A Practical Guide for Australian Fund Managers: Adapting to the Latest AML/CTF Amendments

On September 11, 2024 the Australian government introduced the Anti-Money Laundering and Counter-Terrorism Financing Amendment Bill 2024, and as of the 13th of November 2024, the Legal and Constitutional Affairs Legislation Committee has provided their recommendations to the Senate after their inquiry and report deadline.

The proposed Bill changes will usher in significant updates to safeguard Australia’s financial system. Set to be fully implemented by 2026, these amendments aim to close regulatory gaps, especially within sectors newly considered vulnerable to financial crime, such as real estate, legal and accounting services, and digital assets. For fund managers, these changes present an urgent call to adapt internal compliance and investor relations practices.

The structure of the Bill’s amendments are contained in 12 Schedules. This article presents a high-level overview of the proposed changes that are relevant to fund managers (in real estate and private credit), the rationale behind their implementation, and a step-by-step guide for fund managers on proactive compliance preparation.

With a timeline for the rollout extending to March 2026, fund managers have a critical window to adapt their systems, policies, and staff training to align with the forthcoming obligations.

1. Expanding Regulated Entities: Impact on Fund Managers

The amendments bring more sectors, known as “tranche two” entities, under the AML/CTF regime. Although fund managers were already subject to AML/CTF obligations, this expansion indicates the government’s determination to leave no high-risk sectors unchecked. Legal professionals, real estate agents, accountants, and dealers in precious stones and metals now face similar AML/CTF requirements as the financial sector.

Historically, sectors such as legal services, accounting, and real estate have been exploited for money laundering due to minimal regulatory oversight. A 2015 report by the Financial Action Task Force (FATF) identified these sectors as high-risk for money laundering and terrorism financing, urging Australia to extend its AML/CTF regulations to cover them. The government's decision to include these 'tranche two' entities aims to close these regulatory gaps and align with international standards.

Recommendations for Fund Managers:

• Initiate a Vendor Compliance Review: Start by conducting a comprehensive review of your third-party relationships. For example, if you work with a law firm for corporate transactions, request a copy of their AML/CTF policy to understand their approach to compliance.
• Draft Compliance Clauses in Contracts: Include AML/CTF clauses in contracts with vendors to enforce compliance standards. For instance, require legal and accounting firms to report any suspicious activities they observe in your account dealings.
• Set Up an Internal Audit Schedule: Plan regular audits for high-risk vendors like real estate agents and accountants. These audits can focus on transaction monitoring practices, customer identity verification, and adherence to AML/CTF reporting. You could also establish annual or semi-annual audits depending on the volume of business and risk exposure.

2. Strengthening Customer Due Diligence (CDD) Requirements

One of the significant shifts in the new AML/CTF Amendment Bill 2024 is the overhaul of Customer Due Diligence (CDD) practices for Australian fund managers. Currently, Australia’s CDD rules allow fund managers and other entities to conduct due diligence on clients even after transactions or services have commenced. However, the latest reforms aim to align Australia’s practices with those of New Zealand and other global standards by mandating CDD completion before services or transactions begin.

For fund managers, this change emphasises the need to understand a client's risk profile at the very start of the relationship. Comprehensive CDD prior to onboarding enables fund managers to assess potential risks, including the client’s geographic location, source of funds, and investment goals. This pre-service assessment is crucial to detecting any potential red flags early, ensuring that high-risk clients are either managed appropriately or avoided altogether.

Recommendations for Fund Managers

• Establish a Pre-Onboarding CDD Protocol: Implement clear protocols for conducting CDD checks before any transactions or services begin. This could involve initial identity verification, beneficial ownership identification, and detailed background checks based on the client's jurisdiction and business activities.
• Invest in Enhanced CDD Tools and Technology: Leveraging advanced CDD tools can streamline the pre-onboarding process, especially for high-volume or international clients. Automated KYC software can quickly screen clients against global watchlists, validate their identity, and flag potential risks for review.
• Create a Risk-Based Client Segmentation Strategy: Develop a system to categorise clients by risk level, ensuring that high-risk clients undergo Enhanced Due Diligence (EDD) while low-risk clients go through standard checks. For instance, clients from high-risk jurisdictions, such as politically exposed persons, should be vetted more rigorously with sources of funds and purpose of investment carefully reviewed.

3. Simplifying AML/CTF Obligations with a Risk-Based Approach

The amendments emphasise a risk-based approach, allowing entities to tailor their AML/CTF measures according to the specific risks they face. This shift should help fund managers allocate resources more effectively, targeting high-risk areas with enhanced compliance efforts.

Recommendations for Fund Managers:

• Establish a Tiered Risk Assessment System: Classify clients and transactions into risk tiers (e.g., low, medium, high) based on factors like transaction volume, client location, or asset type. For example, an investor based in a higher-risk jurisdiction should undergo enhanced due diligence (EDD) and frequent transaction reviews.
• Develop Targeted Due Diligence Protocols: Tailor due diligence steps according to client risk levels. For example, high-risk clients may require more detailed background checks, while lower-risk clients can undergo simplified checks.
• Integrate Machine Learning for Real-Time Risk Detection: For larger fund managers, AI-powered software can help flag suspicious patterns across client portfolios, automating some aspects of risk assessment.

4. New Reporting and Compliance Mechanisms

The Bill introduces a unified framework for reporting different forms of value transfers, including both international transactions and digital asset movements. Additionally, AUSTRAC gains more authority to enforce compliance, which could involve more frequent audits and investigations into fund managers’ practices.

The changes stem from FATF's 2015 evaluation which pointed out deficiencies in Australia's reporting mechanisms, which could be exploited by criminals. Strengthening these mechanisms aims to improve the detection and prevention of illicit financial flows.

Recommendations for Fund Managers:

• Automate Cross-Border Transaction Reporting: Set up automated reporting systems that capture cross-border transactions and flag suspicious transfers. For example, use software that generates a report for any transfer over a certain threshold or involving a high-risk jurisdiction.
• Train Staff on New Reporting Requirements: Compliance and investor relations teams should be trained on how to identify and report transactions that trigger new AML/CTF criteria. For instance, staff should know how to handle red flags and the processes for filing a Suspicious Matter Report (SMR).
• Establish Clear Value Transfer Documentation: Create templates for documenting value transfers, especially if transactions involve digital assets.

5. Repeal of the Financial Transaction Reports Act 1988

The amendments will repeal the outdated Financial Transaction Reports Act 1988, merging its relevant provisions into the updated AML/CTF framework. This would deregulate cash dealers captured by the FTR Act, including solicitors, motor vehicle dealers, sellers of traveller’s cheques, and offshore online remitters. This consolidation is intended to streamline compliance, allowing entities to focus on a single, comprehensive set of AML/CTF obligations.

Recommendations for Fund Managers:

• Update Legacy Compliance Policies: Review all internal policies and remove references to the Financial Transaction Reports Act 1998.
• Organise Training on the New AML/CTF Framework: Provide refresher courses for compliance and front-line staff, especially those involved in transaction monitoring and client verification, to familiarise them with the updated requirements. Consider setting up a series of workshops or webinars to discuss changes and answer questions.
• Re-evaluate Historical Client Records: Conduct an audit of existing client records to ensure that all documents comply with the new AML/CTF standards. For example, update the KYC documentation for clients with accounts predating the amendments to meet the latest verification requirements.

Conclusion

The 2024 AML/CTF amendments represent a significant overhaul of Australia’s approach to financial crime prevention, particularly for sectors like digital assets, real estate, and professional services that now fall under greater scrutiny. For fund managers, the next two years offer a crucial window to align their operations, vendor relationships, and investor communication with these new requirements. From conducting risk assessments to preparing for potential AUSTRAC inspections, a proactive approach will not only ensure compliance but also foster trust and transparency with clients and stakeholders.

By acting now, fund managers can turn these regulatory changes into an opportunity to strengthen their resilience against financial crime, securing a reputation for compliance in an increasingly regulated financial landscape.

Fund managers, meeting the new AML/CTF requirements doesn’t have to be complex. At Caruso, we’re here to simplify compliance for you. Our platform streamlines Customer Due Diligence (CDD) and strengthens your risk-based approach, helping you easily align with the latest standards. From automating KYC processes to identifying high-risk clients, Caruso makes managing onboarding and risk assessment effortless. Ready to make compliance more efficient?

Reach out at [email protected] for a demo - we’re here to support you.