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Money laundering, a brief history and simple explanation

28 June 2018 - By Angharad O'Flynn

Unless you’ve been living under a rock for the past few months, you will know that on 1 July this year (in three days), all New Zealand lawyers and conveyancers become reporting entities under the new Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act 2009.

A lot of information has been pumped out as the legal profession prepares for the change and some of it might be confusing. So, let’s try to liven up the subject.

This article is designed to have an ‘explain this like I’m five’ approach. Although, five might be a bit young, so how about we aim for ‘explain it like I’m an adult with zero background in finance’ approach. All included links will take you to websites that dive further into the history of the process, definitions, and the bigger picture.

It's not new.

The three-step, Placement, Layering, Integration technique of money laundering has ancient roots.

There is recorded history of the technique being used in ancient China during a time when regional trading was heavily restricted, or illegal in certain areas.

Chinese traders would funnel their illegally obtained profits through their legitimate businesses, making their trade profits look legal. But it was 2,000 years later that the technique made a real name for itself when the American/Italian mobs used it during the prohibition period in the US.

The bigger they are, the harder they fall.

While not verified, the use of the phrase ‘money laundering’ is thought to have been coined by notorious mobster Al Capone, and his ‘Chicago Outfit’.

Capone purchased multiple laundromats and dry cleaners in Chicago and would combine the illegal profits from the bootleg alcohol sales with the legitimate profits of his dry-cleaning business’. Out of everything Capone did, he was caught for not paying his income taxes and spent 11 years in Alcatraz prison. 

Since Capone’s time, money laundering has progressed into complex, international schemes involving sometimes dozens of international partnerships with shell companies replacing Capone’s traditional, physical store front approach.

You'll get caught, even if it takes a while.

It took the FBI a while to catch Capone, but they got him, and through a flaw in his finances. Nowadays law firms are being exposed in money laundering operations left right and centre. Just earlier this week the Financial Times shared that the UK Solicitors Regulation Authority found that several UK law firms had breached their new anti-money laundering laws.

Few details were released but the breaches were severe enough that the Regulation Authority is dishing out ongoing disciplinary measures.

The most recent laundering cases had large, international firms at their centre, so why are we, lil' ol' Aotearoa, tightening our laws? The NZ Justice Department discovered that approximately $1.35 billion is laundered through New Zealand businesses every year, that’s why.

The International Monetary Fund estimates that laundered money makes up between 2% - 5% of the world’s Gross Domestic Product, so we're not the only country tidying up their finance laws.

Complex language

Our revised laws take a strong handed approach, tightening the laundering reporting duties of lawyers and conveyancers (and other professions) and the jargon can be confusing.

Frequently used key terms:

  • ‘Captured activities’: Under the AML Act, it is the activity that is regulated. Those activities which trigger AML obligations are often referred to as ‘captured activities’. These include forming legal arrangements such as companies and trusts, work connected with conveyancing and managing client funds)
  • Reporting Entity: In the legal profession, it’s anyone who can call themselves a registered, practising lawyer or conveyancer and who is carrying out ‘captured activities’ (for technical purposes, a lawyer who carries out captured activities is a ‘designated non-financial business or profession’ or ‘dnfbp’ for short)
  • Reporting Duties: Things like undertaking customer due diligence, reporting suspicious activities, establishing an AML/CFT programme for staff, and conducting risk assessments on certain activities, and other areas that will be defined by your firms
  • Money laundering: The Financial Intelligence Unit’s (FIU) precise definition of modern money laundering can be found here with a detailed graph here, but the basic process is (complete with washing related analogies) this:
  1. People place tainted money into the financial system (put the clothes in the washing machine).
  2. Other people then layer the tainted money by putting it through a series of transactions to obscure  the payment origin, through companies, trusts, shares, properties, insurance, securities, etc. (the ‘heavy duty’ wash/rinse/repeat-if-necessary option, then dry).
  3. The money’s illegal origin is now buried among the many layered transactions it has gone through, making it difficult to trace (it’s clean and ready to use).

Phases: There are two of these. Phase 1 has been in place since 2013. Phase 2 is what will be enforced from 1 July 2018 and details all the reporting duties of lawyers and conveyancers.

Questions:

I’m a junior lawyer/conveyancer, am I a reporting entity? Maybe. You need to be familiar with the AML/CFT laws but your exact duties, if you have any, will be defined by your firm and the work you undertake.

Does this only apply to the legal profession? No. Accountants, real estate agents, the New Zealand Racing Board and high value dealers must also comply with these changes (from 1 October for accountants). Any profession considered to be at high-risk of conducting laundering has been targeted.

The Law Society has a dedicated AML/CFT section on its website which is full of information about the law changes, reporting templates, and articles to help you adjust. Remember 1 July is this coming Sunday, your duties will come into effect then.

Whether you’re lawyer or conveyancer, a client, a partner or director of a firm, or general legal staff, it is a good idea to familiarise yourself with these changes to make sure you understand your role.

Last updated on the 16th September 2019