The New Zealand Law Society | Te Kāhui Ture o Aotearoa previously received inquiries from lawyers about whether they can charge for undertaking compliance work required under the Anti-money Laundering and Countering of Financing of Terrorism Act 2009 (AML/CFT). This Practice Briefing outlines what lawyers will need to consider when considering passing on compliance costs.
This Practice Briefing does not constitute legal advice.
The Law Society’s view is that the regulatory framework under the Lawyers and Conveyancers Act 2006 does not prevent lawyers from passing on a genuine compliance cost associated with the provision of regulated services to clients. However, lawyers must adopt a fair and transparent approach to charging such costs to ensure that regulatory requirements are met, and client complaints and grievances are less likely.
The definition of legal work in the Act is broad and extends to any work that is incidental to traditional legal work as specifically defined in section 6. Work undertaken to complete due diligence and verification for AML/CFT purposes and which is required to complete a transaction appears to fall within the category of incidental. However, any fee related to compliance work must be fair and reasonable in the particular circumstances.
The starting point is that any fee charged by a lawyer must be fair and reasonable for the services provided, having regard to the interests of both client and lawyer and having regard also to the factors set out in rule 9.1. The “reasonable fee” factors include various matters such as time expended, urgency and circumstances in which the work is undertaken, and the reasonable costs of running a practice (see rules 9 and 9.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008 (RCCC)).
A lawyer is also required to provide a client with information in writing and in advance about the basis on which fees are to be charged (rule 3.4 of the RCCC). Further, a lawyer must not engage in any conduct which may be misleading or deceptive (rule 11.1). For this reason, a lawyer wishing to charge to cover costs associated with compliance must provide information to the client in advance about this in a way that is open and transparent. This information should be clearly explained in the terms of engagement provided to the client.
New Zealand Law Society guidance is available about open and transparent billing practices.
Describing an office charge or expense recovery as a “disbursement” when it is not an actual third-party cost to the firm has the potential to be a misleading practice, with regulatory consequences. For example, a lawyer passing on compliance costs in a way which was found to be misleading was found guilty of unsatisfactory conduct by a lawyers standards committee (see: Client charged a non-existent tax page 49). Likewise, the Legal Complaints Review Officer in LCRO 176/2022 commented that items such as ‘file opening fees’, ‘AML client due diligence checks’, ‘preparing undertakings’, ‘solicitor’s certificates’ and the like are not expenses or disbursements as commonly understood and defined. Disbursements were instead described as being the actual charges incurred by a lawyer in carrying out their client’s instructions and which have been paid to a third party.
In a 2023 LCRO decision (LCRO 176/2022) the LCRO considered the dictionary definitions of the words ‘expense’ and ‘disbursement’. The LCRO found at paras 60-61 that:
An ‘expense’ is defined by the English Oxford Dictionary as “the charges, costs, items of outlay, incurred by a person in the execution of any commission or duty; ‘money out of pocket’”.
A ‘disbursement’ is defined as being the action of disbursing, which, in turn is defined as being “to pay out or defray (costs, expenses)”.
In each case, the term relates to costs required to be paid to a third party in the course of completing a client’s instructions.
In 2016 the Solicitors Regulation Authority in the United Kingdom (SRA) warned firms about treating customer due diligence costs as a disbursement. The position would be similar in New Zealand under the Lawyers and Conveyancers Act regime.
Any firm contracting with an external AML provider service will need client consent. In those circumstances, any charge back to the client must be correctly disclosed and can be recorded as a disbursement.
Where a firm completes the AML or any other ‘in house’ work, these must be charged as a fee and cannot be held out as, or be construed as, a disbursement or an expense.
Lawyers thinking about passing on compliance costs should consider the following:
The New Zealand Law Society’s regulatory team is available to discuss queries lawyers may have, however the DIA and the firm’s own AML auditor should be your first point of contact. The DIA can be contacted on (04) 495 7200 or 0800 257 887.