Terrorist financing - what lawyers need to know
||On 1 July 2013, the main compliance components of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) came into effect. Lawyers and incorporated law firms are currently not covered by the AML/CTF Act; however it is necessary firms know about it as they may be affected through interactions with banks and other financial institutions.
The second phase of the AML/CTF Act, which will be developed in 2014, will likely include law firms, as well as other businesses and professions such as accountants, conveyancing practitioners and real estate agents.
The purposes of AML/CTF Act are to detect and deter money laundering and the financing of terrorism; to maintain and enhance New Zealand’s international reputation by adopting, where appropriate in the New Zealand context, recommendations issued by the Financial Action Task Force (FATF); and to contribute to public confidence in the financial system.
The AML/CTF Act facilitates cooperation amongst reporting entities, AML/CFT supervisors, and various government agencies, in particular law enforcement and regulatory agencies to counter money laundering and terrorist financing.
What is terrorist financing?
Terrorist financing is the financial support of terrorists, or those who encourage, plan or engage in terrorism. It includes providing, collecting, disposing or otherwise dealing with property of a designated terrorist entity.
Funds can be raised from legitimate sources – such as personal donations and profits from businesses and charitable organisations, or from criminal sources – such as the drug trade, the smuggling of weapons and other goods, fraud, kidnapping or extortion.
Terrorist financing and money laundering both involve the movement of funds, ideally with minimal scrutiny to disguise their origin or destination. The controls established to detect money laundering are applicable to detect and prevent terrorist financing.
Unlike money launderers, terrorist organisations can raise funds through legitimate sources, as well as by criminal activity. Terrorist financers may use specific methods to add complexity or legitimacy to transactions, including through alternative remittance services, charitable organisations and cash couriers.
At the time of writing, there have been no convictions for terrorist related offences in New Zealand since the introduction of the Terrorism Suppression Act in 2002.
The Financial Intelligence Unit and the 2009 Mutual Evaluation Report indicate that there is little evidence to suggest terrorist financing is occurring in New Zealand and consider the risk of terrorist financing to be low.
However given that people who finance terrorism often use similar methods and tools to those used for money laundering there are red flag indicators to look out for which may indicate the presence of terrorist financing.
Methods terrorists use which may require legal professionals
There are a number of money laundering and financing methods that possible terrorists commonly employ or which may require the services of a legal professional. These methods will attempt to obscure the true ownership of the funds, and may include:
- misuse of client accounts;
- purchase and sale of real property;
- creation and management of trusts and companies;
- managing client affairs and making introductions;
- undertaking certain litigation; or
- setting up and managing charities.
Other examples of red flags lawyers should be aware of when looking out for possible indications of terrorist financing activity include:
- the use of an agent or intermediary without an obvious reason;
- the client’s use of a professional business or trust account, particularly where large or frequent cash deposits are made that are not in keeping with the usual activity of such an entity;
- funds being received from a foreign jurisdiction, particularly where there is no apparent link between the client and the jurisdiction;
- receiving instructions from an overseas client where no apparent economic reason exists;
- the client being unconcerned about the level of fees;
- the client having a fast growing property portfolio;
- a purchaser in a transaction being a company with complicated or obscure beneficial ownership;
- the purchase amount looking unusual compared to appraised value or previous purchase amount;
- the client appearing to have access to funds substantially above their means; or
- the client using a virtual office.
Obligations regarding terrorist financing
Legal professional involvement in terrorist financing can range from innocent involvement to complicity. Innocent involvement could be when none of the above red flag indicators are apparent. As such, an unwitting legal professional may undertake basic care and due diligence, but certain red flags may still be missed or their significance is misunderstood.
Complicity occurs when the legal professional has actual knowledge of the criminality in which they are involved. Persistent and repeated instructions from the same client or the client’s associates or other matters with similar red flag indicators may amount to the legal professional being corrupted.
Any one of these red flags in or of itself may not be evidence of terrorist financing – however when red flags are identified and there is a level of suspicion, the transaction should be reported to the Financial Intelligence Unit at Police National Headquarters, Wellington. If appropriate, lawyers should proceed with caution or stop acting for the client altogether. Failure to enquire further or where the isolated transaction is completed and a suspicious transaction report is not filed may amount to wilful blindness.
Lawyers must comply with fundamental obligations to uphold the rule of law and to facilitate the administration of justice (Lawyers and Conveyancers Act 2006, section 4). A lawyer must also take all reasonable steps to prevent any person perpetrating a crime or fraud through a lawyer’s practice (Rules of Conduct and Client Care, R11.4).
Lawyers receiving funds to deposit or invest, or to settle real estate transactions, currently remain subject to the Financial Transactions Reporting Act 1996, with duties to identify and report suspicious transactions.
However, under the AML/CTF Act, reporting entities will be obliged to provide:
- a written risk assessment of money laundering and financing of terrorism that could be expected in their business;
- an anti-money laundering and countering financing of terrorism programme that includes procedures to detect, deter, manage and mitigate money laundering and the financing of terrorism;
- a compliance officer appointed to administer and maintain the programme;
- customer due diligence processes based on their risk assessment including customer identification and verification of identity; and
- suspicious transaction reporting, record keeping, auditing and annual reporting systems and processes.
If you have any further questions regarding terrorist financing or money laundering in New Zealand, contact New Zealand Police on (04) 474 9444 or the Financial Intelligence Unit on (04) 474 9499. For more information see the following FATF documents – Guidance for Financial Institutions in Detecting Terrorist Financing and Money Laundering and Terrorist Financing Vulnerabilities of Legal Professionals.