Client Alert

On Friday 31 August 2007, the Australian Transaction Reports and Analysis Centre (AUSTRAC) released draft anti-money laundering and counter-terrorism financing (AML/CTF) Rules (Securities Rule). The rules set out, for consultation purposes, proposed exemptions from the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) for certain securities transactions. Anyone wishing to comment on these draft Rules must submit their comments to AUSTRAC by 14 September 2007.

Securities dealing

The AML/CTF Act treats all sales of securities and derivatives in the secondary market as designated services, where the seller carries on a business of issuing or selling securities or derivatives (Item 35 service).

As a result, entities that provide these services are treated as “reporting entities” with obligations under the AML/CTF Act.

Following consultation with industry groups, AUSTRAC proposes to exempt certain on-market transactions, and certain transactions conducted through agents such as brokers. If registered, these Rules will mean that some activities carried on by many financial sector entities will cease to be “designated services” under Item 35.

Transactions through a broker or other agent

Under the draft Securities Rule, the sale of securities or derivatives (in the course of a business of issuing or selling securities or derivatives) (Item 35 service) will not be a designated service where the same service is covered by Item 33 in section 6 of the AML/CTF Act.

This will mean, for example, that a broker who issues or sells securities or derivatives as an agent will not be covered by Item 35. However the broker will still be covered by Item 33.

On-market transactions

The draft Securities Rule also provides that the issue or sale of securities or derivatives will not be a designated service where the issue or sale occurs on a “prescribed financial market” within the meaning of the Corporations Act.

This means that, where securities or derivatives are traded on one of the 4 prescribed financial markets (the Australian Securities Exchange, the Australian Pacific Exchange, the Bendigo Stock Exchange and the Stock Exchange of Newcastle), the seller will not provide a designated service under Item 35. Without this rule, the seller could have been required to identify their own broker, the purchaser, and the purchaser’s broker. (As above, any broker acting for the seller or the purchaser would provide a designated service and be required to identify their customer.)

Other recent developments - ongoing CDD and threshold reporting

AUSTRAC has also recently released draft AML/CTF Rules specifying the reporting standards for transactions involving currency or “e-cash” with a value over $10,000, and an AML/CTF Rule specifying the obligation of reporting entities to carry out “ongoing customer due diligence”. These rules relate to obligations that commence in December 2008, and comments have been requested by 14 September 2007.

These draft AML/CTF Rules replace earlier drafts released for public comment on 4 July 2006, before the AML/CTF Act took its final form.

Developing effective systems for ongoing customer due diligence will be a key challenge for reporting entities in the lead-up to December 2008. Reporting entities should carefully review the draft Rule and provide comments if it will not be practical to implement these systems.

Reporting entities should also consider commenting on the draft Rules dealing with threshold transactions, especially given the extent of the information that is proposed must be provided in relation to the relevant transaction, customer and any agent.

Commencement timeframes

Financial services companies in AUSTRALIA should already have determined whether they will be “reporting entities” under the AML/CTF Act. If so, they should be well advanced in identifying their designated services and assessing the money laundering and terrorist financing risks that affect them. Reporting entities are required to have implemented an AML/CTF Program by 12 December 2007, including a framework for identifying customers. Additional publications on this topic are available at the Mallesons website.