Understanding Tranche 2: Expanding AML/CTF Coverage

In 2015, a Financial Action Task Force (FATF) evaluation flagged Australia for its lack of AML/CTF requirements for DNFBPs. The absence of regulation in these industries posed a significant risk for money laundering and terrorism financing, particularly through sectors like real estate and legal services.

Countries like Australia are under external pressure from international organisations such as the FATF and the Organisation for Economic Co-operation and Development (OECD) to align with global AML standards. Specifically, the absence of Tranche 2 regulations places Australia behind other jurisdictions such as the UK and EU.

Historically, organised crime and corrupt actors have relied on weaker DNFBP controls to launder money under the guise of legitimate transactions. For instance, purchasing high-value assets, such as luxury properties or artworks, can be used as a layering technique to obscure the origins of illegal gains.

Tranche 2 aims to target the following high-risk sectors:

• Lawyers and Conveyancers: Particularly involved in activities such as managing client funds or establishing complex legal trusts.
• Accountants: Often entrusted with corporate financial operations, which could be exploited for illicit purposes.
• Real Estate Agents and Property Managers: Historically a preferred sector for laundering funds through asset purchases.
• High-Value Goods Dealers: Includes auction houses, jewellery dealers, and luxury goods sellers facilitating high-value transactions.
• Trust and Company Service Providers: Entities managing corporate formation or nominee director services.

High-Risk Example: A jeweller selling diamond watches and receiving substantial cash payments would be required under Tranche 2 to perform Customer Due Diligence (CDD) checks to ensure the legitimacy of the funds used by the buyer.

Under Tranche 2, DNFBPs must conduct thorough KYC processes. These include:

• Identity Verification: Businesses must verify and document customer identities.
• Beneficial Ownership Checks: Identifying individuals who ultimately own or control a client entity.
• Risk-Based Profiling: Risk assessments tailored to each customer's transaction behaviour and profile.
  

• Standard CDD: Ensures that DNFBPs understand who their clients are.
• Enhanced Due Diligence (EDD): Required for high-risk clients, such as politically exposed persons (PEPs). LSEG’s enhanced screening capabilities, like LSEG World-Check, provide advanced due diligence tools to streamline these obligations.
  

Entities will be legally mandated to notify authorities of any suspicious activities, including:

• Transactions exceeding specific cash thresholds.
• Unusual client behaviours that may indicate illicit activities.
  

Utilising automated transaction monitoring solutions can significantly simplify compliance. LSEG offers tools that integrate screening functionalities into operational workflows to detect and review potentially suspicious activities in real-time.

DNFBPs will need to overhaul their compliance frameworks, which will involve:

• Operational Overhaul: Implementing robust KYC and AML checks during customer onboarding.
• Increased Costs: Adjusting for costs related to personnel hiring, technology upgrades, and ongoing training.
• Audit Preparation: Digital record-keeping systems will be indispensable, enabling seamless audits when required by AUSTRAC.

LSEG Risk Intelligence solutions, such as LSEG World-Check and Account Verification tools, can assist enterprises by conducting efficient risk mitigation at scale and ensuring regulatory obligations are met.

As Australia’s AML/CTF regulator, AUSTRAC will oversee compliance and enforce hefty penalties for non-conforming entities under Tranche 2 reforms. It will likely provide guidance on how DNFBPs can adhere to new compliance requirements, mirroring its oversight for Tranche 1.

Other jurisdictions, such as the UK and EU, implemented DNFBP-focused AML/CTF regulations, setting robust benchmarks for compliance. Tranche 2’s alignment will bring Australia closer to meeting global regulatory standards and avoiding potential reputational damage.

• Scope: Tranche 1 focuses on financial institutions, while Tranche 2 introduces AML/CTF obligations for DNFBPs.
• Gaps Addressed: Tranche 2 resolves blind spots in sectors like real estate and law, which are frequently exploited for laundering.
• Implementation Timeline: The government is targeting 2026 for rolling out Tranche 2 regulations fully.
  

• Privacy Concerns: Legal professionals are particularly vocal about ensuring that client confidentiality is not compromised.
• Resource Constraints: Many small businesses in affected sectors may struggle with compliance costs and operational challenges.
• Technology Requirements: Firms lacking advanced compliance tools will need to invest in sophisticated monitoring and due diligence platforms.

LSEG World-Check supports compliance readiness through advanced screening, continuous updates, and seamless technology integration.

Real Estate and Money Laundering

Large sums of unexplained income continue to find a home in luxury real estate assets. For example, a criminal syndicate could purchase high-end properties through third-party proxies.

Accounting Fraud in Funds Transfers

Layering illicit funds through complicated account movements often involves accountants. Ensuring EDD protocols can flag anomalies early in such transactions.