House of Representatives

Explanatory Memorandum

(Circulated by authority of the Attorney-General, the Hon Mark Dreyfus KC MP)

SCHEDULE 10 - EXEMPTIONS

871. Various provisions in the AML/CTF Act permit the AUSTRAC CEO to make rules exempting designated services from certain obligations under the AML/CTF Act. Some of these exemptions would not be remade in the new Rules due to the level of risk associated with the exemption. The AML/CTF Act was amended in 2017 to require the AUSTRAC CEO to only make exemptions when satisfied that they pose a low money laundering and terrorism financing risk (see section 212(3A) of the AML/CTF Act).

872. Additionally, some exemptions currently in the AML/CTF Rules will be incorporated into the AML/CTF Act because they are intended to be enduring, noting the view of Senate Standing Committee for the Scrutiny of Delegated Legislation that exemptions in delegated legislation should operate for no longer than 3 years. Exemptions that will remain in the AML/CTF Rules will be time-limited.

873. Some exemptions made by the AUSTRAC CEO under section 248 of the AML/CTF Act by way of non-legislative instrument are intended to be enduring and would be more appropriately legislated as statutory exceptions.

874. This Schedule would also make amendments to the exemption currently in Chapter 75 of the AML/CTF Rules, lower the threshold exempting casinos, on-course bookmakers, totalisator agency boards and gaming machine operators from conducting initial CDD measures when providing certain gambling services to customers involving transactions from less than $10,000 to less than $5,000 to align with the FATF Standards.

Anti-Money Laundering and Counter-Terrorism Financing Act 2006

Item 1 – Section 5 (definition of account )

875. This Item replaces the existing definition of 'account' in section 5 of the AML/CTF Act so that it remains an inclusive definition, but no longer lists account types.

876. The existing definition of 'account' includes specific references to account types. These references have created uncertainty for industry when trying to understand if other account types such as deposit, transaction and debit accounts are covered by the AML/CTF Act.

877. The 2016 Statutory Review recommended removing the list of account types in this definition to provide clarity and certainty for industry, and that the definition should be left to retain its ordinary meaning and be supplemented by guidance, explaining what types of account could be included in the definition.

878. This Item implements the recommendation of the 2016 Statutory Review. The list in the new definition of 'account' is not intended to be exhaustive and it is intended to have flexibility to capture any new payment methods that may become available in future in order to ensure AML/CTF obligations are adequately applied.

879. The expectation is that AUSTRAC will develop guidance on the interpretation of 'account' to explain what types of account are intended to be captured, while also making it clear that the list is non-exhaustive.

880. AUSTRAC has worked closely with financial institutions to determine at what stage a designated service can be provided on a new account. This has been reflected in the retention of paragraphs (a) and (b) of the account definition.

881. The new definition of 'account' also clarifies the meaning of account in the new definition of 'stored value card' inserted in section 5 of the AML/CTF by Item 12 of Schedule 6 of the Bill.

Item 2 – Section 5

882. Item 2 inserts a number of new definitions in section 5 of the AML/CTF Act, which are related to the exemptions that will be codified in the AML/CTF Act. This includes:

•

'Australian Border Force', which has the same meaning as in the Australian Border Force Act 2015.

•

Definitions of 'credit card acquirer' and 'credit card issuer', which rely on the concept of a designated payment system outlined in the Payment Systems (Regulations) Act 1988 and is defined in the existing Chapter 71 of the AML/CTF Rules. Chapter 71 of the AML/CTF Rules currently augments designated services 1, 2 and 3 of table 1 of section 6 of the AML/CTF Act, to expand the regulatory perimeter to include credit card issuing and acquiring by non-authorised deposit-taking institutions (ADIs). Defining these terms which will be referenced in designated services 1, 2 and 3 will support the intended enduring nature of this exemption.

•

'deductible gift recipient' and 'departing Australia superannuation payment', which are given the same meaning as the Income Tax Assessment Act 1997.

•

'exchange settlement account' means an account provided by the Reserve Bank of Australia (RBA) that is used for the final settlement of obligations between holders of such accounts.

•

'on-course bookmaker' 'online gambling service', and 'totalisator agency board', which relate to the gambling-related exemptions. Online gambling service takes its meaning from the provision of any of the designated services in table 3 of section 6 of the AML/CTF Act, through means referred to in paragraph 5(1)(b) of the Interactive Gambling Act 2001

•

'representative office', which takes its meaning from the Banking Act 1959.

883. Item 2 also introduces the concepts of 'extension notice', 'keep open notice', 'serious offence' and 'senior member', which are defined in new section 39B (see Item 7 of this Schedule below).

Items 3 to 5 – Subsection 6(2)

884. Items 3 to 5 repeal the line item 'a person specified in the AML/CTF Rules' from table items 1, 2 and 3 in subsection 6(2) of the AML/CTF Act. This line is replaced with references to a 'credit card issuer', 'credit card acquirer', or a person specified in the AML/CTF Rules. This inclusion removes the need for a specific exemption currently in Chapter 71 of the AML/CTF Rules to clarify the intended scope of the services following amendments to the Banking Regulations 1966.

Item 6 – Subsection 6(2) (table item 47, column headed "Provision of a designated service", paragraph (b))

885. Item 6 repeals paragraph (b) of designated services item 47 and replaces it with a new paragraph to transition the exemption that currently exists in Chapter 32 of AML/CTF Rules. The new paragraph excludes services provided in the course of carrying on a business that provide short-term accommodation for travellers from all AML/CTF obligations.

886. This Item gives effect to the exemption currently at Chapter 31 of the AML/CTF Rules, rather than creating a standalone exemption.

Item 7 – At the end of Division 7 of Part 2

887. Item 7 inserts new sections 39A, 39B, 39C, 39D, and 39E in Division 7 of Part 2 of the AML/CTF Act. New sections 39A to 39D relate to exemptions for assisting the investigation of certain offences, which are currently in Chapter 75 of the AML/CTF Rules. This Item legislates and amends the current exemptions in Chapter 75 of the AML/CTF Rules. Chapter 75 of the AML/CTF Rules allows the AUSTRAC CEO to exempt reporting entities from particular sections of the AML/CTF Act where providing a designated service to a customer would assist the investigation of a serious offence.

New section 39A Exemption—assisting the investigation of certain offences

888. Subsections 39A(1) and 39A(2) provide that a reporting entity is not required to satisfy sections new sections 28, 30, or 26G in respect of the provision of a designated service to the customer to the extent that they reasonably believe that compliance with those sections would or could reasonably be expected to alert the customer to the existence of a criminal investigation. This only applies in circumstances where a reporting entity has received a keep open notice in relation to the customer and the keep open notice is in force.

889. Subsection 39A(2) provides a clarifying note that the reporting entity is not required to report a SMR when they receive a keep open notice. However, a SMR obligation may otherwise arise for the reporting entity in relation to the customer in accordance with section 41 of the AML/CTF Act.

890. Further, the reporting entity will retain the discretion to choose whether to continue to provide a designated service to a customer after receipt of a keep open notice.

891. Subsection 39A(3) clarifies that for the purposes of subsection 39A(2), it is immaterial whether the reporting entity knows of the existence or otherwise of a criminal investigation.

892. Subsection 39A(4) clarifies that if subsection 39A(2) applies in relation to the provision of a designated service to a customer, the reporting entity will not be committing an offence under section 139 (providing a designated service using a false customer name or customer anonymity) for a customer under investigation.

893. The note at the end of subsection 39A(4) clarifies that a defendant will bear the evidential burden in relation to the matter in subsection (4). This reversal of the burden of proof is justifiable, as evidence regarding whether subsection (2) applies will be particularly in the knowledge of the defendant (that is, the reporting entity).

894. Section 39A is intended to create a safe harbour from liability from the relevant provisions of the AML/CTF Act for a reporting entity that continues to provide a customer with designated services so long as it conforms with the requirements of the AML/CTF Act, AML/CTF Rules and the details in the keep open notice.

Section 39B Keep open notices

895. Section 39B provides for the issuing of a 'keep open notice' where a senior member of an agency reasonably believes that providing a designated service by the reporting entity to a customer under investigation for a serious offence would assist said investigation. For example, where the investigation would benefit from continued transaction monitoring of a suspected criminal's financial behaviours.

896. For clarity, the agency does not need to seek permission from AUSTRAC to issue the keep open notice to a reporting entity. This streamlines the process by removing the largely administrative intermediary role performed by AUSTRAC previously. AUSTRAC will retain a role in overseeing the issue of notices by agencies, but without delaying the investigation of serious criminal activity.

897. Subsection 39B(2) provides the definition of 'serious offence' for the purposes of section 39B. A serious offence is an offence against any law of the Commonwealth, or a law of a State of Territory, that is be punishable by imprisonment of at least 2 years; or an offence against a law of a foreign country that involves an act or omission that, if it had occurred in Australia, would have constituted an equivalent offence. This reflects the current timeframes provided in the AML/CTF Rules.

898. Subsection 39B(3) provides the definition of 'senior member' for the purposes of section 39B. A senior member of an agency that can issue keep open notices includes any person that is the head of an agency, a person employed or acting in a senior executive position of an agency and any statutory office holder of an agency.

899. Subsection 39B(4) sets out the agencies that can issue a keep open notice pursuant to section 39B. These include all Australian Commonwealth, State and Territory police forces and services and a selection of other state and Commonwealth agencies. Subsection 39B(4)(g) permits the AUSTRAC CEO to make rules that may add to this list of agencies.

900. Subsection 39B(5) sets out requirements for the form and content of a keep open notice. The AML/CTF Rules will prescribe the form for the keep open notice and the details for information to be included therein.

901. Subsection 39B(6) sets out the duration of a keep open notice, unless extended under subsection (7) or (8). Subsection 39B(6) outlines that the keep open notice starts on the day specified in the notice and ends on the earlier of either; 6 months after the day specified in the notice, or the day the issuing agency informs the reporting entity and the AUSTRAC CEO that the relevant investigation has ended.

902. Subsection 39B(7) provides for a senior member of an agency that has issued a keep open notice to extend the period of time that the keep open notice remains in effect by issuing an extension notice. The policy intention is that an agency will be able issue a keep open notice, including extensions, for a maximum total duration of 18 months. An issuing agency may wish to extend a keep open notice to reduce the administrative burden on the agency.

903. Subsection 39B(8) sets out the requirements for AUSTRAC CEO to authorise the issuing agency to extend the notice one or more times if the keep open notice has previously been extended at least twice under subsection 39B(7). A senior member of the issuing agency is required to apply to the AUSTRAC CEO in the form prescribed in the AML/CTF Rules, and the AUSTRAC CEO must be satisfied that the continuation of the keep open notice would assist the investigation of a serious offence.

904. Subsection 39B(9) enables the AUSTRAC CEO to give a notice under paragraph 39(8)(d) more than once in relation to a particular keep open notice.

Section 39C Keep open notices – AUSTRAC oversight

905. Section 39C enables the AUSTRAC CEO to provide oversight of keep open notices to ensure that the quality and consistency of the process is upheld, including that notices are used appropriately, by:

•

creating an obligation for agencies to send a copy of each keep open notice and extension notice to the AUSTRAC CEO at the same time the notice is issued to the reporting entity, and

•

creating a discretionary power for the AUSTRAC CEO to revoke a keep open notice or extension notice where the AUSTRAC CEO is satisfied that the notice does not comply with the requirements of the AML/CTF Act or the AML/CTF Rules.

906. Subsection 39C(3) sets out that the AUSTRAC CEO may revoke a keen open notice or an extension notice if the AUSTRAC CEO is satisfied the notice does not comply with the requirements of the AML/CTF Act or the AML/CTF Rules.

907. If the AUSTRAC CEO revokes a notice under section 39C, subsection 39C(4) requires the AUSTRAC CEO to notify the agency that issued the notice, and the reporting entity to whom the notice was issued.

Section 39D Exemption – when a suspicious matter reporting obligation arises

908. Section 39D applies in circumstances where a suspicious matter reporting obligation arises for a reporting entity in relation to a customer.

909. Subsection 39D(2) provides for an exemption for a reporting entity to not be required to satisfy sections 28, 30, or 26G in respect of the provision of a designated service to a customer, where a suspicious matter reporting obligation arises and the reporting entity reasonably believes that compliance with those sections would or could reasonably be expected to alert the customer to the reporting entity's suspicion.

Section 39E Exemptions - specified conditions

910. Section 39E introduces a table into the AML/CTF Act that compiles a number of exemptions to the CDD provisions. These exemptions were all previously included in the AML/CTF Rules, and have been moved into the AML/CTF Act to provide ongoing certainty for the affected sectors regarding the status of their exemptions. The table sets out the particular designated service to which the exemption applies, and any condition they have to meet to receive the benefit of the exemption. The provision states that the exemption will not apply where the entity has an ECDD obligation under section 38. Detail on each exemption in the table is provided below.

Exemptions – specified conditions table

911. Item 1 of the table in new section 39E adds the substantive provisions in Chapter 35 of the AML/CTF Rules to the AML/CTF Act. Chapter 35 currently exempts reporting entities from customer identification requirements when the entity allows a person to become a signatory to an account, or allows a transaction to be conducted in relation to the account, where the provision of the service relates to a correspondent banking relationship.

912. This exemption only applies where the customer is a financial institution which is in a correspondent banking relationship, where the geographical links set out in section 100 of the AML/CTF Act are satisfied, and where the service relates to signatories to the account who are employees of the other financial institution. This exemption is required to be retained as it is unnecessary and burdensome to be required to conduct customer due diligence in this circumstance due to the existing requirements to conduct correspondent due diligence.

913. Items 2, 3, 4, 5, 9 and 10 of the table in new section 39E codify Chapter 14 of the AML/CTF Rules, which has been in place for over a decade and is intended to be ongoing. These items set out circumstances, such as the cashing out of a low value superannuation fund, where exemptions may apply to reporting entities from performing customer identification procedures. These exemptions are applied to extremely low risk situations where the requirement to conduct customer due diligence amounts to a burden.

914. The exemptions do not apply where a reporting entity determines, in accordance with its enhanced CDD procedures, that it should obtain and verify any KYC information about a customer in accordance with its customer identification procedures. This exemption is appropriate to include on the AML/CTF Act due to the low-risk nature of the services in question.

915. Item 6 of the table in new section 39E codifies Chapter 38 of the AML/CTF Rules to exempt reporting entities from customer identification provisions where the reporting entity disposes of low-value parcels of shares on a prescribed financial market, and gives the proceeds directly to charitable organisations who are deductible gift recipients under the Income Tax Assessment Act 1997.

916. The reporting entity must provide an undertaking to distribute by cheque or electronic funds transfer the proceeds of the security to a deductible gift recipient and lists the details of the disposal on its public website for a specified period. This exemption is limited to transactions less than or equal to $10,000. The threshold has only been amended once, in 2016, since the exemption's creation and is intended to be enduring.

917. Item 7 of the table in new section 39E codifies Part 41.2 of the AML/CTF Rules which exempts trustees of a superannuation fund from customer identification provisions where they cash out a customer's superannuation fund, in circumstances where:

•

the customer's account balance is not greater than $1,000

•

no additional contributions are accepted from the customer in relation to the interest

•

the whole of the interest of the customer in the superannuation fund is cashed out

•

the account is closed as soon as practicable after the account has been cashed out to the customer, and

•

the service is not a Departing Australia Superannuation Payment (DASP) as defined under s 301-170 of the Income Tax Assessment Act 1997.

918. These exemptions are appropriate to be codified in the AML/CTF Act due to the low risk nature of these situations. This exemption has been in place for 11 years and is intended to eliminate duplication of identification procedures by the ATO, who administer the DASP system, and the reporting entity. The threshold has not been changed since it was made in 2012.

919. Item 8 of the table in new section 39E codifies Part 41.43 of the AML/CTF Rules into the AML/CTF Act. This item exempts reporting entities from customer identification requirements where the reporting entity provides designated services 43 (cashing of superannuation or approved deposit fund interests) or 45 (cashing of retirement savings account interests), designated services in table 1 of section 6 of the AML/CTF Act, where:

•

the customer applies to cash out their interests in the superannuation fund, approved deposit fund or retirement savings account online using the DASP system

•

the value of the interest is less than $5000

•

the member does not make any more contributions, and

•

the whole of the interest is cashed out and the account is closed as soon practicable after the interest is cashed out.

920. As with item 7 of the table in section 39E (see above), this is intended to eliminate duplication of identification procedures by the ATO, who administer the DASP system, and the reporting entity. The threshold has not been changed since it was made in 2012.

921. Items 12 to 17 of the table in new section 39E lower the current CDD exemption threshold for reporting entities that are casinos, on-course bookmakers, totalisator agency boards (TABs) and gaming machine operators when providing specified designated services to customers involving transactions less than $5,000 (it is currently $10,000).

922. Chapter 10 of the AML/CTF Rules currently provides casinos, on-course bookmakers, TABs, and gaming machine operators with a number of exemptions from performing customer identification requirements when providing specified designated services where the service involves an amount less than $10,000, except where the reporting entity determines that enhanced CDD should be applied.

923. FATF Recommendation 22 requires countries to impose an obligation on casinos to conduct CDD on customers that engage in financial transactions equivalent to or above a designated threshold. The FATF determined that this designated threshold should be USD/EUR3,000, which, depending on the exchange rate is roughly equivalent to $4,500-5,000 in Australian dollars. This threshold is based on the globally recognised risks inherent in these services. This CDD exemption threshold has always been significantly higher than the FATF Standards.

924. In legislating this exemption, the Bill would lower the threshold to $5,000 to align more closely with the FATF Standards, recognising the ML/TF risks posed by the sector.

Section 39F – Exemption for intermediary institutions

925. New section 39F provides an exemption so that that Divisions 1 to 6 of Part 2 of the AML/CTF Act relating to CDD do not apply to entities that act as intermediary institutions for the purposes of passing on a transfer of value – see Schedule 8 of the Bill for additional information.

926. This is intended to exempt intermediary institutions from most customer due diligence obligations in recognition of the fact that intermediary institutions do not have a direct customer relationship with either the payer or the payee.

927. Subsection 39F(2) provides that intermediary institutions must monitor for unusual transactions and behaviour that may give rise to a suspicious matter reporting obligation. This will ensure that an intermediary institution must submit a SMR to AUSTRAC where, for example, it detects that a person or entity subject to targeted financial sanctions is a party to the transfer of value.

928. Subsections 39F(3) and (4) provide that subsection 39F(2) is a civil penalty provision. These penalties are outlined in Division 2 of Part 15 of the AML/CTF Act. The maximum civil penalty under the AML/CTF Act is set at the highest amount allowed, which is 100,000 penalty units for a corporation and 20,000 penalty units for individuals. While the penalties can be substantial, AML/CTF enforcement actions can involve serious systemic failures by a reporting entity where the number of contraventions is immeasurable. The amount of any civil penalty will be determined by the court. Courts will decide the appropriate penalty (subject to the statutory maximum) based on the circumstances of a contravention. In determining the appropriate amount for a civil penalty, the courts will consider the impact of these violations on the Australian community, the financial system, and law enforcement efforts.

Item 8 – At the end of section 44 (after the note)

929. Item 8 amends existing section 44 of the AML/CTF Act to provide additional exemptions from the threshold transaction reporting obligation (currently section 43 of the AML/CTF Act). These exemptions apply to:

•

a designated service provided by an ADI to a customer that is an ADI; and

•

a designated service provided by the holder of an Exchange Settlement Account (ESA) to a customer which is the holder of an Exchange Settlement Account.

930. These exemptions are appropriate as services provided between ADIs and ESAs are extremely low risk due to the regulation of these entities by APRA and the RBA.

Item 9 – Section 106

931. Item 9 repeals the current section 106 related to record keeping, as per the below Item 10, it will be replaced with the new section 107.

Item 10 – Section 107

932. Item 10 repeals the current section 107 related to record keeping and adds a new section 107 to replace the former sections 106 and 107.

933. The current obligation in section 107 is too broad as it requires entities to retain any record made in relation to the provision of a designated service to a customer, not just transaction records. As a result, Chapter 29 of the AML/CTF Rules exempts nine types of records that are exempt from the current section 107. These can be characterised as records that are not essential to permit the reconstruction of a transaction for the purposes of possible prosecution of criminal activity.

934. Due to the limited law enforcement and prosecutorial value of requiring entities to keep these documents, particularly when balanced against privacy concerns, and noting that FATF does not require that these types of records be kept, the exemption for these records should be codified so that reporting entities continue not to be required to keep these records.

935. Subsection 107(3) requires records be kept for 7 years. This timeframe aligns with other legislation, such as the Privacy Act 1988.

936. The new section 107 reframes the obligation to retain transaction records to align more closely with FATF requirements, so that records of the kind exempt by Chapter 29 would no longer be captured by the obligation and the exemption is no longer needed.

937. The exemption from keeping a record of these documents is only for the purposes of the AML/CTF Act and should not limit any record-keeping obligations that the entity may have under any other legislation, such as the Privacy Act 1988.

Item 11 – After Part 17A

938. Item 11 inserts a new Part 17B after Part 17A of the AML/CTF Act. Part 17B sets out additional exemptions in certain circumstances that are intended to apply more broadly than the above exemptions to specified Parts of the AML/CTF Act.

New section 233H – Simplified outline

939. Section 233H inserts a simplified outline into Part 17B, which provides that certain parts of the AML/CTF Act do not apply to certain persons in certain circumstances. This simplified outline is included to assist a reader's understanding of the substantive provisions to follow, and is not intended to be comprehensive.

New section 233J – Exemption – Reserve Bank of Australia

940. Section 233J codifies the exemption for the RBA. The RBA is a corporate Commonwealth entity and its functions are predominantly statutory. Its provision of designated services was previously exempted from the AML/CTF Act through a series of ad hoc exemptions. In 2016 the RBA received the overarching exemption that applies to all substantive provisions of the AML/CTF Act.

941. The current RBA exemption is currently made by the AUSTRAC CEO through legislative instrument under section 248 of the AML/CTF Act, and has no time limit and is intended to be enduring. Noting the view of the Senate Standing Committee for the Scrutiny of Delegated Legislation that exemptions made by delegated legislation should be time limited, the Bill would legislate the RBA exemption rather than have it maintained in a time- limited non-legislative instrument.

942. The risk for most of RBA's customers and services are 'low' or 'very low', and the RBA has robust and systematic risk management processes and is subject to the Public Governance, Performance and Accountability Act 2013 risk management and oversight requirements.

943. Given that the FATF does not explicitly require central banks to be subject to AML/CTF regulation and likeminded jurisdictions (the United States, the United Kingdom, New Zealand and Canada) do not subject their central banks to AML/CTF regulation, legislating this exemption would be consistent with international standards and practice.

New section 233K – Exemption for operating no more than 15 gaming machines

944. Section 233K is intended to reduce the regulatory impact to small businesses in the pubs and clubs sector that operate no more than 15 gaming machines. This amendment would move the current exemption from Chapter 52 of the AML/CTF Rules into the AML/CTF Act. This would exempt persons who are licensed to operate no more than 15 gaming machines from most AML/CTF obligations, other than enrolment, keeping enrolment details up to date, SMR reporting and certain record keeping obligations.

945. Chapter 52 of the AML/CTF Rules was made in 2011, responding to exemption applications from industry highlighting the significant regulatory burden of the AML/CTF regime on small venues that operated a limited number of gaming machines, mainly pubs and clubs. This exemption only applies to reporting entities that provide one or more of the designated service items 5, 6, 9 or 10 from table 3 in subsection 6(4) of the AML/CTF Act, limiting its application to pubs and clubs.

946. Section 233K would continue the exemption from Chapter 52 of the AML/CTF Rules into the AML/CTF Act. This exemption would not apply if a venue is part of a reporting group which collectively has an entitlement to operate no more than 15 gaming machines across all venues in the group.