New Zealand's anti-money laundering legislation is going to be extended to bring in the legal profession. The New Zealand Law Society has prepared a submission giving its views of the issues involved and the matters which will need to be addressed. The latest developments come seven years after the AML/CFT legislation was enacted. We look at the expected timeline for the changes and some of the key issues.
Phasing in Change
An estimated $1.5 billion of 'dirty' money is laundered in New Zealand each year, according to the Ministry of Justice. Current anti-money laundering legislation covers financial institutions and casinos, but the Government is looking to expand this to include other sectors, including the legal profession.
The first phase of the Anti-Money Laundering and Countering Financing of Terrorism Act was passed in 2009. Some of it came into force on 17 October 2009, but the Act really came into full effect in June 2013.
Implementation of the second phase of the Act has always been on the cards but in the wake of the Panama Papers scandal, which raised concerns that foreign trusts registered in New Zealand were being used to launder money, the Government decided to fast-track its implementation. "There's no question that as a result of debate around the Panama Papers and the wider public debate globally around this issue, we're certainly trying to push part two of that through as quickly as we can," Prime Minister John Key told media back in May 2016.
Although there were several years between phase one of the AML/CFT Act being passed and it fully coming into effect, the Government expects to push through the second phase of the Act at a snappier pace. Having completed a four-week consultation period in August and September, it intends to introduce a Bill to Parliament later this year, and see the extended Act passed by July 2017. "After that, businesses will need a period of time to prepare for changes, but the extended Act will come into force as soon as practically feasible," the Ministry of Justice has said.
But what is 'practically feasible'? Given the likely high compliance burden and associated costs of meeting the Act's obligations, the New Zealand Law Society believes the lead-in period for Phase Two of the Act should be at least two years, preferably three.
"It would likely take law firms two to three years to properly implement systems and processes to allow them to comply. Firms would need to develop procedures manuals, run internal training sessions, appoint Money Laundering Reporting Offices, and bed in the new information gathering and filing protocols," the Law Society says in its submission to the Ministry of Justice.
Who Will Be Covered?
The extended legislation will bring in sectors that are seen as being at high risk of being misused by criminals, but which are not currently covered by the Act. This includes lawyers, accountants, conveyancers, some additional gambling operators and other businesses that deal in high-value goods, such as auctioneers, bullion dealers, jeweller, motor vehicle and boat dealers, and antique and art dealers.
There is some concern about whether non-lawyer providers of legal services will be covered. The Law Society says there is no definition of 'legal profession' in the current Act, but reference to the term in the consultation paper appears to relate to lawyers regulated under the Lawyers and Conveyancers Act 2006 - which applies to a person who holds a current practising certificate.
However, the Law Society points out there is a wide range of legal services within the legal landscape that non-lawyers can provide. In its submission to the Ministry of Justice, the Law Society has warned that these unregulated legal service providers may become an attractive option for individuals seeking to avoid the rigours of the AML/CFT compliance regime. "Leaving these service providers outside the AML/CFT umbrella could then open a significant loophole ripe for criminal exploitation."
Who Will Supervise the Legal Profession?
Currently there are three supervisory bodies under the Act: The Financial Markets Authority supervises securities, trustee corporations, and entities involved in investment and financial advice; the Reserve Bank of New Zealand supervises banks, life insurers and non-bank deposit takers; and the Department of Internal Affairs covers casinos, non-deposit taking lenders, money changers and other reporting entities not covered by either the FMA or RBNZ.
Rather than try to fold the legal profession into any of the current supervisors' workloads, the Law Society wants to step up as a new supervising body. It argues that any of the three existing supervisors would need to invest time and money in getting up to speed on the legal sector.
"The transition and implementation period for Phase Two is likely to be relatively short. Given a short lead-in period, the Law Society as a supervisor with an established knowledge of the legal sector would be effective at an earlier date. In contrast, an alternative supervisor would face a significant challenge in quickly gaining this capability," the Law Society says in its submission to the Ministry of Justice.
What Would Lawyers Be Obliged To Do?
Businesses covered by the Act have to take steps to "deter and detect" money laundering and financing of terrorism, the Ministry of Justice says. These steps include:
- Developing a risk assessment and compliance programme;
- Verifying customers' identification;
- Vetting and training staff;
- Monitoring accounts;
- Monitoring compliance and audit;
- Reporting customers' suspicious transactions to the police financial intelligence unit.
Ethical Issues and Client Confidentiality
Coming under the umbrella of the Act will present a conundrum for the legal profession, with lawyers having to balance their ethical obligations of confidentiality, acting in their clients' best interests and protecting privileged communications against new monitoring and reporting obligations. "There is a significant tension between the role of lawyers as trusted advisers and their role as informants under the regime," the Law Society says.
The Law Society has warned that any new reporting obligations imposed on lawyers would need to be carefully crafted to ensure the solicitor/client relationship is preserved to the greatest extent possible, while still delivering on New Zealand's anti-money laundering commitments to the international community.
15 October 2009: The Anti-Money Laundering and Countering Financing of Terrorism Act is passed into law, with some provisions relating to institutional arrangements coming into force on 17 October 2009.
30 June 2013: The rest of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 comes into force.
17 August to 16 September 2016: Submissions period for Phase Two of the AML/CFT Act, in response to a Ministry of Justice consultation paper.
Late 2016: After the consultation period the final policy options will be provided to the Justice Minister. It is expected a Bill will be introduced to Parliament later this year. There will be an opportunity to comment on the specific proposals in the Bill when it is considered by a parliamentary Select Committee.
July 2017 – The Government intends to have the Bill passed by July 2017. The Ministry of Justice says businesses will need a period of time to prepare for the changes, but the extended Act will "come into force as soon as practically feasible"