Money laundering loopholes: Tranche 2 legislation inbound

28 April 2023

Australia’s anti-money laundering and counter terrorism financing (AML/CTF) laws have been in place for almost two decades, and in that time, it has gone through various iterations aimed at keeping pace with the ever-changing nature of financial crime. Since 2007 “Tranche 2” of the legislation, which would broaden the entities required to comply with AML/CTF obligations to include real estate agents, notaries and lawyers, bookkeepers, accountants and auditors and trust/company service providers (known as gatekeepers), has been under consideration. In 2021 the Senate launched an inquiry into the adequacy and efficacy of Australia’s AML/CTF regime, and it is expected to publish its response to its recommendations by the end of April. It is anticipated there will be a consultation period on the Tranche 2 proposals before introducing a bill into parliament 1.

Under Tranche 2, these gatekeeper entities would be reporting entities and required to register with AUSTRAC, (Australian Transaction Reports and Analysis Centre) assess their money laundering and terrorism financing risk and implement an AML program to manage that risk and report certain transactions to AUSTRAC. Requirements will extend to undertaking customer due diligence, implement transaction monitoring, reporting of threshold and suspicious transactions to AUSTRAC, maintaining transaction records and complying with training, review and reporting obligations.

Australia is currently one of only three countries yet to implement Tranche 2 requirements (the others being Haiti and Madagascar 2). Undoubtedly, this has put Australia and, in particular those businesses which are the focus of Tranche 2, at risk of being targeted by money launderers. The evidence suggests that this risk has been realised in the real estate sector. AUSTRAC estimates that in 2020, Chinese interests alone laundered more than $1 billion through Australian real estate 3.

“Australia has become the destination of choice for the flow of illicit funds, particularly corruption related proceeds which too often do end up in the property market,” said Serena Lillywhite (then CEO of Transparency International Australia) in 2021 [4]

In being a destination of choice for illicit funds, Australia is also at risk of being put onto the ‘grey-list’ by the Financial Action Task Force (FATF) when it is next evaluated in 2026 5.

The grey list comprises countries which are working with FATF to address identified deficiencies in their AML/CTF regimes. Once countries are placed onto this list, they are subject to increased monitoring by FATF. If Australia is grey listed, it will join the likes of Uganda, Cayman Islands, Burkina Faso and South Sudan and may suffer a consequential adverse economic impact, which the IMF reports is on average 7.6% of GDP 6, in addition to the detrimental reputational impact.

Australian entities have recently made worldwide news for laxity in AML/CTF measures. Notably the Royal Commissions into the Crown Casinos found that Crown was unsuitable to hold a casino operator license, in both Victoria and Western Australia because it was found to have “facilitated millions of dollars to be laundered through a bank account of its subsidiary” and “links to organised crime via junkets”.

The Royal Commissions described the Casino’s actions as “disgraceful” and engaged in conduct that was “variously illegal, dishonest, unethical and exploitative” 7. Similarly, the NSW Gaming regulator’s review of the Star Casino found it failed to carry out appropriate customer due diligence leading to widespread AML/CTF non-compliance over a number of years [8].

In November 2022, AUSTRAC ordered that external auditors be appointed over Sportsbet and Bet365 9 to assess their compliance with the AML/CTF laws. There is also an increased focus on money laundering occurring through pokies and non-compliance with AML/CTF laws. In addition, Australia could now also be at risk of becoming a target for Russian cash belonging to oligarchs who are seeking to avoid sanctions due to the Russia/Ukraine war 10.

Meanwhile in the bullion industry, the AML/CTF compliance of the West Australian government owned Perth Mint (the world’s largest producer of newly mined gold which turned over $21 billion in 2021) is also under scrutiny.  AUSTRAC has stated that it suspects criminal laws may have been breached, as well as provisions of transaction monitoring laws 11.

Recent history has shown that sophisticated and well-resourced sectors – financial services, gambling and bullion have fallen short of their AUSTRAC obligations.  As they tighten their controls and compliance the risk will continue to shift and the soon to be regulated “gatekeeper” industries may well experience the coincidence of being increasingly exposed to money launderers and subject to a more stringently enforced regulatory compliance regime.

We will continue to share insights into money laundering and terrorism financing vulnerabilities, and the typologies employed to exploit them. In the meantime, businesses that will fall within Tranche 2 would do well to assume that the regulatory net is finally about to drop and now is the time to get advice and prepare the systems and processes necessary to comply and to protect your business from criminal exploitation.

[1] Australia to push ahead with Tranche 2 laws amid international pressure

[2] Weak money laundering laws put Australia at risk of becoming a haven for Russian cash

[3] Real estate a prime target for money laundering

[4] Widespread money laundering in property locking out Australians from owning homes, Senate told

[5] “Black and grey” lists

[6] Australia in Danger of Being Placed on FATF Grey List in 2025

[7] Royal Commission into the Casino Operator and Licence

[8] Star broke money laundering laws ‘innumerable’ times: AUSTRAC

[9] AUSTRAC orders audit of Sportsbet’s and Bet365’s compliance with financial crime laws

[10] Weak money laundering laws put Australia at risk of becoming a haven for Russian cash

[11] Why is Australia’s financial crimes watchdog investigating the Perth Mint?