The purpose of this Practice Briefing is to inform law firms of the likely effect on them of upcoming legislation designed to detect and prevent money laundering.
This Practice Briefing does not constitute legal advice.
It has been estimated that the proceeds of criminal conduct valued at over $US1.6 trillion are laundered worldwide through the legitimate financial system every year. A United Nations Office on Drugs and Crime report estimates that in 2009, criminal proceeds amounted to 3.6% of global GDP.
This would suggest money laundering amounted to between $US590 billion and $US1.5 trillion. The lower figure was roughly equivalent to the total output of an economy the size of Spain. However, the above estimates should be treated with caution. They are intended to give an estimate only of the magnitude of money laundering.
This movement of money is considered to be the world’s third largest industry after forex and the oil trade. The on-going global effort to counter this money laundering now involves legislation to criminalise money laundering, to make the prosecution process easier and to provide the investigative and prosecution powers. There are also due diligence procedures to reveal and report suspected illicit money entering the financial system.
Due to the international nature of the criminal organisations involved, counter-measures to money laundering have needed to be uniform, at national and international level, to prevent arbitrage between jurisdictions. It is therefore a major focus of supra-national bodies such as the Financial Action Task Force to devise a comprehensive global framework of laws and regulations.
In 2013 phase one of Anti-Money Laundering practices came into effect in New Zealand. The Anti-Money Laundering and Countering of Financing of Terrorism Act 2009 (AML Act) placed obligations on financial institutions and casinos and tasked government agencies with overseeing and enforcing a comprehensive anti-money laundering regime.
In June 2016, the Government announced that it would accelerate phase two which would bring many more businesses and professions into scope, including lawyers, accountants, real estate agents, conveyancers, some additional parts of the gambling sector and some high value goods dealers.
In August 2016, the Ministry of Justice issued a consultation paper on phase two seeking feedback about proposed changes. The Law Society made submissions on the consultation paper and these are summarised in an article published in Issue 898 of Law Talk on 7 October 2016.
This can be viewed here.
On 13 December 2016, the Government announced the release of an exposure draft of phase 2 of the AML Amendment Act. The proposed changes in the exposure draft aim to strike the right balance between combatting crime and minimising compliance costs to New Zealand businesses. Accompanying the exposure draft was an information paper that provides additional information on the proposed changes, including details for each phase two sector.
The exposure draft and information paper can be found on the Ministry of Justice website. NZLS will be making submissions on behalf of the profession.
The legal profession is currently within the scope of limited (and unsupervised) obligations to verify the identity of clients and report suspicious transactions under the Financial Transactions Reporting Act 1996 (FTR Act). The rationale for a sensibly constructed and regulated anti-money laundering regime is therefore likely to be known to lawyers, but education and support will be required by the profession in relation to the new, more onerous, obligations under the AML Act.
The AML Act requires businesses within its scope to comply with various measures to reduce the risk of them being unwittingly drawn into criminal activity. These include developing a risk assessment and compliance programme, asking for and verifying the identity of their customers, vetting and training staff, monitoring accounts, monitoring compliance and audit, and reporting suspicious transactions to the Police Financial Intelligence Unit (FIU).
The amendment Act is likely to impose several new obligations on lawyers:
These obligations will likely apply when lawyers (not including in-house lawyers employed to provide services only to their employer) provide the following services in the ordinary course of business:
Preparing for or carrying out transactions for customers related to creating, operating or managing companies.
The Law Society recognises the need for lawyers to be within the scope of the AML Act. There is evidence from both within New Zealand and overseas of some services provided by lawyers being used by criminals wishing to launder the proceeds of crime and finance terrorism.
The scope of services contained in the draft legislation is wide. Submissions have been received by the Ministry of Justice which comment on the specific terminology used. Some of the obligations to be imposed on lawyers under the AML Act are inconsistent with some of the keystones of the traditional lawyer/client relationship. The Law Society addressed these issues in its first set of submissions and will follow this up in its further submissions on the draft exposure bill.
A Lawyer’s Guide to Detecting and Preventing Money Laundering lists some of the “red flags” lawyers can look out for that may suggest some criminal behaviour is involved with the funds about to be channelled through the practice. The existence of a “red flag” may, of course, have a legitimate explanation, but international experience shows that they are something one should look out for.
These “red flags” include:
Under the obligations currently imposed on lawyers by the FTR Act, a lawyer is required to file a report to the FIU when there are reasonable grounds to suspect that a client’s transaction is suspicious and could be related to criminal activity, and legal professional privilege does not apply.
Phase two of AML will expand significantly these obligations and codifies common law exceptions to legal professional privilege which may apply in certain circumstances. Lawyers will likely face difficult situations in which their disclosure obligations are triggered but may be unclear whether the exception to privilege applies.
The AML Act provides protection from criminal, civil and disciplinary proceedings for a person who supplies information about a suspicious transaction if the information is provided in good faith. While this is, in principle, a blanket protection to lawyers, some situations arising in practice are likely to be nuanced and present ethical dilemmas.
The relationship between a lawyer and a client is one of “utmost trust and confidence” (Rule 5.1 of the Lawyers and Conveyancers Act (Lawyers: Conduct and Client Care) Rules 2008). There are likely to be situations in practice where this duty is inherently incompatible with the reporting and disclosure obligations to be imposed by the AML Act.
One of the significant proposed changes to the AML Act is to require reporting to the FIU on suspicious activities, not just on suspicious transactions. This proposed change was partly prompted by concerns that valuable financial intelligence for detecting crime was not being passed to the FIU in circumstances where suspicious or unusual activities did not involve a transaction, or the transaction did not go through a New Zealand bank.
Issues may arise in legal practice if the concept of “suspicious activity” is not clearly defined or understood, leading to confusion around when a report should be made and potential under-reporting. This is now defined in the draft exposure bill.
There are a number of issues to be resolved and matters to be clarified in relation to these concerns and the Law Society will be actively engaged with the Ministry of Justice seeking to ensure that the impact of the new regime on lawyer’s ethical duties be minimised so far as possible. However, the profession should prepare itself for some fundamental changes to the traditional application of duties and codes of conduct.
There are currently three supervisors under the AML Act: the Reserve Bank, the Financial Markets Authority, and the Department of Internal Affairs.
Each supervisor monitors the businesses within their remit by carrying out reviews, on-site audits and other activities.
Phase one of the AML Act allowed four years for full implementation but phase two will be implemented much more quickly. The draft exposure bill contemplates lawyers complying with the Act within 6 months of the Act coming into force.
Law firms will need to develop procedures manuals, run internal training sessions, appoint and train compliance officers and implement new information gathering and filing protocols. This will have a particular impact on small firms.
It is important to appreciate that the AML Act is generally comparable to regimes which have existed in other jurisdictions for several years. The ultimate goal is for there to be uniformity on a global basis. The disadvantage of this is that certain obligations will be imposed in New Zealand which may be excessive in our generally open and trusting society where corruption is less prevalent than elsewhere.
On the other hand it is important to realise that New Zealand lawyers are far from immune from the illicit activity which the AML Act regime is designed to prevent and detect and the profession has a responsibility to co-operate.
Accordingly, while the concerns so far raised by members of the legal profession are valid and it is important for the voice of the legal profession to continue to be heard in relation to the concerns expressed in this practice briefing, it is necessary to prepare for a change in the ordinary course of business. The Law Society will continue to engage with the Ministry seeking to ensure the impact on law firms is reasonable and proportionate. Guidance notes and further information will be provided to the profession in due course.
In the meantime, lawyers should:
The Law Society will continue to provide updates on developments.