Explanatory Statement – Amendment of the Anti-Money Laundering and Counter-Terrorism Financing Rules

1. Purpose and operation of Anti-Money Laundering and Counter-Terrorism Financing Rules (AML/CTF Rules) amending Chapter 1 and adding Chapters 36, 37, 38 and 39 of the AML/CTF Rules

Section 229 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) provides that the AUSTRAC Chief Executive Officer may, by writing, make AML/CTF Rules prescribing matters required or permitted by any other provision of the AML/CTF Act.

Amendment of Chapter 1 of the AML/CTF Rules

This amendment to Chapter 1 amends the definitions of ‘certified copy’ and ‘certified extract’ by expanding the list of persons who can certify that a document is a true copy of, or an extract from, an original document, to include all persons prescribed by Regulation 4 of the Statutory Declarations Regulations 1993.

Chapter 36 ‘Exemption of certain designated services within a corporate structure’

Subsection 247(3) of the AML/CTF Act allows for AML/CTF Rules to provide an exemption from the AML/CTF Act for a designated service that is provided in specified circumstances.

These AML/CTF Rules specify circumstances where the AML/CTF Act will not apply to any designated services that are set out in table 1 of subsection 6(2) of the Act.  The circumstances prescribed by the Rules cover services provided within corporate groups and other organisations with multiple entities, such as religious organisations.

The purpose of these AML/CTF Rules is to remove unnecessary financial and administrative burden in cases where a group can in practical terms be said to be providing a financial service to itself.

These AML/CTF Rules are neutral as to the type of entities involved, as both corporate groups and religious organisations are known to use companies, trusts and other types of entities within complex groups.

The relationship required between entities in a group for these AML/CTF Rules to apply is based on Corporations Act 2001 (Corporations Act) requirements as these are familiar to both the regulated population and their advisers.

Given the money laundering and/or terrorism financing (ML/TF) risks in providing financial services the benefit of these AML/CTF Rules is only available in circumstances where ownership or control make the provision of a designated service akin to an internal activity. It is only in these cases that the level of shared responsibility is such that the ML/TF risk of the transaction is low enough to allow the benefit of these AML/CTF Rules.

These AML/CTF Rules also extend to guarantee activities where the borrower benefiting from a guarantee is similarly related.  This is because the guarantee is being given in circumstances akin to an entity providing security over its own assets.

The customer has been specified to allow the benefit of these AML/CTF Rules to flow to foreign subsidiaries of Australian-based groups in limited circumstances. These AML/CTF Rules apply where the customer is not resident in Australia only if the entity providing the service has identified the ML/TF risk of providing services to the customer in that place, and has concluded on reasonable grounds that the relevant risk is the same as, or lower than, the ML/TF risk of providing the service in Australia.

In circumstances where the service provider is unable to make such a conclusion on a reasonable basis, the exemption would be unavailable to the entity in that jurisdiction and the Act would apply to the service.

Chapter 37 ‘Exemption from threshold transaction reporting for certain designated services’

Subsection 44(4) of the AML/CTF Act allows exemption from a specified provision of Division 3 of Part 3 (threshold transactions) in relation to a designated service that is provided in circumstances specified in the AML/CTF Rules.  A threshold transaction is one involving a transfer of physical currency or e-currency, where the amount is $10,000 or more.

These AML/CTF Rules exempt reporting entities from providing threshold transaction reports required by section 43 of the AML/CTF Act, if those threshold transactions take place wholly between:

 (a) one authorised deposit-taking institution (ADI) and another ADI, or

(b) the Reserve Bank of Australia and an Exchange Settlement Account holders, or

(c) one Exchange Settlement Account holder and another Exchange Settlement Account holder, or

(d) a cash logistic carrier who provides item 51 (collecting physical currency) or item 53 (delivering physical currency) designated services under table 1 of subsection 6(2) of the AML/CTF Act, and an ADI where these designated services relate wholly to a transaction between one ADI and another ADI.

The exemptions regarding ADIs and Exchange Settlement Account holders are in effect continuations of exemptions previously in place under the Financial Transaction Reports Act 1988. As these are highly regulated entities and the transactions are on their own behalf the ML/TF risk is considered to be low.

Chapter 38 ‘Exemption from applicable customer identification procedures for the sale of shares for charitable purposes’

Subsection 39(4) of the AML/CTF Act allows exemption from a specified provision of Part 2 (identification procedures) in relation to a designated service that is provided in circumstances specified in the AML/CTF Rules.

These AML/CTF Rules exempt from the customer identification provisions of the AML/CTF Act, reporting entities who provide an item 33 designated service involving the disposal of low-value parcels of shares, for the purpose of passing the proceeds to charitable organisations who are deductible gift recipients (DGRs) under the Income Tax Assessment Act 1997.

Disposing of a security, in the capacity of an agent, is a designated service under item 33 of table 1 in subsection 6(2) of the AML/CTF Act.

The exemption would apply when a person who wishes to donate the proceeds of the sale of their shares to charity provides details to a broker, who sells the shares and provides the proceeds of the share sale to a charitable fund or charitable institution who subsequently distributes the proceeds to DGRs.

Stockbrokers currently undertake the sale of the shares in such circumstances without charging a fee to the customer. It is considered an unnecessary financial and administrative burden on such reporting entities to carry out the applicable customer identification procedure when they are providing the designated service on a without-fee basis.

Chapter 39 ‘Exemption from applicable customer identification procedures - premium funding loans for a general insurance policy’

Subsection 39(4) of the AML/CTF Act allows exemption from a specified provision of Part 2 (identification procedures) in relation to a designated service that is provided in circumstances specified in the AML/CTF Rules.

These AML/CTF Rules exempt reporting entities that provide insurance premium funding for general insurance, from performing the applicable customer identification procedure under section 32 of the AML/CTF Act. Insurance premium funding involves a loan to a customer to pay for the premium of the insurance policy, where the lender and the insurer are not the same entity.

The provision of general insurance is not covered by the AML/CTF Act as a designated service, and the money laundering or terrorism financing risk (ML/TF risk) of a loan to pay such an insurance premium was considered lower than the risk of the general insurance service. The burden on industry was therefore considered excessive when balanced against the ML/TF risk.

The relevant reporting entities will still have suspicious matter reporting obligations under the AML/CTF Act.  In order to assess the level of suspicious matter activity, the reporting of any activity and the wider impact of these AML/CTF Rules, the exemption will only apply until 30 June 2011.

2. Notes on sections

Section 1

This section sets out the name of the instrument, i.e. the Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2009 (No.4).

Section 2

This section specifies that the Instrument commences on the day after it is registered.

Section 3

This section contains the Schedule which amends the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No.1) as follows:

Schedule 1

This schedule amends Chapter 1 and adds Chapters 36, 37, 38 and 39.

3. Notes on paragraphs

Paragraph 1.2.1

This paragraph inserts replacement definitions of ‘certified copy’ and ‘certified extract’.

Chapter 36 ‘Exemption of certain designated services within a corporate structure’

Paragraph 36.1

This paragraph specifies that these AML/CTF Rules have been made under section 229 of the AML/CTF Act.

Paragraph 36.2

This paragraph specifies that, subject to paragraph 36.5, the AML/CTF Act does not apply to a reporting entity providing a designated service that is contained in table 1 of subsection 6(2) of the AML/CTF Act; and is provided to a customer within the same corporate or organisational structure.

Paragraph 36.3

This paragraph specifies that, subject to paragraph 36.5, the AML/CTF Act does not apply to a reporting entity providing a designated service in either item 48 or item 49 of table 1 of subsection 6(2) of the AML/CTF Act, that is provided by the guarantor to a lender, and where the borrower is within the same corporate or organisational structure as the lender.

Paragraph 36.4

This paragraph specifies the circumstances in which a customer and a reporting entity are related.

Paragraph 36.5

This paragraph specifies that the exemption only applies if the customer is resident in Australia, or, if the customer is not resident in Australia, the reporting entity concludes that the ML/TF risk is the same or lower than in Australia in regard to the designated service.

Paragraph 36.6

This paragraph defines ‘control’.

Chapter 37 ‘Exemption from threshold transaction reporting for certain designated services’

Paragraph 37.1

This paragraph specifies that these AML/CTF Rules have been made under section 229 of the AML/CTF Act.

Paragraph 37.2

This paragraph specifies that the threshold transaction reporting requirements of the AML/CTF Act do not apply to a designated service where the reporting entity is:

• an ADI providing the designated service to another ADI
• the Reserve Bank of Australia providing the designated service to an Exchange Settlement Account holder
• an Exchange Settlement Account holder providing the designated service to another Exchange Settlement Account holder
• a cash logistic carrier providing item 51 (collecting physical currency) or item 53 (delivering physical currency) designated service under table 1 of subsection 6(2) of the AML/CTF Act, where the designated services relates wholly to a transaction between one ADI and another ADI.

Paragraph 37.3

This paragraph defines ‘Exchange Settlement Account’.

Chapter 38 ‘Exemption from applicable customer identification procedures for the sale of shares for charitable purposes’

Paragraph 38.1

This paragraph specifies that these AML/CTF Rules have been made under section 229 of the AML/CTF Act.

Paragraph 38.2

This paragraph specifies the circumstances in which a reporting entity, as an agent of a person disposing of a security, does not have to carry out the applicable customer identification procedure. The disposal must occur on a prescribed financial market; the value of the security cannot exceed $500; and the proceeds of the disposal must be given directly to a charitable fund or charitable institution.

In addition, the charitable fund or charitable institution must undertake to distribute the proceeds of the disposal by cheque and/or electronic funds transfer to a deductible gift recipient before the end of the financial year in which it receives the proceeds. It must also list on its public website within 14 business days, and for a period of 12 months, the details of the distribution.

Paragraph 38.3

This paragraph defines ‘deductible gift recipient’; ‘prescribed financial market’; ‘charitable fund’ and ‘charitable institution’.

Chapter 39 ‘Exemption from applicable customer identification procedures -premium funding loans for a general insurance policy’

Paragraph 39.1

This paragraph specifies that these AML/CTF Rules have been made under section 229 of the AML/CTF Act.

Paragraph 39.2

This paragraph specifies that the applicable customer identification procedure does not apply to a premium funding loan made under item 6 (making a loan) of table 1 of subsection 6(2) of the AML/CTF Act or when a transaction is conducted in relation to a premium funding loan, under item 7 (transactions in relation to a loan) of table 1 of subsection 6(2) of the AML/CTF Act.

Paragraph 39.3

This paragraph specifies the date on which these AML/CTF Rules cease. The Rules will then be reviewed in order to determine whether the exemption should be continued.

Paragraph 39.4

This paragraph defines ‘premium funding agreement’.

4. Legislative instruments

These AML/CTF Rules are legislative instruments as defined in section 5 of the Legislative Instruments Act 2003.

5. Likely impact

These AML/CTF Rules will not have a negative impact upon reporting entities as they reduce regulatory burden.

6. Assessment of benefits

Chapter 1

These AML/CTF Rules will be beneficial to reporting entities as they provide an expanded list of persons who can certify that a document is a true copy of, or extract from an original document, and therefore provide greater flexibility for reporting entities in fulfilling their obligations under the AML/CTF Act.

Chapter 36

These AML/CTF Rules will reduce compliance costs associated with the AML/CTF Act, as they exempt reporting entities in certain circumstances from having to comply with the AML/CTF Act.

Chapter 37

These AML/CTF Rules will reduce compliance costs associated with threshold transaction reports, as they exempt reporting entities in certain circumstances from having to submit those reports.

Chapters 38 and 39

These AML/CTF Rules will reduce compliance costs associated with the applicable customer identification procedures of the AML/CTF Act, as they exempt reporting entities in certain circumstances from having to conduct those procedures.

7. Consultation

AUSTRAC has consulted with the Office of the Privacy Commissioner, the Australian Customs Service, the Australian Federal Police, the Australian Taxation Office and the Australian Crime Commission, in relation to these AML/CTF Rules.

AUSTRAC also published a draft of each of these AML/CTF Rules on its website for public comment.

8. Ongoing consultation

AUSTRAC will conduct ongoing consultation with stakeholders on the operation of these AML/CTF Rules.