Ethical dilemma for lawyers forced by new rules to disclose dodgy dealings
Lawyers and real estate agents will be obliged to alert the authorities to dodgy transactions under the next phase of tough anti-money laundering rules coming in this year.
But lawyers say they will not be forced to breach client confidentiality, an important legal principle.
The Anti-Money Laundering and Countering Financing of Terrorism Act (AML-CFT) came into force initially with banks and financial institutions four years ago, amid an international effort to crack down on tax avoidance.
In July the law will be extended to accountants, real estate agents, lawyers and conveyancers, in an effort to ensure illegal funds aren’t washed through property purchases.
It will also apply to the NZ Racing Board and businesses dealing in “high net worth goods”.
The new rules will put the country’s 13,000 lawyers in an interesting position, requiring them to report any suspect activity unless it is “privileged communications” – connected to confidential advice they have given.
Lloyd Kavanagh, chairman of law firm MinterEllisonRuddWatts, said lawyers took their responsibility not to aid or abet crime seriously. But it would be a balancing act between observing the act and protecting their clients’ right to confidential advice.
For example, he said, a client might ask a lawyer about the legalities of a hemp plantation and shortly after make a property purchase with cash that was hard to account for. The purchase was suspicious but the suspicion was based on privileged advice.
“It is going to involve some important judgement calls … and many of the medium sized and smaller law firms in particular are going to need extensive guidelines to understand how to apply this in practice, than they’ve had so far.”
The other key concern was the cost of the new regime, with training, software and possibly new staff required.
“There is really an enormous amount of work for lawyers to do, and there is no doubt that it is going to have substantial cost implications.”
Justice Minister Andrew Little said the regulations tried to strike a balance, “but for things that are not about advice, just about facilitating transactions of money, that isn’t necessarily privileged and it can be disclosed.”
“You want people to go their lawyer with confidence about getting advice on their legal rights,” but the ease of international transfers meant money laundering was “a big problem worldwide”.
Asked whether it had been happening to any great degree in New Zealand, Little said: “I think we’d be naive to think it hasn’t been happening. The scale of it is open to conjecture.”
The National Government’s 2015 “brightline test”, which requires tax to be paid on properties sold within two years, was another way of detecting whether people were paying over the odds on properties to launder money, Little said.
He agreed the cost of compliance could be high. “That is the price to pay to make sure we are clean.”
For real estate agents, the new rules pose less of an ethical dilemma but the checks and balances will still be onerous.
Bindi Norwell, chief executive of the Real Estate Institute, said her industry had been at work for months to ensure a smooth transition when it is included in 2019.
Agencies would be required to keep more records, train their staff and check every vendor was legitimate and not on a money-laundering watchlist.
“It’s making sure we know where the money is coming from, they legitimately own the property.”
The checks would be costly – “that’s why we’re trying to find an industry-wide solution”.
“But if we can reduce levels of risk around money laundering, it’s ultimately a good thing.”
New Zealand’s move to bring real estate agents and lawyers under anti-money laundering laws is ahead of Australia, although that may soon change.
Last month the OECD warned that Australia’s attractive real estate market was vulnerable to being used for laundering the proceeds of foreign bribery.
Big fines are already being imposed on financial institutions who fail to heed the new regime. The Department of Internal Affairs has issued several warnings and begun court proceedings against three companies.
In September, Ping An Finance, an Auckland money remitter and foreign currency business, was fined $5.29m in the High Court for “failing abysmally’ to keep records or verify the identify of its customers.
It was criticised for not reporting a single suspicious transaction in 2014, despite handling more than 1500 financial transactions involving $105.4m.
When the Department of Internal Affairs investigated, it found 173 suspicious transactions.
Suspicious signs included the “unnecessary use of several transactions to pay or receive funds from a single customer on a single day or within a short period; the presence of very large transactions; and significant high-value cash deposits”.
The court said it seemed the company’s non-compliance “amounted to a calculated and contemptuous disregard for the AML/CFT requirements, and that non-compliance was a cultural norm within the business”.