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Payment service providers (PSPs) in Australia will face new customer due diligence (CDD) requirements if proposed changes to the country’s anti-money laundering (AML) and counter-terrorist financing (CTF) framework are adopted by parliament.
Under the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2024, AML reporting entities would be subject to new CDD requirements that go above and beyond previous measures.
CDD is a new and foundational element of the proposed AML/CTF regime, requiring reporting entities to identify and verify the identity of their customers and certain persons associated with their customers.
In addition to the concept of CDD, a category of “beneficial owner” would be introduced to Australia’s AML framework for the first time.
Under the proposed definition, a beneficial owner is any individual who controls the customer (directly or indirectly), or who owns 25 percent or more of the customer (directly or indirectly).
The bill would also require reporting entities to understand the money laundering and terrorism financing (ML/TF) risks associated with providing services to the customer, and to take appropriate steps to mitigate and manage these risks.
In some cases, where “enhanced” CDD is required, a reporting entity may need to collect additional personal information about the customer.
How does this change things?
The new requirements will have a number of implications. For example, all foreign politically exposed persons (PEPs) would need to undergo enhanced CDD. Likewise, all domestic and international organisation PEPs that are identified as “high-risk” would need to undergo enhanced CDD.
Enhanced CDD would also need to be applied to family members and other close associates of foreign PEPs and “high-risk” domestic and international organisation PEPs.
As per Financial Action Task Force (FATF) recommendations, CDD rules would be applied to former PEPs for the first time, based on the perceived ML/TF risk of the customer.
Under the current regime, PEP status ceases with the termination of a politically exposed position or function — an approach that the Australian government believes “does not accurately reflect” the ML/TF risks posed by PEPs.
Initial v ongoing CDD
The bill includes further requirements for AML reporting entities related to ongoing CDD.
New amendments would establish parameters for when reporting entities may apply simplified CDD or when they must apply enhanced CDD, whether as part of initial or ongoing CDD.
Simplified CDD aims to give reporting entities more discretion, provided the ML/TF risk of the customer is low and other requirements are met.
Enhanced CDD should be applied to customers in certain specified circumstances, or if the customer is regarded as a high ML/TF risk.
Where enhanced CDD is required, reporting entities must collect and/or verify additional know your customer (KYC) information that is relevant to mitigating the identified higher risk.
They must also be “reasonably satisfied” that they know and understand the identity of the customer.
Why should you care?
The proposed amendments represent a paradigm shift in how AML reporting entities in Australia are expected to understand the identity of each customer and mitigate ML/TF risk.
Under the country’s existing AML law, the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, the focus is put on merely “verifying” the customer’s identity.
In contrast, the new bill seeks to introduce the dynamic concept of CDD, alongside the more nuanced category of beneficial ownership.
These changes will significantly increase the compliance burden of AML reporting entities, and come at a time when banks in Australia face new statutory obligations on scam prevention and reporting entities face new guidance from AUSTRAC on outsourcing AML/CTF functions.
PSPs operating in the country, or considering doing so, will need to familiarise themselves with the new regulation and ensure that they are in a position to be compliant, should the proposed changes be enacted. Given the significant increase in compliance activity inevitable with the new rules, they should plan ahead in terms of budget and headcount.
Given the importance placed on AML/CTF measures, regulators around the world will likely be monitoring developments in Australia. Anything that seems to be effective in curbing ML/TF activity will spark their interest, and they will no doubt consider replicating the Australian approach in their own jurisdictions, should the new rules be introduced and prove successful.
What’s next?
The bill was introduced to Australia’s House of Representatives on September 11, 2024. It was read for the first time and moved to a second reading on the same day.
A third reading is prepared if the bill is amended by the House of Representatives. This version of the bill is then considered by the second house.
On September 18, the bill was also considered by the Senate Standing Committee for the Scrutiny of Bills, and on September 19, it was referred to the Senate Legal and Constitutional Affairs Legislation Committee.
A report from the Senate Legal and Constitutional Affairs Legislation Committee is due on November 13.
