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Industries: AccountantsAccountants will be subject to customer due diligence, record keeping and reporting obligations under the Government's new Anti-Money Laundering and Counter-Terrorism Financing Act 2006. GatekeepersAccording to the Financial Action Task Force (FATF), the growth of anti-money laundering (AML) regulation and advances in technology have led to money launderers using increasingly complex commercial arrangements which require the services of professionals outside the financial services industry, including accountants. The FATF Forty Recommendations on AML and its Nine Special Recommendations on counter-terrorist financing (CTF), (collectively, the FATF Recommendations), are intended, subject to domestic application, to impose new and significant obligations on accountants, who FATF include in a category of businesses and professions commonly referred to as 'gatekeepers'. By the nature of the services they provide, FATF considers 'gatekeepers' to be the gateway through which the launderer or terrorism financier accesses the legitimate market. In the case of accountants, these services can include, among other things, the creation of corporate vehicles, managed investment schemes, trusts and other corporate arrangements, and the performance of financial transactions for clients.
The Anti-Money Laundering and Counter-Terrorism Financing Act 2006The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (the Act), which came into effect in December 2006, implements the first tranche of the Government's proposed AML/CTF reforms (intended to bring the Australian AML/CTF regime into compliance with the FATF Recommendations) and is intended to cover accountants to the extent they are in direct competition with the financial sector. The Act introduces radical changes. Not only does it have considerable resource implications for the accounting profession, but it will also have a significant impact on the way accountants (and those other businesses affected by the Act) interact with their clients. The Act is to be supplemented by Regulations (mainly technical in nature), AML/CTF Rules (which will contain the practical, operational detail of the AML/CTF regime and have legislative force), and Guidelines (which will not be legally binding and which are intended to assist reporting entities (see below) to interpret their obligations and are anticipated in time to represent a 'best practice' approach for reporting entities).
Who is affected?According to CPA Australia, most accountants (except those with an Australian Financial Services Licence (AFSL)) will not be caught by the Act. The Act imposes AML/CTF obligations on entities (known as reporting entities) who provide one or more of a wide range of services (known as designated services). Section 6 sets out a comprehensive list of 70 different types of designated services. Those most likely to apply to accountants include:
The Act represents the first tranche of the Government's AML/CTF reforms. Implementation of the second tranche is progressing. For most accountants, the real crux will come with the release of the second tranche of the reforms, which will specifically target services provided by accountants. It is anticipated that activities to be covered in the second tranche will include where an accountant is instructed in the planning or execution of transactions for their clients concerning:
An accountant providing a designated service will only be a reporting entity if the service is provided at, or through, the accountant's permanent establishment (that includes where the accountant is carrying on business either himself or through an agent) in Australia or at, or through, a foreign branch or an overseas subsidiary.
TimingThe AML/CTF obligations in the Act will commence in stages over a two-year period. Some substantive obligations came into force on 13 December 2006, including the requirement that accountants (and others) who provide designated remittance services must register with AUSTRAC. The schedule for implementation of obligations is as follows:
A 15-month amnesty period will follow each of the stages outlined above. During that period, AUSTRAC will only take criminal or civil penalty action against a reporting entity where the reporting entity has manifestly failed to take steps towards compliance with its obligations. The Government has indicated that a Technical Amendments Bill will be introduced in the autumn 2007 sitting of Federal Parliament to address some of the amendments arising out of the report of the Senate Scrutiny of Bills Committee and outstanding technical issues.2 Operational detail is contained in the AML/CTF Rules. Some draft AML/CTF Rules (including rules on customer identification, reverification, third parties, ongoing customer due diligence and AML/CTF programs) were issued for consultation in 2006. Some AML/CTF Rules remain outstanding. Some final AML/CTF Rules were issued in December 2006. The Government has said that all AML/CTF Rules necessary for those provisions that will come into effect on 13 December 2007 will be finalised by 31 March 2007. The core requirementsCore requirements that will affect accountants include customer due diligence, suspicious matter and threshold transaction reporting, development of – and compliance with – an AML/CTF program and record keeping. AAR has commented in detail on some of these core requirements in Focus publications (22 December 2005, 27 July 2006, 3 August 2006, 2 November 2006, 17 November 2006, 8 December 2006 and 14 December 2006).
Customer due diligenceAs a general requirement, reporting entities must identify and verify the identity of all new clients before they can provide the client with a designated service. How that procedure, which is referred to in the Act as the 'applicable customer identification procedure', is implemented will be set out in AML/CTF Rules.3 The Draft AML/CTF Rules adopt a risk-based approach, meaning that it will be up to accountants to decide what client identification information is required, based on what they assess as their money laundering/terrorism financing (ML/TF) risk.
Existing customers and low-risk service customersExisting clients and clients who receive only low-risk designated services are exempt from the general customer identification requirements and generally will only need to be identified/verified if a suspicious matter reporting obligation arises. In those circumstances reporting entities (in addition to making a suspicious matter report) must take such action as is specified in the AML/CTF Rules.4 There is no prohibition against providing, or continuing to provide, a designated service pending such action. However, where an existing client is accessing a new designated service which presents a different increased risk, that client may need to be identified and verified as part of the accountant's ongoing due diligence obligations. Re-verificationReporting entities must take action (to be specified in the AML/CTF Rules) to re-verify clients who have already been the subject of a customer identification procedure where an event, circumstance or period specified in the AML/CTF Rules occurs or expires.5 Designated business groupThe Act introduces the concept of a designated business group (DBG), which will facilitate sharing of client identification information and allow for a group-wide compliance program. Members of a DBG can rely on another member of the group to discharge their ongoing customer due diligence, record keeping and compliance reporting obligations and can, in some circumstances, share suspicious matter information. Members of a DBG6 can enter into joint AML/CTF programs, but can adopt some systems and controls to suit their individual needs. The Explanatory Memorandum to the Act (the EM) indicates they can also share customer identity information within the DBG. However, accountants may not be able to take advantage of a DBG. This is because, although a DBG is defined in the Act as a group of two or more persons7 (not just companies), the Draft AML/CTF Rule on DBGs8 restricts membership to:
Other requirements for membership are that each member has elected in writing to be a member of a DBG and is not a member of another DBG.
Ongoing customer due diligenceAs part of the customer due diligence requirement, reporting entities must monitor their provision of designated services in Australia with a view to identifying, mitigating and managing the risk they may reasonably face that they might facilitate 'money laundering' or 'financing of terrorism'.9 Elements of a customer due diligence program are set out in the Draft AML/CTF Rules and will require accountants to put in place know your customer systems and transaction monitoring, and enhanced customer due diligence programs. Third partiesAccountants will often provide services after their client has been identified by another reporting entity. The Act facilitates this by providing that accountants will be able to rely on customer identification procedures carried out by other reporting entities (subject to any conditions set out in the AML/CTF Rules). Accountants can also engage agents to carry out their customer identification procedures, but will remain liable for conduct of their agents subject to the usual agency principles. AAR's Focus of 27 July 2006 deals with the customer identification obligations in more detail.
Suspicious matter reportingReporting entities are required to make a report to AUSTRAC if they suspect on reasonable grounds that:
The obligation to report may arise before there is any business relationship between the accountant and potential client. The suspicion (and the grounds on which it is based) must be reported within three business days (or, in some circumstances, 24 hours). The EM indicates that the relevant time period will only begin when a 'responsible officer' forms the relevant suspicion. Tipping off is an offence, but there is an exception where the disclosure is by a reporting entity that is a qualified accountant (or an accounting partnership or company), the information relates to the affairs of a client and where disclosure is made for the purposes of dissuading the client from engaging in conduct that could be tax evasion or a criminal offence. Some suspicious matter information can be shared within a DBG where members of the DBG share a joint AML/CTF program, where the information relates to the affairs of a client and where the disclosure is made for the purpose of informing another member of the DBG about the risks involved in dealing with the particular client. AAR's Focus of 3 August 2006 deals with the suspicious matter reporting obligations in more detail.
The AML/CTF programReporting entities must put in place and maintain an AML/CTF program. Providing a designated service without doing so will attract a civil penalty (of up to $11 million). There are three types of programs:
Every standard or joint AML/CTF program must be divided into two distinct parts - Parts A and B. The primary purpose of Part A (the general part) is to identify, mitigate and manage the risk that a reporting entity may reasonably face that the provision of designated services at, or through, a permanent establishment in Australia might (inadvertently or otherwise) involve or facilitate:
In practice, Part A will include risk awareness training and employee due diligence programs, procedures for board and senior management oversight, independent auditing and the appointment of a Money Laundering Compliance Officer. Part B sets out the applicable customer identification procedures which will apply to clients. Some general principles apply to the implementation of an AML/CTF program by accountants.
Although there is no specific requirement in the Act to carry out an ML/TF risk assessment, such an assessment will form the basis of any AML/CTF program. AUSTRAC can, where it is satisfied that the reporting entity has not carried out an ML/TF risk assessment or that it has and it is inadequate or out of date, compel a reporting entity to carry out a risk assessment and provide a written report to AUSTRAC.
Record keepingGenerally, reporting entities will be required to retain records (or copies of records) for seven years. The record keeping obligations relevant to accountants apply to:
Registration of providers of designated servicesAccountants (and other reporting entities) are expressly prohibited from providing a registrable designated remittance service (see our comments above on how this applies to accountants) unless they have provided AUSTRAC with their names and details. This information will be maintained in a register to be maintained by AUSTRAC. AML/CTF Rules on what registrable information is required were issued in December 2006.11 Where the reporting entity is a partnership the information to be provided includes names, residential addresses and home telephone numbers of all partners.
EnforcementThe Act provides AUSTRAC, in its role as AML/CTF regulator, with a number of enforcement tools. AAR's Focus of 3 August 2006 deals with AUSTRAC's enforcement powers in more detail. Failure to comply with the AML/CTF obligations under the Act can attract civil penalties of up to $11 million for a body corporate or $2.2 million in all other cases. AAR's Focus of 14 December 2006 discusses the civil penalty regime. The Act also sets out various criminal offences, such as disclosing that a suspicious matter report has been made to AUSTRAC, or providing a designated service using a false customer name or where the customer is anonymous.
Industry concernsThe Institute of Chartered Accountants in Australia (the Institute) and CPA Australia have indicated12 that the majority of the concerns of the accounting profession have been addressed. A few outstanding issues remain. These include the following. Third party customer identificationThe provision whereby accountants can rely on customer identification procedures performed by other reporting entities is welcome in that it will minimise duplication of these procedures and the regulatory burden on accountants. However, until the AML/CTF Rules are released, the Institute and CPA Australia consider the usefulness of the provision is uncertain.13 Suspicious matter reportingThe Institute and CPA Australia argue that the suspicious matter reporting obligation places obligations on business with which they will have difficulty complying. Specifically, because the requirement is to report suspicions that may be relevant to Commonwealth and state offences, it will be necessary to train front-line staff in a range of laws that bear no resemblance to the performance of their position. Further, placing an obligation to report suspicions of virtually any crime amounts to regulation for the lowest possible risk without consideration for the practicality of implementation.14 The second trancheCPA Australia has expressed the view that the framework of the Act will not be applicable to small professional practices (such as accountants). They consider that it is essential that the compliance obligations and processes created for large financial institutions are not automatically transferred to accountants in small practices and, consequently, that some amendments and exceptions will be required in the implementation of the second tranche of the reforms. The full CPA Australia and Institute submissions can be found at http://www.cpaaustralia.com.au.
Footnotes
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