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What Internal Affairs is planning

04 August 2017 - By Nick Butcher

Law firms throughout the country must prepare for the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 phase two.

They’ll have to come up with a plan to ensure compliance. This includes appointing a compliance officer, assessing the risk of money laundering and terrorism financing occurring within their business, and putting in place a programme of systems and controls to mitigate that risk.

Phase two also includes accountants, real estate agents and conveyancers as reporting entities.

The Department of Internal Affairs (DIA) is the appointed supervisor of compliance and the director of phase two implementation is Kate Reid.

The Reserve Bank and the Financial Markets Authority are also supervisors under phase one of the AML/CFT Act. The Department of Internal Affairs currently has some cases before court.

What will the DIA be looking at in relation to lawyers and law firms?

Risk assessment of legal sector

In preparation for the changes, the department is carrying out a risk assessment of the entire legal sector to identify areas which may be vulnerable to exploitation by criminals.

“The areas of business we will be most interested in are those where criminals might identify opportunities to launder the proceeds of crime. An obvious example is the use of trust accounts, but there are other services that lawyers offer that criminals might wish to utilise, such as setting up shell companies or using trust structures to mask laundering activity,” Kate Reid says.

“We want to provide essential information to assist lawyers when they come on board as reporting entities – which is likely to be in July 2018.”

An education and communications plan is being worked on. As with phase one, that’ll include information roadshows to be held throughout the country.

“It’s very early days in our planning but the roadshows are likely to happen in the early months of next year and could include multiple agency involvement,” Ms Reid says.

She says there are a range of educational tools they’re working on providing to the legal sector to assist them in setting up their risk assessments and AML/CFT programmes.

“The number of reporting entities DIA supervises will increase five-fold, so our staff numbers will increase accordingly, along with the tools we have available to assist business with their programmes,” she says.

DIA a proactive supervisor

Ms Reid describes the department as a “proactive supervisor”, in that it won’t be waiting for complaints to occur before engaging with the sector. Instead the DIA actively works with regulated firms to achieve compliance.

“That doesn’t mean we’ll be knocking on lawyers’ doors every five seconds. It means that we will be regularly communicating either through the New Zealand Law Society or directly with legal firms. It could also be through conferences or webinars. We’ll work with the legal profession to find out what kinds of communication will work best for them,” she says.

Kate Reid says DIA will periodically review law firms’ AML/CFT Act phase two controls and programmes. There are two types of review – a desk-based review of programme documentation, and an on-site inspection which involves assessing how well the AML/CFT programme is working in practice. Firms will also be required to report annually to the DIA on their risk assessments and AML/CFT programme.

“We’ll be adopting a risk-based approach to engaging with reporting entities. It won’t be done every year for every firm. We are likely to pick a sample and we’ll prioritise firms that engage in activities that in our view pose a higher risk of money laundering or terrorism financing. Examples might be firms that deal with high value customers in New Zealand or internationally. However our approach will also aim to ensure that lower risk firms are doing the right thing and that our risk assessment of their activities is accurate,” she says.

From 1 November this year, the Prescribed Transaction Reporting regulations come into force. The DIA says that means if a business engages in cash transactions of NZ$10,000 or more or if it sends or receives funds overseas totalling NZ$1,000 or above, they’ll need to start reporting on that date.

Will that affect law firms?

“It’s highly likely. They’re probably quite normal amounts of money to be dealing with in relation to conveyancing work. Reporting these transactions is managed by the New Zealand Police Financial Intelligence Unit, and Police will be producing the relevant guidance. What we (DIA) will do is make sure that law firms have processes and procedures in place so that they can do this reporting effectively which might include reporting a suspicious transaction,” she says.

Ms Reid says during phase one of the AML/CFT Act there were people that dug their heels in and considered the whole process too difficult.

“There’s a serious reputation risk if you do nothing, along with a range of possible interventions and sanctions. But our contact with the sector to date indicates that the great majority of lawyers are keen to comply and we will be working to support them in that,” she says.

Last updated on the 4th August 2017