Australia’s property sector is preparing for major changes under the expanded Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) regime, with compliance with the Tranche 2 reforms estimated to cost the real estate sector $1.2 billion in this financial year alone.
Writing in the September/October edition of The Property Development Review, Professor James O’Donovan, Honorary Professor of Law at the University of Queensland, examines how the reforms apply specifically to property developers and where limited concessions may exist.
His analysis focuses on two important areas for developers: delayed verification and deemed compliance.
When Do Developers Fall Under the AML/CTF Regime?
Under the reforms, property developers can become reporting entities when they directly sell or transfer real estate as part of their business without the transaction being brokered by an independent real estate agent.
According to AUSTRAC guidance cited by Professor O’Donovan, this can include developers selling off-the-plan apartments, commercial property, subdivided land, apartment and townhouse complexes, and assigning off-the-plan contracts before settlement.
A developer can begin providing a designated service when it accepts a deposit, enters into a contract, receives funds or issues payment instructions.
One of the most significant consequences is the requirement to identify and verify buyers and undertake customer due diligence.
Importantly, it is the buyer or transferee, rather than owners or contractors involved with the project, who is treated as the developer’s customer for these purposes.
Developers May Be Able to Delay Verification
Professor O’Donovan argues there is an important distinction around exactly when customer due diligence must be completed.
While the general rule prevents a reporting entity from commencing a designated service before verifying the customer’s identity and completing customer due diligence, the AML/CTF Rules provide mechanisms for delayed verification.
For property developers selling directly to buyers without an agent, Professor O’Donovan writes that it is not necessarily required to complete full customer due diligence at or before signing a contract of sale, provided the requirements for delayed verification are satisfied.
Under this mechanism, verification of some KYC information may be delayed for up to 20 business days after commencing the designated service.
However, this is subject to strict conditions. Developers must have appropriate AML/CTF policies in place, take reasonable steps to verify the buyer’s identity, assess the buyer’s money laundering and terrorism financing risk, collect appropriate KYC information and establish on reasonable grounds the identity of the buyer and their principal.
What Counts as Reasonable Verification?
Simply collecting documents will not necessarily satisfy the requirements.
Professor O’Donovan explains that reasonable verification involves collecting reliable KYC information and checking it against independent sources. Any anomalies should be escalated to the developer’s Compliance Officer, and the transaction should stop if verification cannot be completed.
The process is intended to be risk-based and evidence-based, with developers expected to resolve discrepancies and document why they are satisfied with the buyer’s identity.
The article also identifies several approaches that will not meet the standard, including blindly accepting documents supplied by a buyer, relying on unverified statements, ignoring red flags or proceeding simply because the buyer is already known to the developer.
Commercial pressure is also not sufficient justification for proceeding where verification cannot be completed.
No Deemed Compliance for Developers
One of the most important distinctions highlighted by Professor O’Donovan concerns deemed compliance.
Real estate agents may be able to rely on deemed compliance in certain circumstances where they have taken reasonable steps to verify a customer who is not their client but cannot complete initial customer due diligence because that person is uncooperative.
Property developers do not receive the same concession.
If a developer cannot verify a buyer’s identity or required KYC information, Professor O’Donovan states that the developer must stop the transaction, assess and escalate suspicious matters, provide the appropriate “unable to verify” notice and document the process.
What Developers Need to Know
The practical message for developers is that delayed verification provides some flexibility, but it does not remove the underlying customer due diligence obligations.
Where the relevant requirements are satisfied, developers may have up to 20 business days after beginning to provide a designated service to complete certain verification requirements. But if customer due diligence cannot ultimately be completed within the prescribed period, the transaction may need to be abandoned.
Professor O’Donovan concludes that while real estate agents have access to deemed compliance in certain circumstances, developers do not. Where buyers fail to cooperate with KYC requirements, developers must not simply proceed with the transaction and may also be required to lodge a Suspicious Matter Report with AUSTRAC.
For developers preparing for the Tranche 2 regime, the distinction makes having appropriate AML/CTF policies, buyer verification processes and escalation procedures increasingly important before the reforms begin affecting day-to-day transactions.
