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More on tranche 2, but when?

Monday 16 April 2018

Financial Crime 

The question of when DNFBPs will be captured in the Australian regulatory frameworks is still up in the air.

For the attendees of the Thomson Reuters Australian Regulatory Summit, perceptions were mixed, with 40% of the belief tranche 2 implementation in Australia will improve the current regulatory regime by covering previously-missed vulnerabilities, and 31% doubtful the regime will be implemented before they retire!

One thing the audience did agree on, however, was the question of why regulating DNFBPs has taken so long—especially when New Zealand, which implemented AML laws three years after Australia, has beaten Australia to it.

Bradley Brown, National Manager, Strategic Intelligence and Policy at Australian Transaction Reports and Analysis Centre (AUSTRAC), responded that tranche reform is just one of the many recommendations AUSTRAC has not yet managed to implement. Thus far, the regulator has achieved about the quarter of the FATF recommendations.

“There are 100,000 entities that are considered within the second tranche of reform,” he said, “and many of the entities are smaller businesses within Australia. There is no doubt in our minds the importance those sectors play in the community and the relationships and the interrelationships in the finacial sector.”

2016 saw the start of the consultation process, with the cost-benefit analysis taking place in 2017.

“All that material is with government,” Brown continued. “There isn’t a timetable or date when tranche 2 will be regulated; however, there is progress—important progress, not necessarily visible to yourselves—that will be continued throughout this year and into 2019.”

Brown’s response is interesting, since earlier this year there was growing speculation about when tranche 2 would be enacted.

Similarly, earlier this year, InfoTrack CEO, John Ahern, said there was increasing pressure to implement tranche2 of the AML/CTF Act, and that it was expected to happen sometime in 2018.

There has been speculation as to whether the introduction of tranche 2 will be similar to the approach currently being taken in New Zealand.

More Collaboration

Brown spoke a little about the impact that Home Affairs will have on AUSTRAC’s continued push to develop closer relationships with their partners.

The collaborative approach of the regulator also extends to industry, through their Fintel Alliance and their increased efforts to improve information-sharing between themselves and industry, as well as their eagerness to change the traditional adversarial relationship between regulators and industry.

However, continued effective collaboration with regulated entities could be challenged, as the 14,000 regulated entities currently captured by the regulation will grow exponentially when tranche2 is expanded to reach DNFBPs.

Summit panellist, Wendy Ward, Vice President and Head AML Compliance, at JAPA AMEX, said the challenge for AUSTRAC is keeping those entities engaged.

“We do want to see that enforcement action, but we need to understand the expectations of the regulator,” she said. She added that the regulator needs to understand the challenges facing their REs, as well.


Collaboration and Tranche 2

Gary Hughes, Barrister of Akarana Chambers, spoke to the tranche2 regime in New Zealand and the challenges of trying to stay abreast of regulatory expectations.

“It’s not straightforward, and we are doing it in a really rushed timeframe, which is part of the problem. You are going to get a lot of non-compliant or a lot of late-compliant entities.”

Clearly, this not ideal, but Hughes believes there were a few issues that needed to be worked through, particularly from the perspective of the legal profession. These issues included privilege and legal obligations, as well as financial industry concerns, such as the terminating of an account, which while made easier for banks, could prove problematic for law firms that may have legal requirements to complete the retainer.

“In New Zealand, we have a multi-supervisor system,” Hughes explain. “So, we have three supervisors, but it is not the party you report suspicious matters to, that goes to the police. “

He said there are challenges with coordination and being consistent, as well as concerns regarding slow guidance and worries around system outcomes.

Neil Jeans, Principal Consultant at Initialism, highlighted the challenges inherent in one expected outcome and one set of rules expected to cover a diverse range of regulated entities in Australia, and suggested that this is what is happening in New Zealand with the exemption of the AML laws.

“Where we are now with financial services is that it has been relatively easy to manage because a product is a product is a product,” he explained. “But when you start to move it into more of a service industry, significant changes need to be made to set legislation and to come up with a set of rules that cover all those entities in a way that is meaningful for them, because all those entities think about things very differently.”

Towards the end of the Summit, Nathan Lynch put forward the question of how the mutual evaluation from the Financial Action Task Force (FATF), coming in 2019, will reflect on Australia, if they haven’t yet implemented Tranche 2?

Brown’s response was nothing if not telling. “If it’s not in place in Australia’s environment by that particular time, then we have to land on the sword and see how we go from there.”