Paper 4 — information for digital currency exchange providers, remittance service providers and financial institutions.
Paper 1 | Paper 2 | Paper 3 | Paper 4 | Paper 5
This is an article of a series of articles explaining proposed measures to amend AML/CTF regime by the Attorney General’s Dept.
Paper 4 provides information for several sectors under certain circumstances.
I. digital currency exchange providers
II. remittance service providers, and
III. financial institutions.
The paper also proposes
1. Expanding the range of regulated digital currency-related services.
2. Amending the definition of ‘digital currency’
3. Ensuring the integrity of remittance providers and digital asset service providers
4. Streamlining value transfer service regulation
5. Updates to the travel rule
6. Reforms to IFTI reports
7. Cross-border movement of bearer negotiable instruments (BNIs)
1. Expanding the range of regulated digital currency-related services
Australia’s AML/CTF regime currently only regulates exchanges between digital currency and fiat currency, and vice versa. The department is proposing to extend regulation to capture all five services required to be regulated by the FATF.
Proposed amendment to Item 50A of Table 1 in section 6 of the Act
Proposed designated services include:
- Exchanging or making arrangements for the exchange of digital assets for money (or vice versa) where the exchange is provided in the course of carrying on a digital asset business. The customer is the person whose digital asset or money is exchanged.
- Exchanging, or making arrangements for the exchange of, one digital asset for another where the exchange is provided in the course of carrying on a digital asset business. The customer is the person whose digital asset is exchanged.
- Providing custodial services of a digital asset or a private key on behalf of a person, where the services are provided in the course of carrying on a digital asset business. The customer is the person whose digital asset or private key is held in custody.
- Providing a financial service (defined as a designated service in Table 1 of the Act) relating to an issuer’s offer or sale of a digital asset, where the service is provided in the course of carrying on a digital asset business participating in the offer or sale. The customer is defined in the relevant item in Table 1 of section 6 of the Act.
2. Amending the definition of ‘digital currency’
FATF states that generally NFTs are not subject to the global FATF standards where they are in practice used as collectibles. However, FATF Guidance requires that regulators look beyond marketing terms to the underlying purpose. If a token functions as a means of payment or investment instrument it should be subject to AML/CTF regulation.
The department proposes adopting the terminology of ‘digital asset’ to replace the current term ‘digital currency’ in the Act.
The department proposes that Central Bank Digital Currencies (CBDCs) could be explicitly captured under the definition of ‘money’.
3. Ensuring the integrity of remittance providers and digital asset service providers
Ensuring the integrity of remittance providers and digital asset service providers is crucial. Currently, AUSTRAC can refuse, cancel, or suspend their registration if they pose an unacceptable risk. However, there’s no authority to restrict or ban individuals from key roles within these entities, unlike other reporting sectors.
Proposed reforms aim to address this gap. They would empower the AUSTRAC CEO to prohibit individuals from involvement in management or business based on demonstrated unsuitability. This aligns with powers ASIC holds in the financial services sector under the AFSL regime.
Additionally, the reforms would enable the AUSTRAC CEO to consider:
- The capability of these providers and their key personnel to comply with AML/CTF regulations.
- The fitness and propriety of key personnel associated with the applicant, during registration, suspension, and cancellation decisions.
4. Streamlining value transfer service regulation
To streamline value transfer service regulation, the department proposes replacing specific terms with a unified concept: ‘value transfer service’. This would apply to remittance providers, digital asset service providers, and financial institutions offering remittance-type services as a core business. The aim is to prevent unintended inclusion of businesses not primarily engaged in remittance services under the AML/CTF regime.
The proposed designated services include:
a) Accepting instructions to transfer value as an ordering institution on behalf of a payer, where the customer is the payer.
b) Making transferred value available to a payee as a beneficiary institution, where the customer is the payee.
c) Passing on a message in a value transfer chain as an intermediary institution to another intermediary institution or the beneficiary institution. The customer is the ordering or intermediary institution from which the message was received.
These changes would be supported by an updated concept of a ‘value transfer chain’, defining terms like ‘ordering institution’, ‘intermediary institution’, and ‘beneficiary institution’ based on their roles in the value transfer process.
5. Updates to the travel rule
Updates to the travel rule are being proposed to ensure compliance with FATF requirements. Currently, only financial institutions are subject to the travel rule, which mandates the transmission of payer information only. Under the new streamlined value transfer services, all entities in the value transfer chain would be responsible for collecting, verifying, and transmitting travel rule information.
When the payer is an existing customer, the ordering institution wouldn’t need to collect or re-verify travel rule information if previously verified; it would only need to include it in the value transfer message.
For domestic and cross-border transfers, full travel rule information would generally be required, except in certain circumstances where a subset of information suffices due to technical limitations in existing payment systems.
Regarding digital asset transfers, full travel rule obligations would apply when assets move between financial institutions or digital asset service providers. For transfers involving self-hosted wallets, limited travel rule obligations would be imposed. Financial institutions and digital asset service providers would need to collect and keep records of travel rule information but wouldn’t necessarily transmit, receive, or screen for missing travel rule information.
6. Reforms to IFTI reports
a) Moving the responsible institution towards the customer
Reforms to IFTI reports are being proposed to address data quality issues stemming from the current ‘first in, last out’ approach. Currently, IFTI reporting obligations do not apply to all regulated entities. The obligation falls on the sender of an instruction to transfer funds out of Australia, or the recipient of an instruction sent into Australia, whether or not the payer or payee is its customer. However, this ‘first in, last out’ approach has led to data quality problems in IFTI reports, as the first-in institution in Australia can only report information about the payee based on the information received from the overseas bank
The proposed reforms suggest that Australian institutions initiating outgoing transactions or making incoming payments available for their customers should report IFTIs. This would align reporting obligations with institutions having direct relationships with payers and payees.
b) Updating the trigger
The department proposes to update the trigger for reporting IFTIs, so that IFTI reports would be triggered by the reporting entity sending value, or making it available to the customer, rather than it being triggered by the sending or receipt of an instruction which could subsequently not be given effect. This would minimise the possibility of cancelled and aborted IFTIs triggering the reporting requirement. IFTIs would still need to be reported within 10 days.
To achieve this, the department proposes IFTI reporting obligations be amended so that an IFTI report is triggered by a reporting entity acting on an instruction:
• for outgoing IFTIs, the ordering institution’s reporting obligation would be triggered by initiating the transfer, or
• for incoming IFTIs, the beneficiary institution’s reporting obligation would be triggered by making the transferred value available to the payee
c) Creation of single IFTI report format
Furthermore, the proposal seeks to abolish the distinction between IFTI-Es and IFTI-DRAs, merging them into a single IFTI report to adapt to evolving payment services and reduce regulatory complexity.
d) Extend IFTI reporting to digital asset transfers
The department proposes that IFTI reporting be extended to transfers of digital assets. This reporting would be limited to financial institutions or digital asset service providers transferring digital assets to, or receiving from, a counterparty based overseas on behalf of a customer. The geographic test for IFTIs related to digital asset transfers would therefore be tied to the overseas location of a counterparty’s permanent establishment or an overseas jurisdiction in which the overseas counterparty is registered or licensed.
e) Apply IFTI reporting to certain incidental remittances
The department proposes the Act be amended to expressly provide that IFTI obligations are triggered where a reporting entity, in providing a foreign currency conversion service contained in Item 50 of Table 1 of the Act, or a gambling service contained in Table 3 of the Act:
- transfers, or arranges to transfer value, out of Australia on behalf of the payer, or
- makes available, or arranges with the payee to make available, value transferred into or out of Australia to a payee
7. Cross-border movement of bearer negotiable instruments (BNIs)
The department proposes amending the definition of bearer negotiable instruments (BNIs) in section 17 of the Act to ensure clarity. The proposed amendment would specify that BNIs only include instruments that are truly bearer negotiable, such as those in bearer form, endorsed without restriction, or made out to a fictitious payee. This adjustment aligns the BNI definition in the Act more closely with the definition in the FATF Standards glossary.
