Dr AML, leading New Zealand AML/CFT compliance specialist, is answering questions each month in a new column for NZ Lawyer. This month, a client is irked by due diligence complications and whether you should rely solely on checks Australian lawyers have conducted to comply with the AML/CFT Act.
Question: My client is an Australian resident (not permanent/citizen), originally from Sri Lanka. He does not live in NZ, and was referred to me by a firm in Sydney who I have known for several years (I studied with one of their partners). The client was new to them, but they have carried out AML[i] hecks as part of their engagement.
We are advising on an investment in New Zealand. I obtained an emailed copy of his Sri Lankan passport. Given he was subject to checks by the firm in Sydney and the substantive transaction was yet underway, I have proceeded, relying on the checks done in Australia and delaying completion of full CDD[ii] until he comes to NZ.
He is exploring purchasing commercial real estate, and the vendor’s solicitor refused to rely on our due diligence. My client became frustrated and withdrew.
How can I reduce the risk of this ‘impediment to business’ in future?
I feel your pain, this is a common scenario. The legislation makes delayed CDD available as a tool, but does not set out in black and white what the rules are.
But let’s deal with reliance first: it is a pretty high bar, and in this case quite simple. You may only rely on an entity that has carried out CDD at least as well as you would. Australian lawyers are not supervised AML entities in Australia (s33(2)(a))[iii] so you should not rely on them.
Even if they were, in order to rely on any other entity you should show that you reviewed their processes and confirmed that it met your (NZ) standards. They must also supply copies of all the information they relied upon within a maximum of five working days (s33(2)(c)).
Generally, we find that reliance is more effort than simply carrying out the CDD yourself.
The trick with delayed CDD is to show you took a risk-based approach (s16(3)) and keep good file notes. Firstly, explain why it is “essential not to interrupt normal business practice”. In this case there doesn’t appear to be a glaring deadline, so I don’t think it meets that test. And with modern technologies, there is rarely a genuine need to wait until you physically meet.
But even if it did, the connection with a high-risk jurisdiction (Sri Lanka is a FATF-monitored[iv] country) means you should be carrying out enhanced due diligence. In all likelihood this will simply confirm that he is a fine upstanding Australian, but the point is that you must show you took reasonable steps to check (17(b)).
The scenario you lay out is common business practice, but unfortunately, it is also a common precursor to money laundering, so I would be reviewing the red flags issued by NZ Police (FIU[v]) and FATF to make sure you show you considered and mitigated these as part of your process.
That all sounds like a lot of work, but I find 15 minutes on the phone with your client and a positive approach to why you need to ask will generally break the back of it. We find these turn into epic sagas if it is all attempted by email.
Next time as part of your normal engagement process, think about the level of risk involved and discuss with your client what will be required. Learn something about them. It is part of that essential requirement to know your customer.
On that note, you should never engage with any client overseas entirely through forms and email. Apart from being dubious in compliance terms, a conversation helps build a relationship and can save huge amounts of administrative effort.
The TIC Company carries out CDD as the agent of reporting entities across New Zealand. Dr Alice Tregunna [LLB (Hons), LLM, PhD] is their Chief Compliance Officer. You can submit questions for published responses through their web form at www.ticc.nz or email DrAML@ticc.nz.
[i] Anti-money Laundering / Countering the Financing of Terrorism
[ii] Customer Due Diligence
[iii] Legislative references are to the Anti-Money Laundering and Countering Financing of Terrorism Act 2009
[iv] Financial Action Task Force
[v] NZ Police Financial Intelligence Unit