House of Representatives

Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Hon Mark Dreyfus KC MP)

GENERAL OUTLINE

1. This Bill would reform Australia's anti-money laundering and counter-terrorism financing regime, which is comprised of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the AML/CTF Act), the Anti-Money Laundering and Counter- Terrorism Rules Instrument 2007 (No.1) (the AML/CTF Rules) and associated regulations, and would repeal the Financial Transaction Reports Act 1988 (FTR Act).

2. Australia's AML/CTF regime establishes a regulatory framework for combatting money laundering, terrorism financing and other serious financial crimes. At its core, the AML/CTF regime is a partnership between the Australian Government and industry. Through the regulatory framework, businesses play a vital role in detecting and preventing the misuse of their sectors and products by criminals seeking to launder money and fund terrorism.

3. The reforms in the Bill would ensure Australia's AML/CTF regime continues to effectively deter, detect and disrupt illicit financing, and protect Australian businesses from criminal exploitation. The reforms would improve the ability of Australian national security and law enforcement agencies and the Australian Transaction Reports and Analysis Centre (AUSTRAC), as the AML/CTF regulator and Financial Intelligence Unit, to target illicit financing. This will impact the ability of transnational, serious and organised crime groups to invest their illicit funds into further criminal activities in Australia and our broader region.

4. The reforms would also ensure that Australia's AML/CTF regime meets international standards set by the Financial Action Task Force (FATF), the global financial crime body. The FATF Standards (comprising the FATF Recommendations and their Interpretative Notes and Glossary) are a comprehensive framework of measures to combat money laundering, terrorist financing and proliferation financing. These standards set an international benchmark for countries to implement and adapt to their legal, administrative and operational frameworks and financial systems. The FATF Standards are regularly revised to strengthen requirements and adapt to emerging crime trends and threats.

5. The FATF promotes compliance and effective implementation of the standards through peer assessment mechanisms—known as mutual evaluations—and public listing of jurisdictions found to have weak AML/CTF systems. In 2015, the FATF identified deficiencies in Australia's compliance with the FATF Standards and areas for improvement. Since then, the FATF Standards have continued to be strengthened, particularly in relation to the regulation of virtual assets.

6. The reforms in this Bill would ensure that many of the key legislative gaps in Australia's regime are addressed. This will minimise the risk of Australia being 'grey listed' by the FATF, which would result in significant economic and reputational costs. Australia will undergo its next mutual evaluation by the FATF in 2026–27.

7. There are three key objectives of the Bill:

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to extend the AML/CTF regime to certain higher-risk services provided by real estate professionals, professional service providers including lawyers, accountants and trust and company service providers, and dealers in precious stones and metals—also known as 'tranche two' entities

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to improve the effectiveness of the AML/CTF regime by making it simpler and clearer for businesses to comply with their obligations, and

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to modernise the regime to reflect changing business structures, technologies and illicit financing methodologies.

8. An outline of key measures in each Schedule of the Bill is set out below.

Schedule 1 – Anti-money laundering and counter-terrorism financing programs and business groups

9. The AML/CTF Act currently requires a reporting entity to have an AML/CTF program that identifies, mitigates and manages the money laundering and terrorism financing risks that the reporting entity may face when providing a designated service.

10. Schedule 1 of the Bill would replace Part 7 of the AML/CTF Act with a set of outcomes-focused obligations that will ensure reporting entities undertake appropriate measures to mitigate and manage risk. This includes:

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introducing new, flexible concepts for reporting entities that organise themselves into groups to manage risks more efficiently

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clarifying the roles and responsibilities of a reporting entity's governing body and its AML/CTF compliance officer, and

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clarifying obligations for Australian companies operating overseas through a foreign branch of an Australian reporting entity, or a foreign subsidiary of an Australian parent company.

Schedule 2 – Customer due diligence

11. Customer due diligence (CDD) is a foundational requirement of the AML/CTF regime. It requires reporting entities to:

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identify, and verify the identity, of their customer and certain associated persons, and

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understand the money laundering, terrorism financing and proliferation financing risks associated with providing designated services to the customer, and take appropriate steps to mitigate and manage these risks.

12. Schedule 2 of the Bill would reframe and clarify the core requirements for initial CDD and ongoing CDD, clarify when enhanced CDD must be applied, and streamline the circumstances when simplified CDD may be applied.

Schedule 3 – Regulating additional high-risk services

13. A key element of the reforms is to expand the AML/CTF regime to certain services provided by gatekeeper professions: real estate professionals, dealers in precious metals and precious stones, and professional service providers, including lawyers, conveyancers, accountants and trust and company service providers (also known as 'tranche two' entities).

14. Certain services provided by these sectors are recognised globally as high risk for money laundering exploitation. AUSTRAC's Money Laundering in Australia National Risk Assessment 2024 found that these sectors posed a medium to high money laundering vulnerability. The assessment also identified that gaps in regulation of tranche two entities is a key national vulnerability that impacts the effectiveness of Australia's AML/CTF regime.

15. Schedule 3 of the Bill would expand the list of designated services in section 6 of the AML/CTF Act to include higher risk services provided by tranche two entities. Businesses that provide these designated services would be regulated under the AML/CTF regime.

Schedule 4 – Legal professional privilege

16. Schedule 4 would clarify the treatment of information subject to legal professional privilege for the purposes of the reporting and information disclosure obligations in the AML/CTF Act. Existing section 242 already provides that the AML/CTF Act does not affect the law relating to legal professional privilege. The Bill provides stronger protections for the disclosure of information or documents subject to legal professional privilege once legal practitioners are brought into the AML/CTF regime, in response to stakeholder feedback.

17. These amendments preserve the core intention of the doctrine of legal professional privilege in both common law and statute, and ensure that regulated entities who handle client information that is subject to legal professional privilege can comply with their reporting and information disclosure obligations under the AML/CTF Act.

Schedule 5 – Tipping off offence and disclosure of AUSTRAC information to foreign countries or agencies

18. Schedule 5 would reform the current prohibition against reporting entities 'tipping off' their customer about the formation of a suspicion. The new offence will focus on preventing the disclosure of suspicious matter report (SMR) information or information related to a notice issued under section 49 or 49B of the AML/CTF Act where it would or could reasonably prejudice an investigation. The new offence framework would be more flexible for reporting entities seeking to share information for legitimate purposes, including within reporting groups to manage risk and prevent further crime.

Schedule 6 – Services relating to virtual assets

19. Digital and virtual assets are an increasingly popular conduit to represent, store and move value, and the virtual asset sector and related technologies continue to evolve rapidly. AUSTRAC's Money Laundering in Australia National Risk Assessment 2024 identified digital currency exchanges and digital currencies as a store of value as an increasing money laundering vulnerability.

20. Schedule 6 would extend the AML/CTF regime to additional virtual asset-related services to appropriately address the sector's risk, amends the current terminology of 'digital currency' to 'virtual asset', and inserts a new definition of 'virtual asset' in line with FATF Recommendation 15. The amendments would ensure that the rapidly growing virtual asset sector is hardened against exploitation by criminals.

Schedule 7 – Definition of bearer negotiable instrument

21. Schedule 7 would clarify what monetary instruments are captured by the definition of a 'bearer negotiable instrument' and its subsequent reporting requirements. This responds to industry concerns that the current definition is unclear and too broad because it includes negotiable instruments that are not payable to bearer. The amendments in this schedule would reduce the volume of reportable bearer negotiable instruments to reduce regulatory burden and maintain compliance with FATF Standards.

Schedule 8 – Transfers of value and international value transfer services

22. Schedule 8 would simplify and modernise the framework for electronic funds transfer instruction obligations, designated remittance arrangements and international funds transfer instruction (IFTI) reporting purposes. The amendments in Schedule 8 replace the previous funds transfer chain concept with an updated and simplified value transfer chain. Streamlining value transfer chains would reduce undue regulatory burden on industry. The value transfer chain concept will provide a framework for key AML/CTF reporting obligations for certain entities that transfer value on behalf of customers, like the travel rule and IFTI/international value transfer service reporting obligations.

Schedule 9 – Powers and definitions

23. Schedule 9 would introduce a number of new information gathering powers for AUSTRAC to effectively monitor, investigate and enforce compliance with the AML/CTF regime. These include an examination power, an important investigatory tool to enable AUSTRAC to obtain relevant information needed to make enforcement decisions and obtain evidence to be used in proceedings, and additional notice to produce powers allowing AUSTRAC to gather information to assist with its financial intelligence functions.

24. Schedule 9 also includes updates to a number of definitions to respond to issues identified by the 2016 Statutory Review of the AML/CTF Act, AML/CTF Rules and the Associated Regulations, or where updates are otherwise required to modernise and simplify the AML/CTF regime.

Schedule 10 – Exemptions

25. Schedule 10 would move current exemptions under the AML/CTF Rules into the AML/CTF Act either by reframing the primary obligation to avoid the need for the exemption, or incorporating an express exception in the AML/CTF Act. This will ensure that enduring exemptions are codified in the AML/CTF Act, and subject to appropriate parliamentary scrutiny.

26. This Schedule would also make amendments to the exemption currently in Chapter 75 of the AML/CTF Rules, lower the threshold exempting casinos, on-course bookmakers, totalisator agency boards and gaming machine operators from conducting initial CDD measures when providing certain gambling services to customers involving transactions from less than $10,000 to less than $5,000 to align with the FATF Standards.

Schedule 11 – Repeal of the Financial Transaction Reports Act 1988

27. Schedule 11 would repeal the FTR Act to streamline and simplify the AML/CTF regime, establishing a single source of obligations for industry. The repeal of the FTR Act would deregulate cash dealers who provide low risk services under the FTR Act, including motor vehicle dealers, sellers of traveller's cheques and offshore online remitters.

28. This Schedule also makes minor amendments to the Australian Securities and Investments Commission Act 2001, Commonwealth Electoral Act 1918, Criminal Code Act 1995 (Criminal Code), Freedom of Information Act 1982, Proceeds of Crime Act 2002, and the Surveillance Devices Act 2004, which are consequential to the repeal of the FTR Act.

Schedule 12 – Transitional rules

29. Schedule 12 would provide a power for the Minister to make rules concerning any amendments introduced by this Bill. This modification power is limited to 4 years to address any unforeseen issues that may arise after the reforms commence and to accommodate the extensive time needed for industry to effectively implement each measure.

FINANCIAL IMPACT

30. Nil.

REGULATION IMPACT

31. An Impact Analysis has been prepared by the Attorney-General's Department and has been assessed by the Office of Impact Analysis. The executive summary and a table outlining the average annual regulatory costs from the Impact Analysis is at Attachment A. The full Impact Analysis is available on the Office of Impact Analysis website: (https://oia.pmc.gov.au/published-impact-analyses-and-reports/reforming-australias-anti- money-laundering-and-counter).