Customer due diligence is a high priority for both global and national regulators. Customer due diligence is seen as a key tool in the global fight on terror and in cracking down on tax evasion and money laundering.

Australia’s response to the Financial Action Task Force’s revised international standards on customer due diligence and the United States Foreign Account Tax Compliance Act (FATCA) is likely to result in significant changes to current customer on-boarding requirements and increased compliance costs.

In response to the revised Financial Action Task Force standards, AUSTRAC has issued a discussion paper proposing reforms to current procedures. The focus of the reforms is on understanding who owns and controls the customer.

Many of the reforms propose a move from the current risk based discretion around understanding ownership and control based on the assessed money laundering and terrorist financing risk to mandatory procedures. For example, the paper proposes:

  • removing the existing discretion around understanding beneficial ownership and replacing it with a requirement that reporting entities must take reasonable steps to verify the identity of beneficial owners;
  • introducing a mandatory obligation to determine whether a customer is acting on behalf of another person and if so are they attempting to conceal or disguise the true ‘owner’ of the transaction; and
  • introducing a mandatory obligation to understand the nature of a customer’s business or occupation.

A new requirement to keep customer information up to date and relevant regardless of the money laundering and terrorist financing risk posed by that customer is also proposed.

These changes are likely to result in significant increased costs as a result of no longer being able to tailor procedures as appropriate based on the risk posed by the customer. It will also require changes to customer on-boarding systems, processes and documentation to capture the necessary information.

The Inter-Governmental Agreement currently being negotiated by Treasury in response to FATCA will also require significant changes to current customer due diligence processes including those relating to ownership and control. For example, reporting entities may be required to identify whether existing and new customers have any “Controlling Persons” who are U.S citizens or residents.

The closing date for submissions on the AUSTRAC discussion paper is 30 September 2013.

We urge industry to make submissions to ensure that the reforms create a consistent and workable approach to identifying beneficial owners and control and for updating customer information.