Tranche 2 AML rules expose insurance gaps
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Accountants and real estate agents now face AUSTRAC obligations, and many assume their professional indemnity policy has them covered – brokers have good reason to check
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SOMEWHERE IN a suburban real estate office, a property settlement that looks entirely routine is being filed away. The buyer paid, the keys changed hands and the commission cleared. If questions about that buyer surface five years from now, the agency’s defence will rest on whatever its records can prove.
This is the position accountants and real estate agents across Australia now occupy under the Tranche 2 reforms introduced by the Anti-Money Laundering and Counter-Terrorism Financing Amendment Act 2024 (Cth), which amended and expanded the existing Anti-Money Laundering
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Tranche 2 entities
from 1 Jul 2026
Real estate businesses, including real estate agents, buyers’ agents and property developers
“Treat Tranche 2 as a professional risk-management issue, not merely a regulatory deadline”
Ross Chambers,
Hutch unDERWRITING
and Counter-Terrorism Financing Act 2006 (Cth). The reforms bring certain designated services provided by these professions within AUSTRAC’s regulatory oversight. They are also a live issue for the brokers who insure them because they have created exposures that a professional indemnity (PI) policy was never designed to absorb on its own.
Hutch Underwriting has developed occupation-specific PI wordings for both professions, alongside management liability (ML) cover, and its view of where firms go wrong starts with a single assumption.
“The biggest misconception is that Tranche 2 is simply a compliance checklist and that an existing PI policy will automatically protect a firm from all consequences of getting it wrong. In reality, a combination of PI and ML is needed to address the concerns that clients may have around their Tranche 2 obligations, and it’s always best to place these together where you can,” says Ross Chambers, head of long tail at Hutch.
The obligations behind the checklist The list of duties is longer than many firms expect, and each one leaves its own paper trail. “The reforms extend Australia’s existing AML/CTF regime to designated services provided by professions, such as accountants, and real estate businesses. They require affected firms to assess financial crime risks, verify customers and beneficial owners, monitor relationships, report suspicious matters, train staff and maintain appropriate records,” says Alex Burrows, PI and liability claims specialist at Hutch.
Each of those duties can fail in a different way, and the manner of the failure decides which policy, if any, picks up the bill.
“For Hutch policyholders, the critical distinction is between an accidental professional failure, a regulatory investigation, a statutory penalty, and the cost of correcting an inadequate compliance program. These are distinct exposures and may attract different insurance responses from different policies the client may hold,” says Burrows.
The design of the legislation compounds the problem, since penalties can fall on the business, on its directors or on both. “Due to how the penalties are structured and applied in the legislation, a single policy may not be able to respond to the variety of liabilities that may arise from breaching the Act’s requirements,” Burrows adds.
The paper trail that has to explain itself Record-keeping sounds like the least glamorous part of the reforms, and it is where firms are most likely to be caught out.
“The seven-year retention period receives the most attention, but the greater challenge is creating records that demonstrate how decisions were made,” says Burrows.
What must be kept runs from the firm’s overall program down to the reasoning behind individual client decisions.
“Firms need to retain evidence of their AML/CTF program, customer due diligence, risk assessments, transactions, training and escalation processes. Records should show what information was obtained, how it was verified, which risks were identified and why the firm decided to proceed, decline or undertake enhanced due diligence,” Burrows explains.
Few professional offices hold that information in one place, and the scattering looks different depending on the trade.
“For a real estate agency, that information may be scattered across the CRM, listing files, emails, text messages and employees’ phones. For an accounting practice, it may be spread across tax, bookkeeping, corporate secretarial, trust and advisory files,” Burrows says.
Back in that suburban office, the moment of reckoning may arrive long after the staff who handled the sale have moved on.
“From a claims perspective, an undocumented decision is difficult to defend. Years later, the issue may not be whether the insured believes it completed the right checks, but whether the contemporaneous file substantiates it,” Burrows adds.
The pressure point is the higher-risk file, where a standard identity check will not do.
“It’s important to have clear and demonstrable guidelines on how decisions are made in relation to suspicious or high-risk transactions, particularly when customer due diligence isn’t suitable and enhanced due diligence is required. Clients want to be able to demonstrate how they have complied with the guidelines in the event of an investigation,” says Burrows.
When a breach becomes a claim Brokers fielding calls from anxious clients will need to unpick one assumption early, which is that any breach of the new rules becomes a PI matter.
“Non-compliance may not result in a PI claim at all. A statutory breach does not automatically constitute professional negligence or trigger a PI policy. In these cases, the more appropriate policy to respond may be an ML policy,” Burrows says.
The distinction turns on who is doing the complaining: a regulator enforcing the statute, or a client or counterparty left out of pocket.
“PI exposure generally arises when the conduct underlying the breach also gives rise to an allegation that the professional caused another party financial loss. If the penalty is statutory, coverage under a PI policy will be limited, if available at all,” Burrows explains.
The scenarios are easy enough to sketch for both professions. “An accountant might be accused of failing to identify the true beneficial owner when assisting with a company or trust structure. A real estate agent might face allegations following a transaction involving impersonation, concealed ownership, suspicious funds, or another warning sign,” Burrows adds.
The first bill may not come from an aggrieved client at all.
“There is also substantial exposure before any damage claim is made. Responding to an AUSTRAC investigation, compulsory notice or disciplinary proceeding can involve significant legal and forensic costs. Some PI policies provide limited cover for these scenarios, but statutory liability cover under ML wordings offers higher limits of cover,” says Burrows.
“From a claims perspective, an undocumented decision is difficult to defend. Years later, the issue may not be whether the insured believes it completed the right checks, but whether the contemporaneous file substantiates it”
Alex Burrows,
Hutch unDERWRITING
Two professions, two wordings The split between civil claims and regulatory action shaped how Hutch approached its wordings for accountants and agents.
“At Hutch, we use occupation-specific wording because accountants and real estate agents perform different work and face different types of claims,” Chambers says.
Each wording is anchored to the professional services the insured delivers, and that anchor determines how an AML/CTF failure is treated.
“If an alleged AML/CTF failure in the delivery of professional services causes a third-party financial loss, either wording may respond to the resulting civil liability claim, subject to the
applicable policy terms,” Burrows adds.
The reforms also reach past the front counter and into the way a firm is governed.
“Professional indemnity policies are designed to respond when claims arise out of the professional services being offered, such as real estate or accounting. Some of the risks arising from a failure to adhere to the Tranche 2 requirements are not directly associated with the professional services but are more of a business risk. Management liability can complement a professional indemnity policy in these circumstances, especially in relation to statutory liability, where there are regulatory-based claims against the company and/or the directors themselves,” Burrows explains.
The answer to a client’s AML coverage question, therefore, depends heavily on how a particular matter unfolds.
“Most policies do not universally label an ‘AML breach’ as covered or excluded. They consider the actual consequence of the alleged failure, the nature of the claim and the penalty resulting from a decision. At Hutch, we’re launching an updated ML wording that specifically addresses these concerns with affirmative coverage for an AML/CTF act and the responsibilities a reporting entity might have,” says Burrows.
The costs that sit on the firm’s own ledger
Clients tend to discover the limits of their cover at the worst possible moment: once a regulator has already been through the files.
“The main gap is between liability to another party and the firm’s own cost of achieving compliance after an investigation has found the current systems are insufficient,” Burrows says.
The bill after an adverse finding can run across several fronts at once.
“A firm may expect to incur an AUSTRAC penalty, the cost of conducting retrospective customer due diligence, the cost of replacing compliance software, staff training, record restoration and compensation for lost fees or reputational damage. These costs are not the same as damages payable to a third party for professional negligence under a professional indemnity policy, or as liabilities and defence costs that may be covered by a management liability policy,” Burrows adds.
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Published 02 Nov 2026
Lawyers, conveyancers and legal services
Dealers in precious metals, stones and products
Professional services, including accountants, and trust and company service providers
Source: AUSTRAC
Source: Hutch Underwriting
Questions brokers should ask their real estate and accounting clients
Which services bring the business within the AML/CTF regime?
Has the client completed a documented risk assessment?
Who is responsible for compliance and escalation?
How are customers, representatives and beneficial owners verified?
How are high-risk customers, suspicious matters and source-of-funds concerns handled?
Where are records stored, and can they be retrieved for seven years?
Does the client use an external verification or compliance provider, and how is its performance checked?
Are the client’s activities accurately described in the PI proposal and policy schedule?
Does the client hold an ML policy with appropriate sections and limits?
What protection does the client expect for civil claims, investigations, penalties and remediation costs?
The reforms also regulate what staff say to a client once a suspicion has formed. “Tipping off, or intentional or knowing breaches, also present a fundamentally different coverage position from inadvertent errors. These carry criminal charges under the Tranche 2 updates and are not insurable,” Burrows explains.
For brokers, all of this changes the tenor of the renewal conversation with professional services clients.
“Brokers may need to shift into a more risk-advisory role rather than just an insurance role. A good place to begin is with the client’s services and the requirements that those services flag under Tranche 2,” says Chambers.
At the same time, compliance itself is not the broker’s responsibility. “The broker’s role is to identify how the client’s services and risk profile have changed and to ensure its insurance arrangements are understood accordingly in relation to the client’s shifting liability profile,” Chambers adds.
Timing, notification and the case for one insurer Programs that look sound on paper can still falter at the front desk.
“Treat Tranche 2 as a professional risk-management issue, not merely a regulatory deadline. Firms need controls that work in practice, clear authority to stop or escalate a transaction and an audit trail that explains key decisions,” says Chambers.
The first sign of trouble is often informal, and how a firm responds in that window can shape its cover.
“Early engagement with brokers and insurers is equally important. If a firm receives an adverse compliance review, a compulsory notice or an allegation concerning a suspicious transaction, it should promptly consider its notification obligations. Both Hutch wordings operate on a claims-made and notified basis, so waiting for formal proceedings may create avoidable uncertainty,” Chambers adds.
Because a single Tranche 2 matter can produce a civil claim, an investigation and a penalty at the same time, where the policies sit also affects how the claim is handled.
“The variable nature of the claims that can arise under this regulation highlights the importance of having multiple policies with the same insurer where possible. This allows the claim to be reviewed holistically by the claims manager, with cover found in the right places, rather than avoided where it can be,” Chambers explains.