Compliance tsunami hits New Zealand lawyers: Who is to blame?

It’s not always easy migrating to a new regime, and it’s expected that there’ll be some humps and bumps along the way with adjusting to various changes.

So spare a thought for the legal fraternity in New Zealand, where new anti-money laundering rules have hit rather hard, and baffled lawyers have been advised to seek answers from peer lunch-time chat groups to get direction on major policy — basically to consult colleagues and decide among themselves the best way to implement the rules.

There is some confusion as to what to apply and how, giving the impression that puzzled lawyers are scurrying about, trying to make sense of this maze of new rules.

Meanwhile, the government has now agreed to suspend a requirement related to property transactions as the pressure heats up.

Why has it come to this, and who is to blame: the government department or regulator connected to the rules, the lawyers who now have to implement the ‘puzzling’ rules or the Law Society, which is generally expected to help such stunned and worried lawyers?

Let’s take a closer look at this rather delicate matter.

“The compliance aspect is heavy”

The storm kicked off when the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act – which has been in force since 2013 and initially applied to banks, casinos and a range of financial service providers – was extended to lawyers and conveyancers on 1 July 2018.

The transition has been a huge leap for lawyers who, prior to the new AML law, were subject to the Financial Transactions Reporting Act 1996, where they had to simply report suspicious transactions.

Mary Ollivier, acting Executive Director of the New Zealand Law Society, in an interview with KYC360 said: “What has been challenging for law firms is the compliance aspect, it is heavy. Things like getting your head around what you have to do, training your staff, conducting risk assessments, appointing a money laundering compliance officer, and so on, and asking clients for identity details.”

“They now they have to carry out extra compliance and report suspicious activity – the KYC, source of funds, risk assessments of their practice and what their risks of being targeted by money launderers are. So lawyers are having to do carry out a lot of compliance now, which they did not have to do before.”

One of the several areas where there has been an issue is customer due diligence in property transactions, Ollivier said.

She explained that, generally, if someone is buying a property with a mortgage, law firms are required to conduct due diligence on the house buyer, who is their client in order to complete the land on line requirements.

“The new law, if strictly interpreted, could require law firms to carry out due diligence checks on the bank employee who sends the mortgage instructions to the law firm.

“The banks were not wanting their employees to have to provide identity information every time they instructed a law firm. So, this was discussed with the [Department of Internal Affairs] DIA and the Bankers Association and this aspect has been suspended for the time being.”

“There is also the issue of wire transfers, for example, while lawyers have to report prescribed wire transactions one question is whether wire transactions such as payment of costs or disbursements that are not related to captured activities also need to be reported.”

The timing factor

Could the problem be that the government did not give lawyers reasonable time to prepare for the rules, research, hold workshops, and so on?

The government, however, seems to refute the blame.

A DIA spokesman told KYC360 that: “The Ministry conducted two rounds of public consultation, including consultation on an exposure draft of the Bill. There was also a further opportunity for input during the legislative process when the Parliamentary Select Committee heard public submissions. After consultation, the implementation period for the legal sector was extended from six to nine months.”

Is extending the implementation date of vast new legislation by three months ‘enough’ time? Not so for some.

It seems that the lawyers had hoped for a few more months than that (some would need years!).

The Law Society’s Ollivier said that the legal profession was hoping that the law would come into effect later this year or early next year, “to allow more time for the practical elements of the legislation to be ironed out. It came into effect in July 2018 and feels a bit rushed for some.”

The money factor

It’s also important to take into consideration the resources factor – not just from the aspect of how much it will cost firms to implement this new law with its vast requirements, but also the question of how much did the government invest in rolling out the law; or does it have enough resources to administer the law and to handle storms that may brew up, such as what has now happened.

In the interview with KYC360, Ollivier said: “A main challenge for lawyers is determining what aspects of the legislation apply or do not apply to their practices. There are a number of technical issues arising and the lawyers’ supervisor for AML, the Department of Internal Affairs (DIA), is quite stretched, currently.”

Is the DIA stretched? The chaos on the ground seems to suggest so.

A DIA spokesman, however, said: “Regarding our resourcing, we are confident we have the right level of dedicated resourcing for our supervisory role, and we are scaling up our regulatory capacity throughout the year to accommodate the growing number of new reporting entities as they come under the legislation.”

The ‘helper’ factor

Where do puzzled lawyers turn to for help about the law?

Looking at the situation, it appears the lawyers were provided help by two main actors – the DIA and Law Society.

The DIA said it published guidance in December 2017 and worked in consultation with lawyers on the matter.

“We also published a sector risk assessment specific to the business types that the regime is extending to. The risk assessment is accompanied by a “Prompts and Notes” document that makes suggestions about what to consider when assessing risk to their business,” the DIA spokesman said.

The spokesman added that the DIA has been responding to issues and working with the Law Society, Ministry of Justice and other supervisors, and will continue to release guidance ‘as required.’

Whatever help the DIA gave, however, was apparently not enough, judging by the queries from lawyers and the suspension of the property-related requirement.

Meanwhile, the Law Society attempted to help by communicating the lawyers issues to the DIA, but it seems it was also met with a wall in some instances.

“The Law Society is liaising with the Department of Internal Affairs, but so far has not received firm guidance from the department in relation to the interpretation of that issue,” it said, regarding the issue of wire transfers after the law was enforced.

“What we are saying to lawyers is that if the DIA is unable to provide specific advice on a complicated issue, that they should look at the legislation and interpret it as best they can,” Ollivier said.

“They can talk to their colleagues about it and make notes of what they decided to do and why, in case asked in the future. We are encouraging law firms to form support groups, meet together, set up lunch time discussions and share their knowledge and questions.”

But the Law Society too can only go so far.

It has limitations about what help it can give its members, explaining that it cannot give legal advice.

If it is of any comfort, it appears that lawyers who misinterpret the rules at this stage might escape punitive action.

Olliver has said: “At this implementation stage, the DIA is being quite flexible and understanding and won’t take a punitive approach because it is aware of challenges being faced. It is taking an educative approach.”

And rightfully so perhaps.


This article was originally published on KYC360 on 2nd August 2018.

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