AML/CTF reforms: should professional firms narrow their services?

The Tranche 2 AML/CTF reforms are prompting professional service firms across Australia to think about how to comply with the regulatory regime.

Discussions have understandably focused on implementation - setting up governance arrangements, undertaking risk assessments, implementing customer due diligence systems, and so forth.

However, before deciding how to comply, many are asking a more fundamental question:

Should we continue providing the services that are now regulated?

For many small firms and sole practitioners, the reforms present an opportunity to step back and reassess their service offering. Before investing time, money, and energy into compliance, it is important to:

• identify which services may constitute ‘designated services’, and

• decide whether it makes commercial sense to continue providing those services.

Tranche 2 is not just a compliance issue

The AML/CTF regime now touches certain professional services.

To date, professional services providers have been focused on understanding the new obligations and preparing for implementation. However, compliance should not be viewed solely as a regulatory exercise. It is also a business decision.

The costs and effort associated with compliance affect firms differently. For some firms, activities captured by the regime form a core part of their practice. Conveyancing, for example, is often a significant source of recurring work, and certain activities undertaken as part of those matters may fall within the AML/CTF regime. For other firms, regulated activities may arise only occasionally, such as when acting as registered office or principal place of business.

Importantly, the AML/CTF regime regulates particular activities, not services as firms may choose to describe or package them. A designated service may involve a single activity or multiple activities. Nevertheless, because those activities are typically undertaken as part of broader service offerings, firms should consider how the reforms affect the services they provide to clients.

Before implementing controls, you should first identify the activities you undertake, determine whether those activities are captured by the reforms, and assess whether continuing to provide them remains commercially worthwhile.

Reviewing your service offering

The AML/CTF reforms introduce new compliance responsibilities that will require time, energy, and resources.

Understanding the new compliance burden

Firms engaging in regulated activities need to:

• establish governance arrangements

• undertake risk assessments at the business and customer levels, and potentially the engagement level

• develop and implement controls to address those risks

• undertake customer due diligence for new customers, noting that transitional arrangements affect the extent to which existing clients are captured

• conduct ongoing customer due diligence and monitor customer relationships

• train personnel on AML/CTF compliance

• report suspicious matters to AUSTRAC, and

• maintain records of all of the above

Not all firms will be affected equally

The impact of these obligations will vary considerably between firms.

Larger firms are generally better able to absorb these obligations within existing risk and compliance functions. They may also have governance frameworks and dedicated personnel and systems that can be adapted to support AML/CTF compliance.

Smaller firms, however, often operate with more limited resources and may not have dedicated compliance personnel. This means that compliance responsibilities may largely fall on principals and fee earners who are already balancing client and practice management responsibilities.

Can the costs be recovered?

The economics of compliance will also differ from firm to firm.

In many cases, larger firms are also better placed to recover compliance costs through their fee structures. Where matters involve larger clients and higher-value work, the additional cost associated with AML/CTF compliance may represent only a modest increase in overall fees and be more readily absorbed or passed on.

For smaller firms, the equation is often reversed. Fees may be lower, margins tighter, and clients more price sensitive. In those circumstances, the cost of complying with the AML/CTF regime may represent a proportionately larger increase in the cost of delivering a service, making it more difficult to absorb or recover those costs.

Strategic review

As a result, smaller firms should consider whether the compliance burden associated with a particular service is proportionate to the value that offering delivers.

This is particularly relevant where designated services are provided infrequently, generate limited revenue, or sit outside the firm's strategic priorities.

Viewed through this lens, the reforms represent more than a regulatory change. They present an opportunity for firms to reassess their service offering and make deliberate decisions about where they invest their limited resources.

Start with identifying regulated activities

The first step is understanding what regulated activities your firm actually engages in.

This involves examining the activities listed in Table 6 of section 6 of the AML/CTF Act and determining whether any of the work performed by your practice constitutes a designated service.

Professional service providers are generally well placed to undertake this assessment, particularly when supported by guidance issued by AUSTRAC and professional bodies. Where uncertainty remains, legal advice should be sought to confirm the position.

While guidance continues to emerge, determining whether a particular activity constitutes a designated service is not always straightforward. For example, the restructuring category (Item 6) has been the subject of debate given the breadth of activities it may capture. This reflects the inherent challenge with regulating specific activities.

Consider the commercial value of the service offering

Once you have identified the regulated activities undertaken by your practice, step back and assess the role those activities play within your practice.

Questions worth considering include:

Which activities undertaken by the firm constitute ‘designated services’?

• How frequently are those services provided?

• What revenue do they generate?

• What do those services cost to provide (including compliance costs)?

• Are those services strategically important to your practice?

• Do they support key client relationships?

• Do they align with your practice’s long-term direction?

• If those services were discontinued, could that workload and revenue be replaced by other service offerings?

The answers to these questions will place firms in a stronger position to determine whether particular service offerings remain worthwhile, and whether they justify the investment required for compliance.

In some cases, the additional obligations may be a reasonable cost of continuing to provide valuable services. Equally, a decision to discontinue a designated service should not be viewed in isolation. Firms should also consider whether the resulting reduction in revenue can realistically be replaced through the growth of other service offerings. If not, exiting a service line may have broader implications for profitability, staffing levels and the long-term sustainability of the practice.

Make an informed decision

After completing this assessment, you should have a clearer understanding of whether the benefits of continuing to provide a service outweigh the costs of compliance.

Broadly speaking, there are two options:

1. Continue providing the service
   
   This will require you to invest in the systems, processes, and resources required to comply with the AML/CTF regime.
   
   This does not necessarily mean undertaking every compliance activity internally. Depending on the circumstances, firms may be able to leverage third- reliance arrangements to collect and verify KYC information. For example, where an accountant, real estate agent, or other reporting entity acts as the primary client contact.
   
   Alternatively, some firms may choose to engage specialist service providers to outsource certain AML/CTF compliance functions. While this may reduce the compliance burden on the firm, outsourcing in this way won’t provide the same protections as a reliance arrangement with another reporting entity.
   
   

2. Stop providing the service altogether
   
   This will require you to implement appropriate measures to transition away work and prevent those activities from being undertaken in the future.

There is no universal answer. The appropriate outcome will depend on your firm's size, resources, client base, risk appetite, and business strategy.

Conclusion

Much of the discussion surrounding the AML/CTF reforms has focused on implementation. While implementation is undoubtedly important, it may not be the first question firms should ask.

Before deciding how to comply, identify the activities undertaken by your practice, determine whether those activities are captured by the AML/CTF regime, and assess how those activities fit within their broader service offering and business objectives.

By identifying regulated activities and evaluating the value of the associated services, you can make an informed decision about whether those services justify the investment required for compliance. That assessment should extend beyond compliance costs alone and consider the broader commercial role those services play within the practice, including whether lost revenue and workload can realistically be replaced if a service is discontinued.

For some practices, the answer will be to continue providing those services and invest in compliance. For others, the costs associated with the AML/CTF regime may outweigh the benefits. In making that decision, firms should consider not only the cost of compliance, but also the potential impact that exiting a service line may have on revenue, profitability, staffing and client relationships.

For many firms and sole practitioners, the Tranche 2 reforms will not simply be a compliance challenge. They present a strategic opportunity to reassess your service offering and ensure that limited resources are directed towards the services that matter the most.

If you are considering how the Tranche 2 reforms may affect your practice, our team can help you work through the commercial and compliance considerations, including tailored AML/CTF training for your staff.

Authors: Juan Roldan, Lisa-Marie McKechnie & Rebecca Hegarty

 

This publication is intended as a source of information only. No reader should act on any matter without first obtaining professional advice.