December 2006 Top Story:
***MLI ARCHIVE***
The rules: industry will have to get used to ‘evolution’
While the AML/CTF laws have successfully passed through parliament, many banks and financial institutions are still scratching their heads about how they should comply with the new laws.
This is because formal rules and guidelines about compliance obligations are yet to be issued by the Australian Transaction Reports and Analysis Centre (Austrac), the regulator charged with administering the new laws.
An exposure draft of the rules was issued in July for public comment, but final rules won’t come through until 2007, leaving industry in the dark about what needs to be done to comply with even the most basic obligations of the new laws.
Money laundering compliance expert Joy Geary says Austrac’s draft rules give a broad idea about what the final rules will look like “but we need much more certainty at this point”.
Industry commentators are not expecting final rules to be issued by Austrac before the New Year, despite financial institutions having to comply with new obligations such as recording electronic funds transfers from the time the new legislation receives royal assent on January 1, 2007.
Mallesons Stephen Jaques’ partner Ros Grady says: “I’m not expecting any of the new rules to be finalised before the end of March.”
Although the federal government has indicated it won’t back down from the timetable it has set out for full compliance with the new rules, it has agreed to extend by a further three months the 12 month moratorium period during which Austrac won’t prosecute banks that are in breach of the new laws.
The government is arguing this effectively extends the transition period for the new laws, but experts say this concession will have a limited effect if new rules have not been issued.
“I’d like to see the transition period changed to 12 months from when the rules are finalised,” says Grady.
According to Geary, there are two key rules that everybody needs that won’t be available before the laws come into effect.
These are the crucial “know your customer” rules, which set out how banks should properly identify their customers, as well as the transaction monitoring rules.
Geary argues that if the new customer identification rules are not available until, say, April 2007, entities caught by the new laws “will lose 25 per cent of the implementation period” that has been provided for these requirements.
Another key issue, says Grady, is the lack of direction over what constitutes a “low-risk service” under the new laws.
There is provision in the draft bill for certain low-risk services to be exempt from the identification requirements of the new laws, yet there is no information about which services might fit this category, making it tricky for financial institutions to know how to comply.
“You can’t assume you will get relief for low-risk services – you just have to comply. It would make sense for Austrac to work out which services are designated as low-risk so organisations know how to pull together their full compliance program,” she says.
Grady also says organisations are particularly nervous about how Austrac will apply its new powers because of the potential for it to issue fines of up to $11m to companies that fall foul of the new laws.
In contrast to Grady and Geary’s views, PwC partner Steve Ingram was less concerned over the tight timetable and the lack of defined rules to support the new AML/CTF laws.
Ingram says he is comfortable with the evolutionary nature of the development of the rules, and says industry should get used to an ongoing program of amendments to the laws and be prepared to respond to changes as they evolve.
“The rules will change fairly regularly – the legislation will change again in February; this is a normal procedure. It’s going to be an evolutionary process – this is just the end of the beginning,” he says.
Commentators and the industry are counting on considerable consultation between industry and government during the transition phase, particularly in relation to the development of guidance notes to support the new legislation.
Austrac has just issued its first guidance note but, rather than treating the directive as a guide, Geary says everyone will regard this “as what they have to do unless they have very good reason not to”. This potentially becomes regulation by stealth. Austrac has broad powers to create this guidance, but it is not subject to government review.”
Geary says it will be important for Austrac to work with industry to develop the guidance notes for the new laws, to ensure they can be practically applied. Discussions are underway between Austrac and industry to establish new consultation frameworks and processes for 2007.
A spokesman for Austrac said there will be ongoing consultation with industry on the development of the rules as the AML legislation is progressively introduced over the next couple of years. He said the draft rules would be amended to reflect the final legislation, but would not confirm a timetable for the release of the final rules.
© DelMonte Publications Dec 2006
