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Unravelled: The end of the AML/CTF regime as we know it?

2 June 2016

Written by Partner Peter Haig, Managing Associate Ed Martin and Associate Andrew Shetliffe

The past year or so has been a thrilling one for devotees of anti-money laundering policy. It's perhaps a small group, to which we aren't too proud to admit belonging. If you've read this far, the chances are you also belong and will have enjoyed the sudden prominence of our chosen field as much as we have. With the release of a landmark report, it appears that the excitement has only just begun.

The backdrop

So, to recap…

We were still reeling from the excitement of the introduction of the new customer due diligence (CDD) rules when we were hit with the much anticipated 'mutual evaluation report' from the Financial Action Task Force (FATF). FATF assessed the effectiveness of Australia's anti-money laundering/counter-terrorism financing (AML/CTF) regime, finding it 'non-compliant' in some significant respects. Of its many recommendations, perhaps the most stridently expressed concerned AUSTRAC's enforcement activity. The message? Go get them!

No doubt spurred on by FATF's urgings, AUSTRAC then really set our collective pulses racing by commencing the first civil penalty proceeding against a reporting entity. Since then it's been a giddy ride, taking in the de-banking of remitters, allegations that laundered Chinese money is inflating the property bubble and, finally, the Panama Papers.

The Statutory Review Report

But it turns out that these developments were just to whet the appetite for the main event. Against this backdrop, and just when we were beginning to wonder whether it would ever see the light of day, comes the release of the Report on the Statutory Review of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 and Associated Rules and Regulations (the Statutory Review Report). Don't let the title deceive you, this is a good old-fashioned bodice ripper.

AUSTRAC and the Attorney-General's Department, the authors of the Statutory Review Report, had foreshadowed that the FATF report would be a key input into the Statutory Review. We've written previously that FATF's recommendations were therefore likely to be a reliable pointer as to the future direction of our AML/CTF regime (see our Focus: What next after FATF's mixed review of Australia's anti-money laundering and counter-terrorism financing regime?). And this looks set to be the case, with the Statutory Review Report addressing most, if not all, of FATF's criticisms and recommendations. Now it's over to the Government to legislate the recommendations into being. But not before – as is AUSTRAC's wont – further detailed industry consultation.

Simplifying the AML/CTF Act and Rules

It would be churlish to complain that the Statutory Review Report heralds just further consultation, not immediate reform. It would also be short-sighted. AUSTRAC and the Attorney-General's Department should instead be lauded for the approach they have taken, having stood back and assessed our regime squarely against its objectives. Better to consult further and implement valuable, comprehensive reform than to impose ill-considered tinkering.

While some will criticise the report's authors for not biting the bullet and recommending the immediate implementation of 'tranche 2' reforms (wrapping the legal profession, real estate agents and others into the regime), its recommendations are commendably practical and, in some cases, sweeping.

Take, for example, its call to simplify the AML/CTF Act and Rules. If, like us, you have found yourself adrift in the labyrinthine complexity that is this legislative morass, you will welcome this ambition. In fact, one could substitute the AML/CTF Act for the Act the subject of the famous lament of Edmund Davis LJ in 'Putbus' [1969] P 136:

Were bewilderment the legitimate aim of statutes, the Merchant Shipping (Liability of Shipowners and Others) Act, 1958, would clearly be entitled to a high award. Indeed, the deep gloom which its tortuousities induced in me has been lifted only by the happy discovery that my attempt to construe them has led me to the same conclusion as my brethren.

While perhaps not going quite so far as Edmund Davis LJ, the Statutory Review Report's authors don't hold back, noting simplification is a 'pressing need'. Tellingly, the Statutory Review Report notes that:

The AML/CTF regime is overly complex, spanning 344 pages of primary legislation and 309 pages of legislative rules. All industry stakeholders and partner agencies indicated that this complexity impedes the ability of reporting entities to understand and comply with their AML/CTF obligations. The scale, structure and density of the AML/CTF Rules, in particular, was considered to be a major problem, rendering the Rules hard to follow and largely inaccessible, particularly for small business.

The feedback from industry indicates that there is a pressing need to simplify the AML/CTF Act and Rules, and streamline AML/CTF obligations. This could be achieved by establishing a more principles-based AML/CTF regime under the Act and providing some of the details surrounding the content of obligations in the Rules. The remaining details surrounding obligations could be provided in guidance. As part of this process, the AML/CTF Rules should be rationalised, drafted in plain language and presented in a user-friendly format.

Hard to argue with any of that. But where on earth to start? The report's authors clearly consider the whole regime needs to be overhauled. Once this much is understood, and it's clear from the opening pages, then it's hard to get too excited about the comparatively minor observations and recommendations to follow. When passengers on the Titanic realised it was going under, they quickly lost interest in the captain's views as how the cabins may be re-upholstered before the next sailing.

We're being unfair, as there is much that is eminently sensible in what follows. The desire to minimise the burden associated with complying with CDD obligations is very welcome, particularly the recommended enhancement of the ability of business to rely on CDD conducted by others. So, too, is the recommendation that AUSTRAC adopt a proactive and systematic approach to granting exemptions and provide guidance to a streamlined and simplified application process.

But what form will these amendments take? Clearly, a streamlined, simplified regime will not be foisted upon reporting entities without consultation. Indeed the Statutory Review Report promises not just industry consultation, but 'co-design'. While this augurs well for the readability and accessibility of what emerges, it's a process that will take time. Still, the ambition to deliver a regime that 'better supports industry to understand and comply with AML/CTF obligation' is a noble one. For the AML boffins among us (and if you've read this far, you certainly qualify), there's never been a more exciting time to be a reporting entity.

Other articles in this edition of Unravelled

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Coming this spring: ACCC to monitor large merchants' payment surcharges
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AMITs are here (at last)
It has taken a while, but out of the dust of an early Federal Budget and double-dissolution election announcement, a new tax attribution regime for 'Attribution Managed Investment Trusts' has emerged relatively intact. While the AMIT regime should generally be welcomed as a positive thing for MITs in terms of certainty and flexibility, it remains to be seen whether it will achieve another of its original aims. Read more>>

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