The RegTech Pulse
The RegTech Pulse examines the latest industry and technology trends that help organizations fight financial crime and streamline payments, so money and goods can move safely and securely around the world. Industry experts across the world join the conversation to discuss their insights and share best practices. The RegTech Pulse is brought to you by LexisNexis Risk Solutions, which helps power compliant and assured client transactions to build an interconnected and trusted financial ecosystem.risk.lexisnexis.com/regtechpulse
The RegTech Pulse
Australia’s AML Reform: Understanding Tranche 2 and Its Impact
In this episode of The RegTech Pulse, host Ankit Sharma speaks with Konstantin Poptodorov, Market Planning Director at LexisNexis Risk Solutions, about Australia’s anti-money laundering (AML) and counter-terrorism financing (CTF) reform. They explore the key changes the legislation introduces including Tranche 2, their implications for the affected industries, and what businesses need to do to stay compliant. Tune in for expert insights on regulatory shifts and global AML trends.
DISCLAIMER: The information provided in this podcast is for informational purposes only and is not intended to and shall not be used as legal advice. The views and opinions expressed in this podcast are solely those of the speakers and do not necessarily reflect the views or positions of LexisNexis Risk Solutions. LexisNexis Risk Solutions does not warrant that the information provided in this podcast is accurate or error-free.
Welcome to another episode of the REC Tech Pulse podcast, powered by LexisNexis Risk Solutions, where industry leaders discuss the latest trends in financial compliance. I'm your host, ankit Sharma, and today is a special edition. We've got my friend Kon Pop Todorov, who's the Market Planning Director at LexisNexis Risk Solutions, based in Australia, and he's joining me to discuss the recent AML CFD reforms that happened in Australia. Really exciting times. Welcome, kon. How are you?
Speaker 2:Thank you, Ankit. I'm great and it is good to be here.
Speaker 1:Lovely and I remember Kon our last conversation in the series that we had for Australia and New Zealand. We did speak about some of these regulations which will be knocking our door and looks like they're around the corner. They're about to, in the larger context of history, change what we will be expecting from a regulatory and reporting standpoint.
Speaker 2:So I'm sure these are exciting times and something that you're looking forward to Absolutely so. Last time we discussed the scam accord, and today we're going to be talking about slightly different and quite significant topic, and that's the upcoming AMR-CTF reform in Australia.
Speaker 1:Lovely. So let's jump straight into it. Colin, if I could, just for the benefit of our listeners, if you could give a brief overview of the historical context of these anti-money laundering and counterterrorism financing regulations in Australia and basically what has led to these reforms in the first place?
Speaker 2:Sure. So MLCTF legislation it's a recent form because it is changed. It was introduced in Australia in 2006, following the financial transaction reporting at 1988. And it was enacted to combat money laundering and terrorism financing by regulating financial transactions and ensuring that financial institutions and other regulated entities implement measures to detect and prevent projectivities. So it has taken us about 20 years to get to where we are and, given the timeframe or the timeline, it is clear that it is time to make a change. So back then, there were a mix of driving forces behind the introducing the regulations, and that includes international pressure from the Financial Action Task Force, which is also the case today and generally protecting the integrity of the Australian financial system and enhancing national security and again, all these reasons remain valid, also the case today and generally protecting the integrity of the Australian financial system and enhancing national security and again, all these reasons remain valid. We just needed to keep up with times and update the legislation.
Speaker 1:And that's an interesting point, conrad. So, of course, better late than never. It's taken us some time, but we are heading into the right direction, as you said, which is very exciting. Can you share perhaps some example, either use cases or problems that led to the current legislation and the need for the reforms? Basically, and how does the Financial Action Task Force assessment play into all this, because you mentioned FATF being a key component within this as well?
Speaker 2:Great questions, ankit. So maybe I'll start with the drivers, or the international drivers, for the reform. And we live in a constantly evolving and quite volatile world today, and financial crimes are constantly evolving and the reform ensures that, in general, australia's regime can effectively deal and prevent and disrupt those activities. As we alluded earlier, the reform aligns Australia's law to international standards set by the FATF and that helps Australia maintain its reputation and effectiveness in the global fight against financial crime. Conversely, had we not introduced the reform, it could have had quite negative consequences for our economy. So it is about the right time to do that Now.
Speaker 2:There is another part to the reform and that is that serious and organised crime can exploit legitimate businesses and the reform helps protect the Australian economy from such exploitation. And, for example, when we we're going to talk about this perhaps later when we talk about the so-called trans-stitute entities. So these new professions that were brought under the MRCTF regime. We're going to talk about this perhaps later when we talk about the so-called transitor entities. So these are these new professions that were brought under the MRCTF regime. The Attorney General, in the introduction of the bill, highlighted that, for example, real property makes up more than 65% of confiscated proceeds of crime in Australia, while most of real estate transactions are legitimate.
Speaker 1:This example highlights or it's just one of the examples that highlights, why there is a need to introduce such regulation, makes sense. You mentioned the DNFPB segment, kind of coming within the new regulatory and reporting framework, and we did touch upon some of the initial fundamentals of this regulation which is coming into force. But if we could just take one step forward and go into the details of this concept, what are the key changes being introduced in the Amendment Act and, for the understanding of our listeners, how do they aim to? Basically simplify, strengthen and modernize the current regulatory framework that already exists within Australia?
Speaker 2:So there is a two-part answer to your question. If you look at AML reform in general, that affects all reporting entities. There are four or five specific changes that are happening and that they're going to help simplify, streamline AML-CTF regulations for AML-CTF efforts and make them more effective. Possibly the most important one is risk-based approach. So the new framework shifts from a compliance-based approach to a risk-based approach or outcomes-based approach, which is again quite important, and this allows entities to tailor their AML-CTF measures to the specific risks they face. Linked to this is also customer due diligence. Enhanced requirements for customer due diligence will be introduced, and that includes also more stringent verification process and ongoing monitoring. The new measures also are aimed to prevent tipping off, ensuring that suspicious activity reports do not inadvertently alert the subject of investigations, or such provisions are considered in the legislation or they're part of the legislation In terms of value or in terms of transfers.
Speaker 2:The changes to the reporting of international transfer from instruction to value transfers is something that is also being introduced.
Speaker 2:And then, finally, governance and compliance, or the emphasis of the role of senior management and governing bodies in overseeing MLCTF programs, and that also includes the appointment of dedicated MLCTF compliance officers.
Speaker 2:Now the second part, which is more prominent and has received a lot more attention due to, I suppose, the scale of it, is the introduction of the so-called trans-2 entities, with trans-1 being the existing, mostly financial institutions, existing reporting entities. And the trans-2 professions are broadly, or these are, professions who form a touchpoint with increased financial crime. As to the nature of what they do, that could be the value of transactions, their professional expertise and or the confidentiality of their services. So these professions are real estate that includes agents, buyers, as well as sellers and property developers, dealers in precious stones, metals and products in addition to bullions, which is subject of the recent regulations, lawyers and conveyancers, accountants, trust and company service providers and then eventually, after March 2026, virtual asset service providers. So this is the summary of changes to the reform. Of course, there is a lot more to it that every business needs to consider, but broadly speaking, this is, or, in a nutshell, this is what the reform is about.
Speaker 1:That's great. I mean you know really optimistic steps by the regulator and the enforcement agencies and the community coming together in that, and you talked about the various segments and industries being added from a regulatory expectation or reporting perspective, and at the start of it we talked about how excited the market is to these in the conversations that you may be having locally in the market. But why is this so significant, Con? Because I've also been picking a lot of chatter on social media and otherwise around this. But if you just help us understand the significance of this or the impact that it brings along with us and, more importantly, what specific changes will the institutions need to do to implement these new regulations going forward?
Speaker 2:So, if we talk about a broader impact, what is in the public eye, what also professionals are discussing, is, of course, the scale or the size of the pool that the introduction of the tranche tour is capturing. We are looking at about a tenfold increase to over 100,000 entities that are going to be covered by the regime once the reform is through. And this is going to be challenging, obviously for the affected organisations, but also from an enforcement point of view. You can imagine that Austrako have quite a bit of an extended scope of what they do and quite a large number of entities to oversee compared to what they have today. And there are also models, of course, that could help address this. For example, group reporting could be one way to reduce the effective number of entities that are monitored. But ultimately, again, the scale and the number of affected entities is clearly expected to be quite challenging.
Speaker 2:Now, when we look at the impact on individual businesses, it will result from having to review and possibly change their AML CTF progress. So that applies to all regulated entities today, not only to the new industries that will come under the regime. For them, of course, that's going to be a little bit harder because they have to introduce those programs and set everything up from the beginning, and there will be, of course, operational and other cost implications, and they must not be underestimated. However, I think most listeners would agree that the industries that are facing this change will be affected a lot more if the changes weren't happening by increasing financial crime, and there is also cost of crime to the business. So we think that the long-term impact of the changes will be mitigated by the benefits for the country and the society as a whole.
Speaker 2:Now, if we look at specifically the trans-2 entities, most of them are sole traders in small companies, family businesses and some with little or no awareness of what's coming their way, and the new obligations will mean significant changes not only in the way they work. They need to start understanding the obligations. They need to implement compliance measures. For large organizations, they need to be cultural changes so that they understand the reasons of what they're being asked to do. And, of course, there will be cost implications.
Speaker 2:Now, again, money laundering is costing legitimate entities right now. Money laundering is costing legitimate entities right now, and the benefits of reducing financial crime should outweigh the investment, not only from financial but also from ethical standpoint. We would like Australia to become a lot less attractive for financial crime. All businesses should benefit from the ability to control these activities and prevent criminal activity from a reputational point of view. And finally, technology is also there to help, and choosing the right technology solution that will assist with compliance will also help manage how much businesses spend in due course or longer term on those activities, since we have found out in our own research that businesses that invest in the right technology ultimately benefit from lower spend on compliance over time.
Speaker 1:So you've raised a couple of interesting points there, right, con, and thank you for going into the details. I mean so one, of course, the tenfold increase in terms of the volume of entities coming into the purview. And then, secondly, the types of organizations and who may not necessarily have the means or resources to ensure compliance from day one, right? So in the past we've done research reports through LexisNexis risk solutions around the cost of compliance, which was ballooning towards a $5.3 billion Australian dollar amount in 23. And then the other aspect which it brings along is on the friction of a consumer doing transaction or on the onboarding side because of these enhanced kind of regulatory expectations, right? So from where you are seeing this gone, what would be your recommendation to compliance professionals or the new transfer regulated entities to basically be in that journey of preparation before the rollout of these reforms? What should they do?
Speaker 2:Well, technology is certainly a part of that, and we can talk about technology separately From an organisation standpoint. And this, by the way, shouldn't be taken as legal advice, or the first thing that I'd advise organisations is to take professional and legal advice to take them on that journey. However, broadly speaking, what organisations need to do is understand their new obligations and, again, taking advice is something that they think is mandatory in this case. Conduct a gap analysis to understand what changes are necessary to comply with the requirements. Whether they're existing reporting entities that need to change their MLCTF programs or they will be newly regulated, and particularly if they're newly regulated, they need to know what they will be facing. Introduce or update policies and procedures. Again for existing reporting entities who, by the way, are quite likely to already be compliant with many points, so maybe just updating is required there they need to revise their policies to align particularly with the new risk-based, outcomes-oriented approach and ensure that for all businesses that those procedures are tailored to specific risks and operations in the business. And, again for newly regulated entities, such processes need to be introduced and built up from the ground Now.
Speaker 2:Organizational changes may also be necessary, like, for example, appointing an AMR CTF compliance officer, our CTF compliance officer operationally introducing more stringent customer verification process in line with the new requirements in order to meet the due diligence aspect of the regulation Again, from operation or from people point of view.
Speaker 2:Establish and strengthen the culture of compliance. So that involves providing regular training to staff from the new AML CTCTF obligations and their role in compliance, so that the organisation ensures that everyone is aware of the changes, how to implement them effectively and also what their particular role is in maintaining compliance and combating financial crime. So it is really important for people to understand why they're doing what they are being asked to do in their roles. And finally, engage with AUSTRAC. Austrac is not only an enforcement body. They also are there to guide entities through those changes and participate in consultations and also seek advice and guidance from professional organizations as well as from technology vendors. Like ourselves, we have a lot of experience in providing services to regulated entities worldwide and we can also provide advice as to what are good and wise choices in terms of technology.
Speaker 1:Absolutely. I mean, having a responsible regtech partner who has an understanding of global AML standards, as well as regional and local nuances, is quite critical whenever these new changes and regulatory policies are put in place. But just so that we simplify this, if you could just walk us through the timeline for the implementation of these reforms and what are some of the key deadlines that businesses need to be aware of?
Speaker 2:This is quite topical. The timeline is quite wide, but let's not be deceived by it, because changes take a lot of time to implement, so businesses need to start thinking and acting right now. The legislation passed in Parliament in November last year, in 2024, and the first round of rule consultations was completed on the 14th of February. There will be another round. The rules, then, are expected to be finalised in July 2025. So this is where we all will have a bit more information as to how the legislation will be implemented in practice.
Speaker 2:Core guidance for reporting entities will be finalised in August, and tranche two specific guidance will be released by the end of the year. So this is where these entities can look forward to a bit more specific guidance for their industries, although they also need to remember that they need to adopt a risk-based approach. So don't expect to be taken step-by-step in the process of what exactly you need to do. And then tranche-to transfer entities can register with Ostrac from March 2026 and compliance is mandatory from July 2026. So we've got just under two years to go now. However, again, it is important that we start these activities today so that we are prepared at the right time.
Speaker 1:Thank you for simplifying that. That is really helpful, I'm sure, for our listeners. I mean, if we had to take a step back and maybe look at this from the prism of regional regulations within APAC or even global regulations that you are aware of and I'm sure this is brought up in your conversations with regulators and industry bodies within the region and globally how are you comparing this with, let's say, some of the AML directives in European Union or the regulations that you may have noticed around Monetary Authority of Singapore or, you know, the Hong Kong regulator? And then I mean again, if we are to look at this from a global view or a sub-regional view, you know what are the benefits of aligning Australia's regulations with global standards and does it impact and if it does, in what way into the country's reputation and business environment, which is also important?
Speaker 2:Really really good question, ankit. And that brings us also back to some of the reasons why the reform is going ahead in Australia. It will bring us in line with international jurisdictions Australia is one of only five such jurisdictions more than 200 that do not regulate tranche 20s, for example and by implementing those changes, we'll be joining other major economies like Europe, the UK, regional economies like Hong Kong and Singapore, as well as New Zealand, which implemented the tranche to coverage back in 2018. And the country will certainly benefit from this as a whole because, again, it will make it a lot less attractive place for conducting criminal activities. But also the reform is aimed to avoiding a negative fat death assessment, which could have negative consequences for our economy, in worst case, impact our ability to trade internationally. So it is quite important to be aligned with all other developed countries in our approach to combating financial crime, and this legislation brings us there.
Speaker 1:Thanks, Con. I mean I've really found this conversation meaningful and insightful and it's always a pleasure to talk to you, but right towards the concluding part of it, you mentioned previously around the preparedness on people, process and technology. So, within this framework, what would be your final thoughts or key takeaway as advice to the listeners of this podcast today?
Speaker 2:I think just to summarize what we've just mentioned earlier be prepared, stay on the pulse, monitor all announcements and changes, participate in the RORS consultation, as that would help shape the RORS implementation of the legislation. Look at revising and revamping your AML-CTF programs if they exist, or plan for creating those if they don't. It is important to build in flexibility in all your processes as well as any technology that you might be looking to help you out there, because AML regulations change, or all regulations change, and they may change frequently and especially in the areas of crime prevention. Again, we're dealing with a quite a dynamic environment, so changes would always come and they can come very quickly if we think in recent or maybe not so recent anymore sanction changes, where we have to act very quickly again, building flexibility in your programs and processes and technology, because that would help you keep up with changes and ultimately even stay ahead and also watch this space. We're also going to release further information assets. We're looking forward to delivering a webinar and other materials that could help you stay informed.
Speaker 1:Absolutely, as you said, con, watch this space. But again, thank you so much for joining us today, con. As I said, I found this really insightful and valuable, as I'm sure will our listeners. It's always a pleasure to talk to you. Thank you so much for your time today, thank, you Ankit.
Speaker 2:Thanks everyone for joining us.
Speaker 1:All right For our listeners. If you want to learn more about how LexisNexis Risk Solutions can help you comply with these new AML CTF reforms, please visit our website risklexisnexiscom. I'm your host, ankit. Thank you for your time. We'll be back with a new podcast. Thank you.
