Anti-money laundering and counter-terrorism financing changes

This change relates mainly to situations where a reporting entity is in the practice of referring or introducing clients or customers to an unrelated reporting entity. In such scenarios, the customer or client may have to submit their identity information to both entities, and go through the identification procedures multiple times in order for each entity to comply with their respective customer identification and verification obligations. This can be inconvenient for customers, particularly when each entity is requesting the same information.

Reliance allows an entity to consider the nature of their relationship with the customer and the money laundering and terrorism financing (ML/TF) risks involved, and then determine the extent to which it is appropriate to rely on identification procedures undertaken by an unrelated reporting entity, or reliable third party.

This change should create a more efficient referral service and streamline the customer experience. In appropriate situations it can also help to reduce the costs of carrying out the customer identification procedures.
Other situations where a customer may have dealings with more than one reporting entity, and reliance may be appropriate include:

• A customer having contact with two or more reporting entities as a result of the one transaction;
• A customer holding accounts with multiple financial institutions; or
• An offshore entity offering customers the opportunity to invest in an Australian-based funds manager.

When entering into such an arrangement, the reporting entity who will be “relying”, is expected to:

• Have the arrangement recorded in writing, and be approved by a senior managing official or your governing board. The written arrangement should include the responsibilities of each party. An assessment of this arrangement must be completed at a maximum of two year intervals;
• Undertake an assessment of the risks associated with such reliance, including evaluating the reporting, compliance and record keeping standards of the other entity under the AML/CTF Act and Rules; and
• Remediate any isolated breaches when they occur, and as soon as practicable after the breach is identified.

This change permits an entity to share Suspicious Matter Reports (SMRs) and related information in a number of circumstances, including with:

• External auditors
• Foreign members of the same business group, who are regulated by laws that give effect to the Financial Action Task Force recommendations.

Other than these limited circumstances any information about the SMR must not be disclosed, including information, which could ‘tip off’ the customer or client that an SMR has been submitted, or is required or likely to be submitted.

If an SMR is submitted about a person who is, in fact, breaking the law, and they (or one of their associates) become aware of this, it could have serious consequences for any law enforcement investigation. Employees must therefore use judgment in communicating with the customer to avoid committing the ‘tipping off’ offence.

Entities are not obligated to stop providing a service to a customer who is the subject of an SMR. They do, however, need to follow the AML/CTF program’s risk-based systems and controls, which may include temporarily not providing a service to a customer until it is evaluated the customer does not pose an unacceptable level of ML/TF risk.

This change relates to instances where customer due diligence procedures – referred to as Applicable Customer Identification Procedures (ACIP) – cannot be performed because:

• Doubts are raised about the legitimacy or adequacy of documents or information obtained when conducting ACIP; and/or,
• There is reason to suspect the customer is not the person that the customer claims to be.

If for either of these reasons or any other reason ACIP cannot be performed, the AML/CTF Act explicitly prohibits reporting entities from providing a designated service.

There are, however, a number of exceptions, which allow a designated service to be provided before ACIP has been performed. For example:

• ACIP has previously been performed when providing other designated services to the customer (unless the AML/CTF risk with providing new or additional services is higher).
• A determination is made that carrying out ACIP in respect of a customer after commencing to provide a designated service is essential to avoid interrupting the ordinary course of business.
• Appropriate risk management procedures and controls are implemented to effectively manage the ML/TF risks associated with providing designated services to a customer that has not completed the ACIP.

If at any time when performing ACIP it is suspected the documents presented by a customer are fraudulent or stolen, an entity should submit an SMR.

This change relates to correspondent banking relationships. The more stringent obligations imposed regarding such relationships include:

• Requiring financial institutions to undertake initial and ongoing due diligence assessments for all correspondent banking relationships; and
• Prohibiting financial institutions from entering into correspondent relationships with financial institutions that allow their accounts to be used by shell banks.

If the financial institution becomes aware of the correspondent bank allowing accounts to be used by shell banking, the relationship must be terminated.