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Trustees, Trusts

What do you need to know about money laundering?

Anti-money laundering, counter financing of terrorism could be coming to a trust near you soon.  The article below was published in the Law News earlier this month.  Although pretty dull stuff, the message to take away is some of this stuff might apply to you.  Read on (perhaps fortify yourself with a strong coffee first – there is no way to make this stuff a page turner).

Trust compliance in the face of new Anti-Money Laundering and Countering Financing of Terrorism laws

By Vicki Ammundsen

The main compliance components of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act), which is New Zealand’s contribution to the international Financial Action Task Force (FATF), come into effect on 1 July 2013.  Vicki Ammundsen considers the relevance of this to lawyers and in particular those acting as trustees, advising trustees and settling trusts for clients outside of New Zealand. 

Over the last two years, banks, casinos and other financial institutions have been putting compliance regimes in place in anticipation of the forthcoming laws taking effect. However, it is possible that an exemption in the regulations to the AML/CFT Act which applies to lawyers may have lulled many lawyers into a false sense of complacency that this is just “somebody else’s problem”.

By way of background: the FATF has been tasked worldwide with combatting international money laundering, bribery and corruption, improper insider dealings, tax fraud, financing of terrorist activities as well as other illegal activities.

One of FATF’s areas of focus is on the use of companies, trusts and limited liability partnerships etc, in the context of multi-jurisdictional structures, as the mode of choice for high value, complex, illegal activities.  Given the increase in New Zealand’s “foreign trust” business, this legislation may have more relevance for many lawyers than has been appreciated.

The design of any AML/CFT regime will need to include a reporting methodology to ensure whether such structures can be monitored to determine whether they are being utilised for illegal or improper purposes.

Anyone who has read this far might be starting to wonder how the new regime might apply in the context of any foreign trusts settled by the lawyer or for whom the lawyer acts.

Who must comply?

Importantly, when it comes to trusts the first issue under AML/CFT is to consider whether there are specific reporting obligations. It goes without saying that banks and other financial institutions that are aware of trust clients will need to be asking questions about these clients as well as monitoring for transactions that breach compliance thresholds. Whether there are separate reporting and compliance obligations on trustees or managers of trusts depends on whether the relevant parties come within the statutory definition of a “reporting entity.” Reporting entities include the defined terms of a “financial institution” or a casino. Among the many activities that are defined as those of a financial institution are the very broad “investing, administering, or managing funds or money on behalf of other persons” as well as many lending, trading and money transfer activities.

Crucially, for lawyers who act for trusts or as trustees, additional regulations added to the regime in 2011 specifically provide that persons carrying out the following business come within the definition of a reporting entity:

  • acting as a formation agent of legal persons or arrangements;
  • arranging for a person to act as a nominee director or nominee shareholder or trustee in relation to legal persons or arrangements;
  • providing a registered office, business address, or accommodation, or a correspondence, or an administrative address for a company, a partnership, or any other legal person or arrangement.

However, this is subject to another regulation that excludes lawyers and conveyancers, accountants and real estate agents working in the ordinary course of their business from the definition of a reporting entity.

Does that mean that lawyers are off the hook then for AML/CFT purposes? Unfortunately, for many lawyers the answer is an unhelpful “probably not”. To simply assume that because you are a lawyer you are exempt from the requirements of the regime is to miss the point here.

Obligations

If you are acting as a lawyer, and in doing so arrange for a trust to be established, arrange for the appointment of a trustee (whether personally or by way of a corporate trustee) or for your office to be an address for correspondence, these activities in and of themselves do not create obligations under the AML/CFT Act (although this does not mean that there may not be obligations outside of AML/CFT obligations). However, if the trust engages in activities that come under the definition of a financial institution, then it is clear that it will have compliance and reporting obligations. Those obligations will be binding upon the trustee(s) and on any person(s) with a role in managing the activities of the trust.

What then are the relevant compliance and reporting obligations?  The first requirement is to establish a compliance programme. This involves:

  • appointing a person to be an AML/CFT compliance officer; and
  • the development of a reporting and compliance programme.

The requirements for such programmes have been published by the Reserve Bank, the Financial Markets Authority and the Department of Internal Affairs. The key elements of a compliance programme will include a comprehensive risk assessment, vetting and training obligations for managers, procedures for reporting suspicious transactions or transactions breaching specified thresholds, record keeping, establishing processes for client due diligence and other processes for minimising the risk of abuses. Where required, the process for client due diligence is important because the AML/CFT Act provides that reporting entities must conduct due diligence on the client, any beneficial owner of the client and any person acting on behalf of the client. It is also important to note that there are prohibitions on the use of false names and on dealing with anonymous clients.

The compliance programme must be provided to, and approved by, an AML/CFT supervisor.  In addition to this, an annual report on how the compliance obligations were met must be filed and your compliance programme may be subject to biennial audit. For most trusts captured by the Act (other than those operating in the business of financial advisers, for example), the AML/CFT supervisor will be the Department of Internal Affairs.

The importance of the compliance programme (and evidence that it is being actively implemented) is a critical protection in the event of problems with transactions or with suspicious parties in the future.  There is an obligation to report suspicious transactions or other offences to the supervisor, the police or to other authorities with powers under the AML/CFT Act.

Penalties

The consequences of a breach of the AML/CFT Act are not to be under-estimated. Penalties are substantial, even for lower level non-compliance offences. Failure to adequately monitor accounts and transactions can lay an individual open to a pecuniary penalty of up to $100,000 for an individual and up to $1 million for a corporate entity. Failure to operate an AML/CFT programme, to conduct client due diligence or to keep required records could render an individual open to penalties of up to $200,000 and bodies corporate up to $2 million. Criminal penalties for more serious offences may include imprisonment.

When the banks and insurance companies are treating AML/CFT very seriously indeed, maybe trust lawyers should too.

Post script

After the above article was sent to print, three new sets of AML/CFT regulations were gazetted. One of these, the Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Amendment Regulations 2013, extends the exclusion that applies to lawyers, conveyancers, accountants, and real estate agents to exectutors and administrators of deceased estates and trustees of family trusts providing services to beneficiaries. The amended exclusion also applies to those acting as directors, employees or agents, acting in the course of business, while providing any of the other excluded services. However, the scope of the amended definition needs careful consideration.  Note that the excluded services are subject to the words “in the ordinary course of business”. Further, given the way the amendment that applies to trustees of family trusts is drafted, it is important to consider when or whether trustees are ever “providing services to beneficiaries”. The practical reality appears to be that trustees and advisers of many trusts still need to consider whether they have obligations under the AML/CFT Act.

For another pespective on AML/CFT see New obligations affect lawyers_LT 821_21 June 2013

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