Date posted: 04/12/2019 8 min read

The bright side of anti-money laundering rules

Knowing your customer is more important than ever in anti-money laundering regulations. It could also be good for business.

In Brief

In 2018, New Zealand extended anti-money laundering (AML) rules to accountants. Australia will eventually follow.
AML rules mean CAs will spend more time on compliance, but any ‘suspicious activity reports’ they raise help build intelligence on potential criminal activity.
The tougher ‘know your client’ requirements could allow CAs to better understand the needs of their current clients, and keep dodgy customers from their door.

By Penny Pryor

As the Australian accounting profession awaits the inevitable introduction of Phase 2 anti-money laundering and counter-terrorism financing legislation (known as Tranche 2 in Australia) – which will increase accountants’ data capture and reporting obligations – it is worth looking across the ditch to see what can be learnt from New Zealand, where such reforms were introduced in 2018.

Many New Zealand accountants will have spent much of 2019 grappling with increased obligations under the new anti-money laundering and counter-terrorism financing laws. While it has meant more red tape, accountants have a vital role to play – and it is bringing rewards.

For 30 years, the international direction of anti-money laundering and (since 2001) counter-terrorism financing laws has been driven by the collaborative work of the Financial Action Task Force (FATF). This intergovernmental organisation was founded in 1989 as a G7 initiative to develop policies to combat money laundering.

NZ takes the lead on anti-money laundering rules

In 2018, New Zealand became one of the first nations to enact FATF’s recommendations to adopt Phase 2 laws, which extend anti-money laundering and counter-terrorism financing rules to other “designated non-financial businesses and professions” such as jewellers and other dealers in high-value goods, real estate agents, lawyers and accountants.

As Australia has also signed up to FATF, the introduction of Tranche 2, which will apply to the accounting profession, is inevitable. Amendments to Australia’s Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AML/CTF) will increase accountants’ data capture and reporting obligations, so it is worth seeing what can be learnt from the New Zealand experience.

Regulators and industry experts acknowledge that complying with the new laws takes more effort, but insist that the strengthened regulatory framework is making a critical difference to improving the integrity of the economy and safety of the community.

In April 2019, New Zealand police seized NZ$3.7 million in residential properties and assets from an Australian-based “bikie gang” that had set up chapters in New Zealand. It was property that potentially had been bought with money from criminal activities.

Harley Davidson motorcycles, a Rolls Royce and other luxury vehicles, along with a NZ$10,000 gold chain and a luxury Louis Vuitton bag, were all seized as part of the raid, which was carried out by more than 80 police at a number of properties around Auckland. Firearms and about NZ$60,000 in cash were also confiscated.

“Operation Nova” captured members of the outlaw Comanchero Motorcycle Club, as well as several of their associates. Police also charged a lawyer, accountant and media personality accused of assisting the gang to commit crimes, including money laundering.

Mike Stone, director of New Zealand’s Department of Internal Affairs (DIA) AML Group, says that the ongoing media coverage around Operation Nova should serve as a “timely reminder” of the importance of New Zealand’s recently upgraded anti-money laundering and counter-terrorism financing laws.

Fingering criminal activity

Phase 2 of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) was introduced in New Zealand in July 2018. This extended the existing legislation – that already applied to casinos, banks and other large financial institutions in New Zealand – to also cover lawyers, conveyancers, real estate agents, high-value dealers (such as jewellers and vehicle dealers) and accountants.

Reports estimate about NZ$1.35 billion from the proceeds of fraud offending and illegal drugs is laundered through New Zealand businesses each year, while the true cost and social impact is much higher.

“Businesses are already providing greater numbers of suspicious activity reports across a broader range of business services than New Zealand has ever seen before,” says Stone.

“The obligations will help to dissuade criminals from interacting with New Zealand businesses and will provide the government with a rich intelligence picture of potential criminal activity, allowing for greater targeting of response and the earlier detection of money laundering and terrorist financing crimes,” he says. “All of this contributes to making New Zealand a much safer society for everybody.”

Stone says he is confident that the new professions captured by the reforms now understand how important the legislation is for the country’s safety and security. He is particularly pleased to see New Zealand accountants engaging positively with the new laws and embracing their heightened obligations.

A survey undertaken in July 2019 by the DIA found that 100% of accountants surveyed said they understood the AML/CFT risks in their businesses, up from less than 50% when a similar survey was conducted in July 2018.

“Broadly, as a sector, what we have found with the accountants is that they are very diligent. Right from the outset, from the introduction of the obligations, and even beforehand, they have indicated to us that they are very committed to comply with the legislation,” says Stone.

‘Know your client’ is a cornerstone of AML

Picture: Andrew Gibbin-Price CA.

A cornerstone of the AML/CFT Act is the performance of stricter customer due diligence. The core principle is “know your client”, meaning accountants need to integrate identification verification into their existing client acceptance and continuance procedures.

Meeting that commitment requires accountants to step up from what they have been used to, and that extra workload has been felt particularly keenly by smaller accounting practices.

AP Partners, an Auckland-based accountancy and advisory firm, offers AML advisory and outsourced compliance services. Director Andrew Gibbin-Price CA says some accountants are concerned about having the resources to manage the additional AML/CFT compliance requirements, so are looking to outsourced solutions.

“What I think we will see in the future is the move to outsourcing models where, essentially, practices will outsource their AML compliance [processes] where they can get that expertise from a third party at a lower cost,” says Gibbin-Price.

He cautions that while accountants may be enjoying a grace period now, in the future the DIA is more likely to crack down when it finds non-compliance. “Even unintended non-compliance can give rise to penalties,” he says.

The implementation in New Zealand hasn’t all been smooth sailing and Gibbin-Price is hoping the supervisor for accountants – the DIA – provides more guidance.

“There is still a lot of confusion and unanswered questions around what activities are captured for AML purposes,” he says.

To illustrate, Gibbin-Price points to a case where an organisation was found to be non-compliant under the new laws. Foreign exchange company Qian DuoDuo Ltd was ordered to pay NZ$356,000 to the DIA in July last year (the DIA was understood to originally have sought a fine of about NZ$2.5 million), for failing to complete customer due diligence, account monitoring, record keeping and risk assessment requirements as stipulated under the AML/CFT Act.

Gibbin-Price says that particular case made it very clear that reporting entities cannot claim a defence based on incorrect advice given by external advisers or the DIA.

Australia awaits change

Australian governments of both stripes have been promising to introduce Tranche 2 AML laws since 2006. Following criticism from FATF, Australia made a renewed commitment to do so in 2018. Despite this, a timeline is yet to be announced.

“We know it will happen in Australia and we will actively engage with it when it does,” says CA ANZ business reform leader Karen McWilliams FCA. “In the meantime, we are supporting all our members in New Zealand and we are learning from their experience.”

Malkara Consulting is a company that investigates, among other things, “organised crime and significant fraud against the Australian government”. Its principal, Chris Douglas, is a former Australian Federal Police officer turned anti-money laundering compliance consultant.

He predicts that Australia will introduce Tranche 2 amendments to its anti-money laundering and counter-terrorism financing legislation in either 2020 or 2021.

In October 2019, Australia introduced a raft of amendments (referred to as “Phase 1.5”) to clarify the existing obligations of casinos, banks and other large financial institutions.

Douglas notes that although the shape and timeframe of the Tranche 2 legislation is uncertain, he anticipates Australian accountants will be expected to complete appropriate customer due diligence (‘know your client’ requirements) and report suspicious matters to the regulator, the Australian Transaction Reports and Analysis Centre (AUSTRAC), where appropriate.

“Knowing your customer (KYC) means what it says,” says Douglas. “As well as asking a client for acceptable identification, an accountant should also ask where they work, or their means of support if they’re retired.

“You should know about any business they own, the corporate structure operated, their close family, their investment portfolio and any future business or personal investment plans.

“Some customers might push back and not want to provide information that goes beyond the minimum KYC standards – they have a right to do so. But that resistance should be included in any risk profile developed on the customer.”

An accountant may still have suspicions about a particular client, even if all the information they have obtained on them seems legitimate. In such instances, where the accountant has formed a reasonable suspicion that the person has engaged in, or will engage in, money laundering or another illegal activity, they can make a suspicious matter report.

Even the smallest suspicious matter report from an accountant can make a difference if it helps complete a bigger puzzle that authorities are piecing together, says Douglas. There could be a report from a bank, a lawyer, and then a suspicious matter report from an accountant might be the missing link that gives police enough information to charge someone.

Douglas observes that given some of their existing obligations, accountants are in a better position than some other professions to comply with Tranche 2 of AML/CTF requirements when they eventually come in.

For example, accountants already have obligations to report under the Responding to Non-Compliance with Laws and Regulations (NOCLAR) amendments to the Accounting Professional and Ethical Standards Board Code of Ethics, which came into effect on 1 January 2018.

‘Know your client’ can lead to a better class of client

Aside from the fact that an understanding and identification of money-laundering risks as required under Tranche 2 will reduce the danger that accounting firms are used to launder money, it could also reduce the risk of identity fraud.

McWilliams notes that the kinds of clients carrying out money-laundering activities are not the kind of clients that reputable accounting firms want.

“By identifying these things and hopefully not having them within your client base, you are starting to improve the safety of the nation,” she says.

Gibbin-Price and Douglas also both note that when accounting practices implement better systems and processes that meet AML/CTF ‘know your client’ obligations, they not only reduce the risk of money laundering and the financing of crime, but also create a business opportunity to improve the way they communicate with clients and market tailored services.

So when Tranche 2 of the AML/CTF legislation eventually does come into effect in Australia, there could also be opportunities and advantages for those accountants who got ready early.

Early mover advantages

“What I’d suggest to Australian accountants is that they don’t leave it to the last minute. I suggest they get on top of it early, because if they want expertise at the last minute they will find those resources are stretched,” says Gibbin-Price.

“View it as an opportunity. If you get on top of the rules early, you can then get out and help advise other businesses to get on top of the rules.”

“If you get on top of the rules early, you can then get out and help advise other businesses to get on top of the rules.”
Andrew Gibbin-Price CA, AP Partners

McWilliams urges Australian accountants to participate in the regulatory consultation process when the draft legislation does come through.

“Getting our members’ input and insights into the practicalities in those early stages will be vital, and so we encourage them to engage in the process early,” she says.

Top tips for customer due diligence

There are procedures and reliable resources available to assist in establishing business legitimacy and compliance.

Ask more questions of clients and potential clients.
Do a simple Google search and follow up anything suspicious.
Check sanction lists.
Check identification, particularly international identification and immigration status for international citizens. In Australia, refer to the Department of Immigration and Border Protection and the Department of Foreign Affairs and Trade. In New Zealand, refer to Immigration New Zealand and the Ministry of Foreign Affairs and Trade.
Check business credentials of individuals. In Australia, refer to the Australian Securities and Investments Commission’s Organisation and Business Name Register and the Australian government’s ABN Lookup website (abr.business.gov.au). In New Zealand, refer to the Ministry of Business Innovation and Employment’s One Check website (business.govt.nz/onecheck).
Be wary of third-party introductions.