New customer due diligence requirements under anti-money laundering laws

NEED TO KNOW

Ahead of the full statutory review of Australia's anti-money laundering and counter-terrorism financial laws, the AUSTRAC Chief Executive Officer has amended the Anti-Money Laundering/Counter-Terrorism Financing Rules (AML/CTF Rules) in relation to the Customer Due Diligence (CDD) requirements.

The Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2014 (No 3) (Amendment Instrument) was registered on 19 May 2014, amending the AML/CTF Rules to create new CDD requirements.

In summary, the amendments will require from 1 June 2014:

collation and verification of information about the settlor of any trust that is a customer;
identification of the beneficial owner of a customer; and
additional CDD obligations regarding any politically exposed persons (PEPs).

BACKGROUND

The reforms contained in the Amendment Instrument had been subject to public consultation. In response to recommendations made by the Financial Action Task Force (FATF), the Government released for public consultation between May 2013 and September 2013 a discussion paper, Consideration of possible enhancements to the requirements for customer due diligence.

The FATF identified certain deficiencies relating to the CDD requirements under Australia's AML/CTF regime, including the lack of any requirements to:

take reasonable measures to understand the ownership and control structure of a customer;
identify and verify the beneficial owners of a customer;
identify and verify the settlor of a trust;
take specific additional measures for customers (or beneficial owners of those customers) who are PEPs; and
collect information on the purpose and intended nature of the business relationship.

Following receipt of stakeholder submissions in relation to the discussion paper, a draft Amendment Instrument was released for consultation between 9 December 2013 to 24 January 2014.

AUSTRAC notes a third revised version of the draft Amendment Instrument was released for public consultation in March 2014 with submissions not requiring any further changes. This version is now the finalised and registered Amendment Instrument.

SUMMARY

The Amendment Instrument includes (without limitation) the following substantive amendments to the following chapters of the AML/CTF Rules:

Chapter	Amendments
Chapter 1	Key terms and concepts New definition of 'beneficial owner', removing the previous limitation to companies and extending the obligation regarding identification to all customer types. New definition of 'politically exposed person' which includes (without limitation) an individual who holds a prominent person or function in a government body (such as a government minister, senior foreign representative or a chief executive of any State enterprise) or an international organisation (one that is established by a formal political agreement) and any immediate family member or close associate of such a person.
Chapter 4	Customer identification Clarification that the new CDD requirements regarding settlors, beneficial owners and PEPs only apply to those persons becoming customers after 1 June 2014. New requirement to collect and verify the full name of the settlor of the trust unless an exception applies (such as the settlor contribution being under the $10,000 threshold or where the settlor is deceased). New procedures to require collation and verification of identification information of each beneficial owner. However, reporting entities may assume the customer and beneficial owner are the same unless there are reasonable grounds to consider otherwise in light of money laundering / terrorism financing (ML/TF) risks or if exceptions apply. New procedures regarding identification and verification of PEPs, including requirements to include in the AML/CTF program appropriate risk management systems to determine whether a customer (or beneficial owner) is a PEP either before providing a designated service or as soon as practicable afterwards. More stringent requirements apply to foreign PEPs and those domestic PEPs and international organisation PEPs that are considered high ML/TF risk.
Chapter 5	Special AML/CTF programs Related amendments to clarify the legal powers relating to the identification and verification requirements for a beneficial owner of a customer as the beneficial owner is not a customer of a reporting entity.
Chapters 8 and 9	Part A of a standard AML/CTF program (or for entities which have formed designated business groups, Part A of a joint AML/CTF program) New requirement for reporting entities to understand the nature and purpose of their business relationships with customers, including consideration of the control structure of any non-individual customers such as trusts and companies.
Chapter 15	Ongoing CDD New version of the ongoing CDD requirements to reflect the requirements applying to both customers and the beneficial owners of those customers (including PEPs). These requirements include (without limitation): Know Your Customer requirements in relation to beneficial owners; Record keeping and updating requirements; an enhanced CDD program that must be applied to foreign PEP customers (or customers with foreign PEP beneficial owners); a range of enhanced CDD measures relating to beneficial owners such as identifying the source of funds.
Chapter 30	Disclosure certificates New provisions to allow the use of disclosure certificates for the identification of beneficial owners in specified circumstances such as when the reporting entity has determined that the information cannot otherwise be reasonably obtained or verified.

The Amendment Instrument also makes amendments to privacy notices contained in the AML/CTF Rules and to the definitions of "certified copy" and "certified extract" contained in Chapter 1.

TIMING AND REFORM IMPLEMENTATION

The amendments relating to CDD will commence on 1 June 2014 with an implementation period extending to 31 December 2015.

There are policy principles¹ in place to provide an assisted compliance implementation period. The principles are designed to provide comfort to reporting entities that certain enforcement actions (such as the application for a civil penalty order or an injunction) will not be taken by AUSTRAC during the implementation period for breaches of the new CDD requirements if the entity (or its designated business group if the entity is a member of such a group) has taken reasonable steps to implement the new requirements during the implementation period. These steps may include:

complying with the new CDD requirements as soon as practicable in relation to persons who become a customer between 1 June 2014 and 1 January 2016; and
establishing a transition plan before 1 November 2014, sufficiently resourcing and monitoring the implementation of the plan.

NEXT STEPS

We are available to provide you with further information or guidance about the CDD reforms or the AML/CTF regime more generally. Please contact a team member listed in this publication for further information.

Footnote

¹Policy (Additional Customer Due Diligence Requirements) Principles 2014, available at http://www.austrac.gov.au/customerduediligence.html.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.


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