News & Insights

With COVID-19 now in the past and business growth on the rise, the act of lending money in a commercial sense has never been easier with many non-bank lenders wrongly assuming their loans are largely unregulated.

If you are unaware of the recent amendments to the Anti-Money Laundering and Counter-Terrorism Act 2006 (Cth) (AML/CTF Act), regarding any unregistered loans business, then you could be struck with some serious fines. With commencement of these amendments on 9 November 2023, penalty units now have the ability to accrue overtime.

The crackdown on lenders in this industry has allowed for the Australian Transaction Reports and Analysis Centre (AUSTRAC) to take action against businesses who have lent money in the past and only recently registered.

So, what does this mean for private lenders? Private lenders who continue to be unregistered with AUSTRAC will incur daily fines of up to $3,756 and $18,780 for bodies corporate and further penalties may apply for breaches of the legislation other than the requirement to register.

What ‘loans businesses’ fall under the AML/CTF Act?

‘Designated services’ under the Act include making a loan, where the loan is made in the course of carrying on a loans business. The term ‘business’ taken directly from the AML/CTF Act includes a venture or concern in trade and commerce, whether or not conducted on a regular, repetitive or continuous basis.

This broad definition potentially manages to reach both ends of the spectrum in relation to what ‘loans businesses’ qualify as non-bank lenders regulated by the AML/CTF Act – even a one-off loan could end up costing a non-bank lender thousands in penalties. Accordingly, unaware businesses who provide a ‘designated service’ of a loan on an occasional or incidental basis, may fall into the trap of being liable for non-compliance of AML/CTF requirements. To put this into perspective, read literally, a shareholder whose core business is investment, and who makes a loan to the company in which it holds shares at a modest interest rate to fund working capital on a one off basis may be liable to comply with the AML/CTF Act.

It would appear that this was not the intention of the AML/CTF Act. The target of the AML/CTF regime was to observe and mitigate businesses who pose an AML/CTF risk. Submissions made by the Law Council of Australia regarding the AML/CTF Amendment Bill 2017 notes the inconsistencies between the plain words of the AML/CTF Act and its Replacement Explanatory Memorandum (REM). The REM states that businesses who should be captured under the AML/CTF Act, are those who provide a designated service only where the business provides that designated service in the course of carrying on a core activity of the business, or if they routinely provide the designated service. Despite this, literally read, the AML/CTF Act has cast the net wide to effectively require compliance by any entity who ever makes a loan with an interest rate applied.

So where does this leave someone who makes a loan but not as part of their core business or on a regular, repetitive or continuous basis? According to the REM, the intention of the drafting was that designated services would be limited to services provided to a customer in the course of carrying on the core activity of a business and not to capture activities which are peripheral to that core business activity (although it should be noted that a business can have more than one core activity). However, as noted by the Law Council of Australia, there have been conflicting statements by AUSTRAC about this point and policy intention cannot override the literal meaning of the AML/CTF Act. Accordingly, entities making loans, even if incidental to their core business or irregularly, are left with a choice – to either comply or risk significant penalties.

What are the Compliance obligations?

Reporting entities need to enrol on the Reporting Entities Roll within 28 days of commencing to provide the service and are explicitly prohibited from providing any designated service to customers if the customer identification and verification procedures have not been performed. While most lenders are aware of the requirement to comply with customer identification and verification procedures, many miss the first step of actually enrolling on the Reporting Entities Roll and accordingly, think they are compliant when they are not.

The legislative framework for the AML/CTF regime is complex. To simplify some of the main compliance obligations include:

• Enforce an AML/CTF program;
  • Part A which involves processes to identify, mitigate and manage money laundering and terrorism financing; and
  • Part B which focuses on the identification of your customer processes such as ‘Know Your Customer’ procedures.
• Report any suspicious transactions;
• Submit regular compliance reports;
• Keep records of all transactions and customer identification documents; and
• External auditing every 2 years;

Compliance can be both costly and time consuming to businesses and failing to comply will result in major fines. Business-positive amendments that came out of the reform include an expansion of circumstances to when reporting entities can rely on third party agreements.

Customer due diligence arrangements have been proved to reduce the time of customer identification process by 66% and decrease compliance costs by 80%. This introduces other compliance requirements with the Australian Privacy Principles but that’s for another time.

Summary

There’s no conclusive guidance as to what constitutes a ‘designated service’ of a ‘loans business’ under the AML/CTF Act as it depends on specific facts and few exclusions apply. Reporting Entities must be enrolled with AUSTRAC and follow all compliance requirements. Failure to do so will attract serious fines.

So, whether you are in the finance industry or not, it is very important to check your circumstances before providing financial accommodation to a customer.

If you would like more detailed information around this area of the law or unsure if your business activities fall under a ‘designated service’, please feel free to contact the Commercial team at Macpherson Kelley.