Since first being introduced on August 2017, lawyers, accountants, real estate agents and conveyancers have fallen under the AML/CFT Act. Some firms scrambled to understand the money laundering and terrorism financing risks across their sectors.
For several firms, this has been a costly exercise, setting aside time and personnel to develop anti-money laundering policies, procedures and controls to comply with the AML/CFT Act.
Since these firms are relatively new to AML/CFT obligations, we have put together this article to help understand the rationale behind Phase 2, specific money laundering risks to lawyers, accountants, real estate agents and conveyancers, and their key obligations under the Act.
Why Phase 2?
Benefits: Phase 1 of the AML/CFT Act (came into force in 2013) covered banks, insurance companies, general financial services and casinos. This Ministry of Justice Cost-Benefit Analysis noted some money laundering was going undetected in New Zealand. Lawyers, accountants, real estate agents, conveyancers, and high value dealers act as ‘gatekeepers’ to prevent criminals laundering proceeds of crime. Gatekeeping refers to the role these firms play in providing services and products that can be used to facilitate the entry of illicit funds into the legitimate financial system.
The addition of these entities under the Act increases the likelihood that New Zealand collectively detects and deters money laundering and terrorism financing.
Key benefits of Phase 2 are in increase in deterrence of Money Laundering, reduction in precedent crime, subsequent reduction in social harms, and improved reputation for New Zealand. For example, the drug trade generates significant money laundering, and its estimated Phase 2 entities can detect and deter this money laundering, which contributes to a reduction in crime and social harms.
As for improving New Zealand’s reputation in the international community, the specific benefits are economic, which accrue across society in general. In other words, everyone benefits.
Costs: Compliance costs for Phase 2 Entitles were analysed by Deloitte on behalf of the Ministry of Justice though administering a survey to a sample of lawyers, accountants, real estate agents, conveyancers, and two types of high value dealers – jewellers and motor vehicle shops (which is out of scope of this article).
The analysis showed compliance costs are internal and attributed to setting up and maintaining an AML/CFT programme year over year. Key costs are due to performing customer due diligence, account monitoring, and suspicious activity reporting. The costs of compliance are more strongly felt by small to medium sized businesses. The analysis showed the benefits outweigh the costs, especially when broader strategic benefits are included.
Specific Money Laundering Risks to Lawyers, Accountants, Real Estate Agents and Conveyancers
The Department of Internal Affairs supervises lawyers, accountants, real estate agents and conveyancers for compliance with the AML/CFT Act. DIA released their updated ‘sector risk assessment for these entities, which collectively form ‘Designated Non-Financial Businesses and Professions’ (DNFBPs). The sector risk assessment helps the sectors understand their inherent risks and meet their AML/CFT obligations. We have summarised these relevant risks below.
Lawyers: Rated as Medium-High in the Sector Risk Assessment. Lawyers can provide money launderers access to expertise and facilities they would not have themselves, which can create an environment that conceals and disguises the proceeds of crime. This includes creation/management of companies, trusts or charitable organisations, managing client affairs, and the purchase and sale of real estate. The risk is compounded when the services are delivered non-face- to-face including overseas on boarding of clients.
Although Lawyers have professional obligations that may assist with the AML/CFT regime, their primary purpose is not to detect and deter money laundering, but to maintain confidence in the legal sector.
Accountants: Rated as Medium-High in the Sector Risk Assessment. Accountants may be used at many stages of money laundering. Similar to the other ‘gatekeepers’, money launderers use accountant to set up trusts/companies, open and manage accounts, tax services, and dealing with large sums of money. These activities allow the proceeds of crime to appear legitimate, respectable and normal. The role of accountants in this activity may be complicit or unwitting.
Real-estate Agents: Real estate is a high-value asset often used domestically and internationally to launder and invest criminal proceeds. The National Risk Assessment published by the Financial Intelligence Unit (part of the New Zealand Police Financial Crime Group) indicates real estate is the money-laundering asset of choice. Offenders can move large amounts of illicit funds in a single transaction, and subsequently sell the property to ‘wash’ the source of funds. The large amounts of agents’ means that offenders can seek out a suitable agent to target. Factors that contribute to an increased risk include geographic distance between the agent and the location of the customer, beneficial ownership of real estate may be hidden via trusts, nominees or companies, and cash intensive businesses.
Conveyancers: Rated as Medium in the Sector Risk Assessment. Conveyancers are typically used to transfer the ownership of real estate from one person or entity to another. Conveyancers do not provide the range of services of other gatekeepers; however, the specialist knowledge needed to complete a real estate transaction means that an experienced lawyer or conveyancer facilitates almost all New Zealand real estate transactions. Money Launderers can use Conveyancers to add a sense of legitimacy to transactions and activities, adding a further step in the chain of transactions and activities to frustrate investigation by law enforcement.
Key obligations under the Act
Firstly, it is important to note that not all lawyers, accountants, real estate agents and conveyancers are considered a Reporting Entity (RE) under the act. This depends on whether your firm provides any services that are covered under the act. For example, a lawyer who manages client funds or transfers real property would be covered, and therefore a Reporting Entity. The activities must also be carried out in the “ordinary course of business”.
AML/CFT compliance cannot be achieved with a “set and forget” approach. Your AML/CFT programme needs to be fully implemented within your business. It should be a living and adaptable programme. Key obligations under the Act are as follows:
- Appointing a Compliance Officer – you must appoint an AML/CFT Compliance Officer to administer and maintain your compliance programme, and your supervisor (DIA) must be informed of this.
- Conducting a Risk Assessment – You must conduct and document a risk assessment. You are the best judge of the money laundering risks your business is exposed to, and this forms the basis of the rest of the AML/CFT programme.
- AML/CFT programme – this is your core programme document which includes internal procedures, policies and controls to detect and manage the risk of Money Laundering and Terrorist Financing. It would include (but not limited to) areas such as customer due diligence , account and transaction monitoring, record keeping, ongoing monitoring programme and suspicious activity reporting. The compliance officer must administer and maintain the programme.
- Annual Report – Reporting entities must submit an annual report each year covering the period July to June. Your AML/CFT supervisor advises the date for submission each year, and you will usually have two months to submit.
- Independent Audit – every two years, you are required to have an independent audit of your risk assessment and AML/ CFT programme.
The DIA provides guidance to each sector on complying with the Act. We recommend all lawyers, accountants, real estate agents and conveyancers who are REs under the act to review these guidance documents.
If you would like to understand how Accelerate Advisory could help with your compliance, or require an independent audit, please do complete the form on this website, email us at [email protected] or call us at +64 21 02535718.
Disclaimer: This blog post provided is for information only and cannot be relied on as evidence of complying with the requirements of the AML/CFT Act. It does not constitute legal advice and cannot be relied on as such.