Responsibility without Power: The Disproportionate Burden of AML/CTF Compliance on Legal and Insolvency Practitioners

There is a strong and intellectually respectable argument that the Australian AML/CTF regime imposes disproportionate obligations on insolvency practitioners and solicitors, particularly smaller practices. The argument is not that these professions should be exempt from measures designed to prevent money laundering and terrorism financing. Rather, it is that the obligations imposed on them may exceed what can reasonably be expected of professionals who are neither criminal investigators nor financial intelligence agencies.

The central criticism is this: AUSTRAC expects professionals to identify, assess and manage risks that even experienced law enforcement agencies, armed with extensive investigative powers, frequently struggle to detect. This criticism becomes particularly compelling when the professional is required to make judgements about beneficial ownership, the legitimacy of wealth, complex corporate structures, foreign transactions and suspicious behaviour on the basis of incomplete information.

There are, however, important distinctions between the obligations imposed by Parliament, the requirements prescribed by the AML/CTF Rules, and AUSTRAC's interpretation and enforcement of those requirements.

1. The fundamental problem: responsibility without investigative powers

An insolvency practitioner or solicitor may be expected to identify circumstances suggesting that funds or property are connected with criminal activity. Yet the practitioner ordinarily has none of the investigative powers available to the Australian Federal Police, ASIC or other public authorities.

A practitioner cannot ordinarily:

• Compel foreign banks to disclose confidential customer information.

• Obtain intelligence held by police or national security agencies.

• Require foreign governments to disclose beneficial ownership information.

• Access confidential criminal investigations or intelligence databases.

• Determine conclusively whether funds have been derived from criminal activity.

Nevertheless, the practitioner may be required to assess the risk that the transaction involves criminal property and decide whether enhanced customer due diligence, further inquiries or suspicious matter reporting is warranted.

There is an obvious tension between the responsibilities imposed and the means available to discharge them. The difficulty is not simply that the work is expensive. It is that the professional may be required to reach a defensible conclusion in circumstances where reliable information is unavailable. A properly designed risk-based regime must recognise this limitation.

2. The problem of uncertainty: what does reasonable diligence require?

The most troubling feature of the regime is the combination of an objective standard of reasonable diligence with uncertainty about the information necessary to satisfy that standard.

AUSTRAC's current guidance requires reporting entities to establish specified customer due diligence matters on reasonable grounds. It describes the standard as objective, taking account of information the practitioner knew or could reasonably have been expected to know. The reporting entity must also retain records demonstrating how it reached its conclusions.[1]

This creates three difficulties. First, there is no universally applicable checklist that guarantees compliance. The appropriate inquiry depends on the risk.

Secondly, the practitioner may be unable to determine whether the information obtained is sufficient until AUSTRAC subsequently examines the decision.

Thirdly, there is a danger of hindsight bias. A regulator investigating a transaction after criminal conduct has been discovered possesses information unavailable to the practitioner when the original decision was made.

A professional's conduct should be assessed by reference to what was reasonably knowable at the time, not what became apparent after a criminal investigation. That principle follows naturally from the objective standard described in AUSTRAC's own guidance. It should be central to the regulator's enforcement approach.

3. Insolvency practitioners occupy a fundamentally different position from ordinary commercial service providers

The argument becomes particularly strong in insolvency administration.

Consider a liquidator appointed to an insolvent company whose directors have disappeared, accounting records are incomplete, and financial transactions extend through several foreign jurisdictions. The liquidator's statutory responsibilities may require the investigation and realisation of assets, recovery of property and distribution of funds to creditors. Yet the liquidator may encounter difficulties identifying beneficial owners, explaining historical transactions, or establishing the source of funds.

There is a fundamental distinction between a professional who voluntarily agrees to facilitate a customer's transaction and an insolvency practitioner who assumes statutory responsibilities for administering a failed business. The latter may have no practical choice about the condition of the records or the people with whom the administration requires dealings.

AUSTRAC's guidance, updated in July 2026, expressly recognises that an insolvency appointment does not itself trigger AML/CTF obligations.[2] Whether a designated service is provided depends on the activities undertaken, and the reporting entity may be the individual appointee rather than the firm.

Nevertheless, difficult questions remain. For example, where an insolvency practitioner is required to sell property, should the practitioner bear the same compliance burden as a commercial intermediary who voluntarily undertakes a property transaction?

There is a respectable argument that the statutory duties of insolvency practitioners justify more specific regulatory treatment.

4. Solicitors face a conflict between professional obligations and regulatory responsibilities

Solicitors occupy a different, but equally difficult, position.

The solicitor's traditional responsibilities include loyalty to the client, confidentiality, independent professional judgement and the protection of legal professional privilege.

The AML/CTF regime introduces obligations to investigate specified aspects of the client's affairs, assess risk, monitor relevant transactions and report suspicious matters. Although legal professional privilege remains protected[3], the broader relationship between lawyer and client is affected. Specifically, the solicitor’s duty of confidentiality is no excuse for not complying with the AML/CTF Act.

Three concerns arise.

First, the solicitor may be required to question a client's honesty without any concrete evidence of wrongdoing. The inquiry may be prompted by general risk indicators, unusual structures or a connection with a higher-risk jurisdiction.

Secondly, compliance may discourage clients from seeking legal advice. This is particularly troubling where clients need assistance to regularise their affairs or resolve financial difficulties.

Thirdly, the solicitor may increasingly be expected to act as an intelligence-gathering intermediary for the State. That function is not necessarily compatible with every aspect of the solicitor's traditional professional role.

These considerations do not justify an unrestricted exemption for solicitors. But they do support carefully defined limits on regulatory obligations, particularly where legal advice, confidentiality and privilege are involved.

5. The Most Troubling Issue Facing Reporting Entities Under the AML/CTF Rules

The most troubling issue facing reporting entities under Australia's reformed AML/CTF regime is the uncertainty inherent in the risk-based approach, coupled with the potentially severe consequences of getting that assessment wrong.

The difficulty is not simply that reporting entities must comply with an extensive body of legislation and rules. It is that they must exercise independent judgement about what constitutes adequate compliance, often in circumstances where the legislation does not prescribe a single correct course of action.

This creates a fundamental tension:

The law gives reporting entities flexibility in deciding how to manage money laundering and terrorism financing risks but exposes them to regulatory action if AUSTRAC subsequently considers their decisions inadequate.

That tension is particularly significant for smaller professional practices, including solicitors, and insolvency practitioners, which may lack the compliance resources of major financial institutions.

6. The problem of uncertain legal standards

The Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and the AML/CTF Rules 2025 repeatedly require reporting entities to exercise judgement.

Examples include:

These expressions are not meaningless. They have legal content and must be interpreted in their statutory context. Nevertheless, their application to individual transactions can be uncertain.

Section 26F of the Act requires AML/CTF policies to appropriately manage and mitigate relevant risks, ensure compliance and reflect the nature, size and complexity of the reporting entity's business. Section 5-2 of the Rules requires policies to specify circumstances for collecting and verifying KYC information, including source-of-funds and source-of-wealth information.

The challenge is determining precisely what those obligations demand in a particular case.

7. The danger of retrospective regulatory judgment

Consider an insolvency practitioner assisting in the sale of a company's assets, in circumstances where the practitioner is providing a designated service.

The purchaser is an Australian company whose shares are held through several foreign entities. The practitioner obtains corporate records, identifies the beneficial owners, examines the source of funds and concludes that the transaction presents a manageable level of risk.

Two years later, AUSTRAC investigates the transaction following the discovery that one of the foreign entities was associated with money laundering.

The critical question becomes: Were the practitioner's inquiries reasonable in the circumstances known, or reasonably ascertainable, at the time?

The mere fact that criminal activity is subsequently discovered does not establish that the practitioner breached the AML/CTF legislation. Compliance must be assessed against the applicable legal obligations, not simply by reference to the eventual outcome. Nevertheless, the practitioner may face substantial difficulty demonstrating why the original decision was justified.

This is why contemporaneous documentation is so important. A sound risk assessment should record the information available, inquiries undertaken, reasons for the risk classification, and controls adopted.

8. The particular difficulty for insolvency practitioners

Insolvency practitioners face an additional complication. Their activities often involve distressed companies, incomplete records, disputed ownership, complex corporate structures and transactions conducted under considerable time pressure.

Unlike an ordinary commercial adviser, an external administrator may have statutory responsibilities that cannot simply be abandoned because a transaction presents compliance difficulties.

The practitioner must therefore distinguish between:

• Activities that constitute designated services and those undertaken solely in the administration of an insolvent estate.

• The person who is legally the customer and other parties whose identities or activities are relevant to the risk assessment.

• The practitioner's statutory duties and any separate obligations arising under the AML/CTF regime.

• Suspicious circumstances requiring further inquiry and those giving rise to a statutory reporting obligation.

These distinctions matter because the AML/CTF regime does not apply indiscriminately to every activity undertaken by an insolvency practitioner.

9. AUSTRAC's position provides some reassurance

Importantly, AUSTRAC has recognised the difficulties inherent in the risk-based approach.

In its updated regulatory statement of expectations of 21 May 2026, AUSTRAC emphasised that reporting entities should concentrate on actual financial crime risks, document those risks and their mitigating controls, and avoid applying identical measures to every customer.

AUSTRAC has also acknowledged circumstances in which there is no settled regulatory position.

Its guidance expressly recognises that a smaller, less complex business may use a simpler risk assessment than a large financial institution.[4]

These statements are helpful, although regulatory guidance cannot eliminate every uncertainty in the interpretation and application of the legislation.

10. The underlying problem: responsibility without complete certainty

The reformed AML/CTF regime deliberately moves away from mechanical compliance towards a system requiring reporting entities to understand and manage the risks arising from their own businesses. That is a legitimate regulatory objective. Criminal methods change, and no legislative instrument can anticipate every means by which criminals may exploit legitimate commercial transactions. But there is a price for flexibility.

Reporting entities must make difficult judgements, often without definitive guidance, while remaining accountable for the adequacy of those judgements. The greatest challenge is therefore not knowing what the AML/CTF Rules say. It is knowing when a reporting entity has done enough to comply with them. For insolvency practitioners and other newly regulated professional service providers, that uncertainty may prove more burdensome than the administrative requirements themselves.

11. The economic burden may be disproportionate

A large financial institution can distribute compliance costs across thousands or millions of transactions. A small insolvency practice or suburban law firm cannot.

According to the 2024 National profile of Solicitors, 78% of private law practices in Australia are sole practices.[5] The proportion was particularly high in Western Australia (83%). While these percentages represent the proportion of law practices, not the proportion of individual solicitors operating as sole practitioners, it is clear that the overwhelming majority of Australian law practices are small businesses, operating under the control of a single principal.

The position of the accounting profession is similar. Approximately 70-73% of private accounting practices operate as sole -principal practices.[6] Moreover, ARITA has stated that the majority of its membership is drawn from small and medium-sized practices.[7]

The Australian insolvency profession includes a substantial population of practitioners working in small and medium-sized practices. Unlike large multidisciplinary firms, these practices may lack dedicated compliance departments, specialist AML/CTF personnel and the financial resources necessary to maintain elaborate compliance systems. The extension of AML/CTF obligations to designated services provided by insolvency practitioners therefore raises a serious question of regulatory proportionality. A uniform approach to compliance administration may impose substantially different economic burdens on small and large practices, even where the underlying money-laundering risks are comparable

Consider the cumulative expense of maintaining an AML/CTF program, conducting customer due diligence, identifying beneficial ownership, screening politically exposed persons, training staff, retaining records, arranging independent evaluations and responding to regulatory developments.

These are substantial fixed costs, even where the number of designated services provided is small. AUSTRAC expressly acknowledges that a small, less complex business may maintain a simpler risk assessment than a large, complex business[8]. Nevertheless, the existence of a risk-based framework does not necessarily eliminate the disproportionate effect of fixed compliance costs. A regime can be proportionate in theory but disproportionately expensive in practice.

It is estimated that AML/CTF compliance will cost the real estate sector $1.2 Billion in the first year of the new regime. The cost to the legal and insolvency profession could be a multiple of this figure. This seems to be an excessive burden to place on these professions when less than 1 % of laundered money is recovered.

There is also a broader public-interest concern. Compliance costs may ultimately be borne by insolvent estates, unsecured creditors, small businesses and individuals seeking legal advice.

12. What should reporting entities do?

How can solicitors and insolvency practitioners minimise the compliance burden? Every reporting entity should adopt a documented decision-making framework incorporating five elements:

1. Identify the statutory obligation. Establish precisely which provision of the Act or Rules applies to the designated service.

2. Identify the relevant risk. Assess the customer, service, transaction, delivery channel and jurisdictions involved.

3. Determine the appropriate response. Record why the selected inquiries, verification measures and controls are proportionate to the risk.

4. Document the reasoning. Preserve evidence of what was known, what was investigated and why the ultimate decision was reached.

5. Review when circumstances change. Reassess the position when new information or unusual activity alters the risk.

This approach does not guarantee immunity from enforcement action. It does, however, create a defensible record of the reporting entity's compliance decisions.[9]

13. The strongest counterargument: these professions can facilitate money laundering

AUSTRAC's position cannot simply be dismissed. Solicitors and insolvency practitioners may participate in transactions involving substantial assets, complex corporate structures, trusts, property transfers and cross-border funds flows. Such transactions can be exploited to conceal beneficial ownership, disguise the proceeds of crime or give apparently legitimate explanations for criminal wealth.

AUSTRAC's professional designated-services guidance identifies transaction assistance, property management and corporate restructuring as activities potentially falling within the regime. [10]

There is therefore a legitimate public interest in ensuring that professionals do not knowingly or recklessly facilitate money laundering. Moreover, the law does not generally require professionals to prove that property is free from criminality. It requires reasonable, risk-appropriate inquiries and responses. AUSTRAC has also stated that it does not expect perfection from newly regulated businesses[11] and that its initial enforcement priorities concern wilful non-enrolment, complicity and wilful blindness.[12]

These qualifications substantially weaken any suggestion that AUSTRAC formally requires practitioners to guarantee that their clients are innocent. The stronger criticism is that the practical implementation of the regime may still encourage excessive defensive compliance.

14. The danger of defensive compliance

When obligations are uncertain and penalties potentially severe, practitioners have an incentive to do more than the law reasonably requires. They may commission unnecessary searches, demand excessive documentation, delay transactions, reject legitimate clients or create elaborate compliance records whose principal purpose is to demonstrate regulatory diligence.

This produces what might be called the compliance paradox: The more uncertain the legal standard, the greater the incentive to undertake unnecessary compliance work; yet that additional work does not necessarily improve the detection of money laundering. A profession may consequently devote substantial resources to documenting risk rather than reducing it.

The difficulty is especially acute when compliance becomes an exercise in producing forms, registers, matrices and reports without a corresponding improvement in professional judgment. Indeed, AUSTRAC itself has cautioned against processes that create an appearance of compliance but have little practical effect on money-laundering risk.

15. What reforms would make the regime more defensible?

The most persuasive response is not wholesale exemption but greater proportionality.

These reforms would retain the essential preventive functions of the AML/CTF regime while better recognising the practical limitations under which professionals operate.

16. Conclusion: the strongest argument against AUSTRAC's expectations

The strongest criticism of the AML/CTF regime is not that solicitors and insolvency practitioners should be relieved of responsibility for detecting suspicious circumstances. It is that the regulatory system risks confusing a duty to make reasonable inquiries with a duty to achieve reliable knowledge about matters that may be inherently unknowable.

A solicitor cannot always determine the true source of a client's wealth. A liquidator cannot always reconstruct transactions concealed by dishonest directors. A trustee in bankruptcy cannot always identify the ultimate beneficial owner of property passing through foreign structures. These limitations are not necessarily evidence of professional negligence or regulatory failure. They may simply reflect the limits of the information and powers available to the practitioner.

There is an important difference between requiring a professional to exercise reasonable judgement and expecting the professional to eliminate uncertainty. The former is a legitimate regulatory objective. The latter is impossible. The case for reform is therefore strongest when expressed as a principle of proportionality:

The law may properly require insolvency practitioners and solicitors to take reasonable steps to identify and mitigate money-laundering risks. It should not impose upon them the practical responsibilities of criminal investigators without providing comparable powers, information or resources. Nor should it judge their professional conduct by reference to facts discovered only after the event. A regulatory regime that fails to recognise these limitations risks substituting expensive procedural compliance for effective crime prevention.

[1] See AUSTRAC, “Overview of initial customer due diligence” at www.austrac.gov.au, viewed 21 October 2026.

[2] AUSTRAC, “How designated services apply to insolvency practitioners” in www.austrac.gov.au, viewed 20 October 2026. See also O’Donovan J, An ML/CTF compliance Manual for Insolvency Practitioners (Safe As Compliance Pty Ltd, 2026).

[3] See AML/CTF Act, ss 75N(3) and (4), 167, 49B(6A), 242 and 242A. See also O’Donovan J, The New Anti-Money Laundering and Counter-Terrorism Financing Laws in Australia (Thomson Reuters, 2026), [2.590],  [9.290], [9.350], [9.590], [9.730] and [9.830].

[4] AUSTRAC, “Update to regulator statement of expectations-May 2026”(21 May 2026)at www.austrac.gov.au, viewed 20 October 2026.

[5] Law Society of NSW, “2024 National Profile of Solicitors” (13 June 2025).

[6] Australian Bureau of Statistics, Accounting Practices , Australia 2001-02; Public Practice in Australia  profession practitioner survey; Accounting Practices Australia 2000-02 (28 May 2003) and Paperzz, Public Practice in Australia ( 1 September 2004).

[7] ARITA, Annual Report 2025(15 April 2026).

[8] See AUSTRAC, “Identify and assess your risks” at www.austrac.gov.au, viewed 20 October 2026.

[9] See generally O’Donovan J, An AML/CTF Compliance Manual for Solicitors and Legal practices and An AML/CTF Compliance Manual for Insolvency Practitioners (Safe As Compliance Pty Ltd, 2026), Appendix 1, Forms 1-450, available through drjomcompliance.com.au.

[10] AUSTRAC, “How designated services apply to insolvency practitioners” at www.austrac.gov.au, viewed 15 October 2026.

[11] See “AUSTRAC corporate plan 2025-2029” (29 May 2026) at www.austrac.gov.au, viewed 20 October 2026.

[12] See AUSTRAC, “Legal profession program starter kit: Getting started” and “Update to regulator statement of expectations, May 2026”(21 May 2026) at www.austrac.gov.au, viewed 20 October 2026.