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Money laundering

There seems to be a lot of talk about how much money is being laundered through solicitors’ trust accounts.

Is there somebody out there who can tell us exactly how it is being done so we can put in practices to avoid being used in this way?

We receive money from our clients either in cash, cheques or by electronic transfer from a bank. The cash issues are currently controlled by having to report any cash over $9,999. Cheques and electronic transfers are in the hands of the bank so should be clean from their obligations.

How, then, is unclean money getting into our trust accounts other than lawyers receipting cash of over $10,000 without reporting it or receipting lots of $9,999?

Even if they were doing that would not banks report lawyers depositing large amounts of cash?

Bruce Wagg

LawTalk Editor Frank Neill responds

Thank you Mr Wagg for asking some really relevant questions in relation to money laundering, in particular the question: “Is there somebody out there who can tell us exactly how it is being done so we can put in practices to avoid being used in this way?”

There are a number of ways people are using lawyers to launder money. The list is extensive and criminals are increasingly adopting sophisticated and complex means to channel illicit funds into and through the financial system.

In this short reply to Mr Wagg’s letter, we give four New Zealand examples. The first two highlight one area where lawyers can be vigilant – money going into and then coming out of a lawyer’s trust account. Four actual examples are:

  1. A client “overpays” into a trust account, and then asks for the money to be refunded.
  2. A client engages a lawyer to purchase a New Zealand property. Funds for the purchase arrive from overseas. The sale then “falls through” and the funds are transferred to another overseas account.
  3. Multiple real estate purchases are recorded in the names of an associate and relatives of an offender using four real estate agents and three lawyers.
  4. Offenders used more than $500,000 from methamphetamine sales to buy a farm. Multiple payments were made in the names of different people to lawyers and real estate agents. (In this case, a judge said the complex series of arrangements clearly showed an illegitimate transaction).

[Examples 3 and 4 were from the research conducted by former lawyer Ron Rol, who has nearly completed a three-year PhD thesis on money laundering through professional facilitators, such as lawyers, accountants and real estate agents. These examples were both included, in more detail, in the Ministry of Justice AML/CFT phase 2 consultation document.]

A series of case studies are also provided in a major international report on money laundering. A Lawyer’s Guide to Detecting and Preventing Money Laundering (PDF, 1.5 MB) is collaborative publication of the International Bar Association, the American Bar Association and the Council of Bars and Law Societies of Europe.

This report is recommended reading for lawyers, in my view.

“There are three main reasons why lawyers are exposed to misuse by criminals involved in money laundering activities,” A Lawyer’s Guide to Detecting and Preventing Money Laundering says.

“First, engaging a lawyer adds respectability and an appearance of legitimacy to any activities being undertaken – criminals concerned about their activities appearing illegitimate will seek the involvement of a lawyer as a ‘stamp of approval’ for certain activities.

“Second, the services that lawyers provide, eg, setting up companies and trusts, or carrying out conveyancing procedures, are methods that criminals can use to facilitate money laundering.

“Third, lawyers handle client money in many jurisdictions – this means that they are capable, even unwittingly, of ‘cleansing’ money by simply putting it into their client account,” A Lawyer’s Guide to Detecting and Preventing Money Laundering says.

When talking about money laundering with lawyers, Mr Pol says that with nearly every firm he speaks with, the conversation tracks much the same.

“Most lawyers are adamant that in [fill in the blank] years, they’ve never seen it, and it certainly never happens in their practice. They are invariably genuine.

“I then offer a few examples, and we talk about some of the most common ways lawyers’ practices have actually been used.”

Mr Pol says that the only difference then is the number of recollections of unusual transactions. With some firms, just a few, others many more. Not yet, he says, have there been none.

“Unfortunately, I can’t use those conversations for the research,” Mr Pol says. “But it does provide a solid basis to help develop something more meaningful. Most firms don’t want their practices to be used to help launder criminal funds. And they know that just buying a software package or generic training program to tick the compliance boxes isn’t the answer either. It needs to connect with their values, their practice, and the reality of legal practice in New Zealand.”

A Lawyer’s Guide to Detecting and Preventing Money Laundering also lists some of the “red flags” lawyers can look out for that may suggest some criminal behavior is involved with the funds about to be channeled through the practice. The existence of a “red flag” may, of course, have a legitimate explanation, but international experience shows that they are something one should look out for. These “red flags” include:

  • once funds received into a trust account, the transaction is aborted;
  • client requests that deposited funds are sent to a third party or parties, rather than returned to the client;
  • client avoids personal contact without good reason;
  • unusual manner of execution – eg, the deposit of funds for the purchase price occurred unusually early in the transaction and before the purchase price had been agreed between the parties;
  • amount being deposited is large compared to client’s modest income;
  • surplus funds were deposited;
  • back-to-back property transactions, which were out of sync with normal market dynamics – the purported value of each property rapidly increasing with each subsequent transaction;
  • client changes legal advisor a number of times in a short time period for no apparent reason;
  • the purchase price is paid entirely in cash;
  • client has no proper identification papers;
  • there is no information available about the client and his or her business;
  • purported legal documentation is too simplistic for the relevant transaction;
  • client’s connection with the jurisdiction is unclear;
  • no mention of the issue by the client initially, followed by an over willingness to provide a lot of documentation;
  • urgency in getting the deal done.

These are just some of the indications money laundering may be taking place. Looking at the list, it seems self-evident why these would be “red flags”.

Lawyers interested in finding out more about this, including how criminals launder money and what many people call “red flags”, but this report calls “typology indicators”, can be found in the New Zealand Police Financial Intelligence Unit “Quarterly Typology Report” (PDF, 255 KB) for the first quarter of 2015/16.

Finally, Mr Wagg’s letter raises the question as to whether or not lawyers can consider cheque and electronic transfers from a bank to be clean.

Under phase 2 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, lawyers will be required to report any “suspicious transaction” (and there was a suggestion in the Ministry of Justice consultation paper of widening this to “suspicious activity”).

Although the precise requirements have yet to be finalised, lawyers will be required to report any “suspicious transaction”, not just any suspicious cash transaction. The money may have come from a bank, but the bank had no red flags, whereas red flags were raised when the lawyer became involved. The lawyer would then be required to report under phase 2. Depending on the nature of the evidence a lawyer has, they may already have responsibilities to report, as provided in the Lawyers and Conveyancers Act, the Rules of Conduct and Client Care and the Financial Transactions Reporting Act 1996.

It is a quite commonly held view that if money comes from a local bank it will be “okay”. This may not always be the case.

It is also worth noting that lawyers’ responsibilities under the anti-money laundering legislation are not confined to monetary transactions. They also include other areas, such as advice and work around trust or company formation, to list just two examples.

For a fuller discussion of this, see Beyond cash-stuffed briefcases – Part 1, LawTalk 842 (23 May 2014) and Part 2, LawTalk 843 (6 June 2014).

Also see the New Zealand Law Society submissions on the Ministry of Justice’s discussion paper on phase 2 of the AML/CFT (PDF, 675 KB) regime.

Using full stops

In the “Love your full stops” piece [LawTalk 898, 7 October] Hon Michael Kirby is quoted to have said: “It’s important to teach lawyers to put full stops in sentences”. Did. he really. say. that?

John McLean

LawTalk Editor Frank Neill responds

Yes, Hon Kirby really said that. Given the frequency with which I see writing by lawyers, who seem to prefer separating what are essentially two or more sentences by employing semicolons, colons or “dashes”, I think I see where Hon Kirby is coming from. I recall one article a lawyer submitted in which there were well over 300 words between one full stop and the next. I took the liberty of replacing four semicolons with full stops. Suddenly we had five proper sentences. Suddenly the meaning became much clearer.

There is a case, of course, for separating what could be two sentences with a punctuation mark that is not a full stop. With no easy “rule” pertaining to this, the test I apply is that I am reading the material to a sixth form, or year 12, class. Would I pause as though at the end of a sentence, or would I use my voice to indicate the two (or more) clauses are linked?

When thinking about what Hon Kirby told me, I cogitated on the fact that we often view older writing as being a bit “heavy”. And yet we have the example of the now more than 400-year-old King James version of the Bible (completed in 1611) with the famous two-word sentence “Jesus wept”. I rather like that.

Interestingly, the King James version does not seem to be averse to beginning sentences with conjunctions, either. Oscar Wilde and I are both fans of that.

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