What’s the difference between a standard AML program and one that a financial adviser needs (also called a “special program”)?
If a business or entity provides one or more designated services (listed in section 6 of the AML/CTF Act) and is geographically linked to Australia, it will be required to comply with the obligations set out in the AML/CTF Act, as a “reporting entity”.
Item 54 of Table 1 is a relevant designated service for most financial advisers. It is a service provided by an AFSL holder (in their capacity as licensee), which involves making arrangements for a person to receive another designated service in Table 1.
If the entity is a financial adviser, and operates as an authorised representative of an AFSL holder (and is not an AFS licensee), it is not typically providing an item 54 designated service. In this situation, it is not caught by the AML/CTF regime, unless it is providing another designated service which is listed in Table 1 (eg acting as an agent for a customer in acquiring or disposing of a security or a derivative (item 33)).
AUSTRAC has provided the following examples of financial advisers (it calls them financial planners) (who hold AFSLs) providing a customer with an item 54 designated service:
- A financial planner implements the advice given to a customer to invest in a share through a broker.
- A financial planner arranges for a customer to take out a life investment policy with ABC Life Ltd.
- A financial planner advises their client to obtain an interest in a product through an investor directed portfolio service and the financial planner undertakes transactions to realise this.
- A financial planner transfers money, with the written and signed consent of the client, from their client’s investor directed portfolio cash account to the client’s bank account.
What does “making arrangements” mean?
AUSTRAC explains that ‘making arrangements’ has a broader meaning under the AML/CTF Act than the definition of ‘arranging’ under section 766C of the Corporations Act.
According to AUSTRAC, ‘making an arrangement’ includes a scheme, plan, proposal, action, course of action or course of conduct to enable a customer to receive a designated service.
General indicators of ‘a course of action or conduct’ that is likely to amount to ‘making arrangements’ include:
- The financial planner is integral to introducing and completing the provision of the designated service (which is a financial service under the Corporations Act) to the customer and the provision of that designated service may not have occurred without that person’s involvement.
- The financial planner negotiated the terms and conditions between the product issuer and the customer involved in the transaction.
- The financial planner helped the customer complete a product issuer document (eg. PDS), including:
- explaining the meaning of questions and suggesting answers to complete the product issuer’s documentation
- collecting and transmitting the customer’s funds to the product issuer to facilitate completing the designated service.
- assisting and providing guidance on completing the product issuer’s documentation.
Exemptions for item 54 only service providers:
If you are an item 54 provider (and you do not provide any other designated services), you are exempt from complying with some of the AML/CTF obligations, as follows:
- You are not required to have a “Standard” AML/CTF Program which includes Parts A and B, which is the requirement for providers of other designated services.
- Subject to our comments below, the general position is that item 54-only providers are required to create and implement a “Special” AML/CTF Program, which only includes Part B. (Note: Part A sets out all of the general AML/CTF obligations that the entity must comply with, as set out in the AML/CTF legislation , and Part B sets out the entity’s customer identification and verification procedures.)
- You do not need to appoint an AML/CTF compliance officer, or have in place appropriate management oversight procedures.
- You do not need to lodge an Annual Compliance Report with AUSTRAC.
- You are not required to ensure that Part A of your Program is independently reviewed on a regular basis.
- You do not need to conduct ongoing customer due diligence.
The primary purpose of a Special AML/CTF Program is to set out your customer identification and verification procedures (also referred to as the Know Your Customer or KYC procedures).
However, AUSTRAC considers that it is good practice for item 54-only providers to also have in place an oversight structure which is based on the nature, size and complexity of your business, and includes the appointment of an AML/CTF compliance officer.
Accordingly, although the AML/CTF legislation states that a Special AML/CTF Program only includes Part B, we recommend that the Board of an item 54-only provider maintains ongoing oversight of the Special Program, and, in addition to the Know Your Customer section, in order to comply with your AML/CTF obligations, the Special AML/CTF Program should include the following procedures:
- Management oversight and governance procedures, which ensure that the financial planner complies with their AML/CTF obligations;
- Recordkeeping procedures;
- ML/TF risk assessment procedure, and an assessment of the type of ML/TF risks you might face;
- Risk-based systems and controls for determining whether any additional customer identification information must be collected and verified (including a customer ML/TF risk assessment procedure);
- Employee due diligence procedures, as well as appropriate control mechanisms to ensure that employees and authorised representatives are complying with the Program;
- AML/CTF training for employees and authorised representatives; and
- Suspicious matter reporting procedures.
We have created a template Special AML/CTF Program, which is appropriate for financial advisers who hold an AFSL, and only provide item 54 designated services.
However, it is important to note that if you are providing an item 54 designated service, and you are also providing another designated service (i.e. doing more than simply arranging for a person to receive another designated service), then you will be required to have in place a standard Part A and Part B Program. For example, if you act as an agent for a client in acquiring or disposing of a security or a derivative (item 33), then in addition to item 54, you are also providing an item 33 service, and thus you will not be able rely on the exemption, and must create and implement a Standard AML/CTF Program.
If you are not sure which designated services you are providing, Holley Nethercote Lawyers can provide you with tailored legal advice which explains your obligations.
Author: Naomi Fink, (Senior Associate)