Dear the almighty awesome person whom we worship with reverence:

We're required by Australian anti-money laundering laws to confirm your
identity once your PayPal account balance reaches $1000.

Please help us confirm your identity by providing some information about
yourself.

IMPORTANT INFORMATION REGARDING ANTI-MONEY LAUNDERING & COUNTER TERRORISM
FINANCING LAWS IN AUSTRALIA & HOW IT MIGHT AFFECT YOUR PAYPAL ACCOUNT

We are writing to you because your PayPal account balance has reached a
balance of $1,000.00 AUD and a partial limitation has been placed on your
account in accordance with Australian Anti-Money Laundering & Counter
Terrorism Financing laws. This means that while you can continue to receive
payments, you are unable to withdraw funds or make payments until we have
verified your identity.

Basically they ask me to give them information like my driver's license and tax assessment to prove who I am, my question is, what happens after I've submitted this information? will I be under constant "monitoring" for any sign of illegal activities? or is this just a formality and they'll totally forget about it once its done? I always import games that are banned here, and sometimes buy stuff thats are not very legit from importers, from what I heard the customs are now on the watch out for importing banned stuff (Play Asia already declares that they take no responsibility if MK is "confiscated" by the customs), so will it be of any problem for me? I asked Paypal's custome service but they won't give me a clear answer, if anyone knows anything about this, or have been through this before, please let me know, thanks.

They will run an background check on you like when you go to get an phone etc and see if you happen to be lets say: transfering thousands of dollars overseas to an suspisious location to suspisious people they will monitor your transfers. 

Also people can use Paypal to transfer money to avoid taxiation, by transfering it to another person account/s and then withdrawing them in small amounts to avoid taxiations. 

"We're required by Australian anti-money laundering laws to confirm your
identity once your PayPal account balance reaches $1000."

So anyone who gets up to $1000 is checked. Not you especially. So they won't be "monitoring" you.

It's good that I only draw money when buying stuff then. I don't keep a disposeable amount there!

I know they won't really be "monitoring" me, but since I buy banned stuff consistently  and some times spend hundreds of dollars on importing cheap crap I was just wondering if the shit would happen and they take my stuff away for not being legit, it just gives me a feeling thats I'm on the radar.

I usually don't have much spared money either, but few days ago I felt its too much trouble to add funds regularly so I added 1000 dollars straight away and got this lol.

Sounds like a scam to me

Why in the world do you have a thousand dollars in it? >___> 

I empty it out as soon as I get money in mine...

because I can't be bothered with the time it takes to complete an eCheque so I transferred a thousand dollars >_____________>