Small and medium-sized law firms, along with many other reporting entities, have long complained about the onerous compliance burden of anti-money laundering (AML) and combating the financing of terrorism (CFT) legislation.
But while changes are in the wind following the release last month of the Ministry of Justice’s Report on the review of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009, along with 200 recommendations, they are unlikely to alleviate law firms’ key concerns.
Immediate changes include:
- relaxing the requirement on businesses to verify the addresses of most customers;
- doubling the time allowed for businesses to submit prescribed transactions reports (PTRs) from 10 to 20 days; and
- exempting registered charities from AML obligations when providing small loans.
The review followed a critical report on New Zealand’s AML/CFT regime by the Financial Action Task Force (FATF) in April 2021.
Lloyd Kavanagh, a partner at MinterEllisonRuddWatts, says the 256-page MoJ report should be read by all reporting entities under the AML/CFT Act. Even law firms that currently fall outside the regime should read it to understand whether they may be brought within its scope, Kavanagh says.
Sam Short, a solicitor at Minters, has highlighted some of the key findings.
They include:
- not changing the purpose of the AML/CFT Act to include the prevention of money laundering and terrorism financing;
- not expanding the regime’s captured activities, for example, to criminal defence lawyers;
- increasing available penalties with a non-exhaustive list of aggravating and mitigating factors to help it be risk-based;
- introducing the ability to restrict, suspend or cancel registration or licensing and for directors, senior managers, employees and/or agents to sometimes be held responsible;
- amending the Amended Identity Verification Code of Practice 2013 to reflect the Digital Identity Trust Services Framework once it is enacted;
- removing both the need for address verification other than for enhanced customer due diligence (CDD) and the blanket requirement for enhanced CDD for trusts;
- providing further clarity around the beneficial owner concept;
- expanding the politically exposed person (PEP) requirement to include domestic PEPs to a lesser extent;
- considering whether the Suspicious Activity Reports (SARs) regime should have a less-strict time frame and/or differentiate between initial suspicions and having reasonable grounds to suspect;
- whether the obligation to submit SARs should be reduced or removed where there would be little intelligence value to be gained; and
Kavanagh welcomed the changes to address verification, in particular. “The requirement [to verify addresses] never made sense in the first place and has proven a major challenge for many of us,” he says.
Tinkering at the edges
But views on the review are mixed. Nick Kearney, special counsel at Davenports Law, one of those smaller-to-medium-sized firms that might be disproportionately affected by the regime, accepts that New Zealand backs the AML/CFT regime but says it’s applied inconsistently across reporting entities.
“It can be very onerous for a small rural law firm in the middle of Waikato, which has essentially the same requirements as a multinational bank,” Kearney says. Streamlining of the Act and regulations to help with this type of anomaly is needed.
Removing the requirement to obtain current addresses from clients will be helpful, as will some of the other small changes. But the review feels like it’s tinkering at the edges. “It will do a little bit here, a little bit there, that might make things a bit easier.”
Some of the changes, however, will make little difference. “Removing or relaxing the timeframe in which to furnish a Prescribed Transaction Report is just ambulance-at-the-bottomof-the-cliff stuff. Instead of doing it within five days, you can do it within 10. That doesn’t really make much difference,” Kearney says.
“What I’d like to see from the review is the law and the regulations made a lot clearer. What I have trouble with at the moment is that the DIA [Department of Internal Affairs] publishes a whole bunch of guidelines around what lawyers should be doing.
“If you [say] I’m not sure about this or that, they just refer you to the website. The website has 25 or 30 documents on it that they expect you to trawl through, which is far too much. The guidelines should be stripped back and condensed into a [single] document and included in the Act itself.”
He adds that guidelines should never be the law but are treated by the DIA as such.
Costly beast
The AML/CFT regime is a costly beast, especially for smaller firms. Davenports Law, which has the equivalent of 15 full-time lawyers, can, like most firms, on-charge AML onboarding to clients. Additional costs that can’t be passed onto clients add up to around $25,000 per year, Kearney says.
“We need to have an AML supervisor, separate from a compliance officer. So, we have to find someone and employ them. We’ve just rewritten our compliance program and that [cost] $3,500. We spend hours and hours on [AML/CFT] that we could spend on billing clients.”
Dimension GRC, a company that offers outsourced AML/CFT compliance to lawyers and other reporting entities, surveyed 590 lawyers recently, asking them among other things: “Do you have transparency around the amount of money you spend on AML compliance over a three-year period?”
“We have been talking to four- to eight-partner firms that have identified their cost of compliance over a three-year period to be in the vicinity of $45,000-plus,” says Dimension founder Jenine Colmore-Williams. “That’s alarming compared to the size of the firm. Bear in mind [that] compliance doesn’t differentiate you from your competitor.”
The legislation as it stands is sector-agnostic, she says, and doesn’t differentiate between a large bank and a small law firm.
“If you were to take a big firm like Dentons Kensington Swan, they have a dedicated compliance officer, and [team]. They don’t really have a big problem in managing their obligations. When the cost is spread over like 100 lawyers, then it’s not even a really big impact on their bottom line. With smaller firms the impact is grossly disproportionate,” Colmore-Williams says.
Some of the changes will ease the burden for small-to- medium sized businesses. “They addressed some key areas that had to be addressed. They’re putting a lot of support in for small businesses, although what that support looks like remains to be seen. The devil will be in the detail.”
Colmore-Williams says in her opinion the review was well-constructed, but lawyers won’t be sitting back, throwing their hands in the air and saying, ‘thank God, there’s not a huge amount of change’. It’s not going to change their life significantly.”
Each individual law firm will have to wade through the 256page document to determine how it affects them, what the changes will be, when they will take place, how they are going to implement them and how to get their people to understand them, she says.
“It’s not going to be easy. One of the biggest problems that they’re facing in managing [AML/CFT] is translating the Act into their business model, and then pulling it into a set of documents that addresses the issues that they have to address.
“Every single [firm] will now have to update its risk assessment and AML program. And next year is also the second wave of audit for phase two. So, there is a lot of angst in the legal sector around the fact that they’re all going to have to undergo audits. That results in cost, business disruption and stress,” says Colmore-Williams.
Small improvements from the review, such as easing the address verification and ranking trusts from low-risk to high-risk, will slightly reduce the friction of onboarding clients, she says. On the other hand, increased compliance around the conveyancing process will impact lawyers.
Law firms will also face a range of fines for non-compliance, instead of simply being told they are non-compliant, as is the case now, says Dimension GRC’s global head of governance, risk and compliance, Phil Sarsfield.
Sarsfield and Colmore-Williams say out-sourcing takes the obligations off law firms’ hands and reduces costs by 50% to 75%.
“We manage the risk assessment, and we manage all the program updates. We keep them up-to-date with training and the registers and all the little things that just take time,” she says.
Some of the changes are expected to be made quickly with changes to regulations over the coming months, says Short. However, the “progressing” of recommendations could go on for a long time, depending on whether they need legislative changes, regulatory changes, a code of practice or changes in supervisory guidance or operational practices, he says.
He expects the ministry to move in several different tranches. Further consultation and exploration of options will be needed before the ultimate shape of some of the changes becomes clear.
0 Comments