The customer due diligence (CDD) requirements of the AML/CTF Rules are about to change.  From 1 June 2014, reporting entities (REs) and designated business groups (DBGs) will need to take action – to either change their AML/CTF programs or to have a transition plan to compliance, or both. 

The changes place more extensive obligations on RE/DBGs to:

  1. identity, verify, review and update information about the beneficial owners of customers;
  2. determine whether a customer or beneficial owner is a politically exposed person (PEP);
  3. understand the nature and purpose of their business relationship with customers;
  4. understand the control structure of non-individual customers in particular;
  5. identify the ML/TF risks arising from changes in the nature of the business relationship, control structure or beneficial ownership of its customers; and
  6. finally, and very significantly, broaden its enhanced CDD program.

Without a transition plan, RE/DBGs whose AML/CTF programs don’t comply are in jeopardy.

Beneficial ownership

This is all about who owns or controls a customer.

Just how this concept applies in practice to an individual is going to be interesting.  AUSTRAC has indicated that, in the case of an individual, a RE/DBG can assume that the customer and the beneficial owner are one and the same unless the RE/DBG has reasonable grounds to consider otherwise.

A beneficial owner of a company will be the person who ultimately owns 25% or more of it or who otherwise controls that company.  The test of control is broad and includes control via trusts, understandings and practices, whether or not having legal force, and the capacity to determine decisions about financial and operating policies.

Once identified, an RE/DBG must collect and take reasonable measures to verify each beneficial owner’s full name, date of birth and full residential address.

The new ongoing CDD requirements compel an RE/DBG to undertake reasonable measures to update and review information collected about beneficial ownership.

PEPs

The amendments contain a new definition of a PEP to mean an individual who holds a prominent public position or function in a government body or an international organisation, including:

  • head of state or head of a country or government;
  • government minister or equivalent senior politician;
  • senior government official;
  • judge of a superior court;
  • governor of a central bank;
  • senior foreign representative, ambassador, or high commissioner;
  • high-ranking member of the armed forces; or
  • board chair, chief executive, or chief financial officer of, or any other position that has comparable influence in, any State enterprise or international organisation.

The definition extends to immediate family members and close associates of each of these individuals.

ML/TF risk

Significantly, and for the first time, the amended Rules include a customer’s source of funds and wealth as a specific factor in considering the ML/TF risk.  This extends to that of beneficial owners and PEPs.

RE/DBGs will be required to add to their AML/CTF program elements which enable them to understand the nature and purpose of the business relationship with all of their customer types.  This includes, as appropriate, the collection of information relevant to that understanding.  In the case of non-individual customers (like companies or trusts) RE/DBGs will need to understand their control structure.

On top of that, the AML/CTF program will need to be re- designed to enable the RE/DBG to identify significant changes in ML/TF risks arising from changes in the nature of the business relationship, control structure or beneficial ownership of its customers, but then to assess what those changed ML/TF risks are for the RE/DBG.

Enhanced CDD program

Where a customer is high risk or where a suspicion arises, the new enhanced CDD program requirements will compel an RE/DBG to:

  • clarify or update beneficial owner information already collected from the customer;
    • obtain any further beneficial owner information, including, where appropriate, taking reasonable measures to identify and undertake more detailed analysis of the source of each beneficial owner’s wealth and funds; and
  • seek senior management approval for continuing the business relationship with a customer.

Transition plan

AUSTRAC has issued a draft supervisory approach under which it won’t, prior to 1 January 2016, commence civil penalty proceedings against a non-complying RE/DBG in specified circumstances

The specified circumstances, all of which will need to be present, are that the RE/DBG:

  1. complies with the new obligations as soon as practicable for any high risk customers who become a customer after 1 June 2014;
  2. establishes a transition plan before 1 September 2014 which includes actions and time frames to enable compliance before 1 January 2016;
  3. obtains approval for the transition plan from the relevant board(s) or similar governing body (Board) or, where no board exists, the chief executive officer or equivalent (CEO);
  4. sufficiently resources the implementation of the transition plan to enable the 1 January 2016 time frame to be met;
  5. regularly monitors and reports on the implementation of the transition plan to the Board or CEO and, as necessary, takes appropriate action to ensure time frames do not unreasonably deviate from those set out in the approved plan;
  6. provides AUSTRAC with a copy of the transition plan and information on progress against that plan upon request; and
  7. complies, in respect of the whole or part of the RE/DBG’s provision of designated services, with the new obligations immediately if they reflect current practice or can be reasonably accommodated under existing systems.

In the draft supervisory approach document, AUSTRAC reserves the right to withdraw or revise this supervisory approach at any time. In doing so, AUSTRAC will give due allowance to the consequences if a reporting entity has acted in reasonable reliance on AUSTRAC’s supervisory approach.

What you need to do

Until your AML/CTF program complies, you’ll need to have a transition plan that meets the requirements of AUSTRAC.

That plan needs to be in place before 1 September 2014, just over 3 months away!!

We suggest that your time could be better spent amending your AML/CTF program in order to comply.