AML/CTF Act 2024 Reforms: Foreign PEP Screening Requirements

PEP definition under the AML/CTF Act

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act) defines a ‘politically exposed person’ (PEP) through reference to the AML/CTF Rules. This definition establishes categories of individuals considered to be at higher risk of being involved in money laundering or terrorism financing due to their position and influence.

PEP categories include foreign PEPs, domestic PEPs, and PEPs associated with international organisations. A foreign PEP is defined as someone holding a prominent public position in a foreign country. The definition also extends to include immediate family members and close associates of individuals meeting these criteria.

It is important to note that PEP status is risk-based; it does not, in itself, prevent a reporting entity from providing designated services. However, it triggers a requirement for enhanced customer due diligence for foreign PEPs, and proportionate risk-based measures for domestic PEPs and those associated with international organisations.

2024 reform measures

The Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 introduces substantial changes to the AML/CTF Act, with the majority of reforms being implemented on a phased schedule from late 2024 to mid-2026. These changes impact reporting entities and their obligations regarding politically exposed persons (PEPs). The scope of these reforms is detailed further in AML/CTF Tranche 2 scope.

Key PEP-related measures focus on clarifying the definition of ‘prominent public position’ and ensuring alignment with the FATF Recommendations. Specifically, enhanced customer due diligence is now mandated for foreign PEPs. This includes requirements for senior management approval, verification of source of wealth and source of funds, and ongoing enhanced monitoring.

Reporting entities must strengthen their use of risk-based PEP screening tools to meet the new requirements. It is important to note that the existing treatment of family members and close associates of PEPs as PEPs themselves, as outlined in section 18 of the AML/CTF Rules, remains unchanged.

Enhanced due diligence (EDD)

When dealing with foreign Politically Exposed Persons (PEPs), reporting entities are required to undertake enhanced due diligence. This involves taking ‘reasonable measures’ to establish both the source of wealth and the source of funds. These measures must utilise reliable sources of information, such as commercial PEP screening providers and publicly available official lists.

Prior to establishing or continuing a business relationship with a foreign PEP, reporting entities must obtain approval from senior management. This approval may be sought from individuals such as the Chief Executive Officer or the Money Laundering Reporting Officer.

Following the establishment of a business relationship, ongoing enhanced monitoring of foreign PEP transactions is mandatory. It is important to note that for domestic PEPs and international organisation PEPs, enhanced due diligence is applied on a risk-based approach, only when the risk assessment indicates a higher level of risk.

AUSTRAC enforcement and compliance

AUSTRAC is responsible for enforcing compliance with the AML/CTF Act and Rules. Reporting entities that fail to conduct Enhanced Customer Due Diligence (ECDD) on foreign Politically Exposed Persons (PEPs) are in breach of section 36 of the AML/CTF Act and may face civil penalty action. These penalties can be substantial, with potential civil penalties reaching up to 100,000 penalty units per breach.

AUSTRAC regularly identifies areas of focus for regulatory action, publishing these as annual priorities. PEP compliance has been a consistent priority in these publications, demonstrating AUSTRAC’s ongoing scrutiny of reporting entities’ PEP risk mitigation strategies.

AUSTRAC has demonstrated its willingness to pursue significant enforcement action for AML/CTF Act breaches. Previous settlements, such as those with Westpac ($1.3 billion) and CBA ($700 million), highlight the potential financial consequences of non-compliance. The expansion of the AML/CTF Act to ‘tranche 2’ designated services from 1 July 2026 will further broaden the scope of reporting entities and AUSTRAC’s oversight.