Lawyers lagging in AML compliance
Lawyers are dragging their heels on anti-money laundering (AML) compliance, risking penalties of up to $5 million, reputational damage and full-scale police investigations when the regulator begins its inspections towards the end of this year.
Also in the regulator’s sights are real estate agents, who have been required to be compliant since January and have six months’ grace before the regulator comes knocking. And, from August, dealers in high-value goods such as art, precious metals and gems, and top-end motor vehicles will be brought into the AML framework.
In the meantime, the regulator – the Department of Internal Affairs (DIA) – has trebled its staff numbers for monitoring AML compliance. Where it finds breaches, DIA is warning it will pass its findings onto the police and other law enforcers.
According to the NZ Financial Intelligence Unit, more than $1 billion – the proceeds from drug dealing and other crime – is laundered locally each year. Added to this is the dirty overseas money being laundered here, some of which is finding its way into property transactions, according to evidence from the DIA.
If you ask them, most law firms will say they have AML under control, says Jenine Colmore-Williams, executive director of Dimension GRC, an AML software and service provider. But the reality is quite different
“To say that all lawyers are compliant would be a massive exaggeration,” says Colmore-Williams. While the big tier one firms know the risks and have largely put robust systems in place, tier two – the mid-sized firms is floundering.
“We have significant intel from the market. [Tier two firms] are going at it with the best of intentions, albeit through the lens of frustration.”
The need to get a client on board and billable in the shortest possible time is driving their behaviour, says Colmore-Williams. Without compliance, the client cannot be billed so many firms are doing the bare minimum and taking shortcuts. “What happens when you do that is you are not compliant,” she says.
Richard Manthel, director at AML Solutions, says from his experience around one-third of lawyers are still in learning mode, but real estate agents appear to have made a better start.
The Anti-Money Laundering and Counter Terrorism Financing [AML/CFT] Act 2009 places the onus on businesses to do client due diligence (CDD) and ongoing monitoring to make it harder for criminals to profit from and fund illegal activity.
The penalties set out in sections 90, 100, and 105 of the AML/CFT Act range up to $5m.
Colmore-Williams, who offers a one-stop-shop for risk assessment, ongoing compliance and monitoring, and audit, says her firm can onboard a client in about 15 minutes and a mid-size firm or SME can be made compliant in a couple of weeks.
It’s a new experience for real estate agents to verify the identity of clients in line with the legislation and, where necessary, to establish the source of funds for the transaction and wealth. This becomes more difficult where there are trusts, or shell/ nominee companies.
The next issue is that smaller firms often manage compliance manually, Colmore-Williams says.
“When you have to verify somebody’s passport and that passport is issued in China, how are you doing that? Most are not. They are falling way short of the mark. The law says you must be able to identify the person and understand the risk they pose to your business.”
Matching a face to a passport that might be fake isn’t enough. Even clients domiciled in New Zealand may have multiple names they’re known by in different languages and their passports may use a variety of scripts including cyrillic, abjad, hanzi and others.
“We are in a global economy. If you think you can look at someone’s passport and [AML] is done and dusted, you are falling way short of the legislation.
“In December the DIA is going to come hunting,” says Colmore-Williams. “They will hunt for the lawyers first.”
The regulator isn’t out to hang every lawyer and agent who makes a mistake or doesn’t try hard enough. There is a big difference between cutting corners, and failing to educate oneself or deliberately breaking the law.
Chapman Tripp partner Penny Sheerin says the DIA has a range of levers it can use when genuine mistakes are made. Those include feedback, guidance, warnings and announcements designed to affect reputation. Only the most egregious cases will end up in proceedings, says Sheerin.
Inevitably the lure of billings and commissions will encourage a minority of lawyers and agents to cut corners, turn a blind eye or worse. Those who think they can operate under the radar, however, are mistaken. AML regulators have teeth and are willing to use them
If the experience of financial institutions, under the AML umbrella for five years now, is an indicator, the DIA will find breaches.
So far, two court proceedings under the AML/CFT Act have been concluded, the DIA says. Ping An Finance was hit with a $5.29m penalty plus costs, and Qian DuoDuo Limited had to pay $356,000 plus costs.
The Financial Markets Authority (FMA), which regulates the financial sector, has lost patience.
Liam Mason, FMA director of regulation, says even after five years under the AML regime the sector isn’t compliant across the board.
The FMA plans to step up its desk-based and on-site monitoring, and will increase its focus on reviewing independent audit reports. “We expect to see more mature policies, procedures and controls in place,” says Mason.
Both agents and lawyers complain about the cost of compliance and fear honest customers will defect to a less-stringent competitor.
Bindi Norwell, chief executive of the Real Estate Institute of New Zealand (REINZ), says CDD is proving laborious for agents.
“[Clients] think it is very invasive,” she says. “They ask, ‘Why should you know all that about me?’ You might spend hours with us, doing your homework. They can then turn around and say ‘I am going with someone else’. That is hard.”
“We are not whinging. The industry is very well aware of the potential implications if they don’t comply,” says Norwell.
Like lawyers, agents who deal with many overseasdomiciled clients are finding AML compliance most taxing, thanks to the need for enhanced CDD.
Doing it manually can take hours and is subjective, says Colmore-Williams. It takes three seconds using Dow Jones data checks that report on politically-exposed people, relatives and close associations, international government sanction lists and watch lists, and those linked to highprofile crime, she says.
Electronic databases such as Dow Jones are a far cry from assigning an administrator to trawl through Google and hope they get it right, she says.
“There are a whole bunch of [lawyers and agents] out there doing the best they can with what they have interpreted the legislation to be [but] they are not being compliant.”
With no centralised system such as RealMe to help reporting entities in meeting their obligations, many have turned to third parties such as Dimension and AML Solutions to perform CDD. Smaller businesses with their own in-house systems and under-resourced staff are open to risk.
To beat anyone up after three months, however, would be really unfair, says Manthel. “Phase one has been going five years and some of those guys haven’t got it right yet.”
While many Kiwi lawyers and agents would like the public to think money laundering doesn’t happen here, it does.
The spectre of homes bought with suitcases of money was raised by more than one interviewee for this article. The possible use of cryptocurrencies to launder money through property is likely only to rise.
Real estate is one of those high-value assets targeted by criminals who can use an agent or lawyer to provide a veil of legitimacy. Not all agents play by the rules, as anyone who reads a newspaper or the Real Estate Authority database knows.
“Every industry has a bad apple,” said Carolyn Cody, training, liaison and compliance manager, Financial Intelligence Unit, in a training webinar for lawyers.
In a report published earlier this year, Transparency International Canada found widespread opacity in the real estate market, suggesting evidence of significant money laundering in an economy it called “‘la la land’ for financial crime.”
On March 14 this year, the British regulator raided 50 real estate agencies and imposed a £215,000 fine, the largest ever in the UK for money laundering violations in the real estate market.
Solicitors’ firms are also in the gun, with the UK regulator taking 60 cases to the disciplinary tribunal in the past five years. Another 400 of the UK’s 7000 law firms are being earmarked for a random audit this year.
Chapman Tripp’s Penny Sheerin agrees the real estate sector is vulnerable. “For agents, the challenge will be to understand what money laundering is, how it happens and to be aware of the red flags out there so they can meet their legal obligations and [protect] their reputation,” she says. “No business wants to be embroiled in a money laundering situation.”
The issue of beneficial trusts was raised by multiple interviewees for this article. The problem, says Sheerin, is beneficial owners can be hidden behind trusts and companies.
“That is when you have to look at the source of funds or wealth of the customer, depending on type of trust you have,” she says.
Following the Shewan report into foreign trusts in 2016, 18 of the 19 recommendations were adopted by the government, says Suzanne Snively chair of Transparency International New Zealand.
That was a step in the right direction, with requirements brought in for registering beneficial ownership for foreign trusts. There are still loopholes in our legislation and room for improvement, says Snively. “The issue is you are unable to follow an audit trail to see who really owns something.”
If the agent or lawyer’s search determines the funds come through a shell company, the risk to your business is higher and the CDD needs to be escalated to enhanced level.
Manthel says for lawyers and real estate agencies concerned about compliance, the AML/CFT Compliance Officer is the most important position in their business.
That person must receive good training and have sufficient AML knowledge to maintain the program, receive good support from senior management, have the confidence and knowledge to provide guidance and make good judgments calls, and have a good system for record-keeping and data management.