According to The Australian Financial Review, Australian banks were fined a whopping $1.3bn last year – mostly for breaches of anti-money laundering (AML) and counter-terrorism financing (CTF).

As well as indicating the regulator’s enthusiasm for pursuing violations and doing all that is within its means to curb criminal behaviour, the fines show many reporting entities are still struggling to bring legacy systems up to speed.

But AML Compliance officers and their risk colleagues, who are hastily making updates to systems this year, need to review their processes in the context of the latest legislation: Phase 1.5 of the AML/CTF Regime (“The Amendment Act” or “Phase 1.5”).

Here is our take on what The Amendment Act means for those reporting into AUSTRAC:

1. But first, some context

Phase 1.5 of the AML/CTF Regime was first introduced into Parliament in October 2019.

It implements the next phase of reforms to the country’s anti-money laundering and counter-terrorism financing (AML/CTF) laws, bringing Australia’s AML/CTF compliance in line with international regimes.

Its intention is to strengthen Australia’s capabilities to address money laundering and terrorism financing risks: increase the resilience of our financial system against criminal threats, while making it easier for businesses to understand and comply with their obligations.

Phase 1.5 was passed through Parliament in December 2020 and is likely to come into force in the next six months.

Phase 2, which has an unknown timeframe, will bring other businesses into the regime. These include non-financial businesses like lawyers, accountants and real estate agents.

The very latest update is that AUSTRAC has now published the proposed Phase 1.5 legislation on their website on 27 January 2021. The draft Rules to support its implementation are now available for review and consultation.

2. Customer due diligence is key

Phase 1.5 mostly focuses on customer due diligence.

It extends reporting entities’ ability to rely on customer identification and verification procedures undertaken by a third party under certain scenarios like a written agreement and appropriate regular checks.

It also explicitly prohibits reporting entities from providing their services until ID verification is confirmed. Although this part is not new, its inclusion highlights its importance.

When onboarding a new customer, it is important to check the person’s identity by using either reliable and independent documentation, or electronic data (or both).  It is worth mentioning here that this is the case for onboarding individuals as well as ‘non-individuals’.

As part of Know Your Customer (“KYC”) procedures, focusing on the verification of customer ID is very important. illion’s processes underpin the digitisation of ID verification and enable customers to achieve compliance without document collection.

Increasingly we are seeing a move towards the use of Biometric solutions to additionally verify the customer claiming a valid identity is the owner of that identity.  At the end of the process, you have to be fully satisfied that the person is who they claim to be.

Businesses should therefore review their customer due diligence policies to ensure they are compliant and make sure they have the procedures in place to file a suspicious report when customer due diligence can’t be completed.

3. But once you know your customer, keep knowing them!

The days are gone where banks and others could sign up a customer and then fail to monitor their spending and transaction history from that point on.  Monitoring and ongoing due diligence are particularly important, especially for those with ageing legacy IT systems.

With civil penalty provisions under the AML/CTF Act attracting a fine of up to $22.2m, and the significant financial settlements that AUSTRAC has reached with reporting entities in Australia in recent years, businesses should take this opportunity to closely review their AML/CTF programs, especially in the context of customer due diligence.

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