Run the item 3 analysis
Item 3 covers receiving, holding and controlling or managing money, securities or other property as part of directly advancing a transaction, in the course of carrying on a business. The firm's role must be tested on the facts: what money is held, who controls it, what transaction it advances and which statutory boundaries apply.
Not every trust deposit is item 3. A retainer or costs advance held for the firm's own fees, or a passive receipt with no control or management role, requires separate analysis. Record the conclusion rather than assuming that holding any client money is captured.
CDD before the money is controlled
In a settlement, the firm may hold a purchaser's deposit and a lender's funds while acting for one or both parties. The CDD file should identify every relevant party and the purpose of each amount, so the money is attributable when it moves.
- Identify the parties whose money is held and the transaction it advances
- Verify the instructing parties and map entity owners
- Screen for PEPs, sanctions and adverse media
- Record the source-of-funds position at the risk tier the matter requires
- Complete initial CDD before providing the service
Authority and reconciliation controls
The firm's authority and reconciliation records are the evidence that it controlled the money lawfully. A settlement that balances and documents each movement is a controlled process; a running balance with manual adjustments is a finding waiting to happen.
- Obtain documented authority for each movement of controlled money
- Use separate records for each matter and party
- Reconcile the settlement account before and after each transaction
- Investigate every discrepancy, however small
- Keep an audit trail of instructions, approvals and movements
Reporting and records
Settlement is a concentrated window: large amounts, multiple parties and a fixed date. The controls must be in place before the window opens, not improvised during it. A settlement checklist that includes the AML steps is the operational answer.
- Lodge SMRs where the funds or the parties create reasonable suspicion
- Protect SMR-related information from tipping off
- Report TTRs for physical currency thresholds
- Retain the settlement, authority, CDD and reporting records for the required period
Official sources
Use these primary AUSTRAC pages to confirm the current rules and apply them to your circumstances.
Frequently asked questions
Is holding a deposit in trust always item 3?
No. The elements of item 3 must be met, including receiving, holding and controlling or managing the money as part of directly advancing a transaction. Test each holding on the facts.
Who must be verified in a settlement?
The parties whose money is held and the transaction parties the service requires, together with beneficial owners for entities. The program defines the party list and depth.
What is the key control for controlled money?
Documented authority for every movement, regular reconciliation and a complete audit trail. Without those, the firm cannot show what it controlled or why.
Does settlement money need source-of-funds review?
Apply source-of-funds review proportionately to the risk tier and the matter. High-risk matters and suspicious patterns should always include it.
Put it into practice
Cassandra AML turns these obligations into a working system: designated-service decisions, customer due diligence, screening, monitoring and reporting records — hosted in Sydney, free to start.
This guide is general information for Australian professionals. It is not legal advice and does not replace the AML/CTF Act, the AML/CTF Rules or AUSTRAC guidance. Confirm your specific obligations with AUSTRAC or a qualified legal adviser. See our editorial and correction standards.