Tranche 2 reforms likely: how will they affect you?

Tranche 2 reforms likely: how will they affect you?

7 June 2023

7 June 2023

Australia trails behind many other jurisdictions when it comes to their AML laws for gatekeeper professions. As one of only three developed countries without comprehensive regulations for tranche 2 entities, Australia remains susceptible to exploitation from criminals. With pressure on the government to make meaningful changes, improved legislation is imminent—but what does this mean for you?

The lack of urgency in introducing Tranche 2 reforms is reflected in Transparency International’s corruption perceptions index. Australia dropped 12 points since 2012, hitting a record low in 2021. The country was identified as “troubling” (along with the likes of El Salvador, Kazakhstan, Lebanon, Mozambique, and Russia) due to concerns around Australia’s lackadaisical approach to regulations, which has caused the property market to be seen as an “easy target for corrupt individuals from abroad”.

Introduction of Tranche 2 legislation

In an effort to improve Australia’s ability prevent terrorism financing and adhere to Financial Action Task Force (FATF) recommendations, the Attorney-General and AUSTRAC released a paper for public consultation. The paper focuses on simplifying compliance legislation and the introduction of Tranche 2. 

The proposed reforms would require gatekeeper professions to report to AUSTRAC, verify client identities, assess the risk of money laundering or terrorist financing, and monitor transactions for suspicious activity. Failure to comply could result in significant civil penalties.

Whilst feedback on the consultation is still ongoing (due by June 16, 2023) and conclusions are yet to be drawn, regulatory reforms are likely. A spokesperson for Attorney-General Mark Dreyfus said, “The government is committed to continually reviewing Australia’s anti-money laundering and counter-terrorism financing (AML/CTF) regime to ensure that it remains effective and complies with international standards as set by the Financial Action Task Force (FATF).”

The importance of Tranche 2 legislation

The introduction of Tranche 2 is expected to close loopholes that criminals are exploiting to launder money. As it stands, The United Nations Office on Drugs and Crime estimates that between two and five per cent of global gross domestic product (GDP) is laundered globally. This equates to between USD800 billion-USD2 trillion per year.

The Australian property market, in particular, has been a hot target for criminals as it has been identified as an easy way to wash dirty money.

AUSTRAC has previously stated that “Compared to other methods, money laundering through real estate – both residential and commercial – can be relatively uncomplicated, requiring little planning or expertise. Large sums of illicit funds can be concealed and integrated into the legitimate economy through real estate.”

AUSTRAC estimates there were suspicious transactions worth $1 billion emerging from China in the Australian property market as far back as 2016. 

And, what is evident from recent AFP raids is that money laundering via property is still being committed in Australia today.  Earlier this year the Australian Federal Police seized properties and luxury assets worth at least $150 million from a Chinese-Australian money laundering organisation. An estimated $10 billion was moved offshore, while acquiring a substantial real estate portfolio, including commercial and residential properties around Sydney. The sting operation showed the vulnerability of real estate (and other) sectors to abuse and highlighted the current staggering gaps in legislation. And according, to Nathan Lynch Author of the Lucky Laundry “What we know is that for every $1 million dollars that’s washed in Australia through a syndicate that’s using a range of measures more than half is moved through property”.

The Australian Criminal Intelligence Commission is among the many stakeholders who have declared that  ‘Professional facilitators with their skills, connections, expertise, access and knowledge of systems, markets, legislation and structures are particularly vulnerable to exploitation by transnational serious organised crime groups (TSOC).

Some of these professional facilitators are coerced into providing services for TSOC groups, whilst others are actively complicit. They are critical enablers for TSOC, to drive profit and apply strategies to generate an appearance of legitimacy—in the process potentially undermining regulatory frameworks and efforts.’

Gatekeepers essential in the fight against fincrime

Gatekeeper professions are in a unique position to identify and report suspicious transactions and help identify and prevent some bad actors from infiltrating the financial system.

The proposed reforms could also help reduce the costs associated with the rising property market in Australia. “It can reasonably be argued that it (money laundering) is driving up property prices in Australia and locking many Australians out of owning their own home.” a ccording to Transparency International Australia’s chief executive, Serena Lillywhite. 

But fincrime concerns still exist

Some gatekeeper professions have expressed genuine concerns about the burden of compliance and the costs associated with implementing the changes.

A recent article published by Smart property Investment stated that the Real Estate Institute of Australia (REIA) believe ‘the proposed changes to the country’s anti-money laundering and counter-terrorism financing (AML/CTF) laws will do more harm than good to the real estate market’.

In New Zealand, REIA highlighted that ‘the cost of implementing increased regulations on gatekeeper transactions, which are identified as having a higher risk of being involved in money laundering or terrorist financing, has been estimated at between $30,000 to $100,000 per real estate agency.’

Regtech as a cost-effective solution

Tranche 2 reforms have sparked a mixed reaction among stakeholders and lobbyists. The proposed legislation aims to bring Australia’s AML/CTF regime in line with international standards and prevent bad actors from using gatekeeper professions to launder money. 

While some gatekeeper professions have expressed concerns about the compliance burden and costs, one potential solution to the compliance burden is the use of regulatory technology (regtech). Companies like Identitii that specialise in automating compliance reporting aim to reduce the cost of compliance. By automating compliance processes, regtechs can streamline operations, reduce costs, and improve efficiency.

Learn more about how Identitii can help you improve your AUSTRAC reporting here.