New Zealand Law Society - The AML/CFT regime - More on retainers, etc

The AML/CFT regime - More on retainers, etc

Readers may have read my previous article in relation to the AML/CFT regime and retainers, etc (24 September 2018). It struck a chord with quite a few lawyers.

I don’t know of any lawyer who considers that a payment by a client of a retainer on account of fees or of disbursements in advance (especially if invoiced but regardless of invoicing) or of an amount to be used for barristers’ fees is or should be a captured activity.  The DIA takes a different view, which I believe is wrong for the reasons set out in the previous article.

Lawyers may have read the New Zealand Law Society Guide on Wire Transfers which has just become available.  Case Studies Three and Four are of concern, at least to me. I believe that the conclusions reached in those Case Studies are wrong, for the reasons set out in my previous article.

Case Study Three involves payment by an overseas client of a retainer on account of disbursements to be incurred eg, court filing fees, through a wire transfer.  Case Study Four involves a New Zealand law firm using trust client funds to pay by wire transfer disbursements incurred by an Australian law firm.  In each case, the NZLS states:  

This is a captured activity. The law firm is [an ordering institution/beneficiary institution] in relation to an international wire transfer.

I assume that the New Zealand Law Society isn’t suggesting that the mere fact that a wire transfer is involved means that there’s a captured activity.  That wouldn’t be correct.  

  • Wire transfers are defined as transactions that are carried out through reporting entities – see the definitions of “wire transfer” and “prescribed transaction” and see also s48A as to reporting obligations.  (The NZLS refers to the definitions in its Guide.)
  • A lawyer will only be a reporting entity if they fall within the definition of a designated non financial business or profession, which relates to carrying on certain transactions in the ordinary course of the lawyer’s business.  So obligations for a lawyer in relation to wire transfers as a reporting entity can only arise if the wire transfer is sent or received by the lawyer in relation to a captured activity that is being undertaken by the lawyer in the ordinary course of their business.

Accordingly, the assumption must be that the New Zealand Law Society agrees with the DIA view that the payments themselves involve captured activities on the basis that they involve managing client money (which isn’t a defined term in the AML/CFT Act).  If so, that’s unfortunate.

  • First, in terms of ML and TF, it’s an obvious  nonsense.  The requirement to pay retainers of any kind (whether on account of fees, or for disbursements and whether invoiced or not, or for barristers’ fees) stem from the lawyer.  It isn’t a question of managing client funds in the financial sense or any ML or TF sense.  There’s no risk of ML or TF.
  • Secondly, if disbursements yet to be incurred are invoiced to the client, and if disbursements that have been incurred have been invoiced, isn’t the invoice a fee for professional services (payment of which isn’t a captured activity)?
  • That leaves payments for disbursements to be incurred but which haven’t been invoiced.  This is just a question of timing - the payments would be on account of fees for professional services to be incurred.  If the lack of an invoice would mean that the payments aren’t for fees for legal services, that could be resolved by issuing an invoice.

It’s unfortunate that a matter that should so obviously be straight forward and that should so obviously not involve captured activities should be the subject of ongoing uncertainty.  It seems to me that insufficient thought has been given to the AML/CFT Act and how it should sensibly apply to lawyers.  

The DIA needs to be persuaded to change its view.  If required, the AML/CFT Act should be changed.  One can only hope that the New Zealand Law Society is lobbying for either or both of these forms of change, as opposed to accepting a position that defies common sense and that has nothing to do with ML or TF.  I don’t know what the official NZLS position is on these matters (or in relation to retainers paid in advance on account of fees) and doubt that my views would be considered to be influential.  I’m comforted however by the fact that there are partners in large law firms responsible for ML and TF who agree with my views.  Hopefully, other lawyers who agree will lobby for change

Steven Dukeson is the principal of Dukesons Business Law, an Auckland commercial law firm.

New Zealand Law Society comment

The New Zealand Law Society is aware of the issues raised in the article and is continuing its discussions with the Department of Internal Affairs (DIA).  Should there be any change in stance by DIA, or updated guidance, this will be communicated to the profession as soon as it is received.

In relation to the comment made by Mr Dukeson in his article regarding wire transfers and the guidance it has recently issued,  the Law Society is not suggesting that the mere fact that a wire transfer is involved means that the activity is a captured activity.   The New Zealand Law Society’s guidance relates to specific case studies and is not intended to apply to all situations.

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