The Government has released an exposure draft of an Anti-Money Laundering and Countering Funding of Terrorism Amendment Bill, which will implement Phase 2 of the Anti-Money Laundering and Countering Funding of Terrorism (AML/CFT) law.
The draft provides for inclusion of lawyers, incorporated law firms and conveyancers from 1 January 2018. The Department of Internal Affairs will be responsible for supervising these entities.
Phase 2 will extend the AML/CFT laws to cover many lawyers, conveyancers, real estate agents, accountants and some additional gambling operators and some businesses that trade in high-value goods such as cars, boats, jewellery, bullion, art and antiquities.
Phase 1 of the laws came into effect in 2013 and covers businesses such as banks, casinos, some trust and company service providers and certain financial advisers.
Different commencement dates for different occupations
The commencement date given in the 49-clause exposure draft is 1 July 2017, with some exceptions relating to the amendment and repeal of other legislation.
Lawyers and incorporated law firms covered by the exposure draft are as defined in section 6 of the Lawyers and Conveyancers Act 2006.
Section 6(2) of the exposure draft states that lawyers, incorporated law firms, conveyancers, incorporated conveyancing firms will be covered from 1 January 2018, accountants will be covered from 1 July 2018, while real estate agents, the New Zealand Racing Board are covered from 1 January 2019 and high-value dealers from 1 July 2019.
Are all lawyers included?
Section 6(3) states that the Act will apply to lawyers and incorporated law firms if the activities they carry out are activities (i) described in the definition of designated non-financial business or profession in section 5(1), and that may give rise to a risk of money laundering or financing of terrorism.
What exactly is a "designated non-financial business or profession"?
As inserted by the exposure draft, the definition of "designated non-financial business or profession" in section 5(1) will read:
"a lawyer, incorporated law firm, conveyancing practitioner, an incorporated conveyancing firm, an accountant, a real estate agent, or a trust and company service provider who, in the ordinary course of business, carries on 1 or more of the following activities:
"(i) acting as a formation agent of legal persons or arrangements:
"(ii) acting as, or arranging for a person to act as, a nominee director or nominee shareholder or trustee in relation to legal persons or arrangements:
"(iii) providing a registered office or a business address, a correspondence address, or an administrative address for a company, a partnership, or any other legal person or arrangement:
"(iv) managing or arranging client funds, accounts, securities, or other assets:
"(v) providing real estate agency work (within the meaning of section 4(1) of the Real Estate Agents Act 2008) that involves the representation, as an agent, of a vendor or purchaser in connection with the sale or purchase, or the proposed sale or purchase, of real estate, or any business:
"(vi) engaging in or giving instructions in relation to— (A) any conveyancing (with the meaning of section 6 of the Lawyers and Conveyancers Act 2006) on behalf of a customer in relation to the sale or purchase, or the proposed sale or purchase, of real estate; or (B) transactions on behalf of any person in relation to the buying or selling of real estate; or (C) transactions on behalf of any person in relation to the buying or selling of businesses:
"(vii) engaging in or giving instructions in relation to transactions for customers related to creating, operating, and managing companies; and
(b) includes a person or class of persons declared by regulations to be a designated non-financial business or profession for the purposes of this Act; but (c) excludes a person or class of persons declared by regulations not to be a designated non-financial business or profession for the purposes of the Act."
More detail on how lawyers will be affected
The Ministry of Justice has released a handy Information Paper on the Phase 2 AML/CFT Reforms. Pages 10 to 12 focus on lawyers and conveyancers.
"The obligations are risk-based," the section on lawyers notes. "The greater the risk of your business, the more you must do to manage those risks."
"In practice, this means that a small law firm providing services to long-term local clients should find it easier to meet their obligations than a large firm which offers a broad range of services and has international clients, or a firm with many new or single transaction clients."
Legal professional privilege
The Information Paper also comments on legal professional privilege, noting that the current definition of "privileged communication" will be more closely aligned with the definition set out in the Evidence Act 2006.
"This is to ensure greater consistency in related areas of law and to cover litigation privilege. It would include communications with legal advisors, preparatory materials for proceedings and settlement negotiations or mediation. Privileged communication is defined in clause 16 of the Bill."
The Paper provides two examples of how legal professional privilege would not apply because information was created for dishonest of illegal purposes.
Who will be supervising Phase 2?
Clause 31 of the exposure draft says the Department of Internal Affairs will be supervising Phase 2 businesses. This means three government agencies will be involved in supervising the AML/CFT regime: the Department of Internal Affairs, the Reserve Bank of New Zealand, and the Financial Markets Authority.
The Information Paper says establishing a new, single supervisor would be more costly in the short term and would require significant time to build the expertise, systems and structures required for effective supervision.
"Having multiple agency supervision by self-regulatory bodies isn't considered appropriate in New Zealand," it says.
"Although self-regulatory bodies could utilise the existing relationships they have with their entities, they have no experience in AML/CFT supervision and would need to build capability to ensure effective, risk-based, proactive monitoring and enforcement."
The Paper notes that industry bodies will play an important role to support their members in the implementation of the AML/CFT laws. It says there may be opportunities for the supervisor and these bodies to explore co-operative working arrangements and for them to help communicate and engage effectively with their members.
What happens next?
The Ministry of Justice is calling for submissions by 5pm on Friday, 27 January 2017.
Justice Minister Amy Adams says the Government intends to introduce the Bill "early in 2017" and to have it passed by mid-2017. A timeline in the Information Paper shows introduction happening in March 2017, with the select committee considering it from "early-mid 2017".
The timeline says regulations will be drafted and circulated for industry feedback between mid-2017 and mid-2019.
What about the cost?
Ms Adams says that since the Government announced it would fast-track the second phase of its AML/CFT reforms, the policy has been fully developed and costed.
"As part of that work, the Government commissioned Ernst & Young to provide an independent report into compliance costs, which showed the reforms may impose up to $1.6 billion over ten years on New Zealanders," Ms Adams says.
“Our goal is to make sure the regime is as effective as possible, while minimising the impact on businesses and their customers. We need to address the real risks money laundering and terrorist financing pose, while also ensuring compliance costs are as low as possible.
“Consulting on the exposure draft gives affected sectors, businesses and New Zealanders the chance to have their say on whether we’ve struck the right balance between countering the financing of organised crime and putting a burden on the livelihoods of hard-working New Zealanders.”
Ms Adams says it is estimated that around $1.3 billion from the proceeds of fraud and drug offending is laundered each year in New Zealand.
“These reforms alone have the potential to disrupt up to $1.7 billion in fraud and drug crime over the next decade. This will mean less crime and fewer victims. Estimates also suggest it may prevent up to $5 billion in broader criminal activity and reduce about $800 million in social harm related to the illegal drug trade."