AML/CTF regime set for a shake up
The Australian Government has announced a consultation to reform Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime following the Senate's report released in March on the 'The adequacy and efficacy of Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime' (the Report).
In a press release, Australia's Attorney-General, the Hon Mark Dreyfus stated that the AML/CTF regime must be updated to respond to the changing threat environment and evolving international standards.
Significant regulatory gaps and vulnerabilities have made Australia an increasingly attractive destination for laundering illicit funds.
According to an overview released by the Attorney-General's Department, the proposed reforms will comprise two parts:
Reforms that will simplify and modernise the operation of the existing regime.
Reforms to extend the AML/CTF regime to high-risk professions, including lawyers, accountants, trust and company search providers and other so-called tranche-two entities.
The Consultation Paper also considers potential reforms in relation to the cryptocurrency industry building on Financial Action Task Force (FATF) guidance .
Crypto-assets such as digital currencies have become established as part of the global financial landscape. The AML/CTF regime must be reformed to respond to the risks in this established sector.
According the paper, the proposed reforms could expand the AML/CTF regulation of digital currencies to cover the following services in line with FATF recommendations:
exchanges between one or more other forms of digital currency;
transfers of digital currency on behalf of a customer
safekeeping or administration of digital currency, and
provision of financial services related to an issuer’s offer and/or sale of a digital currency (e.g. Initial Coin Offerings where start-up companies sell investors a new digital token or cryptocurrency to raise money for projects).
Interestingly, DeFi platforms do not appear to be in scope for reform at this stage, noting that this has been a topic of considerable discussion in other jurisdictions following new guidance released by FATF in 2021.
The Consultation Paper poses two broad questions for consideration in relation to cryptocurrencies:
What are the benefits and challenges of expanding the AML/CTF obligations to a broader range of digital currency-related services?
How can definitions under the Act be amended to integrate digital currency activity in payment‑related obligations, such as activities associated with credit, debit and stored value cards and general transfers?
The paper expressly notes that the proposed reforms in relation to the AML/CTF regulation of digital currencies are intended to align with any reforms in relation to the crypto asset services sector by Treasury to minimize duplication.
According to the Attorney-General's press release, Australia is a founding member of the FATF but has failed to comply with 16 out of 40 FATF standards. Additionally, the Australian Institute of Criminology estimates that serious and organised crime cost the Australian community up to AUD$60 billion in 2020-21. The Government's proposed reform package is in part a response to these matters and an anticipated FATF review 5th Mutual Evaluation of Australia's AML/CTF regime which could see Australia placed on FATF's grey list.
This consultation is the first step in a two part consultation process and will close on 16 June 2023. You can make a submission on the Attorney-General Department's website here. The second consultation is expected to take into account industry feedback and presumably will include more concrete proposals for reform.
The AML/CTF changes proposed in the consultation paper have been long anticipated and would bring Australia into line with reforms which have already been implemented or are in the process of being implemented in other jurisdictions such as the UK and EU. Experience in other jurisdictions suggests that any legislative proposals in relation to digital currencies will need to be carefully examined to ensure that they are fit for purpose while seeking to leverage the transparency benefits offered by blockchain technology to address AML/CTF risks.