Phase two of the AML/CFT Act is clearly going to affect how lawyers and law firms do future business, but is it as daunting as it appears?

Not if you’re organised and have a plan and stick to it, is the general consensus from lawyers and financial advisors who are working with the legal sector to ensure compliance. As phase two approaches, the number of individuals and companies offering advisory services grows.

Advice is as saturated as a rainy season, yet it pays to investigate the best option as opposed to accepting the first cab off the rank. A number of advisors are now targeting lawyers who want help to navigate through phase two implementation.

Fiducia has offices in both Tauranga and Auckland. The company was established in 2013 by Claire Piper, a former lawyer with a background in policy development and commercial negotiation.

“What we are seeing elsewhere in the financial sector with current reporting entities is that they’re doing too much. They’re alarmed and it becomes counter-productive because they’re throwing resources, money and people at a problem they don’t completely understand. They start knee capping themselves down the line when the cost and confusion becomes too expensive to handle,” she says.

Ms Piper is a member of the Association of Certified Anti-Money Laundering Specialists.

Be strategic rather than reactive

Her best advice to lawyers that are perhaps puzzled by the ordeal is to be strategic rather than reactive.

Claire Piper says all lawyers need to be up to speed on section five of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 so that they’re 100% sure they are indeed reporting entities.

“I’ve dealt with reporting entities who have been complying under the rules of the Act over the past four years, yet they didn’t need to at all and I’ve saved them $20,000 a year by explaining what their actual obligations are. So it’s about knowing if you’re in or if you’re out – that’s the most important thing,” she says.

Fiducia offers online DIY AML/CFT templates which Ms Piper says will serve as the foundations of any regime for businesses in New Zealand as a risk assessment and a programme.

“We have boiled down all of the essential methodologies, formats and materials that any reporting entity in New Zealand needs to be compliant, to put it into an easy-to-use template that can be downloaded instantly from our website.

“That means you get all of the expert knowledge that our consultants have put together but without the expensive consultancy fees. You can then build your own capacity within your legal team.”

Obviously there is a cost but it’s a fraction of what an independent consultant would burn up, she says.

“An entry level consulting package to do a risk assessment and programme with the templates is about $1,000, whereas an independent consultant would normally cost about $5,000,” she says.

Cost the biggest concern

And cost appears to be the biggest concern of law firms and lawyers.

“Yes, it’s the cost and the lack of understanding as to whether spending this money is necessary. I find most people want to spend what is needed to protect themselves, but they also get nervous and frustrated about whether they truly need to do this,” she says.

New Zealand Law Society General Manager, Regulatory, Mary Ollivier, warns that there are a lot of so-called compliance experts that have popped up over the past six months.

“The best advice is that lawyers should do their own due diligence on any firm they’re intending to instruct to assist them to comply once the Act comes into force. Make sure you find a firm you can trust, that has a good reputation and that they’ll charge appropriately,” she says.

There’s also a danger of outsourcing too much, to the point of not being aware of what’s really going on within your own clientele.

“Perhaps outsource assistance with your first assessment, but do the required work and analysis yourself,” she says

What are lawyers protecting against?

Claire Piper says specifically what lawyers are protecting themselves from is civil and criminal liability that they’ll face for not fulfilling the requirements of the Act.

“It’s not about proving that you’re not laundering money, it’s about proving that you are fulfilling your obligations under the Act to do everything you can to prevent that from happening,” she says.

“Under the Act as it currently stands there is civil liability of up to about $3 million in penalties. There is also criminal liability attached to the directors, the compliance officer and possibly individual staff. That’s what we’ve seen happen overseas.”

The first cases are already in the High Court.

Ms Piper says these cases before the court are examples of the worst end of the spectrum.

“The reputational damage alone could destroy you and your firm,” she says.

Lawyers already have some reporting requirements under the Financial Transactions Reporting Act 1996.

“But I’m yet to meet a lawyer who has filed a STR – suspicious transaction report – under the Financial Transactions Reporting Act. That means the legal industry as a whole are failing their obligations. There’s been no enforcement in that area as far as I can see. But what the AML/CFT Act is, is a beefed up version of the FTRA, with the spotlight more honed on the legal sector,” she says.

She says if there is money laundering occurring in New Zealand, it is happening because it is being facilitated by lawyers and particularly in the property sector.

“Anecdotally I have dozens of examples of situations where if lawyers were caught by the AML/CFT Act, there would have been much more information reported to the Police. That’s why the legal industry needs to be part of this network. The financial institutions can’t do it themselves. Lawyers and accountants are the leaky boat. We only have anecdotal evidence of that in New Zealand but there are plenty of examples internationally in other jurisdictions where the legal profession has been caught.

“A lot of the time it is just naivety and this Act is saying, no more naivety. You can’t ignore it anymore.”

Ian MacKenzie is a senior associate at MinterEllisonRuddWatts. His specialty is banking and finance.

Phase one and two contrast

He says there is a contrast between AML/CFT Act phase one entities and phase two, the area lawyers fall under.

“The difference with lawyers as opposed to a lot of the phase one reporting entities is that there are a lot of small organisations such as sole practitioners or one or two partner law firms where there is quite a different subset of people that are being caught by this compared to the first time around,” he says.

Is this something people should be more worried about than other areas of their law practice?

“Probably not, It’s not the thing to forsake all other compliance in favour of it but you do have to understand your obligations and comply,” he says.

Mr MacKenzie advises on how to build compliance programmes.

“It’s going to be difficult to get bespoke advice. The small town sole practitioner in a small town doesn’t really have the resources to get someone in to give them all of the whistles and bells like a bank could with phase one.”

He says there are cheap services out there providing what he describes as a cookie cutter approach, but then for every dollar a lawyer spends, it’s a dollar they’re not taking home.

“Small practices just don’t have the same resources to invest as banks were able to in phase one. There are software services that automatically monitor transactions and suspicious transactions but a sole practitioner might need to think about whether that’s appropriate for them because if the only person that has access to a trust account is the sole practitioner, then they probably don’t need to invest heavily in automated transaction monitoring software, as it can be done on a manual level,” he says.

Staff training for new lawyers

For bigger law firms that employ new graduate lawyers, Mr MacKenzie says staff training should be a priority.

“This might be the first time new employees at law firms have really had to think about how to recognise money laundering style issues. There are compliance programmes such as ‘Safe Trac’. It’s an on-line tutorial programme. Staff would sit a test to show what they do and don’t know about the AML/CFT Act phase two.

He says the important thing is to get an AML/CFT compliance programme in place and stick to it.

“Make sure the people in your business who are responsible for it know how the regime works. Ensure they’re training and telling the people who interface with the legislation and the firm’s compliance obligations that they know what to look out for in terms of suspicious activities, that they know what they have to do in terms of identifying their own clients. Make sure that you can show a regular pattern of training. That all starts with getting a compliance programme in place and working out how you’ll address and answer all of these questions.”

Client Privilege

There are circumstances when lawyers can go beyond client privilege, to prevent a crime occurring, says Ian MacKenzie.

“Lawyers are in a different position to some of the phase one reporting entities though because they do owe duties to keep things confidential but equally bankers owe duties of confidentiality to their clients but have still had to report transactions,” he says.

Recently the AML/CFT Amendment Bill returned from the Select Committee with an altered defence to failing to provide a suspicious activity report because the information is subject to privilege.

“The Select Committee has recognised there is a conflict between being required to report information under the AML/CFT regime, and legal privilege requiring lawyers not to disclose information,” he says.

Mr Mackenzie says the Bill gives a clear steer that privileged information should be maintained as such by;

• Providing an altered defence for not filing a suspicious activity report where a person reasonably believes that the relevant information is privileged;
• Opening up lawyers to liability where there were reasonable grounds to believe that information subject to a suspicious activity report was privileged, but the lawyer disclosed it anyway; and
• Including a mechanism for the District Court to resolve disputes about whether information is subject to privilege.

“However, this represents something of a muddying of the waters from the first iteration of the Bill, where there was no reasonableness requirement imposed on the assessment of what was privileged,” he says.

Mr Mackenzie says the revised draft puts lawyers in a potentially awkward position in a situation where a suspicious activity report may be required in respect of information that is only borderline privileged.

He says in these circumstances, the lawyer will have to determine whether it is reasonable to invoke privilege.

“If a lawyer elects not to make a report in these circumstances, but it was subsequently determined that there were no reasonable grounds to invoke privilege, the lawyer breaches the AML/CFT Act. If the lawyer elects to make a report, but it was subsequently determined that there were reasonable grounds to invoke privilege, the lawyer could be sanctioned for breach of professional duties.

This may result in a number of applications to the District Court for guidance in these borderline cases,” he says.

Fiducia’s Claire Piper says how phase two affects legal privilege is a grey area for many lawyers.

“I was speaking to a Queens Counsel who was doing arbitration work in The Hague and she said this exact issue came up during one of her hearings and no-one knew how to resolve this problem. Where were the legal obligations and who held them in terms of reporting potential terrorist or criminal activity under the AML/CFT related legislation in those jurisdictions versus a lawyer’s professional responsibility to keep confidentiality for their clients. There are court cases happening in Canada and the UK about this issue,” she says.

Richard Manthel is a director at AML Solutions, a company set up in 2012 before the legislation came into force for the phase one entities. He is also a Certified Anti-Money Laundering Specialist.

AML Solutions has assisted over 650 companies with phase one and says it is the country’s leading and largest AML consultancy firm specialising in helping companies develop and implement their risk assessment and compliance programmes, or conduct their statutory AML audits.

“We’ve had many inquiries from both lawyers and accountants. There are a lot of people motivated to be ahead of the curve. They all want to know what their obligations are and we can do that to a certain extent, remembering that the legislation hasn’t passed yet,” he says.

Practical advice is the focus

Mr Manthel says AML Solutions is geared to providing practical advice.

“That’s what you need. We educate compliance officers and teams, train their staff and help them understand some of the complexities of the legislation.”

He says simply reading the legislation and hoping for the best isn’t enough.

“You’ve got to have someone who has expertise in the AML legislation, has been around the block, understands it and has seen many different programmes and has seen how different companies put their compliance programmes into place and how they’ve interpreted the legislation.”

AML Solutions is holding three phase two seminars in August in Auckland, Wellington and Christchurch.

Mr Manthel says these two-hour sessions will answer many of the questions lawyers and law firms have about the AML/CFT Act Phase two.

“The Act will be thoroughly explained and then we’ll take floor questions. So lawyers might have questions about legal privilege or who should be considered a high risk client. These questions and answers will be all be collated and published on the AML Solutions website,” he says.

He says there might be confusion over whether a lawyer who doesn’t do conveyancing or trust work is captured under the legislation.

“You’ll learn about what your obligations are as a lawyer,” he says.

The New Zealand Law Society’s continuing legal education provider NZLS CLE Ltd is running a webinar on phase two on 4 September which will be presented by Henry Brandts-Giesen and Neil Russ.

How do you do a risk assessment?

Mr Manthel says when AML Solutions undertakes a phase two risk assessment of a law firm, there’s a range of areas they scrutinise.

“We’re across a wide range of areas including jurisdictional risk, where are the customers based and what’s their product. We also explain the methodology we use to come to our conclusions. These are usually reports of about 30 pages,” he says.

Richard Manthel doesn’t think a template do it yourself assessment is the way to go.

“People need engagement. They’ve got to have engagement because when the Department of Internal Affairs turns up at your office and asks the compliance officer to talk through the risk assessment and you can’t do it, well there’s their first red flag,” he says.

Mr Manthel says he is aware of examples where people are unable to even find their risk assessment documentation.

“This happened a lot with phase one. We’ve seen all of this is why people need to be educated on phase two. If they don’t understand it, in my experience they’ll bury the information in the bottom drawer and put it down to being too hard and that’s a dangerous place to be,” he says.

He says for the first two years of the first part of the legislation, supervisors were lenient because it was new and in the education phase.

“But now we are seeing more and more companies being warned or threatened with prosecution,” he says.