NZLS president calls for AML/CFT compliance reform

Law Society President Frazer Barton has called for the prioritisation of AML/CFT compliance reform in a letter to Associate Justice Minister Nicole McKee.

“The Law Society regularly receives feedback from lawyers who are struggling to meet their obligations under the AML/CFT Act and regulations, both from a practical and resource perspective. While we agree that some level of AML/CFT compliance is appropriate for lawyers, we believe this should be achieved through a risk-based regime (as was originally intended), which imposes the minimum necessary compliance burden and cost”, Barton wrote in his letter.

In a 2021 statutory review of the AML/CFT Act, the Law Society suggested that the review determine “where obligations can be appropriately reduced”, as lawyers consider that they “do not have the time, resource, or necessarily the expertise, to meet this compliance burden”.

“They are concerned that the costs are disproportionate to the risks inherent in their business and their client base. We consider the regime needs to balance these compliance costs with the risks relating to lawyers, especially sole practitioners or small legal practices”, the organisation wrote in its submission.

The Law Society noted that a detailed cost/benefit analysis had not been conducted on the regime. Moreover, a recent Law Society report on the operating expenses of a legal practice in New Zealand revealed that AML/CFT compliance was a major operational challenge for sole practitioners and small-medium law firms; AML/CFT costs for sole practitioners rose by 35.4%, by 22.9% for small firms, and by 172.9%for medium firms.

Approximately 14% of respondents indicated that a reduced compliance burden would significantly impact their business operations. According to Barton’s letter, common themes raised by respondents were as follows:

• the onerous compliance process, “particularly in completing annual audit reports, external audits, reporting money transfers, and trying to understand the complicated language used by the DIA and external auditors”
• high-cost and time-consuming process even if compliance is not relevant to the practice’s risk profiles
• necessity to outsource compliance at potentially higher costs
• practitioners altering the type of work they perform to limit compliance obligations
• calls for reduced or simplified AML/CFT obligations and the provision of more guidance and templates

The Law Society raised concerns that compliance costs, often passed to clients, impact the affordability of legal services, thus affecting access to justice.

“Unnecessary duplication also has a flow on effect for commerce, impacting on consumers of legal services”, Barton wrote in his letter.

Key areas for reform

The Law Society identified specific areas where reform could reduce compliance burdens while maintaining the regime's integrity:

• customer due diligence (CDD): the current requirements often seem disproportionate to the actual risk posed, especially when multiple reporting entities are involved in a single transaction
• sharing of CDD information: lawyers should be able to rely on CDD conducted by other New Zealand reporting entities, such as banks, without additional verification
• access to verified information: utilising verified information from government registries could reduce compliance burdens
• enhanced cdd on trusts: exemptions could be considered for circumstances such as family trusts, where funds are already within the New Zealand financial system, a bank or the family home

“We recently approached the Ministry of Justice to understand whether any policy work or legislative change is anticipated. It is clear we share similar views on changes required, immediately and in the longer-term. We support the view that reform should be prioritised now”, Barton wrote.