House of Representatives

Explanatory Memorandum

(Circulated by authority of the Minister for Home Affairs, the Honourable Peter Dutton MP)

Regulation Impact Statement

EXECUTIVE SUMMARY

This regulatory impact statement (RIS) examines proposed reforms to the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (the AML/CTF Act) and the money laundering offences in the Criminal Code 1995.

Comprehensive domestic and international reviews of Australia's anti-money laundering and counter-terrorism financing (AML/CTF) regime have highlighted a range of difficulties and opportunities for better regulation. The Government is implementing the recommendations of these reviews in phases and the first phase of amendments was implemented in 2017. The next phase is being implemented through the Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Bill 2019. This bill contains a range of reforms including:

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expanding the circumstances in which reporting entities can rely on customer due diligence (CDD) conducted by a third party

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clarifying the prohibition on 'tipping off' to allow designated business groups and corporate groups to better manage their ML/TF risks

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simplifying the provisions governing the secrecy and access of AUSTRAC information

•

simplifying and consolidating cross border movement reporting requirements

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strengthening the money laundering offences in the Criminal Code 1995, and

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measures to improve Australia's compliance with international standards in relation to correspondent banking ^[2] and CDD. ^[3]

The proposed reforms in this bill address feedback from industry that the current regime is too complex and therefore frustrates compliance with AML/CTF obligations. In addressing this feedback, the proposed reforms also focus on streamlining obligations, lowering the regulatory burden where possible and improving compliance with international standards.

Regulatory impact

The AML/CTF Act requires reporting entities to identify and verify their customers through CDD procedures, which represents a major component of AML/CTF compliance costs. The preferred option for reform outlined in this RIS (Option 3) will provide reporting entities with further options to rely on CDD procedures undertaken by a third party. As projected, these options could reduce the time involved in identifying each customer by 66 percent and the cost of verifying each customer by 80 percent. This is expected to deliver a very significant reduction in regulatory burden for reporting entities under the AML/CTF Act, leading to significantly reduced compliance costs and an estimated saving of $3,106,996,010 over ten years.

The other proposed measures in the bill have either a neutral or low regulatory impact.

1. THE PROBLEM

Globally, money laundering is a key enabler of transnational, serious and organised crime. Every year, criminals generate huge amounts of funds from illicit activities, including among other things, drug trafficking, tax evasion, theft, fraud and corruption. In order to identify and combat these threats, in 2006 Australia established an anti-money laundering and counter-terrorism financing (AML/CTF) regulatory regime in consultation with industry. This regime is based on the Financial Action Task Force's (FATF) ^[4] international AML/CTF standards and establishes a strong regulatory regime for combating money laundering and terrorism financing (ML/TF), as well as other serious crimes. This provides for the collection of valuable information from the private sector about the movement of money and other assets to the Australian Transaction Reports and Analysis Centre (AUSTRAC). AML/CTF regulation imposes a necessary regulatory cost to businesses in order to harden Australia's financial system against threats to our national security. However, it is important that such regulation strike the right balance of achieving AML/CTF objectives while minimising the impact on business.

The pursuit of illicit profits comes at a significant cost to the Australian economy. In 2014, the Australian Criminal Intelligence Commission estimated that serious and organised crime costs Australia $36 billion per year. Additionally, funds for terrorism can come from a range of sources, legitimate and illegitimate, and can have similar characteristics to that observed in money laundering. Relatively small amounts of money placed in the hands of terrorists and terrorist organisations can have catastrophic consequences, funding attacks on Australian soil or supporting terrorist activities overseas.

In response to these significant threats, the primary objectives in updating Australia's AML/CTF system is to balance imperatives such as better prevention, disruption and detection of ML/TF in Australia, with complementary regulatory efficiencies while enhancing compliance with the FATF's international standards.

The statutory review

Section 251 of the AML/CTF Act required a review of the operation of the regulatory regime to commence before the end of the period of seven years after the commencement of that provision. The review commenced in December 2013 and involved an extensive consultation process with industry and government agencies. The review was completed in 2016.

As well as taking into account feedback from industry, it also considered the findings of 2015 FATF 'mutual evaluation' of Australia's AML/CTF regime ^[5] . The mutual evaluation identified a number of deficiencies and made a series of recommendations to strengthen compliance with the FATF standards and the effectiveness of Australia's AML/CTF regime. ^[6]

In April 2016 the then-Minister for Justice tabled the report of the statutory review in Parliament with 84 recommendations to strengthen, modernise, streamline and simplify Australia's AML/CTF regime, and enhance Australia's compliance with the FATF standards. ^[7] It also contained guiding principles for reform which included the need to minimise the regulatory burden on regulated businesses, while maintaining a regime that is an appropriate, efficient and effective means of achieving government objectives.

The Government committed to implementing the recommendations of the statutory review in phases. The first legislative reforms were included in the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2017. The Anti-Money Laundering and Counter-Terrorism Financing and Other Legislation Amendment Bill 2019 represents the next phase of reform and progresses the following prioritised initiatives:

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expanding the circumstances regulated businesses may rely upon customer due diligence conducted by a third party (customer due diligence reliance)

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streamlining and simplifying the provisions governing the secrecy and access of AUSTRAC information

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clarifying the prohibition on 'tipping off' to allow ML/TF risk to be better managed at the designated business group and corporate group-level ^[8]

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consolidating and enhancing cross border currency reporting requirements

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enhancing correspondent banking requirements in line with international best practice

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explicitly clarifying the prohibition on providing designated services without customer identification (CDD procedure requirements), ^[9] and

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strengthening the money laundering offences in the Criminal Code 1995.

The CDD reliance and tipping off reforms will provide regulatory efficiencies for industry.

Other measures are expected to have neutral or a low regulatory impact. The correspondent banking reforms is assessed as having a low impact as the amendments largely reflect existing industry practice in line with global best practice. These amendments are necessary to enhance Australia's compliance with FATF standards and improve our global reputation. Reforms to the CDD procedure requirements make clear an already existing requirement. Any costs to bring industry practice into line are therefore not a direct result of this legislative change.

Customer Due Diligence reliance

Broadly, the primary components of the AML/CTF regime require regulated businesses, known as reporting entities, to:

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establish, implement and maintain an AML/CTF compliance program

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conduct CDD to identify and verify customers

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keep records, and

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lodge specified transaction and suspicious matter reports with AUSTRAC.

Reporting entities must obtain a range of information from customers and use independent and reliable information to ensure they meet the obligation to 'Know-Your-Customer'. They are also required to keep up to date information on their customers so they know if there has been any change in circumstances or business activities. These obligations enable reporting entities to better understand their customers and their financial dealings so that they can determine the ML/TF risk posed by each customer and efficiently manage this risk.

Given the intensive and ongoing nature of these obligations, CDD represents a major component of AML/CTF compliance costs.

Breaches of the obligation to undertake CDD procedures prior to providing a 'designated service' under the Act attract a civil penalty (section 32). Reporting entities therefore are concerned to ensure the CDD procedures are carried out in accordance with the Act.

Reforms are proposed to provide greater options for reporting entities to rely on CDD procedures (including equivalent procedures required under a foreign law) undertaken by a third party based in Australia or offshore. The costs incurred by a business to rely on a CDD procedure that has already been carried out on a customer are expected to be significantly less than undertaking the CDD.

These options include reliance on a CDD procedure performed by:

1.

an agent

2.

another reporting entities (eg. a foreign equivalent)

3.

parties to a 'CDD arrangement'.

Liability for breaches of CDD will remain with the relying party in 1 and 2, but generally shift for 3. These options are expected to provide reporting entities with opportunities to reduce a significant amount of administrative cost by effectively reducing the pool of new customers that require CDD procedures to be undertaken. This will provide efficiencies and greater flexibility for reporting entities to rely on CDD procedures undertaken by other reporting entities within Australia and a range of foreign entities, providing certain safeguards are met.

There are also linkages with the Review into Open Banking in Australia ^[10] (Open Banking review), which will give customers a right to direct that the information they already share with their bank be safely shared with others they trust. The Open Banking review recommends that the outcomes of a CDD procedure required by the AML/CTF Act should be shared as part of Open Banking. The CDD reliance reforms will facilitate this recommendation of the Open Banking review by requiring reporting entities to obtain information collected in carrying out to the CDD from the relied on entity prior to the provision of the service.

CDD arrangements

The proposed amendments will allow reporting entities to enter into CDD arrangements with other regulated businesses in Australia and overseas, which will provide a greater range of circumstances where reliance can be applied between parties, and address some industry concerns around liability for CDD procedure breaches.

For illustration, under current arrangements, should a person have bank accounts with multiple lenders it is expected that each of those lenders will have undertaken CDD procedures on that person and absorbed the administrative cost associated with performing those procedures. Broadly speaking, under the proposed reform, should a relevant lender be party to a CDD arrangement, then CDD procedures need not be performed on an individual for the opening of subsequent accounts.

To ensure that the proposed CDD arrangements are adopted by industry, and thus realising the full deregulation potential, the reform is designed to give reporting entities a 'safe harbour' from liability for CDD breaches under section 32 of the AML/CTF Act. This addresses industry concerns about exposure to liability that stems from relying on the CDD procedure undertaken by third parties. More specifically, where the reporting entity has entered into the CDD arrangement, conducted due diligence on the arrangement and can show that it was appropriate to rely on the third party, the relying party would not be held liable for isolated breaches of compliance with the CDD requirements by the third party. However, where there are systemic breaches that indicate due diligence on the CDD arrangement was insufficient, the reporting entity relying on the third party's CDD procedure would be liable for breaches.

Reliance under the current regime - Members of a Designated Business Group (DBG) and licensed financial advisers

Currently, there are only limited circumstances in which reporting entities can rely on a CDD procedure performed by a third party. This includes where the CDD procedure has been undertaken by another entity within their DBG. Despite the fact that a DBG may include offshore entities, the current provisions only allow reliance within a DBG where the other reporting entity is a domestic reporting entity. ^[11] This is set out in section 38 of the AML/CTF Act and chapter 7 of the AML/CTF Rules.

The other circumstance where reliance is permissible is where a licensed financial adviser who is also a reporting entity arranges for a customer to receive a service listed in the Act from a second reporting entity. For example, where a financial adviser refers a customer to a bank, the bank can rely on the CDD carried out by the adviser.

In both of the above cases, liability for a breach of the CDD procedure rests with the relying party.

Under current provisions, a reporting entity is unable to rely on CDD procedures conducted by a member of the DBG outside Australia unless the AUSTRAC CEO provides the reporting entity with an exemption. A limited exemption was provided in 2009 that permits reporting entities to rely on CDD conducted in a foreign country where:

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the CDD procedure is carried out by an Australian reporting entity or a subsidiary of an Australian reporting entity, and

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the reporting entity determines on a risk-basis that the CDD procedure is comparable to that required under Australia's AML/CTF legislation.

Feedback from industry has indicated that the availability of additional options would enable them to fulfil their CDD obligations in a more cost efficient way. Some have suggested reliance would be more widely used if liability did not remain with the relying party in all instances, and that the conditions that apply under section 38 of the AML/CTF Act are too restrictive. Some businesses are less concerned about liability and more concerned with having the ability to rely more broadly within their corporate structures.

Reform is therefore proposed to introduce CDD arrangements that either shift liability for isolated breaches would shift when an agreement is in place, or will retain liability for the relying entity when no agreement is in place.

Secrecy and access of AUSTRAC information

The provisions in the AML/CTF Act governing the secrecy and access of AUSTRAC information ensure that the sensitive information under AUSTRAC's control is secure and protected from unauthorised access, use and disclosure. However, a key finding in the report of the statutory review is that these provisions are unduly complex and impede the sharing of AUSTRAC information to support a modern, collaborative approaches to combating and disrupting ML/TF and other serious crimes. The review report recommends the development of a simplified model for sharing information collected under the AML/CTF Act that is:

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responsive to the information needs of agencies tasked with combating ML/TF and other serious crimes commensurate with the changing threat environment (ensuring that information can be exchanged in a timely manner)

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supports collaborative approaches to combating ML/TF and other serious crime at the national and international level, and

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establishes appropriate safeguards and controls that are readily understood and consistently applied.

The report also makes related recommendations to improve information sharing and collaboration with the private sector and provide the AUSTRAC CEO with new functions to facilitate a more effective information sharing framework.

The proposed amendments to Part 11 of the AML/CTF Act will simplify and streamline the provisions, and ensure that the legislation facilitates timely, efficient and effective sharing of AUSTRAC information with relevant partner agencies and the private sector ^[12] . For the purposes of this RIS, relevant key measures include:

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allowing the AUSTRAC CEO to disclose AUSTRAC information in a manner consistent with the CEO's function and powers ^[13]

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streamlining the process for disclosing AUSTRAC information to international bodies and the private sector (including with the Fintel Alliance ^[14] ), and

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revising the current strict limitations on disclosure of suspicious-matter report (SMR)-related information to ensure that the 'tipping off' provisions do not unnecessarily impede action being taken by government agencies and reporting entities to combat ML/TF and other serious crimes.

These reforms will enable industry to better manage ML/TF in delivering their services by allowing greater sharing of information about known or suspected risks which is crucial to combat and disrupt ML/TF.

The reforms also support the Government's agenda of having our national security, law enforcement and regulatory agencies joined up and provided with timely access to vital financial intelligence.

Consolidating cross border currency reporting

Currently, cross-border movements of physical currency of $10,000 or more (or foreign currency equivalent) must be reported to AUSTRAC, a police or a customs officer (a 'CBM-PC' report). This requirement also captures the carrying, mailing or shipping of physical currency. However, a traveler need only disclose that they are carrying bearer negotiable instruments (BNIs), such as travelers cheques, when requested by a police or customs officer (a 'CBM-BNI' report).

The report of the statutory review recommends the consolidation of these dual reporting regimes and the expansion of the range of reportable monetary instruments to simplify and strengthen the cross-border reporting regime. The proposed amendments will amend Part 4 of the AML/CTF Act to consolidate physical currency and BNI reporting requirements and establish an obligation to report the movement of a "monetary instrument" equal to or more than $10,000.

This measure will be further supported by a provision in the Bill for additional items to be prescribed by regulation to ensure the legislation is "future proofed", for example, when stored value card readers become available then such items can be made declarable at the border.

In addition, the review recommended an increase in the penalties available for failing to comply with the reporting requirements to align with comparable regimes internationally. The proposed amendments increase the current penalty amounts to deter the undeclared movement of monetary instruments across the border, particularly the bulk smuggling of cash.

This will increase the penalties that can be imposed, by way of an infringement notice, for failing to comply with the relevant cross-border reporting requirements and ensure penalties are consistent with other infringement notices that can be issued under the AML/CTF Act.

The proposed amendments will also provide additional flexibility regarding the timing of CBM reports by moving the 'timing rule' from the primary legislation into the regulations. This will allow the timing rule to easily be amended in the future once technology is introduced that enables travellers to make a report prior to arriving at an airport.

Correspondent banking

Reforms are proposed to implement the remaining recommendations from the report of the statutory review on strengthening correspondent banking obligations. These reforms will simplify and streamline the correspondent banking obligations to establish a one-step process for conducting due diligence assessments on respondent financial institutions, and prohibit financial institutions from entering into a corresponding banking relationship with an institution that permits its accounts to be used by a shell bank.

Although the AML/CTF Act already prohibits correspondent banking arrangements with shell banks, it currently does not explicitly prohibit a bank from entering into or continuing a correspondent banking relationship with a respondent institution that permits their accounts to be used by shell banks. The proposed reforms would provide a civil penalty provision that would prohibit entering into, or continuing, correspondent banking arrangements with a bank that permits their accounts to be used by shell banks. Banks would also be required to terminate arrangements if they became aware that a respondent bank is a shell bank or permits accounts to be used by shell banks.

The reforms will also require financial institutions to obtain senior official approval to continue a correspondent banking relationship following a regular due diligence assessment. This is similar to the requirement that currently exists to obtain senior official approval before entering a correspondent banking relationship.

The proposed amendments will largely mirror existing industry and international banking practice and are expected to have a minor cost to banks. They represent an important step in enhancing compliance with relevant international standards set by the FATF.

CDD procedure requirements (service prohibition where CDD not completed)

In addition to the CCD reliance reform discussed above, reforms are proposed to implement a statutory review recommendation to explicitly prohibit reporting entities from providing a designated service in circumstances where the CDD procedure cannot be carried out, and require reporting entities to consider making a suspicious matter report if such circumstances arise.

This explicit prohibition will deter reporting entities from providing designated services to a customer that cannot be identified in accordance with the requirements of the AML/CTF regime and provide for the reporting of information to AUSTRAC when an inability to complete the CDD occurs in suspicious circumstances. This reform is to make clear an already existing requirement under s32.

The proposed reform will address a deficiency identified in the FATF mutual evaluation of Australia's AML/CTF regime in 2015 and strengthen CDD measures.

The proposal to require reporting entities to consider making a suspicious matter report when the CDD cannot be completed is likely to have a low regulatory impact, as this type of reporting is consistent with existing requirements to generally report suspicious matters associated with the provision of a designated service.

Money laundering offences

Reforms are proposed to amend the money laundering offences contained in Division 400 of the Criminal Code. These amendments will strengthen the offences by addressing a number of practical issues identified through prosecutorial experience of the Commonwealth Director of Public Prosecutions (CDPP).

These issues include difficulties in establishing that a money laundering offence is related to a possible instrument of crime. In these instances, the CDPP has been required to re-frame the prosecution or not proceed with an instrument of crime offence. Proposed amendments to the Criminal Code will therefore clarify that only one circumstance connected to a Commonwealth head of power and not two circumstances is required when establishing that a person was dealing with money or property that is, or is at risk of, becoming an instrument of crime.

A second issue relates to situations where law enforcement agencies use undercover law enforcement officers posing as criminals seeking the services of a syndicate to launder large sums of cash to gather evidence to support complex money laundering investigations. The CDPP has advised that where these operations occur, the money or property provided by the undercover law enforcement officers and dealt with by the syndicate is not actually the proceeds of crime, so no money laundering offence can be proved under Division 400 of the Criminal Code . In these circumstances, the CDPP is forced to rely on an extension of criminal responsibility under Division 11 of the Criminal Code, such as conspiracy or attempt. However, prosecutions under Division 11 are significantly more complex and difficult to successfully prosecute.

An amendment is therefore proposed to the Criminal Code that provides that the money supplied in an undercover operation by a law enforcement participant, or civilian participant acting in accordance with the instructions of a law enforcement officer, is the proceeds of crime and therefore is not required to be proved to be proceeds of crime by the CDPP.

3. POLICY OPTIONS

A number of options have been considered in developing the proposed reforms. For the purpose of the RIS, the focus is on the reforms that are most likely to have a regulatory impact on industry - CDD reliance, CDD procedure requirements reforms, and correspondent banking.

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Option 1: Maintain the status quo. This would involve making no changes.

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Option 2: Minimal changes to the existing AML/CTF requirements. Under this option, reforms to CDD reliance would retain the current reliance framework but broaden the parties that can be relied upon with liability remaining with the relying party. Under option 2, changes to correspondent banking, and other CDD procedure requirements (service prohibition where CDD not completed) would also not be pursued.

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Option 3 (preferred): Detailed reform. In addition to the reform under option 2, this option would include an additional option permitting reporting entities to enter into 'CDD arrangements' for reliance to occur. This offers greater opportunity for regulatory efficiency, with liability linked to the relying party undertaking due diligence on the third parties' CDD processes, rather than being liable for each case of inadequate CDD that may arise.

Comparative detail concerning these options can be found at Attachment A.

Impacts

OPTION 1 - MAINTAIN THE STATUS QUO

Option 1 would not address the recommendations of the statutory review, and therefore would not address stakeholder concerns about undue complexity, regulatory burden or address deficiencies in compliance with international standards identified by the FATF.

CDD - reliance

The AML/CTF Act and Rules currently allow a reporting entity to rely on customer identification and verification procedures carried out by another reporting entity in limited circumstances. A reporting entity is unable to rely on customer identification conducted outside of Australia unless the AUSTRAC CEO provides the reporting entity with an exemption.

Outside of the licenced financial advisors options, Industry stakeholders have indicated that the reliance provisions under the AML/CTF Act are rarely used, as they lack clarity and certainty, are too restrictive and reporting entities are reluctant to expose themselves to the risk of being held accountable for a breach of CDD requirements performed by a third party.

Due to the restrictive nature of the reliance provision and limited uptake from industry, reporting entities generally complete CDD for every customer they on-board. CDD is a major aspect of AML/CTF compliance and carries a substantial cost. With the current structure, this cost can be duplicated where customers adopt multiple designated services offered by different reporting entities.

Based on the comprehensive consultation process conducted during the course of the review and through the development of the current phase of legislative amendments, industry generally does not support the option of maintaining the status quo. Doing so would fail to provide flexibility to industry to meet their AML/CTF obligations in a more efficient way and would not be in line with the broader 'Open Banking' reforms.

CDD procedure requirements - service prohibition where CDD not completed

The FATF identified in Australia's mutual evaluation that the CDD identification provision does not explicitly prohibit reporting entities from providing a designated service in circumstances where the CDD cannot be carried out, and does not require reporting entities to consider making a suspicious matter report in such circumstances. Maintaining the status would not address the FATF deficiency.

Correspondent banking

Correspondent banking relationships are vulnerable to ML/TF as they involve a financial institution carrying out transactions on behalf of another financial institution's customers where information on those customers is very limited. The ML/TF risks are particularly high where a respondent institution permits their accounts to be used by shell banks. As shell banks do not have an actual place of business in any country, it is difficult to regulate them or ensure they are not violating anti-money laundering regulations. As a result, the FATF standards contain a prohibition on the use of shell banks.

Australia's AML/CTF regime recognises this threat and prohibits regulated financial institutions from entering correspondent banking relationships with another financial institution that has a correspondent banking relationship with a shell bank. Financial institutions must also terminate a correspondent banking relationship if they become aware that a respondent bank has a correspondent banking relationship with a shell bank.

However, the FATF has identified a deficiency in Australia's AML/CTF regime as financial institutions are not required to satisfy themselves that a respondent financial institution that they are entering into a correspondent banking relationship with does not permit its accounts to be used by shell banks. This exposes Australian financial institutions to unnecessary risk that they may be misused by shell banks for ML/TF purposes. If the status quo is maintained, the FATF deficiency and associated risks will remain.

OPTION 2 - MINIMAL CHANGES TO THE EXISTING AML/CTF REQUIREMENTS

Option 2 would reform the CDD reliance regime by expanding the parties (both domestically and internationally) that a reporting entity may rely upon when conducting CDD but maintaining liability for all breaches with the relying party (a civil penalty provision).

The expansion of the parties that a reporting entity may rely upon when conducting CDD will address one of the key concerns for industry regarding the restrictive nature of the reliance provisions under the current regime. Under this option, while reporting entities may rely on a broader range of businesses, the ultimate liability for one off individual breaches of the CDD requirements will remain with the relying party, thus making reliance less attractive.

During consultation with industry, some expressed concerns that the CDD reliance would continue to be under-utilised if this option was pursued alone due to issues around liability for breaches and tolerance for risk. Reporting entities indicated option 2 would not adequately address liability for one off breaches of the CDD requirements by a third party.

Under Option 2, reforms to correspondent banking would not be pursued, and as such, impacts outlined above would remain relevant.

OPTION 3 - COMPREHENSIVE REFORM

Option 3 would involve more comprehensive reforms of the CDD reliance, clarification of CDD requirements, and correspondent banking arrangements. This approach would best address both industry feedback and FATF deficiencies. This is the preferred option.

CDD - reliance and service prohibition where CDD cannot be completed

Given that CDD is currently a major aspect of a business' AML/CTF compliance costs, this option will provide industry with greater flexibility by allowing increased options for CDD reliance. It will also deliver significant regulatory savings.

Proposed reforms will allow reporting entities to enter into a 'CDD arrangement' with a third party which provides a framework for relying on a CDD performed by the third party. As part of entering into the CDD arrangement, the reporting entity will be required to conduct due diligence on the third party's CDD processes and procedures to ensure they are compliant with the FATF standards and that is it reasonable to rely in the circumstances.

Under this proposal, where a reporting entity has relied on the CDD performed by a the third party pursuant to a CDD arrangement, and there is a breach of identification requirements, the relying entity will not be liable for a one-off breach if it is able to show it was reasonable to have relied upon the CDD in circumstances having conducted robust due diligence on the third party's CDD processes.

Where there are more systemic breaches of CDD requirements by the third party, and the relying reporting entity has relied on this CDD in the absence of conducting adequate due diligence on the third party's CDD processes (including ongoing diligence), the relying party will be ultimately responsible for the individual breaches and liable to the civil penalty provision.

Reporting entities that choose to use the CDD arrangements model will face an initial increase in regulatory costs to establish the arrangements and undertake due diligence on a third party's CDD procedures. However, after this initial phase, the proposal is expected to significantly reduce costs and regulatory burden for users. It is noted that the uptake of this measure will be dependent on a range of factors including company structure, type of service and customer, and ability to broker CDD arrangements with other entities. Allowing a reporting entity to rely on another entity's CDD processes will reduce duplication of effort across regulated business and reduce the requirements on customers to provide identity documentation at the on-boarding stage for various services. The proposal will also be consistent with the reforms of the Review into Open Banking in Australia.

Estimating the regulatory costs and savings of this option across the spectrum of reporting entities is difficult as they service a customer base that includes natural persons, non-individuals and beneficial owners of varying type, size and complexity. Based on AUSTRAC engagement with industry, it is assumed that CDD activities currently require a minimum of approximately three hours to complete for a new customer, and cost approximately $15 per new customer in third-party service provider and database search fees. It is expected that CDD obligations under the new model will reduce the time costs to approximately 1 hour for basic information verification for natural person customers, and will reduce the third-party costs to approximately $2.50 - $3.00 for identity verification searches.

This reduction, when applied across the anticipated 1,630 effected reporting entities with the number of new customers (which ranges from 50 up to 25,000 per entity), is expected to result in an average regulatory saving of $310,722,924 each year for ten years.

To maximise the potential of this option, it establishes a regulatory environment whereby a significant saving of effort can be achieved through encouraging cooperation between reporting entities. Further, it is expected that through the process of establishing agreements, that parties through a natural evaluation process of each other's CDD procedures, will drive a higher overall standard of AML/CTF compliance.

The proposal will also prohibit reporting entities from providing a designated service in circumstances where the CDD cannot be carried out, and require reporting entities to consider making a suspicious matter report in such circumstances. This reform will address a further deficiency identified by the FATF.

During consultation with industry, stakeholders agreed that this option presented the greatest opportunity for reducing burden while strengthening Australia's compliance with FATF standards and international reputation.

Correspondent banking

The reforms would extend the civil penalty provision that prohibits reporting entities from entering into, or continuing correspondent banking relationships with a shell bank, to banks that permits their accounts to be used by a shell bank. The reforms would also explicitly clarify that banks must conduct due diligence and have appropriate senior management approvals prior to entering or continuing correspondent banking arrangements.

The reforms will address the remaining deficiencies identified by the FATF in relation to Australia's correspondent banking regime and will mitigate any risks that Australia financial institutions are misused by shell banks for ML/TF purposes.

The proposed changes reflect a codification of existing practices and are expected to carry a low regulatory cost to reporting entities.

4. IMPACT ANALYSIS

The groups likely to be affected, directly or indirectly, by Options 2 and 3 are:

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reporting entities - financial institutions, bullion and gambling sectors

•

AUSTRAC and partner government agencies, and

•

consumers.

The impact of Option 1 is not addressed in detail in this RIS because it does not impose any regulatory obligations on reporting entities.

Compliance costs

A summary of the estimated overall annualised cost and savings over 10 years of the regulatory impacts/offsets identified in the previous section, as well as the assumptions used to estimate the cost/offsets can be found at Attachment B.

Regulatory savings will arise under both options 2 and 3 and will outweigh the costs in both cases.

Costs excluded from the Regulatory Burden Measurement framework

Non-compliance and enforcement costs

There may be costs for businesses under Options 2 and 3.

Indirect costs

Businesses that incur compliance costs as a result of regulation under Option 2 or 3 are expected to pass part of these costs to consumers.

5. CONSULTATION

Throughout 2014-15, the Attorney-General's Department, in consultation with AUSTRAC, conducted extensive consultation with industry and government agencies as part of the statutory review of the AML/CTF regime. Over 75 submissions were received from industry, government agencies and other interested parties (see Attachment C for a list of entities providing a submission). A series of roundtable meetings were also held with the cash-in-transit, gaming, remittance, not-for-profit, banking and finance sectors in late 2014 and early 2015.

A roundtable meeting with government agencies was held in late January 2015.

A list of industry and government agencies that participated in round-table discussions is at Attachment D.

Input provided by industry and government during the lengthy consultation was considered in developing the review recommendations.

The Department of Home Affairs then undertook consultation on the detail of the review recommendations for implementation in this Bill which commenced in mid-2017 with the release of consultation papers and a workshop with industry representatives on the CDD reliance reforms. Attendance at the workshop was facilitated by the Australian Bankers Association and the Australian Financial Markets Authority.

Meetings were held with government agencies in 2017 and 2018 on the secrecy and access reforms. Consultation with industry has also occurred through the Fintel Alliance.

Throughout these engagements, industry feedback in relation to the proposed amendments has been positive, often providing constructive input resulting in incremental improvements in Australia's AML/CTF regime.

Further consultation will occur during 2019, including targeted consultation with industry sectors and further meetings or workshops if required. The Department will also consult with industry about an appropriate implementation period.

If the Bill is passed by Parliament, the Department of Home Affairs, in partnership with AUSTRAC, will continue to engage with industry and government on implementation issues and consider opportunities for targeted education and guidance to both regulated and non-regulated sectors.

6. IMPLEMENTATION AND REVIEW

Delayed commencement

It is proposed that measures in the Bill would commence 6-12 months from the date of Royal Assent to enable industry time to make any changes to systems. After a suitable time has elapsed to allow consideration on whether these reforms are operating as intended, AUSTRAC and the Department of Home Affairs will seek industry feedback.

AUSTRAC support and guidance

AUSTRAC will consult closely with industry about the reforms and consider opportunities for targeted education and guidance to regulated and non-regulated sectors.