Impact of Tranche 2 legislation on lawyers

Impact of Tranche 2 legislation on lawyers

Australian legal sector impacted by AML Tranche 2 regime

In April 2023, the Australian Attorney-General announced the launch of two rounds of public consultation on proposed Tranche 2 reforms to the country’s anti-money laundering (AML) and counter-terrorism financing (CTF) regime. The first round of consultation, which closed in June 2023, proposed reforms to simplify and modernise Australia’s anti-financial crime regime.

The second round, which closes in September 2023, covers the extension of Australia’s AML/CTF regime to professions considered to be high-risk. This includes lawyers, accountants, trust and company service providers, real estate agents, and dealers in precious metals and stones. These are referred to as ‘gatekeeper’ professionals.

The reforms also aim to reduce the complexity and regulatory burden of AML and CTF, ensure Australia’s AML/CTF regime is fit for purpose, and insulate Australian businesses against exploitation by organised crime.

The Tranche 2 reforms will require lawyers and other professionals in the property industry who provide designated services to conduct client due diligence (CDD), implement risk management programs, and monitor client transactions and behaviour for suspicious activity. They will also need to provide AML/CTF reporting and record keeping and enrol and register with AUSTRAC (Australian Transaction Records and Analysis Centre).

These designated services include the buying and selling of real estate and businesses or legal entities, managing client funds, accounts, and assets, and operating and managing legal entities while acting as a nominee director or trustee. It’s worth noting that a failure to meet these obligations may result in significant penalties.

‘Gateway’ professions can open door to criminal activity

Legal professionals in Australia provide services that could act as a gateway for organised criminals to access the local property and financial markets, as well as financial institutions. In this ‘gateway’ role, legal practitioners and conveyancers provide business and financial services that can be abused by criminals to hide beneficial ownership, evade tax, conceal the origin of financial transactions, and launder the proceeds of crime.

Organised criminals seek to operate through or behind a professional advisor, like a legal professional, to provide legitimacy to their illegal activities.

For example, legal professionals can be used to create a legal, but complex, structure to distance criminals from their illicit wealth. The legal sector also facilitates the process of transferring the ownership of property, which is a high-value asset that gives criminals an ideal opportunity to launder large amounts of illicit funds.

In a recent example, a Sydney lawyer was sent to prison for his role in the multi-million dollar Plutus Payroll tax fraud scheme, which has been dubbed the biggest in Australia’s history, with a value of around $105 million.

According to evidence at the trial, a company called Plutus Payroll offered a ‘zero fees’ service to handle company payrolls. It collected wages from employers, promising to on-send funds to the ATO via GST and Pay As You Go (PAYG) taxation. 

However, instead of forwarding the money, the group syphoned it via ‘second-tier’ companies with dummy directors, who willingly opened bank accounts in their names in exchange for money, without knowing they were involved in fraud. The ringleaders set up these vulnerable people to take the fall, while they spent their proceeds of crime on luxury properties, cars, boats, and jewellery.

Potential Implications for the Australian legal industry

Tranche 1, which came into effect in Australia in 2006, focused primarily on the country’s financial sector. Tranche 2 builds on this foundation and addresses vulnerabilities within the legal sector. Here are the key implications for lawyers, conveyancers, and others involved in financial transactions:

1. Enhanced Customer Due Diligence (CDD). Legal practitioners will need to do more thorough customer due diligence in future. This includes verifying client identities, determining the true source of client funds, and assessing the potential risks of each transaction.

2. Detailed record keeping. Legal professionals will need to maintain detailed records of their activities associated with CDD in order to comply with the new regulatory requirements.

3. Report suspicious activities. Tranche 2 will require lawyers and conveyancers to report any suspicious transactions to AUSTRAC, Australia's financial intelligence agency. This includes identifying and reporting transactions that raise suspicions about money laundering, terrorist financing, and other criminal activities.

4. Greater compliance administration and costs. The implementation of Tranche 2 will also increase compliance costs for Australian law firms and legal practitioners. They will need to improve their technology and processes and invest in staff training to ensure compliance with the new AML obligations.

5. Impacted client relationships and communication. The new CDD and additional reporting obligations will have a flow-on effect on client relationships within the legal industry. Clients will experience greater scrutiny during onboarding and may need to provide additional documentation to verify their identities, beneficial ownership, and the source of their funds. It will be important for legal professionals to communicate the reasons for this in order to maintain transparency and trust with their clients.

6. Professional responsibility and liability. Tranche 2 obligations will place a greater onus on the Australian legal community to be vigilant about detecting and preventing financial crime. The consequences for failing to comply with new AML/CTF regulations can be severe, including legal liability, reputational damage, and potential disciplinary action. It’s essential for legal professionals to prioritise education and training to stay on top of the ever-evolving AML landscape and ensure they remain compliant.

7. Collaboration and cooperation. Tranche 2 of Australia’s AML/CTF laws encourages collaboration and information-sharing among legal professionals, regulatory bodies, and other parties engaged in the fight against financial crime.

With Tranche 2 of Australia's AML/CTF legislation drawing closer, legal professionals must prepare to adapt to the expanded regulatory framework. The increased CDD requirements, reporting requirements, and compliance costs may be challenging for legal firms. However, these measures are important for safeguarding the integrity of the Australian financial system and enhancing the nation's reputation as a responsible global player.

The Australian legal industry has a pivotal role to play in helping neutralise financial crime by embracing the new AML/CTF obligations, investing in the necessary resources, and communicating the upcoming changes with their customers.

How One AML can remove the stress from your AML auditing

If your business is affected by Tranche 2, One AML can help you understand and meet your AML/CTF obligations. We provide robust, cost-effective, and seamless solutions. Get in touch today.