New Zealand Law Society - Police Financial Intelligence Unit reports on lawyer AML/CFT risk

Police Financial Intelligence Unit reports on lawyer AML/CFT risk

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The New Zealand Police Financial Intelligence Unit has released a National Risk Assessment of Money Laundering and Terrorism Financing for 2019. It says the Unit has received 137 suspicious activity reports from lawyers since they became AML/CFT reporting entities on 1 July 2018.

The report says lawyers, conveyancers, accountants and real estate agents provide a ‘gatekeeper’ role in providing professional services to clients. The types of services provided and the everyday nature of these services in the legitimate economy also make them attractive to money launderers and terrorism financiers.

It says increasing financial sector and law enforcement scrutiny of possible illicit funds further incentivises criminals' user of professional services when seeking to hide criminal financial and business dealings, obscure identity of those behind the criminal dealings and hide illicit financial assets in property and other investments.

The report says analysis of 47 properties subject to criminal proceeds recovery action by the New Zealand Police Asset Recovery Unit (ARU) identified a number of professional services used to launder funds through trust accounts; purchasing of real estate; creation of trusts and companies; management of trusts and companies; management of client affairs; and transfer ownership of assets to third parties.

"In all of these cases, there was no evidence of complicity on the part of the gatekeeper professionals involved. Hiding the ownership of property was the most common money laundering method, generally by putting property in the name of a trust set up by a lawyer. The second most common method was transferring the criminal proceeds to a lawyer or real estate agent by electronic transfer."

The report says lawyers and conveyancers adhere to high standards of practice and ethics that may, in turn, reduce the vulnerability of lawyers to criminal misconduct.

"Specifically, lawyers must not act in a way that unwittingly facilitates criminal offending, with current standards enforced by the New Zealand Law Society. Lawyers practising on their own account and operating a trust account are subject to oversight, including risk-based inspections, by the New Zealand Law Society Inspectorate. This oversight aims to ensure proper conduct in operating a professional’s trust account to protect clients’ money and minimise exposure of the Lawyers Fidelity Fund; which also has some mitigating effect on money laundering and terrorism financing risk."

Suspicious activity by lawyers

The Unit says historical low rates of suspicious activity reporting by professional services (under the Financial Transactions Reporting Act 1996) indicate the general measures were not ensuring sufficient professional vigilance to mitigate the risk of money laundering and terrorism financing. Between the commencement of the FTRA 1996 and 1 December 2017, the FIU only received 190 suspicious activity reports from lawyers and 7 suspicious activity reports from accountants.

The report says introduction of the second phase of the AML/CFT reforms has gone some way to addressing this vulnerability and enhancing professional vigilance to mitigate the risk of the money laundering risk to lawyers, conveyancers, accounts and real estate agents. Since they became reporting entities under the AML/CFT Act, the FIU has received 137 suspicious activity reports from lawyers, 65 suspicious activity reports from real estate agents, and 14 suspicious activity reports from accountants.

"In addition, regulatory vulnerability in relation to companies and trusts create further incentives for criminals to use professional services. Companies and trusts can be quickly and cheaply set up to obscure beneficial ownership. Furthermore, criminals can place companies in the names of nominee directors and/or shareholders, who are often the facilitating professional. Parties to trusts may not be recorded anywhere except in the facilitating professional’s records. This exposes professionals to criminals seeking to obscure their interest in illicit funds."

The report says trusts are the main type of vulnerable legal arrangement in New Zealand. It says their principle attraction to criminals is that they can be used to hide beneficial ownership and create a front behind which criminals may mask their activity. Trust arrangements can also be an effective means of dispersing assets while retaining effective control.