The Anti-Money Laundering and Counter-Terrorism Financing Rules Amendment Instrument 2014 (No.3) amends the AML/CTF Rules in relation to customer due diligence (CDD) from 1 June 2014.

The amendments require a reporting entity:
(a) to take reasonable measures to understand the ownership and control structure of a customer that is a legal person or arrangement;
(b) to identify and verify beneficial owners of a customer that is a legal person or arrangement;
(c) to determine whether the customer is acting on behalf of another person and, if so, to take reasonable steps to verify the identity of that other person;
(d) to identify and verify the settlor of a trust;
(e) to apply a range of measures in highrisk situations and some enhanced due diligence measures in addition to normal CDD measures. Reporting entities are required to take specific additional measures for customers (or their beneficial owners) who are politically exposed persons (PEPs);
(f) to collect information on the purpose and intended nature of the business relationship;
(g) to comply with new record-keeping requirements regarding documents collected as part of the processes of
identification, verification and updating of customers.

Transition
The Policy (Additional Customer Due Diligence Requirements) Principles 2014 provide reporting entities with comfort that certain enforcement action will not be taken by the AUSTRAC CEO between 1 June 2014 and 31 December 2015, for breaches of the additional CDD requirements, provided certain conditions are met. These conditions include taking ‘reasonable steps’ to implement the reforms during the policy principles period.

New Chapter 4 (customer identification)
The new CDD measures in relation to settlors, beneficial owners and politically exposed persons only apply to persons who become customers of a reporting entity after 1 June 2014.

Identifying beneficial owners
The new definition of ‘beneficial owner’ relates to the identification of the beneficial owner of a customer. The ‘beneficial owner’ of a customer means an individual who ultimately owns or controls (directly or indirectly) the customer. In the new definition “owns” means ownership (either directly or indirectly) of 25% or more of a person.

Whereas the previous definition limited the requirement to companies, the new definition extends that
obligation to all customer types as specified in Chapter 4.

The word ‘ultimately’ has been used in the definition in order to ensure that reporting entities do not need to collect and verify beneficial owner details at each level in a chain of ownership, but instead only need to collect and verify the details at the ‘ultimate’ beneficial owner level.

The amendments to Chapter 4 do not apply to:

• pre-commencement customers which are existing customers of a reporting entity who were first provided with a designated service before 12 December 2007; and
• customers covered by the statutory exemption at subsection 39(6) of the AML/CTF Act which relates to the designated services covered by item 40 (accepting payment of the purchase price for a new pension or annuity), item 42 (accepting a superannuation contribution, roll-over or transfer) or item 44 (accepting a Retirement Savings Account contribution, roll-over or transfer) of table 1 in subsection 6(2) of the AML/CTF Act.

A reporting entity needs to consider additional risk factors in identifying its ML/TF risk. The assessment of this risk is undertaken generally in respect to customers, rather than in relation to each customer and need not be undertaken prior to providing a designated service.

A reporting entity is allowed to undertake the new beneficial owner identification and verification requirements either before the provision of a designated service to the customer, or as soon as practicable after the designated service has been provided.

The new requirements require reporting entities to collect from the customer, and take reasonable measures to verify, the full name; and the date of birth or full residential address of each beneficial owner.

Reporting entities may assume that the customer and the beneficial owner are one and the same, unless the reporting entity has reasonable grounds to consider otherwise. As a consequence reporting entities need not make inquiries of
the customer in regard to beneficial ownership, unless they consider this is appropriate having regard to ML/TF risk.

Reporting entities are not required to identify beneficial owners if the customer is:

• a company which is verified under the simplified company verification procedure under paragraph 4.3.8;
• a trust which is verified under the simplified trustee verification procedure under paragraph 4.4.8.

Part 4.12 also introduces safe harbour procedures for beneficial owners where the beneficial owner is assessed by a reporting entity as being of medium or lower ML/TF risk. Both document and electronic based procedures are allowed for and are modelled on the existing safe harbour procedures for customers in Chapter 4.

A new Part 4.13, containing the new politically exposed person (PEP) identification and verification requirements, has been inserted into Chapter 4. Part 4.13 covers both customers who are PEPs (and who therefore are identified under the individual customer requirements of Chapter 4) and beneficial owners who are not customers, but if they are a PEP must be identified under the same provisions as a customer.

The new definition of ‘politically exposed person’ requires checks only to be made against ‘public or readily available’ information.

Part 4.13 requires an AML/CTF program to include appropriate risk-management systems to determine whether a customer or beneficial owner is a PEP and this must occur either before the provision of a designated service, or as soon as practicable after the designated service has been provided to the customer.

New Chapter 15 (ongoing customer due diligence)
The new version of Chapter 15 prescribes ongoing customer due diligence requirements in relation to both customers and the beneficial owners of such customers, including situations where the customer or beneficial owner is a politically exposed person.

The Know Your Customer (KYC) provisions have been amended to include requirements relating to beneficial owner
information. It retains the risk-based approach in regard to reporting entities assessing whether to collect any additional KYC or beneficial owner information.

An enhanced customer due diligence program must be applied when a customer is a foreign PEP or the customer has a beneficial owner who is a foreign PEP.

There are new provisions relating to beneficial owners, including obtaining KYC information, identifying the source of their funds or wealth and verifying or re-verifying identification information.