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CDD involves identifying and verifying customers' identities before providing designated services, crucial for understanding customers and assessing money laundering and terrorism financing (ML/TF) risks.
The transition from ACIP under the AML/CTF Rules to initial CDD under the new AML/CTF Act introduces several key changes that reporting entities must address.
The initial CDD requirements are now directly subject to civil penalty provisions, underscoring the importance of compliance with these requirements.
What are the initial Customer Due Diligence requirements?
Chapter four of the AML/CTF Rules currently outlines the Applicable Customer Identification Procedures (ACIP) that reporting entities must follow to comply with their Customer Due Diligence (CDD) AML/CTF obligations.
Australia's AML reforms are transitioning the initial CDD requirements from the AML/CTF Rules to the AML/CTF Act. The changes focus on establishing an outcomes-based framework, enhancing the clarity and effectiveness of CDD processes, and ensuring that reporting entities can better identify and manage risks associated with their customers.
CDD involves identifying and verifying customers' identities before providing them with designated services. This process is crucial for understanding who customers are and assessing the risks they may pose regarding money laundering and terrorism financing (ML/TF).
Initial CDD helps identify potential ML/TF risks associated with new customers, enabling entities to respond appropriately to mitigate these risks.
Establishing a comprehensive customer profile during initial CDD supports due diligence efforts by identifying higher-risk customers who may require enhanced due diligence measures.
The collection and verification of accurate customer information from initial CDD also aids in effective transaction monitoring and the detection of suspicious activities and ensures that reporting entities have the necessary information to meet their reporting obligations.
Initial CDD aims to support a risk-based approach, as it requires reporting entities to tailor their AML/CTF controls based on the specific risks posed by customers and allocate resources more effectively to areas that require greater attention.
Initial CDD also directly supports the adoption of an outcomes-based framework for AML/CTF, as it ensures that entities have a solid foundation for achieving meaningful results in preventing ML/TF and addressing the specific risks faced while promoting innovation and efficiency.
The key requirements of Chapter four of the AML/CTF Rules are:
Customer identification: Reporting entities must collect and verify customer identification information. This includes obtaining full name, date of birth, and residential address for individuals, as well as relevant details for non-individual entities such as companies or trusts.
Beneficial ownership: Reporting entities must identify and verify the beneficial owners of customers. A beneficial owner is any individual who owns or controls 25 per cent or more of the customer.
Politically Exposed Persons (PEPs): Reporting entities must determine if a customer or beneficial owner is a PEP, which includes individuals with prominent public functions, their family members, and close associates.
Purpose and nature of business relationship: Reporting entities must gather information on the purpose and intended nature of the business relationship with the customer.
To achieve compliance with ACIP and effectively mitigate the risks associated with money laundering and terrorism financing, reporting entities are required to undertake the following steps:
Document procedures: The AML/CTF program's Part B should include detailed customer identification and verification procedures.
Risk-based approach: Implement risk-based systems and controls to effectively manage ML/TF risks.
Timely verification: Ensure customer identification is completed before providing any designated services, with some exceptions allowing for post-commencement verification under specific conditions.
Record keeping: Maintain accurate records of all identification and verification processes for at least seven years.
Australia's AML reforms are transitioning the initial Customer Due Diligence (CDD) requirements from the AML/CTF Rules to the AML/CTF Act. This shift aims to establish an outcomes-based framework, enhancing clarity and effectiveness in compliance. The changes result in an approach that is focused on the following:
Outcomes-based framework: The reforms emphasise an outcomes-based approach, focusing on the effectiveness of CDD measures rather than mere compliance.
Clarification of initial CDD: The core requirements for initial CDD are now clearly defined, ensuring that reporting entities understand their obligations to identify and verify customer identities before providing designated services.
Identification of ML/TF risk: Before providing designated services, ML and TF risks, including PEPs and sanctions exposure identities.
Risk rating customers: All customers must be ML/TF risk-rated before a designated service is provided. This involves assessing the ML/TF risks based on available information and using the risk rating to determine the appropriate level of due diligence for the customer.
Streamlined simplified CDD: For low-risk situations, the circumstances under which simplified CDD can be applied are streamlined, making it easier for entities to comply without compromising security.
Enhanced CDD for higher-risk situations: The reforms specify when enhanced CDD must be applied, particularly in higher-risk scenarios, to manage better and mitigate risks associated with ML and TF.
To prepare for the changes to CDD under the AML reforms, reporting entities should follow these steps:
Review current procedures: Assess existing CDD processes and identify areas that need updating to align with the new AML/CTF Act requirements, noting that these procedures will now form part of your AML/CTF program.
Understand new requirements: Familiarise yourself with the new initial CDD obligations and the outcomes-based framework introduced by the AML/CTF Act, together with additional requirements provided by the revised AML/CTF rules once they are published.
Update AML/CTF program: Revise your AML/CTF program to incorporate the new initial CDD requirements, ensuring it incorporates risk identification and assessment, reflects the risk-based approach, and applies simplified due diligence for low-risk customers and enhances due diligence for higher-risk customers.
Implement risk-based systems: Develop and implement risk-based systems and controls to effectively identify, assess, and mitigate ML/TF risks.
Train staff: Provide comprehensive training on the new CDD requirements and the updated AML/CTF program.
Automate screening processes: Due to the time-sensitivity of undertaking screening, consider how you can automate the screening of customers against PEP and sanctions lists to ensure compliance with the new AML/CTF Act.
Stay informed: monitor for additional AML/CTF Rule requirements and guidance AUSTRAC provides.
Following these steps, reporting entities can effectively prepare for the changes and ensure compliance with the new CDD requirements.
Civil penalty provisions
The revised AML/CTF Act introduces initial CDD requirements as civil penalty provisions, increasing the regulatory risk of non-compliance.
Unlike the current Chapter 32 of the AML/CTF Act, the new obligations in the AML/CTF Act have direct civil penalty provisions, including for failing to:
Identify and verify a customer's identity before providing a designated service.
Screen for ML/TF to identify PEP and sanction risk.
Assess the ML/TF risk of a customer.
Keep records on initial due diligence and risk identification undertaken.
We are here to help
Although the new AML/CTF requirements won't be enforced until 2026, it is vital to start planning and preparing for compliance with the revised AML/CTF requirements now.
With a short lead time to compliance and limited AML/CTF experts across Australia, demand will only continue to increase as the compliance date approaches.
If you would like to discuss any of the above with one of our AML/CTF specialists, please reach out.
Learn more about how our Anti-Money Laundering reforms services can help you
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