The current state of Tranche 2 AML reforms in Australia

Rebecca Archer
Welcome to Beyond the Numbers with Grant Thornton – a podcast exploring trends in business and the marketplace. 

I’m Rebecca Archer and today I am joined by Neil Jeans, Partner in Risk Consulting who specialises in financial crime risk management and has worked with law enforcement agencies investigating financial crime and money laundering. 

Australia commenced the Anti-Money Laundering (or AML) reforms in 2021, subsequent to the Senate Enquiry in 2021. So how are they progressing, and what should Australian businesses have on their radar as we approach Australia’s AML/CTF regime evaluation against international standards?
Welcome Neil!

Neil Jeans
Thank you very much. Good to be here.

Rebecca Archer 
What are the current laws in Australia for preventing money laundering?

Neil Jeans 
The main piece of legislation is the Anti-money Laundering and Counter Terrorist Financing act, the AML/CTF Act, as we call it, that is supported by a set of rules, which are published by AUSTRAC – the regulator for AML/CTF in Australia. Those cover the requirements that support compliance with the law. The legislation basically covers all businesses in Australia that are providing one of a number of designated services which are specified in the Act. Those are known as phase one or Tranche 1 entities, and broadly cover financial services, gaming, casinos and also things like bullion and other types of activity.

Rebecca Archer 
And can you give us a bit of detail about exactly what AUSTRAC is, and what it does?

Neil Jeans 
Absolutely. So, AUSTRAC is a Federal Government Regulator. They have an unusual position because they are both the regulator for this legislation and also Australia's Financial intelligence Unit, which provides intelligence both to Australian law enforcement and law enforcement agencies, but also internationally as well. 

So, they play a dual role of making sure that the AML/CTF Act is complied with and also, in addition, making sure that the results of compliance, which is effective information being provided to them, are disseminated to law enforcement to catch bad guys, basically.

Rebecca Archer 
And what happens to companies that don't follow the current AML laws?

Neil Jeans 
AUSTRAC have a range of tools available to them. The big end of town, and the one that gets the most headlines is a civil claim – that is used relatively sparingly. We've had only a limited number of civil claims. 

Effectively, what happens is that if you are found to be non-compliant and really that noncompliance has resulted in undermining a criminal harm to the regime, that's when you tend to get into the space of civil claim. Below that, AUSTRAC has a number of other enforcement powers. Only one of them has financial penalties attached to them, which is infringement notices, but the other regulatory tools, such as enforceable undertaking and remedial directions, have money attached to them because effectively you've got to do a lot of work and they cost the organisations that I'll put through them a lot of money.

Rebecca Archer 
Can you talk to me about the Crown Casino case? Is that something that was under the civil portion of the legislation?

Neil Jeans 
Yes. So, the Crown civil claim again has been finalised. Crown were fined $450m by the court or agree to settle and pay a penalty. Basically, that was for noncompliance with a number of the key elements of the AML/CTF regime. Things like understanding the risk, things like knowing who your customers are, things like doing enhanced due diligence on your customers, things about monitoring the customer's behaviour. 

So, these are key pillars of the AML regime that if any organisation is brought into the regime, they will have to comply with. So, there were fundamental failings there which have been well documented in the press and obviously resulted in facilitated or supported allegedly large amounts of money being laundered through the casino. 

However, Crown is not alone. There are two other civil claims that are currently on foot for both the Sky City Casino in Adelaide, but also the Star Casinos in New South Wales and Queensland as well. So AUSTRAC is focusing on the gaming sector largely. We've seen, obviously, the casinos, they're now turning their attention to the online gaming sector and focusing on potential weaknesses in that sector.

Rebecca Archer 
And what does it mean for trade and Australian businesses if Australia isn't keeping up with international standards for preventing money laundering?

Neil Jeans 
So, the international standards that are set are set by an organisation called the Financial Action Task Force, or FATF. Those have been around since the early 1990s, although they have evolved over time. Australia has been a signatory to the FATF since its inception in the early 1990s, and effectively through its membership, it commits to implement the international standards. 

The way that the international standards are reviewed is through something called a mutual evaluation process, where other countries visit Australia and basically assess how well we're doing against those standards. Those standards can be split into a number of areas. One is black and white compliance with the standards, but also then secondly, the effectiveness of those standards, or what's the effectiveness of what people are doing. Our next dimitri valuation in Australia is in 2026 and FATF have another tool or mechanism to them, which is basically name and shaming or blacklisting – or grey listing, as we call it, a country where they are not actually complying with their requirements.

They have greylisted a number of countries, including South Africa and Dubai, for noncompliance with the FATF standards. Obviously, if Australia doesn't comply or cannot demonstrate compliance with the standards that are set, it also risks the same fate, basically.

Rebecca Archer 
And is there a difference between blacklisting and grey listing?

Neil Jeans 
So greylisting requires other members of the FATF and financial institutions and businesses in those countries to treat transactions coming from a grey listed country more carefully. So, there will be enhanced due diligence or increased due diligence on money flows coming into or going out of Australia. There will be increased due diligence on businesses undertaking, potentially undertaking activity in foreign jurisdictions – that's the grey list. If we fail to put in place the requirements, there's a risk that we could be put on that list. 

The blacklist is usually reserved for countries that are completely non-compliant, people like Iran, people like North Korea, et cetera. Blacklist basically prohibits people dealing with them. So those are usually backed up by domestic and international sanctions. So that's a far more serious list to get on. It's highly unlikely that Australia would get on that list. I would suggest it's probably more likely, if at all, they will get on the grey list.

Rebecca Archer 
And what are the chances of that? Australia getting onto the grey list? What are the sort of risks associated with that?

Neil Jeans 
That's a good question. So, we had our last mutual evaluation in 2014/2015. The scorecard wasn't great. Unfortunately, due to various factors, including COVID and other things, Australia really has been a bit of a laggard in this space – particularly around bringing in designated non-financial businesses and professionals into the regime – things like lawyers, accountants and real estate agents. It's been a requirement since 2006 to have those types of businesses in the regime because they are really gatekeepers to the financial industry basically.

A lot of countries have implemented that. Australia is one of four or five countries in the world that has not implemented those changes or those obligations. It's been something that's been tabled since 2009 and by successive governments, quite frankly, hasn't been paid attention to. And that was the basis for the reforms that occurred last year in 2023 and are still continuing today – although very slowly.

Rebecca Archer
I'm curious why we are laggards? Why aren't we getting on board and being more proactive with bringing those groups into the fold?

Neil Jeans 
I think it's a number of reasons. One, I think until recently it hasn't been a political priority, and obviously this has a political decision because ultimately it needs parliamentary support and bipartisan support to get through the House. And look, yeah, I would imagine that once legislation is put in, put forward, it will get that support. It's the preparatory work that's occurred prior to that, and obviously there's been a lot of concern in those industries about what the impact of this could have on their businesses. Some of that is misguided, I would suggest, given my experience in New Zealand, having worked in New Zealand for a year, bringing their businesses into their regime.

Businesses didn't collapse. There were just additional requirements that were placed on people. So, I think there was that concern and it really, just really comes down to political and government will to get this done.

Rebecca Archer 
And Neil, jumping to tranche two, what's the latest on anti-money laundering reforms in Australia? Where does that stand?

Neil Jeans 
Okay, so for the list of the trance two, if you don't know, is the reforms that will bring lawyers, accountants and real estate agents into the AML/CTF regime that will increase the number of regulated entities under this legislation from around 17,000 to an estimate about 130,000 businesses. So, every lawyer, accountant, real estate agent doing particular designated services – so things like forming companies, things like buying and selling real estate, things like managing client assets, will be required to comply with the AML/CTF Act in some form or other. 
Post the Senate inquiry in 2021 and the change of government, we had a consultation paper that was published last April which set out the broad strokes for the regime. We worked very closely with a number of trade associations in response to that consultation. There was a promise of a second consultation in September 2023. Unfortunately, probably due to other priorities at a government level, that second consultation has not been published, although even as recently as two or three weeks ago in Senate estimates, the Attorney General's Department is promising that it will be published shortly.

Rebecca Archer 
So, Neil, the FATF has recently published a follow up review of Australia's AML/CTF compliance. Have things improved?

Neil Jeans 
That's a good question. In part they have, but not as much as I think the FATF had hoped, and I think more troublingly, some things have actually gone backwards. So, recommendation 15, which is addressing new technology, including digital currencies, they've actually marked us worse than we were in 2014. That is in part because of the expectation that standards have changed since 2014. So, we haven't kept pace with those changes. 

Things have improved in a couple of areas, but we still are struggling with the Tranche 2. Obviously, we are rated non-compliant with the Tranche 2, we are also rated non-compliant with beneficial ownership transparency requirements as well, and those are clearly things that the FATF is focusing on. So, I think this is a bit of a warning shot to us. It's the first follow up we've had since 2014. The FATF now know that we haven't made the progress that possibly they hoped we would have made, and I think that clearly starts to draw into focus the work that we need to do, or Australia needs to do in the next two to three years.

Rebecca Archer 
And what does this mean for the AML reforms, including Tranche 2, on a practical level?

Neil Jeans 
On a practical level, we've got to get going. We don't have the time. We've got to start to make these changes and to ensure that we are compliant because, as discussed previously, grey listing is looming.

Rebecca Archer
What's been the reaction from the Australian government to this follow up report?

Neil Jeans 
Interestingly, almost an unprecedented reaction. So literally within 3-4 hours of the FHF publishing their mutual evaluation, the Attorney General issued a press statement where he actually recognised the significant failings that we currently have in our regime, recognised that that is not sustainable, and actually also referenced the fact that ultimately, we could be greylisted if we do not deal with this. 

So almost at the highest levels in government, we're now getting a recognition that things need to get better, and we need to make the changes to bring us into line with our international obligations. That was interestingly, very quickly followed up by the CEO of AUSTRAC, who in an article in the AFR basically reiterated the same thing, saying we need to get going, the government need to get these things in place because effectively we don't have the tools in place to be able to have an effective regime. 

So, I think we're building, for want of a better phrase, ahead of steam or certainly this is starting to raise / move up the government's priorities. And as a result, I'm hopeful that we will see movement on the consultation in the next two to three weeks. Interestingly enough, we're also getting signals that this is going to be pretty precise consultation. It's going to be – we are going to do this, tell us why we shouldn't, rather than sort of a softer consultation around, what do you think we should do? So, I think it's going to be at last, hopefully in the next two to three weeks, industries will get clarity about what the reforms are really going to be.
Once I think there's legislative certainty, obviously there will need to be rules developed and then there will be a process of supporting, which we call a noncompliance period, organisations to get compliant and obviously understand what those obligations are, understand what they need to do to comply, and obviously give them the time to put those things in place. The big challenge we have is, again, that FATF mutual evaluation at the end of 2026 is a fixed date that we can't move so effectively. We've got to have all our ducks in a row before then.

Rebecca Archer 
And I would imagine that there's a fair bit of pushback for those industries that are looking to be brought on board. So, the lawyers, accountants and real estate professionals, how do you convince them that there are benefits, there are overall benefits to this kind of regulation?

Neil Jeans 
Again, that's an interesting question, because, look, we tend to see this in countries in New Zealand that went through this in 2018, there was pushback from the industry saying, this is going to wreck our businesses, we’re not going to be able to sell houses, the real estate market is going to collapse, et cetera, et cetera, et cetera. 

Those didn't eventuate, and I think in reality, the learned experience in New Zealand was that actually most well-run organisations are doing somewhere around 80 per cent of what they need to do. They're just doing it for other reasons. If you're a conveyancer, you want to know who you're conveyancing for. You want to know where the money is coming from, you want to know where the money is going to. So, people are doing a lot of the AML things already, in my view, they've really just got to basically refocus them and repurpose them for anti-money laundering, but I think the big challenge is that we had this flurry of activity last April, there was an expectation that the next consultation was going to come out. 

And effectively, because of the inaction of the Attorney General's Department and the government more generally, we've lost an opportunity and effectively put the industries back to sleep again. So, we've now got to start again to engage with them, to educate them. And I wouldn't blame them for sort of having a degree of skepticism if this is ever going to happen, and if it's not going to happen, why would I ever want to engage? So, there are significant challenges in relation to getting this up within the timeframe. 

My engagement with the industry associations – most industry associations have moved away from, yeah, this will never work, this will wreck businesses. I think there's a grudging or so acceptance that this is going to happen. They understand the benefits of this, and we're seeing more and more come out in relation to the benefits of this from large amounts of money flowing through the property sector, through the use of legal entities and legal persons to launder the proceeds of investment scams, which is a recent topic that's been focused on. So, these things basically aren't going to stop that, that type of crime, but they are another arrow in our arsenal that we can use and actually means that those industries are playing the part they need to do basically.

Rebecca Archer 
And what about beyond those industries? So, do you think that anti money laundering regulations will expand to include, you know, sectors beyond law and accounting and real estate?

Neil Jeans 
There is a possibility, but the way that this has been approached by Australia, which is sensible, and they look at it from a risk perspective. So, what is the risk of that industry being involved in laundering the proceeds of money? 
So, if you take car dealers, car dealers, cars are valuable assets. If they're not purchased on finance, then there's a risk that the money being used to purchase them is basically criminal proceeds. The way that Australia is proposing to tackle that, which is sensible, which is limit the exposure of those industries only to where there's cash involved. Because effectively, if the money's coming from a bank account, it's already in the system and already subject to scrutiny by somebody else that's covered by the legislation. 

The same for precious metals, the same for jewellery and other valuable instruments. So, what we're seeing is that this will probably be the last expansion, this brings us up to date with what our international obligations are, and there may be additional things around the sides, but this is really the last big change that we're going to see in the legislation for probably 10 to 15 years.

Rebecca Archer 
So, Neil, is there anyone in the world that has set a really high benchmark for this kind of regulation against anti-money laundering? Can you sort of point to an example that someone who's really doing a great job with this and Australia maybe could take a leaf out of their book?

Neil Jeans 
So New Zealand is not bad. They came to the party late, but they've actually benefited from learning from the challenges and issues that are experienced in other countries. So, they've actually got a reasonable regime, although they're going through a refining process at the moment. So, I would probably call out New Zealand is doing this. We've got, obviously some of the more mature countries in Europe that are doing okay. 

Interestingly enough, it's usually the smaller countries that are better at this one because they don't have as large an industry base to deal with and also because of the inequity of their position in the world, they actually get more pressure, so therefore they're more inclined to be compliant. So, a lot of the smaller countries are actually pretty good compared to Australia.

Rebecca Archer 
And I would imagine too that given the increased awareness of and demand, I guess, from consumers for companies to really be signing up to and showing up for ESG responsibilities that, you know, this actually sort of almost folds into that where, well, if you want to be seen to be doing the right thing and having a great reputation, you should want to step up to this.

Neil Jeans 
I would suggest it's part of the social contract that businesses have with their customers and society in general, that we want to make the world a cleaner place for our children and make sure it's as easy as possible for legitimate customers to use the products and services and as difficult as possible for illegitimate customers to use the products and services. 

And that in lies the trick and the balance, which is how do we get that balance right? But yes, certainly the benefits of this are, I think are well understood. Leaving aside that it's an international commitment that we've made, I think the challenge is obviously, as always, will be in implementing this and making sure that we don't get unintended consequences through the implementation. 

The challenge with that is that the way that you avoid unintended consequences is you take your time. Because of the delays that we've had, the time is really narrowing, and basically, what that results in is one, a potential lack of ambition on behalf of the regime, potential reduced and rushed through legislation which may need to be amended and updated later on, and effectively rushed implementation by organisations who are facing a very short deadline or timeline to comply with this legislation.

Rebecca Archer
So, Neil, is there anything else that these gatekeeper industries and other businesses perhaps should have on their radar in this space beyond what we've been discussing – so the current AML reforms? 

Neil Jeans 
From my perspective, not necessarily. Look, we're seeing, obviously focus on modern slavery and that's increasing as well. And obviously that plays into the ESG space as well. We're also seeing sort of things like corruption. So really what it is, is general societal expectations on good governance and making sure that organisations are doing the right thing. 

From an AML perspective, whilst we don't have legislative certainty, there are things that organisations that think they might be covered can do starting to prepare. So, understanding who are your customers, understanding what types of customs you've got, understanding how and what information you collect about customers and the transactions they do with you in preparation for the regime coming in, and certainly in speaking to lawyers, accountants and real estate agents, as I do frequently, that's the message I'm giving them now, which is, all right, we haven't seen the legislation, but we know what the rules are because the rules are already published because there are 17,000 businesses complying with them or trying to comply with them. Look at those and work out what you need to do now because when the legislation swings around in six to nine months, if you've planned now and you invested a bit of time now, that should give you dividends later on.

Rebecca Archer 
So, for those businesses who are sort of potentially affected, how would you suggest that they start to get on the front foot with this? What sort of first steps should they put into place?

Neil Jeans 
First steps would be think about their customers. Think about whether their customers could be high risk for money laundering. And there's a lot of information out there about what types of customers could be high risk, things like politically exposed people, people from high-risk jurisdictions, etcetera. 
Understand what you do for those customers that could be caught. I would then suggest have a look at the business metrics for those activities and really decide whether they're worth keeping. Because the legislation is based on designated services, the way to get out of the legislation is to stop providing services. We're not suggesting that people should change their business and damage their business, but if you're doing one or two things and they're really just ancillary to your business and you're not making much money out of them, I would really suggest that you should have a hard look to see whether you should continue to do those, because the regime that you're going to be put in place, quite frankly, is going to cost you some money to comply with. 

So, understand your business, work out whether you still want to continue to undertake that business, understand your customers, and really look at the information, how you record that information, what types of information you record on your customers. Also, as I said, look at how you can monitor the transaction. So, what information do you get about customers that are moving money in or out of your business?

Rebecca Archer 
Such great advice, Neil. Look, thank you so much for your time. 

Neil Jeans
Thank you.

Rebecca Archer 
If people are wanting to get in touch with you who are listening today and are interested in hearing more or learning more specifically about what it is that you do and how you might even be able to help them, how should they find you?

Neil Jeans 
They can find me through my email address, neil.jeans@au.gt.vom. You can contact me through LinkedIn as well. I've got a fairly active LinkedIn presence, which, again, happy to engage people through that as well.

Rebecca Archer 
If you liked this podcast and would like to hear more, you can find and subscribe to Grant Thornton, Australia on Apple podcasts or Spotify.