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Legal Professional Privilege & AML for Australian Law Firms

AML Sorted - Supporting law firms with Tranche 2 reforms and beyond


AML Sorted explain what legal professional privilege means for law firms when it comes to filing suspicious matter reports

From 1 July 2026, Australian law firms will become reporting entities under AUSTRAC’s Tranche 2 AML/CTF reforms. That means you’ll be responsible for filing Suspicious Matter Reports (SMRs) if you suspect criminal activity.


But there’s one big question we keep hearing here at AML Sorted:


 “What about legal professional privilege?”


What is Legal Professional Privilege (LPP)?


Legal Professional Privilege (LPP) is a core principle of legal ethics and practice. It protects:


  • Confidential communications

  • Between a lawyer and their client

  • Made for the dominant purpose of giving or receiving legal advice, or

  • For use in current or anticipated legal proceedings


But not every communication with a client is automatically privileged.



Routine administrative actions, such as client identity checks or source of funds verification, are not protected. Neither are documents or conversations that involve public information or are shared in furtherance of unlawful conduct.


This distinction matters more than ever under Australia’s updated AML/CTF laws.


LPP Under AUSTRAC’s Tranche 2 Reforms


The upcoming reforms, which take effect from 1 July 2026, explicitly preserve and reinforce the protections offered by LPP.


“The new laws will provide clear protections for legal professional privilege. The common law doctrine of legal professional privilege will remain unchanged under the reformed laws.” 

AUSTRAC


In practice, this means law firms and other reporting entities will not be required to disclose any information or document that is reasonably believed to be privileged.


To support this, AUSTRAC will introduce a formal legal professional privilege (LPP) form (yet to be published), which firms can use to assert privilege when responding to compliance obligations.



This clarification offers welcome certainty for lawyers, confirming that the expanded AML regime does not override their duty of confidentiality or the legal rights of their clients. It ensures that AML/CTF obligations align with the principles of legal ethics already well understood and upheld across the profession.



Reporting Under Tranche 2: SMR or LPP Form?


Here’s the key change under the Tranche 2 reforms:


  • If you suspect something linked to a client or matter may involve criminal conduct, you must file an SMR.

  • BUT…  if the information is protected by LPP, you’re not required to disclose it.

  • Instead, AUSTRAC will introduce a Legal Professional Privilege (LPP) form, a way to flag that a concern exists, without breaching confidentiality.


This helps AUSTRAC understand that you’ve considered reporting but stopped short due to privilege.


What’s NOT Covered by LPP?


It’s important to know what doesn’t qualify:


🚫 Admin like client onboarding forms

🚫 Asking for a passport or bank statement

🚫 Collecting source of funds documentation

🚫 Communications not made for legal advice

🚫 Anything done to facilitate a crime


Just because something is part of your client process doesn’t mean it’s privileged. 

What AUSTRAC Expects You to Do


AUSTRAC’s guidance is clear: firms must be able to justify their use of the LPP form. You’ll need to:


  • Show you’ve applied the right legal test

  • Keep detailed records (privately stored and separate from client files)

  • Be ready to explain your decision-making if asked


And if you’re unsure? AUSTRAC recommends seeking independent legal advice before using the LPP form.


5 Practical Steps to Stay Safe


1. Train your team

Everyone involved in AML compliance ( not just partners) should understand what privilege is, and when it applies.

2. Add a privilege check to your SMR process

Create a review step before submitting any SMR. Use a quick checklist to assess privilege first.

3. Keep records (securely)

Log every decision to withhold an SMR based on privilege. Store these separately from the matter file, with limited access.

4. Seek advice early

Identify now who you’d go to for legal advice in a privilege grey area, don’t wait until you’re 48 hours into a 72-hour deadline.

5. Include it in your engagement letter

Let clients know you’re subject to AML laws, and in rare cases, may have to report - unless protected by privilege.


🤐 What About Tipping Off?


Once you file an SMR (or even consider filing one), you must be careful what you say to clients.


Disclosing that you’re filing, or that you suspect something, may count as tipping off, which is a criminal offence under the AML/CTF Act.


✅ Best practice:

Use your engagement letter to explain up-front that you may withdraw from a matter if documentation isn’t provided. That way, if you need to pull out, you can keep your reasoning vague and procedural.


Final Word: Plan Now, Not Later


Privilege is still your shield. But under the new AML regime, it can’t be used as a blanket to avoid reporting. You need a clear, confident, and well-documented process, one that protects both your client and your practice.


And as with all things compliance: prepare early. Don’t wait for your first tricky client or a regulator’s knock.


Need help with training, templates or policy updates?


At AML Sorted, we work with law firms across Australia to get ready for Tranche 2. Whether you need help updating your procedures, training your staff, or setting up your SMR process:


👉 Book a discovery call with Rhiannon or Amy today. 


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