Navigating the burden of compliance for Australian law firms: The Tranche 2 AML tsunami.

The legal sector is saturated with acronyms, brimming with abbreviations, and deafened by a cacophonous influx of regulatory updates, so you would be forgiven for disregarding or underestimating the latest legislation on the horizon. Well, don your lifejackets and prepare for the tsunami of the “Tranche 2 Anti-Money Laundering” (Tranche 2) regulations set to hit Australia in the next year.

This storm of reforms aims to enhance Australia's defences against financial crimes, comply with international standards, and streamline regulatory processes. According to the Financial Action Task Force (FAFT):

“[Australia] is compliant with 18 recommendations, largely compliant with another 12 recommendations, but remains partially compliant with 6?recommendations and non-compliant with 4.” FAFT, March 2024

In essence if Australia was having her homework graded, she has good potential but must focus and apply herself to keep pace with her peers and do justice to her true abilities.

‘Ensuring Australia is compliant with the international standards set by the FATF is a fundamental objective of the proposed reforms. Australia’s AML/CTF regime will next be comprehensively assessed by the FATF over 2026-27 where Australia will be assessed against 2 strengthened standards. A poor assessment risks Australia being ‘grey listed’ by the FATF, which could have serious consequences, including tangible economic and gross domestic product impacts, and increased threats, risks and burdens for law enforcement.”? Attorney Generals Department, May 2024

Poised to expand Anti-Money Laundering (AML) and Counter-Terrorism Financing (CTF) obligations to new sectors, including Australian law firms, these reforms will have profound implications for the independent legal market. This regulatory shift is not a question of scale; all firms must meet the same standards. For smaller practices, this will be particularly challenging due to limited resources, but non-compliance is not an option.

The second wave of consultations recently ended and we will provide an update as soon as the feedback has been assessed by the government. Lobbying and engaging with regulators is crucial to ensure that the guidance provided around the practical implementation of regulations is both clear and commercially viable. By actively participating in the regulatory dialogue, law firms can help shape policies that are not only compliant but also conducive to business efficiency and innovation, ultimately balancing regulatory requirements with operational feasibility.

Prepare your flood defences and batten down the hatches as we guide you through this timely tempest of regulations…

Distilling the objectives

The reforms have several objectives including:

• enhancing AML defences to deter, detect and disrupt financial crime;
• to ensure adherence to international standards for compliance, set by the FATF and the Australian Transaction Reports and Analysis Centre (AUSTRAC);
• to simplify and clarify what compliance looks like and how firms can achieve it.

A cornerstone of the reforms is the adoption of a comprehensive risk-based approach, which necessitates firms to develop and implement robust policies tailored to mitigating risks. Designing such policies is a meticulous process that requires gaining consensus and endorsement from partners, ensuring alignment with the firm's strategic objectives whilst meeting regulatory obligations.

“Firms that are unprepared for Tranche 2 will face significant challenges, including delayed business operations as intake processes are slowed by cumbersome compliance systems. Efforts to prepare compliant systems may fall short, leaving firms vulnerable to regulatory penalties. Striking the right balance between commercial interests and stringent compliance requirements is crucial to avoid operational disruptions and maintain competitive advantage.” Natalie Kuebler, managing director, Alt-V Law.

Avoiding the rip current

Implementing a risk-based approach under Tranche 2 involves developing a risk assessment framework and policies surrounding Sanctions Checking, Client Due Diligence (CDD) and Know Your Client (KYC) processes, which integrate with other key compliance processes like Conflicts and gaining consensus and endorsement from all partners and key stakeholders. Designing and implementing a comprehensive risk-based approach is inherently time-consuming due to its complexity and the need for meticulous analysis of potential variables. Your firms risk approach should be unique to your firm, tailored to your clients and as nuanced as your strategy. We don’t want to have to say we told you so: calm the seas of change by navigating a course to suit your firm.

Our tips

1. Ensure the right Chief Risk and Compliance Officer exists in your organisation structure to own the delivery of the new service. This resource must be a talented and respected senior leader. They have a difficult task ahead, to create and own a new function with a difficult remit. Often considered at odds with the commercial objectives of the business, this person will often fill critical roles such as a Money Laundering Reporting Officer?(MRLO), Compliance Officer for Legal Practice (COLP) and a Financial Crimes Officer (FCO).
2. Align risk policies with the firm's strategic goals and operational capabilities. This alignment ensures that compliance efforts are integrated seamlessly into daily operations and balances the compliance and commercial risk specific to the law firm in question.
3. Engage partners and relevant departments in consultations to gather insights and feedback on proposed policies. Incorporating diverse perspectives enhances the robustness and effectiveness of risk management frameworks.
4. Plan for design and phased implementation of your updated risk and compliance operating model to manage workload and operational adjustments effectively. This approach allows for iterative improvements based on real-world implementation experiences. Consensus-building among partners will be crucial to the success of Tranche 2 compliance efforts: Securing endorsement from the board and partnership on the finalised risk approach and policies. Their support is essential in allocating resources, establishing governance structures, and ensuring ongoing compliance oversight.
5. It is essential to prepare an engaging learning programme and educate partners and staff on new risk policies and procedures. Enhanced understanding fosters a culture of compliance and strengthens internal controls against financial crimes.

Staying Afloat

Preparing for Tranche 2 involves extensive planning, meticulous implementation, and ongoing adaptation to regulatory changes. This is not a simple project. It’s a complex project with an ongoing implication for operations forevermore. Engaging specialists and leveraging the experience of the global market will be fundamental to minimising pains.

For smaller firms without an established risk function, the task of preparing for Tranche 2 compliance will be daunting. The challenge lies not only in recruiting and hiring qualified personnel but also in building out essential compliance functions within a limited timeframe. These firms may face significant hurdles in identifying and acquiring the right talent with expertise in risk management and regulatory compliance. Moreover, establishing robust operational frameworks and implementing effective risk policies requires meticulous planning and resources that smaller firms may struggle to allocate. By taking proactive steps and seeking specialised assistance, even smaller firms can enhance their compliance readiness and mitigate the challenges posed by Tranche 2.

It is not often in the history of the legal profession, that the need for new functions has emerged. Those that approach the introduction of Tranche 2 as an organic evolution risk taking a revenue hit. Before you rush out to buy some shiny legal tech, let’s consider the bigger picture:

Fortify the ship with a Target Operating Model (TOM)

A target operating model provides a structured framework for designing a new risk and compliance function which achieves the new compliance measures. Key elements of a TOM will include:

• Mission and Vision:? Outline what your existing risk and compliance function delivers today and what it needs to achieve in the future state.
• Service Delivery Model: Define and categorise what services the risk and compliance function will provide and how each will be provided.
• Capability & Culture: Core competencies must be equally matched to skills and experience in this neck of the woods. Define what these are for all services.
• Organisation Structure: Document roles and responsibilities to support the capabilities required and create position descriptions which reflect the cultural nuances of the organisation.
• Governance: Establish governance mechanisms to ensure oversight and accountability across the risk and compliance service catalogue. This will include the policy framework and governing bodies for critical decisions.
• Process: Define process landscape model and detailed process maps to support compliance with the governance framework.
• Technology: Select technologies to support the processes and rigorously conduct due diligence. Do not fall victim to assumption-based implementation or the halo effect: just because x, y and z bought it, doesn’t make it good.

Navigate the seas

Given the magnitude of regulatory changes, a phased implementation approach is recommended. There are many industry examples of firms attempting to deliver compliance to the new framework in one stage, and the initial results have been consistently disappointing, so:

• Stage delivery: Plan the delivery approach to consider the change impact for the business. A dazzling framework which nobody follows does not constitute compliance. Implement highest priority changes first, then pause and reflect. What are people saying and doing?
• Get your engagement right: Don’t select yes men to validate your proposals and don’t just choose representatives from a single practice. Stakeholders who will scrutinise and challenge are fundamental to the success of the new programme.
• Pilot programs: Test new compliance processes in controlled environments before full-scale deployment to identify and address potential challenges.
• Learning and Awareness: Conduct comprehensive learning programs for staff to ensure understanding of new regulatory requirements and their implications. Develop robust change and communications strategies to support.
• Be prepared to pivot: Don’t expect roaring success and subordination. Navigating the raft of opinion with good measure and grace will be an important competency. Equally, be willing to negotiate and compromise where appropriate will help those suffering some shock to move to acceptance.
• Avoid change fatigue Abrupt operational changes can be unsettling and risky; maintain stability by navigating with careful tacks and turns.
• Incremental rollout: Avoid sudden, comprehensive overhauls that can overwhelm resources and disrupt operations and impact operational expenses.
• Iterative improvements: Continuously refine compliance measures based on feedback and evolving regulatory guidance.

Focus on the horizon

Tranche 2 represents a significant regulatory shift for Australian law firms. By understanding the objectives, proposals, and timeline of these reforms, firms can proactively prepare to meet new compliance requirements. This preparation is essential not only for regulatory compliance but also for contributing to Australia's broader efforts to combat financial crimes. Engaging with industry consultations and leveraging specialists will be crucial steps in navigating this storm.

The sea, known as one of the most formidable forces on Earth, serves as a poignant metaphor for the challenges independent law firms may face during the implementation of AML regulations. Just as sailors respect the power of the sea, firms must anticipate and manage the inevitable difficulties that come with regulatory compliance. While navigating these waters, it's crucial to set realistic expectations regarding the extent of disruptions and adjustments required. By doing so, firms can better prepare to weather the storm and emerge stronger and more resilient in their compliance efforts.

For more information on how Alt-V Law is uniquely qualified to assist, please contact us.

Useful Resources

• Australia’s 4th Enhanced Follow-up Report (FAFT), 27 March 2024
• Government Tranche 2 Consultation
• Report backs anti-money laundering reforms, The Hon Mark Dreyfus KC MP, 28 March 2024