By Steve Lewis.

Illustration by Mascha Tace.

In a bid to stem the flow of illicit money being used to fund terrorism, government authorities want to extend AML laws to include accountants, lawyers, real estate agents and other professions handling large sums of money.

But governments are also wary of the additional costs imposed from additional paperwork.

On both sides of the Tasman, professional bodies have advocated for a regime that is pragmatic and proportionate and will not smother practitioners in an unnecessary layer of “red tape”.

The legal profession is also worried that the new AML rules could compromise the centuries-old doctrine of client privilege, posing another dilemma for governments who want tougher rules in place to prevent widespread tax fraud and other financial crimes.

In the wake of revelations contained in the so-called Panama Papers, governments have sought to close loopholes allowing syndicates and individuals alike to undertake wide-scale tax evasion and money laundering.

Extending AML laws

While banks, casinos and pubs, superannuation and insurance firms, bullion dealers and many high-end retailers have been required to comply with AML laws for some years, Australia and New Zealand are seeking to expand this net.

New Zealand hopes to have legislation passed through its parliament by mid-2017 while the Turnbull Government, in Australia, is adopting a more cautious approach. In late November 2016 the Attorney-General’s Department released a bulky discussion paper outlining a range of options for extending AML laws to the professions.

Senior figures in the Turnbull Government say they have not yet signed off on the AML reforms, claiming they will first be subject to a rigorous “cost benefit analysis”.

Having pledged to slash the regulatory burden on business, Australian Prime Minister Malcolm Turnbull is particularly sensitive to the argument that this next phase will mean more paperwork for small accountancy and legal firms.

Just as important is the issue of client privilege with peak industry bodies concerned about the impact of AML reporting requirements on what has been a cornerstone of the legal and accounting profession.

Stuart Clark, the President of the Law Council of Australia, fears the planned AML reforms will be extraordinarily expensive and challenge the legal profession’s independence from government.

“The Law Council is more than happy to work with the government to implement AML laws that are proportionate and effective and that won’t damage the relationship between a client and his or her lawyer,” Clark says.

“But we will not act as the government’s Stasi.”

For many years, the Law Council has been asking Australian Transaction Reports and Analysis Centre (AUSTRAC), the country’s financial intelligence agency with regulatory responsibility for anti-money laundering and counter-terrorism financing, for any evidence Australian lawyers are involved in money laundering.

That has not been forthcoming and now the Law Council is concerned that “suspicious matter reporting” will be inconsistent with fundamental common law doctrines that underpin lawyers’ professional obligations. At risk, claims Clark, are client legal privilege, client confidentiality and the client-lawyer relationship.

Unwitting partners in white collar crime

The accounting profession has been less critical of the proposals. And in the wake of the Panama Papers – and with criminal syndicates using increasingly sophisticated methods to disguise large-scale payments – governments and law enforcement agencies are concerned professional service firms could be unwitting partners in serious white collar crime.

In its November 2016 discussion paper, the Australian Attorney-General’s Department outlined the challenge for law enforcement agencies in tracking financial transactions: “Transnational and Australian-based crime groups are increasingly making use of accountants and other ‘gatekeepers’ to the financial system to establish networks of businesses, proprietary companies, partnerships and trusts to facilitate money laundering and support criminal activity”.

Across the Tasman, the New Zealand Government is more advanced in introducing the next raft of AML legislation.

These so-called “Phase 2” reforms will extend AML to cover many lawyers, accountants, real estate agents, conveyancers, some additional gambling sector operators and some businesses that deal in high-value goods, such as auctioneers, bullion dealers and jewellers.

"The New Zealand Government is more advanced in introducing the next raft of AML legislation."

The government is yet to decide what activities carried out by these businesses will have to comply with the law. But the required AML measures will include carrying out risk assessments, making sure businesses confirm customers’ identities so they know who they are dealing with, and reporting suspicious matters the police’s Financial Intelligence Unit.

Richard Manthel, a director of Auckland-based AML Solutions, notes that the New Zealand Government received significant feedback from professional bodies to these “second phase” reforms under the Anti-Money Laundering and Countering Financing of Terrorism Act.

“They would have received 25 to 40 submissions that outlined deep concerns about the implementation of the legislation. These include the future cost of compliance and the time that it would take to implement these reforms, getting systems and procedures in place,” Manthel says.

But these concerns, legitimate as they appear, have to be weighed against the increasing threat from criminal syndicates who are using ever-smarter methods to shift illicit gains around the globe.

As the New Zealand Ministry of Justice explains, the move to extend the Act will “bolster the ability of authorities to detect and investigate serious crimes – such as drug offending, organised crime, terrorist financing and tax evasion – by following the money trail that such offences generate”.

A forced evolution of AML practices

The unprecedented leak of around 11 million documents from Panamanian firm Mossack Fonseca in April 2016 – the first tranche of the so-called Panama Papers – was without doubt a seminal moment in the evolution of AML practices. It highlighted the challenge for global authorities in tracking and preventing AML and the financing of terrorism.

The release of documents triggered major interest in Australia and New Zealand with agencies forced to act as countless media reports exposed widespread tax evasion of the rich and famous. For instance, the Australian Tax Office announced it would investigate around 800 Australians named in the Panama Papers for possible tax evasion.

New Zealand was also heavily implicated in this extraordinary glimpse into the lives of those who skate close to the legal edge.

The country’s 12,000 foreign trusts – which hold tens of billions of dollars – were subjected to close scrutiny after media revelations that New Zealand had become a prime location for the wealthy to hide their financial assets.The New Zealand Government moved to introduce the next wave of AML reforms, as a matter of priority, in direct response to the release of the Panama Papers.

Professional bodies representing lawyers, accountants and real estate agents expressed reservation and concern about aspects of the New Zealand reforms. With the government keen to engage in serious consultation, there has been a slight delay in introducing draft legislation for the new AML framework.

"The Australian Tax Office announced it would investigate around 800 Australians named in the Panama Papers for possible tax evasion."

This is expected to be introduced into the parliament early this year with the expectation that it will be passed into law before the election, which is due to be held before November this year.

Despite the concerns expressed by professional bodies, Manthel believes the New Zealand Government will forge ahead with laws that he says are justified given the global experience.

“It is very important that (AML) does capture these industries under consideration,” he says.

“It is well documented that money laundering is evident in these industries that are not captured.”

The challenge ahead

The challenge is coming up with a framework that acknowledges that parts of these industries are very low risk when it comes to the threat of money laundering or financing for terrorism.

Manthel cites the example of a small law firm that conducts conveyancing on a residential or commercial property on behalf of a client with funds flowing through a trust account for the purpose of that property.

"The next phase of trans-Tasman anti-money laundering reforms is bound to be controversial."

Like the Law Council of Australia, Manthel has some concerns that these new laws will challenge the traditional client relationship for lawyers with firms required to report suspicious transactions to law enforcement authorities who are taking an increasingly zealous approach to capturing criminal syndicates.

The challenge now for governments on both sides of the Tasman is determining a sensible path forward. The design of the new AML laws will likely contain a detailed list of what services are in and what are out.

But whatever concessions are offered to businesses and industry groups the next phase of trans-Tasman anti-money laundering reforms is bound to be controversial.

Again, governments are grappling with the challenge of tackling organised crime and countering terrorist networks against the costs of additional paperwork and responsibilities for business.

Steve Lewis is an author, journalist and senior adviser with Newgate Communications.

This article was first published in the Feb/Mar 2017 issue of Acuity magazine.