure drafts are crucial for shaping the final AML/CTF Rules that will impact both existing and new reporting entities.

Key Areas of Consultation: Exposure Draft 1 and 2

The consultation process encompasses a wide range of subject matters that are critical to the AML/CTF framework. Exposure Draft 1 is focused on key areas such as:

• Reporting groups: This includes the structure and obligations of reporting groups under the amended legislation.
• AML/CTF programs: The consultation seeks feedback on the requirements for AML/CTF programs that regulated entities must implement to effectively manage risks.
• CDD: This area covers the redesigned customer due diligence obligations for reporting entities.
• AML/CTF compliance officers: The role and responsibilities of AML/CTF compliance officers are under review.
• Keep open notices: Consultation includes provisions related to keep open notices.
• Transfer of value: This encompasses rules around the transfer of value, including the ‘travel rule’.
• Correspondent banking: The consultation also addresses correspondent banking relationships.
• Cross-border movement reports: Requirements for reporting cross-border movements of physical currency are being considered.
• Disclosure of AUSTRAC information to foreign counterparts: The consultation includes aspects of information sharing with international counterparts.
• Compliance reporting: This area covers the obligations for compliance reporting to AUSTRAC.

Exposure Draft 2 will build upon Exposure Draft 1, incorporating amendments as needed and addressing further key areas. These additional areas include:

• Enrolment details: The specifics of enrolment for reporting entities will be detailed.
• Registration details: Requirements for registration under the AML/CTF regime will be clarified.
• Reportable details for threshold transaction reports and suspicious matter reports: The consultation will refine the details required for reporting threshold transactions and suspicious matters to AUSTRAC.
• Any additional measures: This allows for the inclusion of any other necessary measures identified during the consultation process.
• Current rules-based exemptions subject to consequential amendment: Existing exemptions within the current rules are also subject to review and potential amendment.

These exposure drafts aim to provide clarity to both existing and new reporting entities regarding the impacts of the reforms on their AML/CTF compliance obligations. They are designed to assist businesses in understanding what adjustments may be needed to their AML/CTF programs to align with the new requirements for AML/CTF policies under the amended laws.

Preparing for Tranche 2 AML/CTF Reforms

With the new AML/CTF regime taking effect on 1 July 2026, businesses that fall under the Tranche 2 entities category need to take proactive steps. Below is a structured roadmap to help organisations prepare for the upcoming changes.

Confirming Designated Services and Risk Assessment

• Determine Designated Services: Businesses must first verify if they provide ‘designated services’ as defined under the AML/CTF framework. This confirmation is essential to determine whether the new regulatory obligations apply.
• Conduct a Money Laundering and Terrorism Financing (ML/TF) Risk Assessment: Once confirmed as a Tranche 2 entity, the next step is to develop a comprehensive ML/TF risk assessment. Key considerations include:
  • Assessing the unique vulnerabilities to money laundering and terrorism financing.
  • Considering guidance and forthcoming rules from AUSTRAC.

A robust risk assessment forms the cornerstone of an effective AML/CTF program, ensuring tailored mitigation strategies for identified risks.

Developing AML/CTF Policies and Customer Due Diligence Processes

• Establish AML/CTF Policies: In line with the AML/CTF Act, Tranche 2 entities must create policies that outline their compliance framework.
  • These policies should be specifically tailored to the business operations.
  • They must incorporate the AML/CTF Rules and AUSTRAC guidance to ensure consistency with regulatory expectations.
• Implement CDD Processes: Robust CDD processes are critical to verifying customer identities and assessing risk profiles. This includes:
  • Initiating CDD before providing any designated services.
  • Undertaking ongoing due diligence throughout the customer relationship.
  • Developing mechanisms to monitor unusual behaviours or potential risks continuously.

Effective CDD is essential for managing and mitigating money laundering and terrorism financing risks.

Technology, Compliance Officer, and Training

• Adopt Technology Solutions: Explore and integrate technology tools designed to streamline compliance tasks, such as:
  • Conducting customer due diligence.
  • Managing and automating AUSTRAC reporting obligations.
• Appoint an AML/CTF Compliance Officer: Designate a suitably trained compliance officer who is:
  • Responsible for overseeing the implementation and ongoing operation of the AML/CTF program.
  • Considered a ‘fit and proper’ person for the role, ensuring competence and reliability in managing compliance tasks.
• Develop Comprehensive Training Materials: To maintain a culture of compliance:
  • Invest in training programs tailored to various employee roles.
  • Ensure that all staff understand their obligations under the AML/CTF Act.
  • Regularly update training materials to reflect evolving compliance requirements and regulatory updates.

Well-trained staff, supported by clear policies and robust technological tools, are vital for achieving effective AML/CTF compliance.

By confirming designated services, conducting a detailed risk assessment, establishing tailored policies and CDD processes, and leveraging appropriate technology and training, businesses can be well-prepared for the upcoming Tranche 2 AML/CTF reforms.

Conclusion

The AML Tranche 2 reforms, stemming from the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth), represent a significant shift in Australia’s approach to combating financial crime. These reforms extend the AML/CTF regime to encompass ‘Tranche 2 entities’ such as real estate professionals, professional service providers, and dealers in precious metals and stones, aiming to align Australia with international standards set by the Financial Action Task Force.

To navigate these complex changes and ensure your business is compliant, we encourage you to contact AML House today. Our team’s unparalleled expertise in AML/CTF regulations positions us to provide tailored guidance and support, ensuring your business meets its new obligations and strengthens its defences against financial crime risks.

Frequently Asked Questions