Tax crimes, fraud, embezzlement, drugs, theft, bribery and corruption. No lawyer can risk their name being linked with any suggestion of these activities. As lawyers, we are vulnerable to attempts by criminals to use us for money laundering and terrorist financing. New Zealand has a positive “clean, green” image;, it also has an overheated housing market and is one of the few Pacific rim countries not to limit foreign ownership of residential property. Passing money successfully through a New Zealand law firm would be like hitting the jackpot for a money-launderer. And what a jackpot – a 2009 estimate of the extent of money laundering put it at 2.7% of the world’s gross domestic product (or US$1.6 trillion).
Draft legislation proposes that lawyers comply with new rules by 1 January 2018. Phase one of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) came fully into force on 30 June 2013. Initially only financial institutions and casinos as “reporting entities” were required to comply. Phase 2 will extend the definition of “reporting entities” to include lawyers, accountants, real estate agents and others viewed as “gatekeepers” to the financial system.
A suitcase of money will set alarm bells ringing in any practice, but money laundering is a three-stage process of placement, layering and integration. Lawyers are more likely to be drawn -in at the later stages, once the balaclava and swag-bag have been stowed away. To clean the proceeds of crime, money must first be placed in the financial system. Common methods include change of currency or denomination, transportation of cash and cash deposits. Like shuffling cards, dirty money is then layered, to disguise and distance it from its criminal origin. Common methods of layering include wire transfers, withdrawals in cash and cash deposits in multiple bank accounts. To be “laundered” the money must then be integrated, to create for it an apparent legal origin. This is where lawyers are particularly at risk. Common methods of integration include creating fictitious loans or contracts, disguising ownership of assets and using the criminal proceeds in transactions with third parties.
A lawyer adds respectability and an appearance of legitimacy to any activities being undertaken. Simply passing money through a lawyer’s trust account can make it “clean”. Legal services that are seen by international regulators as particularly susceptible to misuse by criminals are (1) purchase of real estate; (2) “sham” litigation; (3) creation or management of trusts, companies and charities. The New Zealand proposals are that lawyers must comply with the AML/CFT regime if they carry out any of the following activities in the ordinary course of business:
- acting as a formation agent of legal entities or arrangements;
- acting as, or arranging for a person to act as, a nominee director or nominee shareholder or trustee in relation to legal entities or arrangements;
- providing a registered office or a business address, a correspondence address, or an administrative address for a company, a partnership, or any other legal entity or arrangement;
- managing or arranging client funds, accounts, securities, or other assets;
- engaging in or giving instructions in respect of any conveyancing on behalf of a client in relation to the sale or purchase, or the proposed sale or purchase, of real estate;
- engaging in or giving instructions in respect to transactions on behalf of any person in respect to the buying or selling of real estate or businesses;
- engaging in or giving instructions in respect to transactions for clients related to creating, operating, and managing companies.
The requirements apply only to the extent that such activities may give rise to a risk of money laundering or financing of terrorism (proposed section 6(3) AML/CFT Act). The obligations are “risk-based”. This aims to enable a business to tailor the cost of compliance to the level of risk. If the AML/CFT Act applies to your firm by 1 January 2018 you must appoint an AML/CFT officer; do a risk assessment; develop an AML/CFT programme and run and monitor that programme. The programme must include confirmation of clients’ identities; monitoring accounts for suspicious activity and reporting suspicious activity.
The proposed regime will challenge our profession, particularly because of the ambitious timetable which requires lawyers to comply more than 18 months before other “gatekeepers”. International experience is that rules developed for banks do not translate well to the broad spectrum of legal practices and firms. The challenges go deeper: disclosure is fundamentally antagonistic to the traditional solicitor/client relationship of trust and confidence. As in all aspects of our professional life, lawyers will be required to balance duties to clients while upholding the rule of law and facilitating the administration of justice.
And our weapon in the fight against crime? Good process.
Unfortunately, no government has yet created a simple means of verification – although distributed ledger technology such as blockchain would appear to provide a solution. But until technology provides a better solution, we will be photocopying new clients’ passports. The significant criminal and civil penalties involved (up to 2 years in prison or a fine of $300,000 for an individual or $5 million for a corporate) do focus the mind on good process. But current “reporting entities” have learned not to dismiss AML/CFT requirements as mere process. The upside is that there is opportunity in the regime to form a stronger relationship with clients, understand more about them and their business and so protect and enhance your business.
Rebecca Sellers is convenor of the New Zealand Law Society’s Commercial and Business Law Commmittee. She is a Director of Melior Ltd.