Do you need to conduct source of wealth checks on every client?

With Australia’s AML/CTF Tranche 2 reforms now in force, many practitioners are asking two key questions: “Which areas of legal practice are actually captured?” and “Do I need to undertake source of wealth checks on every client?”

The short answer is no. The AML/CTF regime applies to designated services, not to all legal work, and source of wealth enquiries are generally risk-based rather than mandatory for every matter.

The starting point: the regime regulates services, not practitioners

A common misconception is that all legal practitioners are now reporting entities under the AML/CTF Act.

The regime regulates the provision of designated services. A legal practice only becomes subject to AML/CTF obligations when it provides one or more designated services with the requisite Australian connection. Whether a firm is captured depends on the work it performs, not simply the fact that it is a law practice.

This means that many areas of legal practice may sit wholly outside the AML/CTF framework.

What legal services are designated services?

AUSTRAC’s guidance identifies some of the major designated services relevant to solicitors as including:

• Real estate (Item 1): conveyancing and property transactions
• Legal entities (Item 2): Assisting in buying, selling, or transferring controlling interests in companies, partnerships, or trusts.
• Handling money (Item 3): Receiving, holding, or managing client funds (including trust accounts) as part of a transaction.
• Financing (Item 4): Assisting with equity or debt financing for an entity or legal arrangement.
• Shelf companies (Item 5): Selling or transferring a shelf company.
• Restructuring (Item 6): Assisting in the creation or restructuring of entities or legal arrangements.
• Nominee roles (Items 7 & 8): Acting as, or arranging for someone to act as, a power of attorney of a body corporate or legal arrangement, a trustee of an express trust, a director, secretary, partner, or nominee shareholder.
• Business addresses (Item 9): Providing a registered office or principal place of business address.

What work is generally not captured?

Many legal services are not designated services. For items 1 – 4 and 6, advice or assistance will generally only be “designated” if it is sufficiently connected with, and directly advances a transaction, creation or restructuring.

Assistance that merely influences a client’s thinking – such as strategic advice, background research, or a summary of legal consequences are typically not regulated.

While practitioners should carefully assess each matter, examples of work that will often fall outside the regime include:

• litigation and ADR: dispute resolution services generally do not advance a future transaction and often relate to historical legal questions
• family law advice: ordinary advice, negotiation and representation do not directly advance a transaction, however, conveyancing or corporate work, transfers under a binding financial agreement, may be designated. nb court-ordered transactions are also exempt
• criminal law representation
• employment law advice
• personal injuries
• wills drafting, drafting a will containing a testamentary trust
• court ordered transactions for items 1-3 and 5
• estate administration – obtaining grants of probate / letters of administration, transfers following a court-ordered grant (transfers where no grant is obtained, may be a designated service)
• legal advice that does not involve facilitating a designated transaction, and
• preparation of legal documents where the practitioner is not assisting in planning or executing a designated transaction.

The critical question is whether the practitioner is providing a designated service, rather than merely giving legal advice. It is for this reason that the practitioner must clearly identify what services they are providing.

Doing a conveyance for a family member or friend on the odd occasion when you would not normally do so would bring you into the AML regime and the required substantive compliance piece.

Customer Due Diligence is required for designated services

Where a practice provides a designated service, it must undertake customer due diligence (CDD) and comply with other AML/CTF obligations. This includes identifying and verifying clients and, where applicable, beneficial owners and persons acting on behalf of clients.

However, not every client of a law practice will necessarily be a customer for AML/CTF purposes. Any identity or other checks undertaken outside the AML/CTF regime should have a separate proper basis and should not be represented as mandatory AML/CTF.

Do I need to conduct source of wealth checks on every client?

No.

One of the most persistent myths about the Tranche 2 reforms is that every client must provide evidence of their wealth or the origin of all funds used in a transaction.

The AML/CTF regime is fundamentally risk-based. A practice must assess and manage money laundering, terrorism financing and proliferation financing risks through an AML/CTF program tailored to its business.

Source of wealth and source of funds enquiries become more important where the circumstances indicate a higher level of risk. Examples may include:

• foreign, high risk domestic or international organisation politically exposed persons (PEPs) nb: mandatory for these clients;
• overseas entities from higher-risk jurisdictions;
• unusually large or complex transactions;
• unexplained wealth;
• transactions that appear inconsistent with the client’s circumstances; or
• matters that otherwise trigger enhanced customer due diligence requirements.

The legislation does not require practitioners to obtain detailed source of wealth evidence from every client. The level of enquiry will increase with the level of the perceived risk.

Source of funds and source of wealth enquiries are not required for every client or every designated service matter. A reporting entity’s AML/CTF policy must identify when that information will be collected and verified.

In some circumstances the enquiries are mandatory, including for foreign PEPs, high risk domestic or international organisation PEPs, and high-risk customers where the source of funds or source of wealth is relevant to the nature of the identified risk. In other matters, the extent of any enquiry and verification should be proportionate to the customer’s assessed ML/TF risk and the circumstances of the designated service.

Focus first on whether you are providing a designated service. If the answer is yes, apply risk-based customer due diligence appropriate to the client and transaction, rather than assuming every matter requires extensive source of wealth investigations.