Preventing money-laundering in New Zealand: a law firm’s role

New changes regarding law firms are coming into force and they may affect your next visit to us. The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (known as AML/CFT) applies to New Zealand law firms from 1 July of this year.

The legislation aims to ensure New Zealand is a safe place to conduct business. The government wants this country to remain at the top of the list of low risk countries with a reputation for low corruption and strong protocols to prevent money laundering activity.

What is money laundering?

Money laundering is the acquisition, possession, transfer, concealment or the conversion of property knowing it is derived from a criminal offence. There are three stages of money laundering:

  1. Placement
  2. Layering, and
  3. Integration.

This activity can occur when funds are processed via a law firm’s trust account to make them appear legal and legitimate. Moving that money into a law firm’s trust account and into a legal transaction (such as buying a house) can make that money untraceable back to the illegal activity from which it came.

Similarly, this law aims to stop people in New Zealand who may finance terrorism. These people can also transfer money towards terrorism by involving a law firm to avoid being caught by law enforcement and to hide their identities.

Why are law firms a target for money laundering?

Criminals who launder money often see law firms as ‘gate keepers’ that can help them create funds that appear genuine.

How money laundering works

Let’s use an example: Alexia has $100,000 of illegal funds she has received from drug dealing in Botswana. She makes an offer to buy a house in New Zealand and instructs a new lawyer, Jim, to establish a trust and act in this purchase. Jim, although he has only just met Alexia, doesn’t ask her any questions about her identity or the source of her $100,000 deposit. Alexia gets the funds paid into Jim’s law firm’s trust account from her overseas Botswana account. Jim doesn’t enquire as to the bank account they have come from (an unknown Botswana bank). Jim, during the property transaction, forwards the funds to the seller’s lawyer for the purchase of the property. Alexia no longer has the funds and now the trust she has created owns a New Zealand property.

Alexia later sells the property on behalf of the trust and benefits from legitimate funds which have arrived in her New Zealand bank account from a New Zealand lawyer’s trust account.

In this example we can see the three steps of money laundering come full circle. First, we saw placement when Alexia transferred the money into Jim’s trust account. Second, layering when Alexia used it for her trust when buying New Zealand property. Lastly, we saw the criminal proceeds integrated into New Zealand funds when it was transferred to another lawyer’s trust account when the property was transferred to Alexia’s trust.

What’s the issue?

If Jim the lawyer had conducted a careful inspection of the origins of the funds and into the client/trustee, Alexia, it’s likely he would have seen multiple red flags.

From 1 July 2018, the AML/CFT Act 2009 requires New Zealand law firms to mitigate and eliminate the risk of being used to facilitate money laundering or terrorist financing activities. All lawyers will be required to do this by verifying identities of their clients and the legitimacy of the transactions. This is called customer due diligence (CDD). To comply with CDD, law firms must conduct a screening to formally identify their client, any other person related to the transaction and the actual funds for the transaction.

When we ask for identification, proof of address, source of the funds or any other questions that relate to you or your transaction, don’t be alarmed; all lawyers are required to do this. Even if you have had the same lawyer for 20 years, we are still required to conduct CDD after 1 July 2018 for every new matter.

Banks, other financial institutions and casinos have been required to comply with this legislation since 2013. Accountants, real estate agents, sellers of high value goods and sports betting agencies are next in line and will all be required to be fully compliant over the next 18 months.

We all want New Zealand to be a safe place to do business, and we need your help to make this so. We have a professional obligation to comply with this legislation. If not, there are a significant range of financial sanctions and penalties that could result.

Posted: Wed 25 Apr 2018

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