By Dr Jim O’Donovan
Dr Jim O’Donovan shares his observations on the new AML CTF regime and what challenges it will bring for legal practitioners.
The main impact of the AML CTF reforms will be that they will deter criminals from using Australia as a favourite destination for illicit funds. Hopefully, this will assist Australia to obtain a more favourable rating from the Financial Action Task Force (FATF) when it assesses our AML CTF regime later this year.
FATF rates countries according to the effectiveness of their AML CTF Compliance regimes. The average score for most modern industrialised countries is 76%. Australia scored a dismal mark of 14%.
Hence, Australia has been under considerable international pressure to lift its game. Indeed, if it had not introduced the Tranche 2 reforms, it risked a grey listing from the FATF. This would have affected international trade and foreign investment in Australia.
Sadly, AML CTF regimes have not been very successful in recovering laundered money. Less than 1% of laundered money is recovered worldwide. This is a mounting concern in Australia because organised crime costs the economy approximately $82 billion per year.
Why solicitors are included in the so-called “gatekeeper” professions that are covered by the second tranche reforms
The so-called “gatekeeper professions”, such as solicitors and accountants, are vulnerable to exploitation for money laundering and terrorism financing because they are often involved in setting up companies or creating trusts and other complex legal arrangements that could be used to disguise the flow of illicit funds. Moreover, they are often involved in high-value transactions that attract money launderers.
The reforms only cover “Professional Services” that have a geographical link to Australia. These are mainly services relating to holding, managing, controlling, buying, selling or transferring a client’s assets or property, or restructuring the client’s financial affairs through a company or trust. Some services, such as providing legal advice or drafting wills, are not Professional Services for this purpose.
The “reporting entity” – a central concept under the AML CTF Act
It is important to note that, while individual solicitors will be subject to the new regime in the sense that they will have some obligations under the regime, they will not be reporting entities unless they are sole practitioners. The legal practice is the reporting entity. Individual solicitors are not required to report.
There is one critically important point relating to new clients. The legal practice must not provide any designated Professional Services to these clients until it has completed due diligence (and enhanced due diligence, where necessary).
The AML CTF Program is not a document to be placed in the bottom drawer. It is expected to guide the day-to-day operation of a legal practice.
The main problems areas in terms of compliance with the AML CTF regime are:
- enhanced due diligence for sanctioned individuals or high-risk clients, such as domestic politically exposed persons and foreign politically exposed persons;
- knowing when and how to decline a client or matter because of the risk of money laundering or terrorism financing;
- separating legal advice that is subject to legal professional privilege from the information on which an SMR (Suspicious Matter Report) is based; and
- penetrating complex structures to ascertain who are the beneficial owners for the purposes of customer due diligence.
Outsourcing AML CTF obligations
Outsourcing parts of the AML CTF process such as verification of identity is permitted, but carries risk. Some legal practices will engage external consultants to assist with client identification and verification and customer due diligence.
However, the AML CTF Act makes it clear that a legal practice must not rely on a third party to conduct due diligence unless that third party is itself a reporting entity and it has entered into a third -party reliance agreement with the practice. Moreover, third party reliance does not excuse the legal practice from its own obligation to conduct due diligence.
AUSTRAC’s expectations
AUSTRAC expects all reporting entities to be enrolled by the due date. It takes the view that the Tranche 2 reforms were announced several months ago, and it has provided exhaustive guidance for reporting entities, including the AML CTF’s, Legal Profession Program Starter Kit. We cannot argue that we were not warned of the need to enrol.
AUSTRAC has stated that it does not expect perfection on Day 1. AUSTRAC understands that it will take some time for legal practices to develop comprehensive and robust AMLCTF Programs.
But there is an expectation of all reporting entities to make genuine, reasonable attempts to comply through a program of continuous improvement.
Client confidentiality and legal professional privilege
Legal practices cannot use client confidentiality as an excuse for not complying with their AMLCTF obligations to report matters to AUSTRAC. On the other hand, the AML CTF Act preserves legal professional privilege.
Legal practices must be careful to keep legal advice separate from the information on which a suspicious matter report is based, and must not include privileged advice in an SMR.
Enforcement actions AUSTRAC could take
AUSTRAC has a range of enforcement options. It could issue an infringement notice or a notice to produce documents. An infringement notice carries a daily penalty of thousands of dollars for individuals and legal practices.
AUSTRAC could require the legal practice to appoint an External Auditor to conduct an AML CTF audit. This could be an expensive measure. AUSTRAC can also use private examinations to assess compliance and gather evidence. My Manual provides useful advice on how to prepare for a private examination.
AUSTRAC can also apply to the Federal Court for Civil Penalty Orders in respect of breaches of the AML CTF Act or the AML CTF Rules. As the name suggests, the onus of proof in Civil Penalty Proceedings is on the balance of probabilities, although the test in Briginshaw v Briginshaw (1938) 60 CLR 336 will be applied because this is a serious matter requiring convincing proof.
Civil penalties can be up to $6.6m per violation for individuals and $33m per violation for businesses.
It is unlikely that solicitors would be exposed to criminal prosecutions under the Criminal Code (Cth), but they could commit criminal offences if they willingly or recklessly become involved in money laundering or terrorism financing. Lengthy prison sentences are imposed for these offences. This would also constitute professional misconduct.
Defences available under the AML CTF Act
The AML CTF Act does not invalidate a transaction due to money laundering or terrorism financing. Indeed, the transaction can proceed even if a legal practice lodges an SMR with AUSTRAC.
The main defences are the “reasonable steps” defence and the “good faith compliance” defence. For example, if a legal practice takes reasonable steps to comply with its obligations, but it is given false information by its client, then it will be able to rely on the reasonable steps defence.
The good faith defence protects Compliance Officers and reporting entities who report suspicious matters from defamation proceedings or suits for negligent misstatement.
You can obtain a copy of the manual and forms at drjimcompliance.com.au
