On April 13 2007 the following rules were registered under the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Act):
- Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No 1), and
- Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No 2),
(together referred to in this article as the Rules).
Superannuation trustees should take note of the following guidance provided by the Rules in establishing their systems and processes to comply with the Act.
Under the Act, a reporting entity, such as a trustee of a superannuation fund, is, from 12 December 2007, generally required to:
- Identify a new customer before providing a designated service to the customer. The up-front customer identification procedures do not apply to a trustee of a superannuation fund when accepting a contribution, rollover or transfer in respect of a new or existing member of the fund. However, the trustee will need to conduct the prescribed customer identification before:
- cashing all or part of a member’s benefit
- making a payment by way of a pension or annuity, or
- commuting a pension or annuity.
- On an ongoing basis, observe the Act’s identification requirements in relation to identifying, mitigating and managing the risk of money laundering or financing of terrorism (AML/CTF) under its AML/CTF program.
Under the Act, trustees must adopt and comply with an AML/CTF program which is developed in accordance with the Rules. Under the Rules, there are two parts to each AML/CTF program:
- Part A deals with identifying, mitigating and managing the risk that the trustee may reasonably face that a designated service may involve or facilitate money laundering or financing of terrorism. Chapter 8 of the Rules specifies the relevant considerations for a trustee in establishing appropriate risk-based systems or controls. The trustee must have regard to the nature, size and complexity of its business and the type of AML/CTF risk that it might reasonably face. Specifically, chapters 8 and 9 of the AML/CTF Rules (No 1) require that a trustee must have an AML/CTF program which:
- identifies and assesses changes in AML/CTF risk
- includes an AML/CTF risk awareness training program
- includes an employee due diligence program
- designates a person at management level as the ‘AML/CTF Compliance Officer’
- is subject to regular independent review, and
- is approved by the trustee’s governing board and senior management.
- Part B of the program outlines the customer identification procedures for members and potential members. Chapter 4 of the AML/CTF Rules specifies the requirements for Part B. The requirements in Chapter 4 only apply to those persons who became members and beneficiaries after 12 December 2007. Part B must include a procedure for the trustee to verify, at a minimum, the following information about a customer:
- the person’s full name, and
- date of birth or residential address.
The verification of information must be based on reliable and independent documentation or electronic data or both. Any discrepancies which are identified should be addressed. Where the trustee determines that the relationship with the person is of medium or lower risk, minimum requirements for verification are specified in the Rules.
The procedures for verification from documentation must specify which documentation or data is required in particular circumstances and the manner in which that documentation or data will be authenticated. There is further provision in relation to verification of agents of customers.
Chapter 6 of the Rules specifies the requirements in relation to the re-verification of the identity of persons who become members before 12 December 2007 and the actions which are required within 14 days after the day on which a suspicious matter arises.
Therefore, trustees will need to be mindful of the Rules when developing their AML/CTF programs.
Perpetual Trustees Australia Ltd v Wallace [2007] FCA 527 is an appeal from a determination of the Superannuation Complaints Tribunal (tribunal), which determination was made on 20 February 2006.
The tribunal’s determination related to the investment strategies made available by Perpetual Trustee Australia Pty Ltd (Perpetual) for the single member personal pension fund for Mr Harry Wallace (fund). The fund’s authorised investment strategies permitted Harry Wallace to elect for up to 98 per cent of the fund to be invested in highly speculative stocks. Between 16 March 2000 and 30 June 2000, whilst invested in the highly speculative stocks, the value of the fund dropped from $380,141 to $7,410. On 2 October 2000 the fund’s assets were sold and the fund was wound up, with an amount overdrawn of $8,161.
The tribunal determined, pursuant to the Superannuation Industry (Supervision) Act 1993 (SIS), that Perpetual had an obligation to devise investment strategies available for member selection that were correctly formulated having regard to Mr Wallace’s age and ill health. We note that there was inconsistent evidence before the tribunal as to whether Mr Wallace had elected the high risk investment strategy or a secure investment strategy.
The tribunal determined that the high risk investment strategy was, in the circumstances, a breach of SIS and that Perpetual had not been fair and reasonable in deciding not to compensate Mr Wallace for the loss suffered as a result of investment of the fund in highly speculative investments. The tribunal observed that Perpetual could compensate Mr Wallace through its power of compromise under the fund’s trust deed and the Trustee Act 1925 (NSW). Following on from this finding, the tribunal substituted its own decision to compensate Mr Wallace in order to place him in the position he would have been had the $380,000 been invested in a low risk investment strategy.
The appeal to the Federal Court by Perpetual was based on a number of factors, but was decided on the issue of whether the tribunal had the jurisdiction, under section 37 of the Complaints Act, to review the decision of Perpetual not to compensate Mr Wallace for the loss which was alleged to have resulted from the high risk investment strategy in breach of SIS.
Perpetual’s submission was that, in order for the tribunal to have had jurisdiction to review the decision, there must have been an identifiable discretionary power exercised by Perpetual which the tribunal determined had not been exercised in a ‘fair and reasonable’ manner. Once such a determination had been made, the tribunal could have re-exercised the discretion.
Justice Edmunds accepted the submission of Perpetual that the trust deed conferred powers on Perpetual to do things on behalf of the fund, in its capacity as trustee of the fund. A discussion ensued in the judgement regarding whether, in the circumstances, Mr Wallace’s claim constituted a claim against Perpetual, or against the fund itself.
Mr Wallace’s cause of action was based on section 55 of SIS, which provides that a person who suffers loss as a result of the conduct of another person who contravenes the governing rules of a superannuation entity may recover the amount of loss by action against the person involved in the contravention. Justice Edmunds concluded that section 55 of SIS provides a claim against the trustee and not against the fund. Given that the claim under SIS section 55 was against Perpetual, it was held that the power to compromise a claim under both the trust deed and the Trustee Act were irrelevant to Perpetual’s power to compromise the claim. Consequently, the Federal Court held that the decision under review, that is, Perpetual’s refusal to compensate the respondent for his loss alleged to have resulted from Perpetual’s contravention of SIS, was not a decision which the SCT had jurisdiction to review.
The 20 February 2006 determination was set aside by the Federal Court and Mr Wallace’s complaint to the tribunal dismissed.
This is a difficult case to interpret in relation to its application to future cases. The reasoning stems in part from the fact that the fund had been wound up but cannot be explained completely by this circumstance. Trustees should take note of the distinction between a claim against the trustee and a claim against the fund and should be mindful of the distinction in relation to future claims.
On 26 March 2007 Draft Corporations Amendment Regulations (Draft Regulations) were released, which seek to further implement the financial services reforms announced by the Parliamentary Secretary to the Treasurer on 14 August 2006 in the Corporate and Financial Services Regulation Review Consultation Paper.
The Draft Regulations contain proposed amendments to provisions of the Corporations Regulations 2001. Those amendments which are of particular interest to the superannuation industry are outlined below.
Updating Financial Services Guides and Product Disclosure Statements
The Draft Regulations propose an alteration to the circumstances in which financial service providers must update a Financial Services Guide (FSG) or Product Disclosure Statement (PDS). Under the Draft Regulations an FSG or PDS is only required to be updated (or a supplementary PDS or FSG provided) if the omission of the new information would be materially adverse to a client. In order for this provision to apply, the original PDS or FSG would need to contain a statement informing the client of the possibility that information it contains may not be up to date and specifying how updated information can be obtained at no charge. This essentially will place within the regulations relief which has previously only been available through class order relief and provide similar relief for FSGs in particular circumstances.
Treatment of superannuation trustees
Under the Draft Regulations, it is proposed that a trustee who has at least one superannuation fund with net assets of over $10 million will be treated as a wholesale client. This will provide some relief to trustees of pooled superannuation trusts.
‘Badging’ of disclosure documents
The Draft Regulations propose that ‘badging’ does not amount to the giving of general advice where a reasonable person would consider that the person who modified the original document (by placing the ‘badging’ on the document) did not provide, endorse or otherwise assume responsibility for the financial product advice contained in the document. This modification will clarify what has been a difficult issue.
Incorporation by reference in disclosure documents
The Draft Regulations propose to allow certain statements or information to be excluded from Statements of Advice (SoA) and PDSs where the SoA or PDS:
- refers to the information and the document where the information can be found
- provides sufficient detail about the information for the client to be able to decide whether to obtain the information, and
- states that the information can be obtained at no cost from a designated person.
For PDSs there is an additional requirement that the information must be publicly available in writing in either a document or on a website and the PDS refers to this other source.
It is proposed that, if these conditions are satisfied, the excluded information is taken to have been included in the SoA or PDS. This is likely to be a very useful modification to the law, which may contribute to the shortening of disclosure documents.
More information
For information regarding possible implications for your business, contact a member of the Financial Services team.