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A thumbnail guide to AML/CFT

Thought needs to be given to trust compliance in the face of new Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) laws. The main compliance components of the AML/CFT Act, which is New Zealand’s contribution to the international Financial Action Task Force (FATF) come into effect on 1 July 2013.

Banks, casinos and other financial institutions have been putting compliance regimes in place in anticipation of the forthcoming laws taking effect. By contrast exemptions in the regulations to the AML/CFT Act that apply to lawyers and accountants may have lulled many trust practioners into a false sense of complacency about “somebody else’s problem”.

One of FATF’s areas of focus is on the use of companies, trusts and limited liability partnerships 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 first issue to determine under AML/CFT is to consider whether there are specific reporting obligations. This 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. Importantly, for lawyers and accountants 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.

Although this is subject to a regulation that excludes lawyers and conveyancers, accountants, real estate agents, administrators of deceased estates and trustees of family trusts providing services to beneficiaries working in the ordinary course of their business from the definition of a reporting entity it does not mean that lawyers are off the hook then for AML/CFT purposes.

If you are acting as a lawyer or accountant, 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. However, if the trust engages in activities that come under the definition of a financial institution, then the trustee will have compliance and reporting obligations. Those obligations will be binding upon the trustee and anyone with a role in managing the activities of the trust.

If there is a compliance and reporting obligation 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. Once developed 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 non-financial advisor trusts captured by the AML/CFT Act, the 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 for non-compliance are substantial with an upper limit of $2 million as well as imprisonment.

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