A comprehensive guide to AML compliance for law firms under Australia’s Tranche 2 reforms
Australia’s Anti-Money Laundering and Counter-Terrorism Financing (AML/CTF) reforms, commonly referred to as the Tranche 2 reforms, will introduce new regulatory obligations for certain legal services from 1 July 2026.
These reforms expand the scope of Australia’s AML regime to include several professional service sectors that have historically operated outside the regulatory framework.
For law firms, this represents a significant regulatory development. Firms that provide certain designated services may become reporting entities under the AML/CTF Act and will need to implement systems to identify, assess and manage money laundering and terrorism financing risks.
Law firms providing designated services will be able to enrol with AUSTRAC from 31 March 2026, with full compliance required by 1 July 2026.
Further information on the reforms is available from AUSTRAC:
AML/CTF Reform
Legal professionals play a key role in facilitating financial transactions and establishing corporate structures.
While these services are essential to legitimate economic activity, they may also be misused by individuals seeking to conceal the origins of illicit funds or obscure beneficial ownership.
International organisations such as the Financial Action Task Force (FATF) have long recommended that countries extend AML obligations to legal professionals involved in certain financial and corporate services.
The Tranche 2 reforms aim to ensure that law firms providing these services implement appropriate safeguards to reduce the risk of financial crime.
Not all legal services will fall within the AML regime.
Routine legal work such as litigation, family law, employment law or criminal defence will generally remain outside the scope of the AML/CTF Act.
However, legal services connected with financial transactions or corporate structures may be considered designated services.
Examples may include:
Where these services are provided, law firms may need to comply with AML obligations.
Understanding financial crime risks is an important part of AML compliance.
The legal sector may face several risks due to the nature of services provided.
Misuse of Trust Accounts
Law firm trust accounts are designed to hold funds on behalf of clients.
However, criminals may attempt to misuse these accounts to move funds through the financial system.
For example, funds may be deposited into a trust account and then transferred to other parties, creating the appearance of legitimate financial activity.
Complex Corporate Structures
Lawyers often assist clients in establishing corporate entities or trusts.
These structures can be legitimate tools for business or estate planning, but they may also be used to conceal beneficial ownership.
Multi-layered structures involving companies, trusts and nominee arrangements can make it difficult to identify the individuals who ultimately control assets.
High-Value Asset Transactions
Law firms frequently assist with transactions involving high-value assets such as property or businesses.
These transactions may present opportunities for criminals to introduce illicit funds into the financial system.
Cross-Border Transactions
Transactions involving international clients or overseas jurisdictions may present additional AML risks.
Jurisdictions with weaker regulatory frameworks may pose higher risks of corruption or financial crime.
Law firms that provide designated services may need to implement a range of AML compliance measures.
These requirements are designed to ensure businesses can identify and manage financial crime risks.
AUSTRAC Enrollment
Firms providing designated services must enrol with AUSTRAC as reporting entities.
Enrolment allows AUSTRAC to supervise compliance and provide guidance to regulated entities.
ML/TF Risk Assessment
Firms must conduct a Money Laundering and Terrorism Financing (ML/TF) risk assessment.
This assessment considers risks associated with:
The risk assessment forms the foundation of the AML compliance framework.
AML/CTF Compliance Program
Law firms must implement an AML/CTF compliance program outlining policies, procedures and controls designed to manage financial crime risks.
The program typically includes:
AML Compliance Lifecycle for Law Firms
Risk Assessment
↓
AML Compliance Program
↓
Customer Due Diligence
↓
Transaction Monitoring
↓
Suspicious Matter Reporting
↓
Ongoing Compliance Review
This lifecycle reflects the risk-based approach that underpins the AML regime.
Customer Due Diligence (CDD) for Law Firms
Customer Due Diligence is a critical component of AML compliance.
CDD ensures that law firms understand the identity of their clients and the nature of the legal services being provided.
CDD procedures may include:
CDD should generally be completed before providing a designated service.
AUSTRAC guidance on CDD is available here:
Customer Due Diligence
Beneficial Ownership Identification
One of the key objectives of AML compliance is to identify the individuals who ultimately control an entity.
Where a client is a company or trust, law firms may need to determine:
This information helps ensure transparency in financial transactions.
Ongoing Monitoring of Client Activity
AML compliance is not limited to client onboarding.
Businesses must also monitor client relationships and transactions throughout the course of the engagement.
Monitoring may involve reviewing:
Ongoing monitoring helps identify suspicious activity that may not be apparent during the initial client onboarding process.
Red Flags in Legal Transactions
Examples of potential red flags include:
When such indicators arise, businesses should conduct additional review.
Suspicious Matter Reporting
If a law firm forms a suspicion that a transaction may involve money laundering or terrorism financing, it may be required to submit a Suspicious Matter Report (SMR) to AUSTRAC.
SMRs provide critical financial intelligence used by law enforcement agencies to detect and disrupt criminal activity.
Further information on reporting obligations can be found here:
Reporting
Preparing for the Tranche 2 reforms will require law firms to review their services and operational processes.
Steps may include:
Early preparation can help ensure a smooth transition to the new regulatory framework.
Bravishi Advisory works with professional service firms to translate regulatory obligations into structured operational systems.
Our approach focuses on helping organisations understand the regulatory framework and implement practical compliance measures that align with their existing governance processes.
This may include:
The objective is to help firms integrate AML compliance into their operations in a practical and manageable way.
If your law firm provides services that may fall within the scope of the Tranche 2 reforms, understanding the new regulatory requirements is an important first step.
Bravishi Advisory can assist you in assessing how the reforms apply to your business and developing a structured approach to AML compliance.
If you would like to understand more about the Tranche 2 reforms or discuss your firm’s requirements, please feel free to contact us.
