Impact of Tranche 2 on real estate

Tranche 2 Legislation - Real Estate

Tranche 2 anti-money laundering regime will shake up Australian real estate industry

The Australian Government recently announced two rounds of public consultation around proposed reforms to the country’s anti-money laundering (AML) and counter-terrorism financing (CTF) regime. This follows a Senate inquiry launched in 2021 out of concern over Australia’s lack of action around its anti-money laundering regime.

The country’s AML/CTF regime currently applies to casinos, bullion dealers, and solicitors that handle cash transactions over $10,000. Excluded right now but likely to be included under potential new AML/CTF legislation aare certain AML and CTF high-risk professions, like real estate agents, lawyers, accountants, and trust and company service providers. These are referred to as ‘tranche-two’ entities.

These professionals will be required to implement risk management programs, conduct customer due diligence, monitor customer behaviour and transactions for potentially suspicious activity, and register with AUSTRAC (Australian Transaction Records and Analysis Centre).

Real estate a weak spot in AML/CTF regulations

Australia is just one of three major developed countries, alongside the US and Canada, that doesn’t have anti-money laundering laws that cover these key industries. The real estate sector, in particular, has been identified as a weak spot in Australia’s AML regime.

In February 2023, ABC News highlighted the vulnerability of Australia’s real estate sector to financial crime when it reported on a federal police bust that netted nine people and seized multi-millions of dollars worth of Sydney homes, cryptocurrency, and luxury items. It described the crime syndicate as offering money laundering on an ‘industrial scale’.

Aside from luxury goods and cars, criminals allegedly hid the illicit funds in a property portfolio that included 20 Sydney addresses – with two homes in the eastern suburbs alone worth a combined $19 million – and a $47 million block of land.

The first round of consultation closed in mid-June this year, and the second closes in September. A Bill will then be introduced into federal parliament, giving enough time to have legislation in place before an evaluation visit by the global Financial Action Task Force (FATF), which is expected in 2026.

Potential implications for the Australian real estate industry

The following outcomes are likely to face the local real estate industry as a result of new AML/CTF legislation:

1. Enhanced Customer Due Diligence (CDD). Real estate agents and other industry professionals will likely be required to do more rigorous CDD on clients. This includes ensuring identities are verified and determining the sources of wealth, including beneficial ownership. This scrutiny aims to thwart money laundering and prevent the proceeds of financial crime from entering the Australian property market.

2. Reporting suspicious transactions. Tranche 2 will require the reporting of suspicious transactions to AUSTRAC, Australia's financial intelligence agency. Real estate agents will need to remain vigilant and promptly report transactions that raise potential concerns about financial crime.

3. Increased compliance costs and administration. The implementation of Tranche 2 laws will likely lead to increased compliance costs for real estate businesses, who will need to invest in staff training and new processes and systems to ensure regulations are followed. Smaller agencies will face a greater challenge in complying with potential new AML/CTF obligations.

4. Impact on property transaction timeframes. Property transactions are likely to take longer to conclude and be more complex as additional due diligence measures are brought into play. Verifying identities, tracking beneficial ownership, and reporting suspicious matters are likely to slow down the pace of the real estate market.

5. Market stability and foreign investment. On a positive note, the Tranche 2 measures aim to reduce the risk of money laundering associated with foreign investment in the Australian property market. The increased scrutiny and transparency could enhance market stability and build confidence by ensuring a level playing field and deterring illicit capital flows.

6. Strengthened reputation and investor confidence. In another plus, the implementation of Tranche 2 is likely to demonstrate Australia's commitment to combating money laundering and illegal financial activities. These measures, together with existing AML regulations, could bolster the country’s reputation as a safe and secure destination for real estate investment and may attract more international investors to the local market, and build confidence among local property investors.

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 quickly and efficiently. We provide robust, cost-effective, and seamless solutions. Get in touch today.