Preparing for AML Tranche 2: A Major Development in Australia’s Anti-Money Laundering Efforts

Australia is on the cusp of a significant transformation in its approach to anti-money laundering (AML) and counter-terrorism financing (CTF). With AML Tranche 2 reforms under government consultation since April 2023, the nation is gearing up to expand its regulatory framework to include additional sectors by early 2025. This move, already in place in countries like the UK, Canada, and New Zealand, brings Australia closer to meeting the Financial Action Task Force (FATF) standards and is set to bring transformative changes for businesses in high-risk sectors. By mid-2025, affected businesses will need to have compliance systems in place to uphold Australia’s reputation as a safe financial hub and reduce money-laundering risks.

What is Tranche 2 of the AML/CTF Reform?

Currently, Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act targets sectors with large cash transactions, such as financial institutions, gambling, remittance services, and bullion dealers. This includes approximately 17,000 reporting entities, which are subject to “designated services” requirements, such as customer due diligence and transaction reporting.

Tranche 2 will expand this framework to capture a broader range of Designated Non-Financial Businesses and Professions (DNFBPs), including real estate, law, and accounting. Once implemented, it’s estimated that this expansion will bring over 100,000 businesses under the AML/CTF regulatory umbrella. These newly included businesses will need to adopt stringent AML/CTF obligations similar to those required of financial institutions, including customer due diligence (CDD) and secure data storage.

Why are Tranche 2 Reforms Important?

The introduction of Tranche 2 aims to address regulatory gaps and counter the growing risks of financial crime in sectors previously left unregulated. Expanding AML/CTF oversight to high-risk DNFBPs supports Australia’s compliance with international AML standards and strengthens protections against criminal exploitation. These changes are designed to:

1. Simplify and modernise the AML/CTF framework, reducing complexity and improving compliance efficiency.

2. Expand the AML/CTF regime to high-risk non-financial sectors, bringing Australia’s practices in line with global standards.

3. Modernise regulations around virtual assets and payment technologies, adapting to modern business practices and emerging threats.

These reforms will bring new oversight from AUSTRAC, Australia’s financial intelligence agency, which will monitor a more extensive network of businesses for compliance.

What Will Tranche 2 Look Like in Australia?

Under the proposed changes, DNFBPs will be required to register with AUSTRAC. Once registered, they will be “reporting entities” under the Act, subject to various obligations, including:

• Developing an AML/CTF Programme: Each business must establish a written AML/CTF plan tailored to its specific risks.

• Conducting Risk Assessments: Regular assessments of money-laundering risks must be documented and updated as necessary.

• Appointing a Compliance Officer: This individual will manage the AML/CTF programme and ensure regulatory obligations are met.

• Collecting and Verifying Customer Information: Known as ‘Know Your Customer’ (KYC), businesses must verify client identities, often through documents or credit-reporting bodies (CRBs).

• Reporting Requirements: Businesses must report certain transactions, such as large transfers, international transactions, and any suspicious activity, to AUSTRAC.

• Keeping and Securely Storing Records: Entities must maintain detailed records of AML/CTF activities, making them accessible if required by AUSTRAC.

• Submitting Compliance Reports: Entities may need to submit regular reports to AUSTRAC.

• Paying an Industry Levy: Businesses earning above a specific threshold may be required to contribute to funding AUSTRAC’s regulatory activities.

These requirements, though demanding, are both a legal obligation and a vital part of maintaining a safe and reputable business environment. With mid-2025 as the expected start date, DNFBPs should begin preparing their compliance systems to meet these new standards.

Tranche 2 vs. Tranche 1: What’s Different?

Tranche 1, implemented in 2006, focused primarily on financial institutions and industries with frequent, large cash transactions. Tranche 2, however, seeks to spread the responsibility of combating financial crime across a broader range of sectors, focusing on DNFBPs. Here’s how Tranche 2 compares to Tranche 1:

Key Features	Tranche 1	Tranche 2
Focus on financial institutions	Yes	Yes
Includes DNFBPs	No	Yes
Approximate reporting entities covered	17,000	100,000+
Comprehensive Customer Due Diligence	Limited	Yes
AUSTRAC compliance registration	Yes	Yes
Compliance officer appointment	Yes	Yes
Employee AML/CTF training	Yes	Yes
Independent reviews for AML programmes	Yes	Yes

What Does This Mean for Australian Businesses?

The Tranche 2 reforms will present some challenges, particularly for smaller businesses in newly regulated sectors. Key challenges include:

1. Resource and Cost Demands: Small businesses may find it difficult to meet the financial and administrative demands of compliance, including technology upgrades and employee training.

2. Complexity of Obligations: DNFBPs, many of which have never been subject to AUSTRAC regulations, will need to familiarise themselves with complex AML/CTF requirements.

3. Skills Gaps: Staff may require significant training to effectively identify red flags and report suspicious activity.

4. Technological Limitations: Implementing systems for real-time monitoring, customer screening, and record-keeping may be a stretch for smaller firms with limited resources.

Legal professionals have raised particular concerns about balancing AML obligations with client confidentiality. Similar challenges arose in Canada when Tranche 2 regulations were introduced, with some calling for potential exemptions, such as for in-house legal counsel, to ensure compliance without compromising professional responsibilities.

Penalties for Non-Compliance

Failure to meet Tranche 2 obligations could lead to serious consequences, as AUSTRAC has the authority to impose various penalties for non-compliance, including:

• Civil Penalties and Infringement Notices

• Remedial Directives

• Enforceable Undertakings

Given the stakes, businesses may benefit from using AML tools designed to streamline compliance. Tools for customer screening and transaction monitoring can simplify due diligence processes and help ensure businesses are always in line with regulatory demands.

Preparing for Tranche 2 Compliance: Steps to Take Now

With the anticipated implementation date for Tranche 2 reforms fast approaching, businesses in affected sectors should start preparing for compliance:

• Assess Current Practices: Identify any existing gaps in AML/CTF processes and prepare to address these under the new regime.

• Invest in Training: Provide staff with the necessary training to understand and fulfil AML/CTF obligations.

• Adopt Technology Solutions: Leverage AML tools for efficient customer due diligence and transaction monitoring.

• Develop an AML/CTF Programme: Ensure it is aligned with AUSTRAC’s requirements and appropriate to your business’s risk profile.

Although Tranche 2 may bring additional responsibilities, compliance offers long-term benefits. By adhering to these regulations, businesses will not only fulfil their legal obligations but will also play an active role in combating financial crime, protecting their reputation, and fostering trust among clients and partners.