Explanatory Statement – Anti-Money Laundering and Counter-Terrorism Financing Rules in Respect of the Definition of ‘Correspondent Banking Relationship’
1. Purpose and operation of Anti-Money Laundering and Counter-Terrorism Financing Rules (AML/CTF Rules) in respect of definition of ‘correspondent banking relationship’
Section 229 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act) provides that the AUSTRAC Chief Executive Officer (CEO) may, by writing, make AML/CTF Rules prescribing matters required or permitted by any other provision of the Act to be prescribed by the AML/CTF Rules.
These AML/CTF Rules have been made for the purposes of paragraph (e) of the definition of ‘correspondent banking relationship’ in section 5 of the AML/CTF Act. Paragraph (e) permits the AML/CTF Rules to exclude banking services from the definition of correspondent banking relationship.
These AML/CTF Rules exclude all banking services except “nostro” or “vostro” accounts. While the terms nostro and vostro are not defined in the AML/CTF Act, it is commonly held that a ‘nostro’ account is a bank account established in a foreign country for the purpose of holding that country’s currency. A bank that maintains a nostro account for a foreign entity refers to the same account as a ‘vostro’ account.
These AML/CTF Rules commence on the day after the date of registration.
2. Legislative instruments
These AML/CTF Rules are legislative instruments as defined in section 5 of the Legislative Instruments Act 2003.
3. Likely impact
These AML/CTF Rules provide a positive impact as they have the effect of narrowing the scope of the definition of ‘correspondent banking relationship’ to nostro or vostro accounts only. They further clarify the meaning of ‘correspondent banking relationship’ to assist financial institutions to understand their obligations under the AML/CTF Act where such a relationship is involved.
A regulatory impact statement in respect of the AML/CTF Act including correspondent banking due diligence requirements was prepared prior to the passage of that Act. The AML/CTF Rules in respect of the correspondent banking relationship definition are relevant to correspondent banking due diligence.
4. Assessment of benefits
These AML/CTF Rules together with other AML/CTF Rules relating to correspondent banking, implement the requirements of the Financial Action Task Force’s Recommendation 7. In brief, Recommendation 7 requires financial institutions to gather sufficient information about a respondent institution to understand fully the nature of the respondent’s business, as well as its reputation and the quality of supervision.
This in turn will result in improved financial intelligence which will help Australian law enforcement agencies to combat money laundering and financing of terrorism. Increased financial intelligence will also help the Australian Taxation Office to detect tax evasion.
5. Consultation
AUSTRAC has consulted with the Privacy Commissioner, the Australian Customs Service, the Australian Federal Police, the Australian Taxation Office and the Australian Crime Commission in relation to these AML/CTF Rules.
AUSTRAC also published a draft of these AML/CTF Rules on its website for public comment. Industry was consulted extensively in the development of these AML/CTF Rules and AUSTRAC has considered industry’s comments.
6. Ongoing consultation
AUSTRAC will conduct ongoing consultation with stakeholders on the operation of the AML/CTF Rules.
Overview
The Anti-Money Laundering and Counter-Terrorism Financing Rules in Respect of the Definition of ‘Correspondent Banking Relationship’ 2007 were introduced to address the specific issue of defining what constitutes a correspondent banking relationship under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006. Enacted by the Australian Transaction Reports and Analysis Centre (AUSTRAC), the rules aim to clarify and narrow the scope of a correspondent banking relationship, excluding all banking services except "nostro" or "vostro" accounts. This legislative instrument is designed to assist financial institutions in understanding their obligations under the AML/CTF Act when such relationships are involved. The policy objective is to enhance financial intelligence, which supports Australian law enforcement agencies in combating money laundering and the financing of terrorism, as well as aiding the Australian Taxation Office in detecting tax evasion. The rules implement the requirements of the Financial Action Task Force’s Recommendation 7, ensuring that financial institutions gather sufficient information about respondent institutions to fully understand the nature of their business, reputation, and supervision quality.
Scope and Application
The Anti-Money Laundering and Counter-Terrorism Financing Rules in respect of the definition of 'correspondent banking relationship', made under Section 229 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006, apply to all financial institutions within Australia, specifically clarifying the scope of 'correspondent banking relationship' by excluding all banking services except those associated with 'nostro' or 'vostro' accounts. These rules aim to delineate the boundaries of correspondent banking relationships to assist financial institutions in understanding and complying with their obligations under the AML/CTF Act. The geographic reach of these rules is national, applying across all states and territories within Australia. While these rules define and narrow the scope of correspondent banking relationships, they do not specify exclusions or exemptions, nor do they mention any thresholds. The rules are legislative instruments as defined under the Legislative Instruments Act 2003, and their operation is intended to enhance financial intelligence, thereby aiding in the fight against money laundering and the financing of terrorism. AUSTRAC, the regulatory body overseeing these rules, has engaged in extensive consultation with various stakeholders, including government agencies and the financial industry, to ensure the rules are practical and effective.
Key Provisions
The Anti-Money Laundering and Counter-Terrorism Financing Rules in Respect of the Definition of ‘Correspondent Banking Relationship’ (AML/CTF Rules) are established under section 229 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF Act). These rules specify that the AUSTRAC CEO can prescribe matters required or permitted by the Act, with a particular focus on paragraph (e) of the definition of ‘correspondent banking relationship’ in section 5 of the AML/CTF Act. In this case, the AML/CTF Rules exclude all banking services from the definition of a correspondent banking relationship, except for “nostro” or “vostro” accounts. A nostro account is a bank account maintained in a foreign country to hold that country’s currency, while a vostro account is the same account as viewed from the perspective of the foreign entity. These rules clarify the scope of correspondent banking relationships to assist financial institutions in understanding their obligations under the AML/CTF Act.
The AML/CTF Rules impose specific obligations on financial institutions to ensure compliance with the Act. Financial institutions must understand and apply the definition of ‘correspondent banking relationship’ as prescribed by the AML/CTF Rules, ensuring that only nostro and vostro accounts are considered within this definition. This means that institutions must differentiate between these accounts and other types of banking services when assessing their correspondent banking relationships. They must also ensure that they gather and report the necessary information about respondent institutions to AUSTRAC, as required by the AML/CTF Act. This includes collecting sufficient information about the respondent’s business nature, reputation, and the quality of supervision, in line with the Financial Action Task Force’s Recommendation 7.
Failure to comply with the AML/CTF Rules can result in significant consequences. The AML/CTF Act provides for both civil and criminal penalties for breaches. Financial institutions that do not adhere to the rules may face civil penalties, which can include substantial fines. The exact amount of the fine is not specified in the AML/CTF Rules, but it can be significant depending on the severity and nature of the breach. Additionally, individuals responsible for the breach may face criminal penalties, which could include imprisonment. The maximum penalties are determined by the courts based on the specific circumstances of the case, but they can be severe, reflecting the importance of compliance with AML/CTF regulations.