Strategy release anticipates Financial Action Task Force visit
The Ministry of Justice says it has proactively released New Zealand’s first National Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Strategy.
The strategy is contained in a Cabinet paper entitled “Setting the strategic direction for New Zealand’s Anti-Money Laundering and Countering the Financing of Terrorism Regime”. This was considered by Cabinet on 21 October 2019 and publicly released in December.
The announcement of a strategy appears to be part of a move to prepare for an upcoming Financial Action Task Force evaluation of New Zealand’s compliance with AML/CFT technical recommendations.
The ministry says the National Strategy will coordinate efforts across government and the private sector and guide prioritisation of work to improve the system.
The Cabinet paper says New Zealand is a member of the inter-governmental Financial Action Task Force (FATF) and as part of that membership, all member states are periodically evaluated for compliance with FATF technical recommendations. New Zealand’s last Mutual Evaluation was in 2009, and the paper says New Zealand was found to be deficient in some areas with many being addressed through passage of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
FATF assessors are expected to conduct an onsite visit in March 2020.
Criticism possible
The Cabinet paper says there are some features of New Zealand’s AML/CFT system that may attract FATF criticism “and media attention when the FATF report on the outcomes of New Zealand’s Mutual Evaluation are made public in February 2021”.
After a paragraph which has been suppressed under section 9(2)(g)(i) of the Official Information Act 1982, the paper says the Ministry of Business, Innovation and Employment (MBIE) is currently leading work on requiring New Zealand incorporated companies and limited partnerships to disclose their beneficial ownership information. These are being considered in a separate Cabinet paper and if approved, it says the changes will demonstrate to FATF that New Zealand is undertaking legislative reform to address issues to one of the required outcomes.
The Cabinet paper says there are several other features of New Zealand’s AML/CFT regime that may attract comment from the FATF. The appendix which outlines these is suppressed under section 9(2)(g)(i).
Law Society joins DIA Industry Advisory Group
The New Zealand Law Society has joined the Department of Internal Affairs’ Industry Advisory Group (IAG).
The department has established the forum as a communication pathway with representatives of the sectors it supervises under the AML/CFT regime. The Law Society says it welcomes this initiative by the department.
The IAG meets quarterly and was established in August 2019. Members include representatives of peak industry bodies who come together to share knowledge and discuss common AML/CFT compliance challenges facing their sectors. The intention is to develop understanding between the DIA and the supervised sectors and to work together to find constructive solutions.
The forum also provides co-design opportunities on engagement and guidance programmes. Peak industry bodies are able to share general information and updates from the forum with their supervised sectors.
The Law Society says it looks forward to continued engagement in the IAG and the opportunity it provides to assist lawyers with meeting their AML/CFT obligations.
Financial Intelligence Unit report points to lawyer AML/CFT risk
The “National Risk Assessment of Money Laundering and Terrorism Financing for 2019” document was released by the Police Financial Intelligence Unit (FIU) at the end of November. It says the unit had 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’ use of professional services when seeking to hide criminal financial and business dealings, to obscure identity of those behind the criminal dealings, and to hide illicit financial assets in property and other investments.
Funds laundered through trust accounts
The report says analysis of 47 properties subject to criminal proceeds recovery action by the New Zealand Police’s 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 to 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.
It 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 reporting 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 seven 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, accountants 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.
51
Number of onsite inspections of businesses by the Department of Internal Affairs under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 between 1 October 2018 and 30 September 2019 (Internal Affairs Minister Tracey Martin in response to a written parliamentary question from Kanwaljit Singh Bakshi).
Feedback welcomed on AML/CFT concerns
Lawyers are encouraged to provide feedback to the Law Society about specific AML/CFT concerns facing the legal profession via our dedicated email address nzls.aml@lawsociety.org.nz.