What Is a Tranche?

You've heard "Tranche 2" thrown around in AML conversations. Maybe you've seen it in investment prospectuses. But what does tranche actually mean?

Simple answer: It's a slice. A portion. A piece of something larger.

The word comes from French — tranche literally means "slice" (like a slice of bread). In finance and regulation, it describes how something's been divided into distinct parts.

Tranches in Finance

Before we get to AML Tranche 2 (which is probably why you're here), let's understand how tranches work in finance. Because the concept's the same.

Securitization Tranches

Banks bundle thousands of mortgages into one big pool. Instead of selling this pool as a single asset, they slice it into tranches with different risk levels:

Senior Tranche (AAA)
Gets paid first. Lowest risk. Lowest return. Safe, boring, institutional investors love it.

Mezzanine Tranche (BBB)
Gets paid second. Medium risk. Medium return. For investors who want a bit more yield without going crazy.

Junior/Equity Tranche (Unrated)
Gets paid last. Absorbs first losses if mortgages default. Highest risk, highest return. For risk-takers chasing big returns.

Same underlying asset pool. Different risk/reward profiles. That's tranching.

Why Do This?

Because different investors want different things. Pension funds need safety (senior tranches). Hedge funds chase returns (junior tranches). Tranching lets one asset pool serve multiple investor types.

It's how the 2008 financial crisis happened, by the way. Mortgage-backed securities got sliced into tranches. Rating agencies gave AAA ratings to tranches that didn't deserve them. When mortgages defaulted, even "safe" senior tranches got wiped out. Trillions in losses followed.

But that's a different story.

Loan Tranches

Construction projects use loan tranches. Developer needs $50 million to build a tower. Bank doesn't hand over $50 million day one. Instead:

Tranche 1 ($10 million): Released when land acquisition completes
Tranche 2 ($15 million): Released when foundation is completed
Tranche 3 ($15 million): Released when structure reaches 50% completion
Tranche 4 ($10 million): Released at practical completion

Each tranche unlocks based on milestones. Reduces the bank's risk (they're not lending $50 million to a hole in the ground). Gives the developer access to capital as they need it.

Investment Funding Tranches

Startups raise money in tranches. Seed round. Series A. Series B.

Investor agrees to fund $5 million, but not all upfront. Instead:

Tranche 1 ($2 million): Immediate funding
Tranche 2 ($1.5 million): When company hits revenue target
Tranche 3 ($1.5 million): When company launches product

Protects the investor (they don't put all their money into a company that might fail). Incentivizes the founder (hit milestones, get more funding).

Now Let's Talk AML Tranches

In Australian AML/CTF law, "tranches" refer to phases of regulatory expansion.

Tranche 1 (2006)

When the AML/CTF Act was first introduced, it covered:

• Banks and financial institutions
• Money transfer businesses (remittance providers)
• Gambling services (casinos, online betting)
• Bullion dealers (precious metals)

These were the obvious money laundering channels. Cash-heavy. High transaction volumes. Regulated first.

Tranche 2 (Coming July 1, 2026)

The second slice expands AML obligations to "gatekeeper professions" — professionals who facilitate transactions that criminals exploit:

• Real estate agents — Property's a favorite for laundering money
• Lawyers and conveyancers — Handle trust accounts and complex structures
• Accountants — Set up companies, trusts, manage client funds
• Trust and company service providers — Create corporate structures that hide ownership
• Dealers in precious metals/stones — High-value, portable, easy to trade

Why the delay? Because these professions:

• Didn't have AML experience (banks did)
• Needed time to build compliance infrastructure
• Had concerns about legal professional privilege (lawyers)
• Lobbied hard against inclusion

But FATF (the global AML standard-setter) kept pressuring Australia. The regulatory gap was obvious. Criminals were using these professions to launder money precisely because they weren't regulated.

So in November 2024, Parliament passed the Tranche 2 reforms. Obligations kick in July 1, 2026.

Tranche 3?

Potentially. FATF recommends covering:

• Auction houses
• Art dealers
• Safes and vault operators

But there's no concrete timeline for Tranche 3 in Australia. Tranche 2 took 18 years to happen. Don't hold your breath.

Why Phase AML Obligations?

Why not regulate everyone at once? Why split it into tranches?

Implementation Complexity
Rolling out AML obligations to hundreds of thousands of businesses simultaneously would've been chaos. Regulators couldn't handle that volume. Businesses couldn't adapt that fast.

Different Risk Profiles
Banks handle billions in transactions daily. A solo accountant might onboard 5 clients a year. The compliance burden needs to be proportionate. Phasing lets regulators tailor requirements.

Political Resistance
Every time new sectors get regulated, they push back. "We're not money launderers!" "This will kill small business!" Phasing lets government manage political opposition one sector at a time.

Learning from Tranche 1
Banks and casinos have been regulated since 2006. AUSTRAC learned what works, what doesn't. Tranche 2 incorporates those lessons.

What Tranche 2 Means for You

If you're a lawyer, accountant, or real estate agent, Tranche 2 is about to change your professional life:

July 1, 2026: Obligations Start
Not a soft launch. Not a grace period. Full compliance expected from day one.

What you need by then:

• Enrolled with AUSTRAC
• AML/CTF Program developed and adopted
• Compliance officer appointed
• Customer due diligence processes in place
• Transaction monitoring systems ready
• Staff trained on AML obligations
• Record-keeping systems for 7-year retention

The Clock Is Ticking

Enrolment with AUSTRAC opens March 31, 2026. That's three months before obligations start. You've got until July 29, 2026 to enrol (within 28 days of first designated service), but why wait?

Building an AML program from scratch takes time. Especially if you've never dealt with customer due diligence, beneficial ownership verification, PEP screening, or suspicious matter reporting.

Tranche 2 vs Tranche 1: Key Differences

Tranche 1 (Banks, Casinos)

• High transaction volumes
• Existing compliance departments
• Technology infrastructure already in place
• Regulatory experience (prudential regulation)

Tranche 2 (Lawyers, Accountants, Real Estate)

• Often small practices (solo operators or small firms)
• No compliance departments
• Limited technology (maybe practice management software at best)
• No AML experience
• Concerns about professional privilege and client confidentiality

That's why AUSTRAC's providing sector-specific guidance. Real estate agents get different guidance than accountants. The principles are the same (CDD, reporting, record-keeping), but the application differs.

The "Gatekeeper" Problem

Why regulate these professions at all?

Because criminals need gatekeepers to access the legitimate economy. You can't just walk into a bank with $5 million in cash. But you can:

• Buy property through a real estate agent using a shell company
• Have an accountant set up a complex trust structure hiding beneficial ownership
• Use a lawyer's trust account to move funds between entities
• Purchase gold bullion with cash that's later resold for "clean" money

AUSTRAC's strategic analysis repeatedly identifies these professions as money laundering vulnerabilities. Criminals exploit the fact that they're not regulated the way banks are.

Tranche 2 closes that gap.

International Context

Australia's not unique. FATF Recommendation 22 explicitly says countries should apply AML/CTF obligations to:

• Lawyers, notaries, other independent legal professionals
• Accountants
• Trust and company service providers
• Real estate agents
• Dealers in precious metals and stones

Most developed countries already regulate these sectors. UK's had DNFBP (Designated Non-Financial Businesses and Professions) regulations since the early 2000s. US regulates real estate deals over certain thresholds. EU's covered DNFBPs since the Third Money Laundering Directive.

Australia was late. Tranche 2 brings us in line with international standards.

Bottom Line

A tranche is a slice. In finance, it's how complex assets get divided into different risk buckets. In AML, it's how regulatory obligations get rolled out in phases.

Tranche 2 is the slice that includes you — if you're a lawyer, accountant, real estate agent, or precious metals dealer.

And unlike financial tranches (where you can choose which one to invest in), you don't get a choice about AML Tranche 2. If you're in scope, you comply. Starting July 1, 2026.

The only question is whether you'll be ready. And given the complexity of AML obligations — CDD, beneficial ownership, PEP screening, SMRs, ECDD, record-keeping — starting early isn't just smart. It's essential.

Platforms like ARCaml exist precisely to help Tranche 2 entities comply without building entire compliance infrastructures from scratch. Because while the obligations are mandatory, how you meet them is up to you.