By Steve Dukeson
Two years on, despite diligently trying to understand and comply with the AML/CFT regime, there are still issues that are unclear to me. The audit of my AML/CFT Risk Assessment and Compliance Programme was undertaken by a firm that is clearly expert on the regime and I learned a few things as a result. However, I still have my queries, only some of which are set out in this article. (Some of the queries that I’ve raised previously remain unanswered.)
I could go through the ever-increasing plethora of guides, seminars and other publications but I suspect that I won’t find the answers that I need, not to mention that I may not have enough years left in this life to go through the mountain of information again.
Answers to my queries will be gratefully received. Alternatively, donations to enable me to retire.
Beneficial owners – chain of company shareholders
I had initially thought that the intent was to trace the ultimate beneficial owner(s) ie, ultimate human person(s) who control the customer or for whose benefit the matter is undertaken, without having to be concerned about immediate layers of beneficial ownership on the way. This wouldn’t seem to be correct.
The only statement that I’ve seen on this is virtually a one-liner in the DIA Beneficial Ownership Guide at para 17: “You should establish the customer’s ownership structure and understand the ownership at each layer.”
Where there’s a chain of company shareholders (none of which can be beneficial owners because they’re not human persons), do you “simply” trace through them to find the ultimate beneficial owners of Company A or do you have to do CDD on the beneficial owners of each company shareholder, all along the chain?
It’s obviously a crucial point. (Of course, it might be questioned why such a complicated structure but that’s a matter that would be relevant as to whether EDD is required or even whether you decide to accept instructions, assuming that you can find good reason to do so.)
Drafting or reviewing an agreement for the sale or purchase of a business or of a legal entity
This isn’t a new query but it’s an important one. I don’t think that I’ve seen any commentary on this, at least, not in any Law Society seminars or publications.
Would this be a captured activity? There’s good reason to argue that it wouldn’t.
The definition of designated non-financial business or profession in s 5(1)(a)(vi) of the AML/CFT Act 2009 is the first port of call, which refers to:
“(B) engaging in, or giving instructions on behalf of a customer to another person for, a transaction (within the meaning of section 4(1) of the Real Estate Agents Act 2008); or
“(D) a transaction on behalf of any person in relation to the buying, transferring, or selling of a business or legal person (for example, a company) and any other legal arrangement. “
Transaction (for (B)) is defined in s 4(1) of the Real Estate Agents Act 2008 as including: “the sale, purchase, or other disposal or acquisition of any business (either with or without any interest in land).”
In relation to (B) and (D), is drafting or reviewing an agreement for the sale and purchase of a business or of a legal entity engaging in the sale or purchase of the business? Is the lawyer thereby engaging in a transaction? (I’m focusing on sale and purchase but note that the wording in the legislation is wider than this – eg, acquisition, disposal, transfer.)
By way of comparison, section 5(1)(a)(vi)(A) refers to: “engaging in, or giving instructions on behalf of a customer to another person for, any conveyancing (within the meaning of section 6 of the Lawyers and Conveyancers Act 2006) to effect a transaction (within the meaning of section 4(1) of the Real Estate Agents Act 2008).”
Conveyancing is defined in section 6 of the Lawyers and Conveyancers Act 2006 to include: “legal work carried out for the purpose of effecting or documenting a sale or purchase of a business, whether or not land is involved.”
What are we to take from the specific reference to legal work for effecting or documenting a transaction? Similar wording doesn’t feature in s 5(1)(a)(vi)(B) or (D) of the AML/CFT Act.
Regardless, should documenting a transaction be taken to be engaging in the transaction?
From informal discussions with experts, my understanding was that they didn’t consider that drafting or reviewing an agreement would be engaging in a captured activity ie, wouldn’t be engaging in a transaction. But rather than antagonise the DIA, I think that the plan was to undertake CDD nevertheless as if the matter were a captured activity.
Usually, the matter would eventually be caught if settlement would involve payment though the law firms advising the parties, because this would involve managing client funds. However, there are occasions where the parties settle between themselves and in those circumstances, it would be a crucial decision whether or not to assume that drafting or reviewing an agreement would be a captured activity. CDD may be extensive and/or complicated where trusts or overseas parties are involved.
Note that if drafting or reviewing isn’t a captured activity but settlement would occur between the lawyers, there shouldn’t be any need to undertake CDD at the outset, because the lawyers wouldn’t initially be engaged in a captured activity. (No doubt, in practical terms, it would make sense to carry out CDD at the outset, to ensure that it’s done and without later resistance from or delay caused by the client.) However, how in that case does one carry out CDD before entering into a business relationship? (Doesn’t make sense to me to view this as delayed CDD, because there’s no captured activity initially.)
This is another issue that shouldn’t require speculation.
Examination and written findings in relation to certain matters
Section 57(1)(g) requires a Compliance Programme to contain procedures for
“examining, and keeping written findings relating to:
“(i) complex or unusually large transactions; and
“(ii) unusual patterns of transactions that have no apparent economic or visible lawful purpose; and
“(iii) any other activity that the reporting entity regards as being particularly likely by its nature to be related to money laundering or the financing of terrorism.”
Note that such transactions would require EDD (s 22(1)(c)), even if the complexity or unusually large size have a clear commercial explanation.
At what point does a transaction become complex? Some lawyers may find a transaction less complex than others. Many business transactions may involve some degree of complexity. (If a transaction is so complex that it requires detailed explanation, it may be outside a lawyer’s comfort zone in any case – eg, it may present increased likelihood of negligence.)
Unusually large compared to what, having regard to what? Unusually large for the client? For the lawyer? I know that some experts have suggested arbitrary dollar limits for some law firms but the figures seem to have been largely plucked out of the air.
What would be activity that the reporting entity regards as being particularly likely by its nature to be related to money laundering or the financing of terrorism? The DIA may consider that every conveyance is such an activity.
From memory, I’ve seen very little on these matters, especially as they relate to lawyers.
Section 57(1)(i) requires a Compliance Programme to contain procedures for: “preventing the use, for money laundering or the financing of terrorism, of products (for example, the misuse of technology) and transactions (for example, non-face-to-face business relationships or transactions) that might favour anonymity.”
Such matters would require EDD under s 22(5).
As can be seen, one focal point of s 57(1)(i) is on any transaction that may favour anonymity eg, non face-to-face meetings. Non face-to-face business relationships are pretty much the norm these days, or close to it. Though most of my work isn’t caught by the regime, I seldom see clients in person – this often includes new clients, who I’ve never met in person and may never meet. Communications are by email or phone, occasionally though virtual meetings.
What does s 57(1)(i) mean in this context, when I’m involved with a captured activity in the ordinary course of my business eg, a sale and purchase of a business or of a legal entity (if caught by the regime in either case) or a lease of commercial premises? Is EDD required pursuant to s 22(5) simply because all communications are by email? If so, would the position be different if CDD is able to be conducted in person at the outset or by reliance on appropriately certified identity documents?
Presumably, for s 57(1) and s 22(5) to apply in relation to transactions that favour anonymity, there has to be something more than a reliance on non face-to-face meetings. There would surely be no cause for concern if the client and beneficial owners can be readily identified through acceptable AML/CFT means, notwithstanding that thereafter all communications may be electronic.
As a result of the independent audit of my AML/CFT documents, I’ve gained a small insight as to products/technology that may be of concern eg, Nord VPN and Bitcoin were mentioned when I raised some queries following the audit.
As to Nord VPN, I haven’t at this stage even looked this up – would I know that it’s being used?
As to Bitcoin, I know that it exists but I don’t propose to try to understand it. My Terms of Engagement don’t permit payment of legal fees by Bitcoin and I don’t propose to advise any client where the need to understand Bitcoin would be fundamental to accepting their instructions. Is it too late to study for a trade?
Another matter that I’ve raised previously.
You would be forgiven if, having read various publications, you feel that once an AML/CFT client has a foot in the door, you have to monitor them from that point onwards (at least, while they’re a client). This is pretty much what’s said in an online seminar on the DIA website (which is directed at a general audience, not just lawyers). I don’t believe that this is correct.
Assume that you assist a client with a conveyance or a sale or purchase of a business (let’s assume that the latter is caught by the regime if only because settlement will occur between lawyers). You carry out your CDD at the outset. The transaction takes two months to complete. In the absence of any circumstances that occur along the way that cause AML/CFT concern, do you have to engage in ongoing AML/CFT monitoring? If so, how often? If not, what if the matter takes three months or four months, etc?
Just asking these questions shows the unsatisfactory application of the regime in relation to law firms. As lawyers, we aren’t like financial institutions, which may have long lasting ongoing financial relationships with their customers (hence the need for ongoing monitoring).
It’s presumably clear that if you’re engaged in a captured activity, then once it’s completed, you have no ongoing obligation under the regime to engage in AML/CFT monitoring of your client, whether or not you have an ongoing business relationship with them. If the client instructs you at some future point in time in relation to a captured activity, you would need to undertake CDD. The starting point has always to be whether we’re engaged in or propose to be engaged in a captured activity – if not, the regime doesn’t apply to us.
The issue of ongoing monitoring is an important one. I can’t recall seeing these issues addressed in any Law Society seminars or publications and again, it would be helpful to have an expert provide an informed view.
It doesn’t seem to have been commented on, at least in detail, but there’s something odd (and if not odd, then awkward) about the requirement to undertake CDD before entering into a business relationship with the client.
At least in relation to my clients, who are business clients, it is more often the case than not that when they first instruct me, it’s on the basis that we enter into a business relationship – ie, it’s contemplated that they are engaging me in relation to a specific matter and that they will or are likely to want me to act for them again, as and when required, in a broad context. I may be asked to do anything that’s within my area of expertise, eg, employment matter, lease of commercial premises, company law advice, sale and purchase of business, trade mark matter, etc.
So, if the need for CDD arises in relation to an existing client, most likely, there’s already a business relationship. How do I undertake CDD before entering into a business relationship with the client? You might say, don’t worry, they’re an existing client and if there’s been no material change in the business relationship, there’s no requirement to undertake CDD. True, but could this state of affairs endure indefinitely? At the very least, might the DIA try to argue that in some way or another, there will have been a point in time where CDD is required? Even if there’s no legal basis for that, does anyone really want to have to do battle with the DIA? It’s energy sapping enough having simply to cope with the regime (certainly, for sole traders like me, part-time players like me, and I assume, for more than just a few small firms).
Note in passing that if there’s been a change in the nature of the business relationship with your existing customer that necessitates CDD, the legislation necessarily recognises that this would be undertaken after the business relationship was formed.
Apart from dealing with existing customers, there’s also the question of how you approach the question of charging for CDD in relation to a new client, before entering into a business relationship with them. You would enter into a business relationship at the time that they accept your Terms of Engagement, when they give you or confirm instructions to proceed with a specific matter. To comply with the AML/CFT, how do you get an agreement to pay your CDD costs before a business relationship is entered into? It seems to me that there are two ways. (This is an issue that I’ve mentioned before.)
The simplest is to make it clear that no business relationship is entered into until CDD has been completed to your satisfaction and, if you want to go this far, until your CDD costs have been paid. On the few occasions where I’ve thought that the regime would apply to my practice, my Terms have provided that where the proposed client accepts them, my acceptance of their instructions and the entry into any business relationship is conditional upon CDD satisfactory to me and payment of my CDD costs. (This doesn’t deal with the situation where I carry out CDD but then decline to act, having incurred time and possibly expense in carrying out the CDD.)
Alternatively, you could send the prospective client Terms that only relate to the carrying out of CDD. Once CDD has been undertaken (and if appropriate, the costs have been paid), you could then send out your Terms for the real business at hand.
The New Zealand Law Society has issued guidance on this and as I understand the guidance, seems to see no problem in sending out Terms of Engagement that include terms as to charging for CDD. The Law Society states that “The charge must be clearly explained in the terms of engagement provided to the client at the start of the relationship”. This seems to miss the point that CDD should normally be undertaken before entering into the relationship. (The Law Society also refers to the CDD charge being shown as an expense in the bill of costs but I can’t see why it couldn’t be charged for on a time basis like any other service, whether it be the subject of a stand-alone invoice or be included in an invoice for the matter to which the CDD relates.)
I’m all for keeping things simple (and hope that the Law Society guidance is appropriate), but that’s a contradiction in terms for just about every aspect of the AML/CFT regime. The mere fact of having to consider the issue of CDD before entering into an business relationship illustrates the complexity of the regime and how much of the regime is ill-suited to lawyers (as opposed to financiers).
From discussions with a couple of small firms, who’ve paid for expert assistance in drafting their AML/CFT documents, I think that there’s still some confusion out there and there remain uncertainties caused by the legislation, even if those of us who seek the light have different queries.
Steve Dukeson email@example.com is the principal of Dukesons Business Law, an Auckland commercial law firm.