As Tranche 2 of Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) reforms edges closer to becoming law, legal practitioners—particularly small to medium-sized law firms—are facing a major shift in regulatory obligations.

Historically exempt, solicitors will soon be required to join other Designated Non-Financial Businesses and Professions (DNFBPs) in actively detecting and reporting suspicious financial activity. The focus is clear: stop criminals from laundering money through legal services, particularly in real estate, trusts, company formations, and financial transactions.

For SME legal practice owners, this means preparing for a compliance framework that is detailed, ongoing, and enforceable.

🧾 What’s Driving the Change?

Australia remains one of the few FATF-member countries yet to implement Tranche 2 obligations on the legal profession. This gap has drawn increasing pressure from:

• International bodies like the FATF
• Domestic regulatory agencies like AUSTRAC
• Parliamentary inquiries focused on financial crime and property laundering

Solicitors—particularly those involved in property transactions, trust management, fund transfers, and company setups—are seen as gatekeepers to the financial system and thus pivotal in the fight against money laundering.

Top Priorities for Solicitor SMEs in Preparing for Tranche 2

1. Understand the Scope of Affected Legal Services

Not all legal work will fall under Tranche 2. But areas that do include:

• Buying or selling real estate
• Creating or managing legal entities (e.g. trusts, companies)
• Managing client funds or assets
• Providing a registered office or business address
• Acting as a nominee or power of attorney

If your firm performs any of these services, you’ll likely be a reporting entity under Tranche 2.

2. Conduct a Risk Assessment of Your Practice

The first step in AML/CTF compliance is understanding your risks. For solicitors, that includes:

• Who your clients are (e.g. politically exposed persons, overseas clients)
• What services you offer that might be misused
• How funds move through your trust accounts
• Where the potential red flags are in day-to-day transactions

A documented firm-wide risk assessment is the foundation for your compliance program.

3. Develop or Update Your AML/CTF Program

Your AML/CTF program should be:

• Tailored to the size and complexity of your practice
• Built around your risk assessment
• Split into two parts: Part A (risk-based procedures) and Part B (customer due diligence)

It must outline:

• Staff roles and responsibilities
• KYC/ID verification processes
• Suspicious matter reporting procedures
• How you train staff and monitor compliance

4. Strengthen Your Client Due Diligence (CDD) Approach

As a solicitor, you may already verify clients under legal ethics rules—but under Tranche 2, the bar is higher.

Your CDD obligations will likely include:

• Verifying identity and beneficial ownership
• Understanding the source of funds and wealth
• Ongoing monitoring of client relationships
• Triggering Enhanced Due Diligence (EDD) for higher-risk clients

You may need to integrate digital ID checks, maintain audit trails, and decline clients if identity can’t be confirmed.

5. Establish Reporting Procedures

Solicitors under Tranche 2 will be required to submit:

• Suspicious Matter Reports (SMRs) when there’s reasonable suspicion of criminal intent
• Threshold Transaction Reports (TTRs) for cash transactions over $10,000
• Potentially International Funds Transfer Instructions (IFTIs) for relevant cross-border activity

You’ll need to develop internal protocols for identifying, escalating, and submitting these reports to AUSTRAC—and doing so confidentially.

6. Train All Staff on AML/CTF Responsibilities

Even in small practices, every staff member—legal or administrative—must:

• Understand AML/CTF obligations
• Know how to conduct due diligence
• Recognise red flags and suspicious transactions
• Follow internal reporting processes

Staff training should be mandatory, documented, and refreshed annually.

7. Prepare for Record-Keeping and Audit Requirements

Tranche 2 will bring with it the need to maintain:

• Identity verification records
• Client risk profiles
• Transaction histories
• Training logs and internal audit results

These must be retained for at least 7 years and available for AUSTRAC or regulatory review.

🧠 Bonus Tip: Don’t Wait for Legislation

While Tranche 2 is expected to be legislated soon, smart SME firms are already:

• Conducting gap analyses
• Developing AML/CTF templates
• Exploring legaltech and compliance tools
• Reviewing their client onboarding and trust account controls

Being proactive will help you adapt more smoothly when legislation is enacted—and protect your firm from regulatory and reputational risk.

🏁 Final Thoughts

Tranche 2 is not just about compliance—it’s about safeguarding the legal profession’s integrity. As the owner of a legal SME, your responsibilities include:

✔️ Assessing your exposure to money laundering risks
✔️ Implementing a compliant AML/CTF program
✔️ Training your team
✔️ Documenting your due diligence processes
✔️ Building a culture of integrity and reporting

By getting ahead of the changes, your firm not only avoids penalties but also positions itself as a trusted legal advisor in an increasingly risk-conscious environment.

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