FINANCIAL TRANSACTION REPORTS AMENDMENT BILL 2006 Explanatory Memorandum

Commonwealth of Australia Explanatory Memoranda

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FINANCIAL TRANSACTION REPORTS AMENDMENT BILL 2006

2004-2005-2006 THE PARLIAMENT OF THE COMMONWEALTH OF AUSTRALIA SENATE FINANCIAL TRANSACTION REPORTS AMENDMENT BILL 2006 EXPLANATORY MEMORANDUM (Circulated by authority of the Minister for Justice and Customs, Senator the Honourable Chris Ellison)

FINANCIAL TRANSACTION REPORTS AMENDMENT BILL 2006 General Outline The primary purpose of the Bill is to vary the amendments to the Financial Transaction Reports Act 1988 (the FTR Act) made by Schedule 9 of the Anti- Terrorism (No.2) Act 2005 (the ATA). Schedule 9 comes into force on 14 December 2006. The Bill needs to come into operation by that date. The amendments are to the new Division 3A which Schedule 9 of the ATA inserted at Part II of the FTR Act. The FTR Act requires identification of persons opening or becoming a signatory to an account with a `cash dealer'. It also requires reporting of certain transactions and transfers and creates certain record-keeping obligations. The purpose of the FTR Act is to reduce the incidence and facilitate the tracking of money laundering and terrorist financing. Consideration is being given to other reforms to strengthen Australia's anti-money laundering and counter terrorist financing standards as set out in the 40 Financial Action Task Force (FATF) Recommendations and the nine Special Recommendations (SR) on Terrorist Financing. Notably, SR VII requires the inclusion, with funds transfer instructions, of customer information about the sender of the funds. As it currently stands, when Division 3A of Part II of the FTR Act comes into force on 14 December 2006, it will require cash dealers in Australia to include required information about the ordering customer with an international funds transfer instruction when transmitting international funds transfer instructions (IFTIs) out of Australia, and creates offences for failure to include this information. The proposed amendments to Division 3A are as follows: · An amendment to the definition of `account' for the purposes of Division 3A of Part II of the FTR Act, · Clarification of the definition of `customer information' in section 17FA of the FTR Act, · An amendment to the definition of `customer information' for incoming IFTIs under section 17FB of the FTR Act, and · An amendment to restrict the application of Division 3A of Part II of the FTR Act to authorised deposit taking institutions (ADIs) (which are for example, banks).

Financial Impact The legislative change to amend the definition of `account' for the purposes of Division 3A of Part II of the FTR Act will assist industry by reducing the number of systems changes required at an institutional level. If the amendment to restrict the application of Division 3A of Part II of the FTR Act to ADIs is not made, then certain legitimate non-bank money remitters assert that they could be put out of business.

NOTES ON CLAUSES Clause 1 Short title This is a formal clause which provides for the citation of the Bill. This clause provides that the Bill when passed may be cited as the Financial Transaction Reports Amendment Act 2006. Clause 2 Commencement This clause provides that each provision of the Bill specified in column 1 of the table commences, or is taken to have commenced, in accordance with column 2 of the table. Any other statement in column 2 has effect according to its terms. In particular, column 1 of the table provides that sections 1-3 and anything in the Bill not elsewhere covered by the table commences on the day on which the Bill receives the Royal Assent. Column 1 also provides that the Schedule of the Bill will commence immediately after the commencement of item 10 of Schedule 9 to the ATA. Currently, as it stands the amendments to the FTR Act made by Schedule 9 of the ATA will come into force on 14 December 2006. Therefore, immediately after the commencement of those amendments, the amendments (as contained in the Schedule to the Bill) to Division 3A of Part II of the FTR Act will come into force on the same day. Clause 3 Schedule(s) This clause makes it clear that the Schedule to the Bill will amend the FTR Act in accordance with the provisions set out in the Schedule. SCHEDULE 1 The Schedule contains amendments to Division 3A of Part II of the FTR Act. Namely, amending the definition of `account' for the purposes of Division 3A of Part II of the FTR Act; clarifying the definition of `customer information' in section 17FA of the FTR Act; amending the definition of `customer information' for IFTIs under section 17FB of the FTR Act; and restricting the application of Division 3A of Part II of the FTR Act to ADIs. Item 1 This item inserts `Division 3A of Part II' before the reference to `Part VIA' in subsection 3(1) (definition of account) into the FTR Act. The purpose of the amendment is to restrict the new definition of account to Division 3A of Part II of the FTR Act. Division 3A of Part II of the FTR Act implements SR VII, which requires the inclusion, with funds transfer instructions, of customer information about the customer sending the funds. SR VII was developed with the objective of preventing terrorists and other criminals from having unfettered access to wire transfers for moving their funds and for detecting such misuse when it occurs.

Currently, Division 3A of Part II of the FTR Act contains sections 17FA (Customer information in international funds transfer instructions transmitted out of Australia and 17FB (Customer information in international funds transfer instructions transmitted into Australia). Item 2 An amendment to the definition of `account' for the purposes of Division 3A of Part II of the FTR Act Item 2 inserts a definition of the term `account' into Division 3A for the purposes only of Division 3A of Part II of the FTR Act. New section 17FAA will define the term `account' to include a credit card account, a loan account (other than a credit card account) and an account of money held in the form of units in either a cash management trust or a trust of a kind prescribed by the regulations. In order to avoid any doubt, it is immaterial whether an account has a nil balance or whether any transactions have been allowed in relation to an account. It is intended that the new definition of `account' should only be applicable to and confined to Division 3A of Part II of the FTR Act. The other existing definitions of `account' as defined as subsection 3(1) and section 40C (Part VIA) of the FTR Act will be retained. That is, the meaning of account (as defined at subsection 3(1)) will still be applicable for all parts of the FTR Act except for Part VIA of the FTR Act and Division 3A of Part II of the FTR Act. Items 3, 4, 5, 6, 7, 8, 9, 11, 12, 13, 14, 15, 16 Amendment to restrict the application of Division 3A of Part II of the FTR Act to ADIs (which are for example, banks) Items 3, 5, 6, 7, 8, 9, 11, 12, 13, 14, 15 and 16 omit the reference to `cash dealer' and substitute the term `ADI' in paragraph 17FA(1)(a), paragraph 17FA(2)(a), paragraph 17FA(2)(b), subsection 17FA(3), paragraph 17FB(1)(a) and subsections 17FB(2), 17FB(4), 17FB(5) respectively. The term `ADI' (authorised deposit taking institution) is defined in subsection 3(1) to mean: `(a) a body corporate that is an ADI for the purposes of the Banking Act 1959; or (b) the Reserve Bank of Australia; or (c) a person who carries on State banking within the meaning of paragraph 51(xiii) of the Constitution.' Item 4 repeals current paragraph 17FA(1)(b) and substitutes new paragraph 17FA(1)(b) to say that the ADI is acting on behalf of, or at the request of, another person who is not an ADI. This amendment is intended to restrict the application of Division 3A of Part II of the FTR Act to ADIs only. The reason for this restriction is due to problems that have arisen with the current application of Division 3A of Part II of the FTR Act to non- bank money remittance businesses. Presently, the FTR Act does not distinguish

between non-bank IFTIs which are `same-institution' funds transfer instructions and non-bank IFTIs involving `multiple' institutions. It is impracticable to require IFTIs sent from one institution in one country to the same institution in another country to include originator information because in effect this would require the institution to `pass on' the information to itself. In these situations, funds transfer requests are registered on a single internal system of the institution, while the actual transfer of funds is effected through net settlements between the institution's various accounts around the world. Presently, since non-bank money remitters report IFTIs to the Australian Transaction Reports and Analysis Centre (AUSTRAC), this means that ordering customer information is currently available to law enforcement authorities. The amendment to restrict Division 3A of Part II of the FTR Act to ADIs will not change this. Item 10 Clarification of the definition of `customer information' in section 17FA of the FTR Act Item 10 repeals the current paragraph 17A(3)(b) and substitutes a new paragraph 17A(3)(b) to make clear that either an account number or an identification code can be used. Some customers sending money by an IFTI will not be an account holder with a financial institution and clearly in this instance an identification code should be able to be used. In practice, financial institutions can transmit multiple numbers of IFTIs in batch form and even if some or all are on behalf of account holders it is more practicable to use one identification code to cover all of the IFTIs being transmitted in a particular batch. This amendment is intended to clarify that an account number is only required to be included in or with the instruction when the instruction relates to transferring money directly from a single account held by the customer with the ADI. In all other cases, an identification code should be permitted instead of an account number. Item 17 An amendment to the definition of `customer information' for incoming IFTIs under section 17FB of the FTR Act Item 17 omits the words `if the ordering customer does not have an account with the ordering organisation' from subparagraph 17FB(6)(c)(ii) of the FTR Act. The effect of this amendment is that the customer's account number or the identification code is now given equal standing for incoming IFTIs received by Australian ADIs under section 17FB of the FTR Act. The purpose of the amendment is overcome the potential practical difficulties faced by Australian ADIs and AUSTRAC in determining whether a foreign customer has an account with a foreign ordering organisation.

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