Getting Started with AML: The Four Steps to Smart Client Due Diligence for Australian Law Firms

With Tranche 2 AML reforms now firmly on the horizon, many Australian law firms (yes even the small ones) are starting to think seriously about how anti-money laundering compliance will work in practice. For firms that haven’t previously been subject to AML obligations, the learning curve can feel steep.

However, starting is the biggest challenge to overcome because if you leave your compliance to the last minute for the reforms to kick in, that’s where the headaches come in strong.

A common starting point is to ask, firmwide, is:

What exactly is client due diligence (CDD), and how do we do it well?

In short, client due diligence (CDD) is the process of understanding who your client is, why they’re instructing you, and whether anything about the matter might be suspicious. Here’s the key, it’s not just about collecting a passport and ticking a box. There are four steps to effective compliant CDD checks, and each one of them plays an important role in protecting your firm from criminal risk.

Step 1: Risk Assessment: Before You Start the File

This is often missed by new entrants to AML regulation, but it’s arguably the most important part. Before you start collecting ID or getting documents, you need to assess the level of risk posed by the client and the matter.

That assessment should influence:

• What evidence you collect

• How far you go with verification

• Whether you escalate the file for compliance oversight

For example, acting for an individual buying a house in Sydney is likely low risk. Acting for a newly incorporated offshore company purchasing a chain of childcare centres? Much higher!

Red flags to look out for

• Clients from high-risk countries

• Complex ownership structures

• Third-party funding or unusual payment methods

• Last-minute changes to the structure or parties

Step 2: Identification and Verification (ID\&V)

This is the step most lawyers are familiar with, even if they’ve never used the term. It involves identifying who your client is and verifying that information using reliable, independent sources.

For individuals, that might be:

• A passport or driver licence

• Proof of address (such as a utility bill or lease)

For companies or trusts, it may include:

• ASIC or foreign registry documents

• Trust deeds or partnership agreements

• Identifying the people behind the structure (the beneficial owners)

But here’s a seriously major point: this step two only tells you who you’re dealing with, not whether what they’re doing makes sense or could involve money laundering.

If you’re working with a reputable Compliance Consultancy their processes and solutions should give you and your firm this advice and updates. At AML Sorted, we are a consultancy that goes over and above for our clients.

Here are our AML Programs to get you started.

AML SOLUTIONS

Step 3: Understand the Nature and Purpose of the Matter

This is where AML compliance starts to really bite.

You must ask and record:

• Why is the client doing this?

• What’s the commercial or legal rationale?

• Does the explanation align with the facts?

For example, if a client is establishing a company or trust, you should’ve got to dig deep with your detective skills and truly understand the motivation. If they’re buying property, how will they fund it? Does their explanation stack up?

The AML Sorted team headed up by solicitor and AML Compliance Specialist, Amy Bell, run a series of free training courses as well as live webinars that offer insights and updates.

Keep your eyes peeled for these HERE.

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Thanks for reading and do get in touch if you’d like any more information on how we can support you with your next steps.