Ron Pol sheds light on the legal profession & money laundering and argues anti-money laundering is manageable for law firms

By Ron Pol*

Much has been written about lawyers and money laundering. Some of it alarming, some apprehensive, and some plain wrong. But, as Gary Hughes observed (LawTalk 908, pages 36-41), for most lawyers, anti-money laundering is manageable.

Gary offered five steps that firms can take now. This article shares five myths that lawyers should avoid. Falling into any of these traps can make it harder – and more expensive – than it needs to be.

Grounded in practice, these are some of the commonest misunderstandings that lawyers have shared with me over the past five years. My conversations with firms invariably follow the same path:

“There’s no evidence. If it happens in our profession, it’s just a few bad apples. It couldn’t happen in our firm. I haven’t seen it in my practice”.

After I outline some of the ways that Kiwi lawyers were used to launder criminal proceeds over the past 20 years, someone inevitably says “I remember a case where...”. The floodgates open.
Lawyers have a tremendous capacity for remembering past transactions, including ‘odd’ things that, at the time, were difficult to pin down. With new knowledge, red flags suggesting possible misuse of lawyers’ services and trust accounts reappear in sharp focus.

Dispelling persistent myths with real-life examples from a firm’s own practice along with empirical evidence of how it occurs in practice in New Zealand can help identify, and avoid, similar issues in future.

It can also be easier, cheaper, and more effective than training exercises with theoretical examples and overseas case studies infused with the arcane terminology of an industry known for its “official narrative” driving what one expert recently termed “policy-based evidence making”. 

This article is firmly evidence-based. It draws from years of PhD research, including the only empirical evidence of its kind identifying- tifying exactly how New Zealand lawyers were used to launder the proceeds of serious crime, often unwittingly. 

There's no evidence that lawyers are involved

This idea is usually based on the paucity of prosecutions, with just one well known case of a lawyer prosecuted, many years ago, ‘only’ for failing to report suspicions. There are at least three problems with this myth. 

Paucity of prosecutions not all it seems

Less well-known, there have been at least four prosecutions of legal and accounting professionals, with one jailed for laundering. There are also other cases in the civil jurisdiction where lawyers facilitated transactions with criminal funds. And practitioners today in the same position as the two lawyers prosecuted more than a decade ago would nowadays likely face criminal money laundering charges. Prosecutors no longer need to prove knowledge that funds came from a specific offence or type of offence; reckless disregard as to the source of funds is sufficient.  

Nonetheless, a few cases, many years ago, isn’t enough to dislodge the myth. 

Enforcement gap, not evidence gap

A lack of prosecutions doesn’t mean a lack of evidence. I located the contract documents themselves, in proven criminal proceeds transactions facilitated by professionals (lawyers, accountants and real estate agents) going back more than 20 years. In a tightly defined research range, in just one part of one practice area, the number of identified professionals facilitating criminal transactions quickly got into hundreds. (The research cases were anonymised). As well as criminal real estate transactions facilitated by lawyers, professionals were found to have established trusts with criminal assets, acted as trustees over criminal funds, incorporated companies used as consignees for methamphetamine shipments, registered and purchased high value assets with criminal funds, acted as conduits for crime funding, locally and over- seas, and facilitated laundering transactions by many methods, apparently even including litigation in New Zealand courts. 

Logically more

Moreover, the research cases comprise only a small fraction of the $1.35 billion that police say is laundered each year, plus at least as much again in tax evasion, and more again with overseas criminal funds laundered locally. When drug dealers, corrupt overseas officials, tax evaders and others buy and sell real estate with the proceeds of criminal endeavours, they invariably use New Zealand lawyers. Other financial transactions also require, or benefit from, legal expertise.

As a result, the research cases involving lawyers found to have facilitated transactions with proven criminal proceeds are, logically, the tip of an iceberg of indeterminate proportions. All such transactions when criminals choose to use lawyers, and all transactions that must be conducted with legal expertise, necessarily involve lawyers. 

Nonetheless, police might continue a traditional focus mostly on local drug dealers, preferring an ‘education’ path for the professions – in which case this myth might have little practical impact on law firms.

Overseas crime-disruption trends, however, increasingly focus directly on professional services firms facilitating criminal transactions, including those unwitting or wilfully blind to the source of funds. 

If contemporary policing methods take hold here, and perhaps in any event, law firm leaders might wish to consider the benefits of dispelling any lingering perceptions that there’s no evidence that lawyers were used to help launder proceeds of crime. 

The evidence exists. It’s just that some cases haven’t been prosecuted or investigated and in many cases it may be difficult, perhaps impossible, to isolate criminal transactions amongst countless legitimate deals. 

We’ll keep an eye out for cash 

This myth is understandable. Retail drug dealers operate in cash and some of the dumbest criminals still occasion- ally try to use large amounts of cash in real estate and other transactions. Counter intuitively, there are some indications that sophisticated criminals sometimes con- vert assets (back) into cash, to break the record chain or ‘prove’ the legitimacy of large cash sums. Cash therefore remains a relevant indicator and it appears in standard lists of generic red flags. 

A benefit of empirical research, however, is the new- found ability to identify and rank the most common red flags, specifically relevant to New Zealand transactions facilitated by professionals.
The research supports earlier police findings. Criminal transactions using law firms increasingly – and mostly – involve electronic payments.

Moreover, fraud, tax evasion, overseas corruption, and many other sources of criminal funds typically originate electronically. Firms on the lookout mostly for cash therefore risk leaving their trust account open to the main source of criminal funds: ‘from the bank’.

But if it’s from the bank, it’s OK

Partly addressed above, this perception is so strong it’s usually expressed separately. It sounds plausible. If money enters the trust account electronically from a
local bank, it passed through stringent money laundering checks. It ‘must’ be clean.

With longer experience of the realities of money laundering, however, some overseas authorities frankly accept that, amidst millions of legitimate transactions, banks sometimes have only fleeting visibility of criminal funds.

New Zealand’s evidence base holds similar insights. It’s sometimes remarkable that banks identify criminal activity involving only a few transactions, completed in milliseconds. However, often involved with structuring and implementing financial transactions, the research revealed many cases where lawyers had many more interactions with criminal actors over a longer period than banks.

The research also found that banks and lawyers often see different red flag indicators of criminal activity. Red flags visible to lawyers are not always seen by banks, and vice versa. It also exposed many instances where criminals compartmentalised knowledge between banks and lawyers, helping mask their activities from both.

The evidence uncovered cases where, having duped a law firm once, those responsible for directing criminal funds targeted the same firm in future transactions. In at least one case, a firm successfully used by one criminal group was later used by another, seemingly unrelated, criminal network to launder proceeds of serious crime into real estate in Auckland and the Coromandel.

In short, banks sometimes miss, or may not be exposed to, the same red flags as lawyers. This means that firms operating on the assumption that funds ‘from the bank’ are inherently ‘clean’ risk becoming an easy conduit for money laundering.

Risk assessment and software will fix the problem

A risk assessment is compulsory and software will be useful for many firms. However, relying on them is no substitute for people, knowledge and culture.

In revealing how criminal groups use lawyers to launder money, the research showed the vital importance of old-fashioned common sense by lawyers and staff who understand the various ways, in very practical terms, how their services and trust accounts can be misused.

The new legislation has many gaps so software, manuals and training calibrated for ‘compliance’ inevitably leaves avenues open for criminals to continue using law firms to launder criminal proceeds.

‘Tone from the top’, knowledge, common sense and culture remain the most effective, and often cheapest, ways to reduce and prevent criminal misuse of law firms.

The new laws are based on solid evidence

This myth does not suggest that lawyers aren’t used by criminals to launder the proceeds of serious crime. They are. It is just that the new laws were not fully evidence-based, so there are necessarily gaps between the provisions and the reality of financial transactions facilitated by lawyers.

New Zealand Police conducted an evidence-based scoping exercise a few years ago. Surprisingly, despite millions of dollars on policy advice over more than two decades, no New Zealand government appears to have commissioned extensive empirical research to learn exactly how laundering occurs in New Zealand and to combat it based on facts, beyond conjecture, assumption and rhetoric.

There are some indications that New Zealand’s regulatory and enforcement agencies might advance evidence-based practices. The policy-making process for extending money laundering controls to lawyers, however, might someday make an interesting university case study. The trail of policy papers and analyses contain enough unsupported assumptions, circular arguments and obvious gaps, cloaked in apparent obscurantism, to fill many research papers.  

However, in practical terms this myth might not matter as much as the others. Whether it’s well grounded in evidence, or not, the law is what it is, and lawyers will need to comply with it. 

The issue for law firms then is not legal, or compliance, but strategic. Some firms might want to make it harder for their practices to be used to perpetuate serious criminal enterprises. If they believe that the new laws comprehensively prevent criminal misuse of legal practices, they might miss the gaps. 

That is because the research illustrates what police have long known. Criminals adapt quickly, and with obvious legislative gaps, ‘displacement effects’ are inevitable. When one channel closes, criminals use others. 

Paradoxically it should be possible to better protect law firms – at no more cost – than a narrow focus only on ‘compliance’ with (arguably) flawed laws.

For most law firms, anti-money laundering is manageable. Avoiding some of the myths can make the process easier and more effective, and help keep costs down.

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*Former lawyer Dr Ron Pol (ronald.pol@amlassurance.com) is a legal management consultant and principal at AMLassurance.com. His PhD thesis was supervised by Professor Jason Sharman and is entitled “Effective sentinels or unwitting money launderers? The policy effectiveness of combating illicit financial flows through professional facilitators (lawyers, accountants and real estate agents)”.
This article first appeared in the NZ Law Society's LawTalk here and is used with permission.

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22 Comments

" Some firms might want to make it harder for their practices to be used". Big call!
I've had propositions placed in front of me that I've rejected on regulatory grounds, and the response from the client has been "Really?! Well if you don't want the business - (and the huge fees that go with it) - then X & Co will do it" and you know what? X & Co did. Eventually, it catches up with X & Co, but long after you've been replaced and long after the practitioner's at X & Co have moved on, replete with large personal bank balances......The Law is made to keep honest people, honest.

Was going to say "yeah, but you sleep at night" and "you aren't looking over your shoulder all the time", but then given operation of the law in NZ with name suppression, disinterest on the part of the media, the many years delay to litigation I guess the partners of X & Co all sleep pretty well at night too

You find you don't sleep at night, as time goes by. You find yourself looking back, and asking yourself "What kind of fool rejected that business?" when you see others who took that, and other business, living 1%'er lifestyles. Sure there are Libor cases yet to be decided etc., but those are years/decades away. The older one gets, the more it becomes apparent that it's not 'How you play the game" that matters, only whether you "Win or Lose".

My research found that most Kiwi professionals (lawyers, accountant and real estate agents) who facilitated criminal transactions over the past two decades appear not to have profited beyond ordinary fees. Only a very small percentage dipped into the lifestyle.

Some who facilitated such transactions were completely duped, and will sleep fine at night, probably unawares still. (They were useful nonetheless because they helped me isolate ways that crims compartmentalise knowledge between banks and professionals and between professionals).

The really interesting ones for research purposes were those unwittingly used, and those wilfully blind to the source of funds, amidst red-flags waving and alarms sounding.

Ron in your professional opinion; Do you think that the new NZ Anti Money Laundering regulations are going to strong enough to prevent most of the money laundering that been going on?

Since we know just how damaging this type of criminal activity is and how it impacts all our lives, most of that ill gotten gains ends up being launder through NZ property market especially Auckland.

Since you point out; That $1.35 billion that police say is laundered each year, plus at least as much again in tax evasion ($2.7 billion), Think how many houses and apartment that kind of money could buy in Remuera!

It's not surprising that the NZ property market has been running out of control with that kind laundering going on. And then you had all the Speculative Investors piling after them thinking that the gravy train could never end.

Shame that the full effect of the AML regulations for Business doesn't kick in until July 2018.

I know these initiatives we original prompted by UK's David Cameron's back in 2015 and National seem to have been dragging their feet in implement any the AML regulations. Plus the ones that called for extra time were the Real Estate Agents.

Remember this article: http://www.interest.co.nz/opinion/76847/caroline-courtney-argues-john-ke...

Interest Article quote: "Cameron has just promised action aimed at deterring corrupt foreigners from buying up residential properties in the UK as a means of laundering ill-gotten gains".

Several years later and we're still waiting for this NZ's AML Key Initiatives:-
https://www.justice.govt.nz/justice-sector-policy/key-initiatives/aml-cft/

Short answer CJ. Not a chance.

The new regs will give NZ FIU a bit more intel, and a few more crims will be brought to justice. Policymakers will say 'told you so' to people like me, and politicians (of whatever party) will trumpet success.

But, even at that level, with regs based on theory, not on what actually happens, in NZ, there are lots of gaps, so we'll be stuck with catching mostly the dumbest criminals, and a few smart ones whose flunkies make dumb mistakes. This should be enough for the Minister's 'stretch target' to be met, consultants will enjoy their handsome profits and promotions will flow in various agencies.

But, looked across the whole country, and viewed dispassionately and objectively from within a policy effectiveness and outcomes framework, the chance of the new regs having a material, substantial, demonstrable impact on the detection, prosecution and prevention of serious profit-motivated crime is so negligible as to be imperceptible.

There seems only one possible exception. Given that the policymakers are now out of the picture, and the regulators are constrained by poor legislation and, thus far at least, much the same thinking processes that produced the legislation, the only real exception is in the enforcement realm.

They don't need the new laws for any of it either (although a couple of tiny tweaks would help NZ contribute to taking down some major global players, often responsible for exporting their wares to our shores). They could have been doing all of this since about 2003. So, there's no real basis for hope, beyond hope itself. (But, my initial working hypothesis is always positive, as it was for the policymakers, and unlike there, hope remains viable in the enforcement space. Having seen some changes over the past few years, and privileged to see first hand the passion of some within police, at nearly every level, hope has not yet been extinguished).

Different thinking, and a different focus, has the potential to produce vastly different results. Of course, their political framework is cut from the same cloth, and the Minister's target invites them only to do more of the same. That's the easy path. But they are independent, they have the capability, many have the passion to make a difference, and they 'see' the real damage from serious profit-motivated crime more than anyone. And, to their credit, NZ Police don't seem quite so comfortable being international laggards.

But, apart from that, not a snowball's CJ. (& hence my focus more international as noted in reply to twootherguys below)

Thanks for the response Ron. Well I guess that only really leaves us with the option to tax the buggers (Money Launderers) to try and deter them or at least get some revenue from them.

This does seem to have helped in some parts of the world considering that most Money Launders pump their ill gotten gains in to property, Pretty much most of which is left empty since they don't want the complications of dealing with Tenants and they want to keep their assets pristine to push up the value.

The way I see it, there are mostly two types of Money Launders; 1) The highly criminal types which are drugs related.

And Type 2) Corrupt officials mostly from Asia who are siphoning off money from Government coffers and project investment. Thankfully China has cracked down on this by preventing capital outflows from mainland China. And we've already seen what a dramatic effect that has had on Ozzy banks and the Auckland property market.

Really it comes to something when we have to rely on external Governments to actually fix this issues for us!

Better Dwelling article: China’s PBoC Announces An Army of Over 400,000 To Prevent Money Laundering
https://betterdwelling.com/chinas-pboc-announces-an-army-of-over-400000-...

https://betterdwelling.com/chinas-massive-international-real-estate-buyi...

Are you ever going to publish? I know you said last time something about being embargoed.

I'm interested in most aspects.
What has interested me the most is the frenzied lashing that has been meted out to the RBNZ over the last 5 years over OCR decisions and how interest rates in NZ are the highest in the world etc - they have been pilloried

Yet

The RBNZ has been the responsible authority over the Banks for their AML activities. I have never seen anything published about the results of their monitoring, what has been produced, what has been achieved, has there been any uplift in detection since the AML was activated compared to what the police were achieving prior to that. I look at the RBNZ web-site and they say they have issued two warning letters.

Trying to get as much out into public domain as possible.

But with NZ governments eschewing empirical evidence and choosing tick-box compliance over policy effectiveness (to be fair, probably whilst thinking they weren't, and without asking the hard questions it's understandable why they took the easy path), the local evidence isn't going to influence anything.

With limited bandwidth, I've focused on global elements first. In that context, with NZ having chosen not to be a world leader in this area (we had a great opportunity for this, if you're familiar with my submissions on this), we become a footnote and a nation against which others can compare success.

Two 7000+ word articles have already been extracted from three chapters. One has been accepted for publication in an international journal, and a second is wending its way through peer-review processes. NZ is placed in the international context in both. Gareth might give them a mention when they are published.

Tick-box compliance is a much preferred 'known quantity' than evidence based, which must, inherently, involve a certain amount of messiness and uncertainty to adapt to changing attack patterns.

Thanks Ralph. That's really interesting. You may have hit the nail on the head why it remains so prevalent. It is indeed a known quantity, and easier. If firms tick the boxes, regulators can tick their boxes, and the country can get its FATF tick. The policy effectiveness/outcomes framework asks a different question. Not so much if we have rules, if they meet standards, or if they're complied with. It asks, do the rules work? In terms of its success enabling the detection and interdiction of criminal finances, certainly for those criminals with assets stripped, the impact is significant. But the uncomfortable truth is that three decades of AML controls, now globally ubiquitous, has had almost zero impact on criminal finances.

I work in IT security and it is the same here. Security is a way of thinking and yet tick-box security is everywhere. All they want is a set of boxes. Reality is too uncertain. History shows this buy-in to tick-box thinking can last even beyond total collapse of their mental paradigm in the face of reality.

Like those before, we soldier on in spite of it all.

I'm writing a book. That's a great example. One I'd not thought of before. I'd love if you could reach out one day, for a coffee/chat to explore that a little more. Details at www.amlassurance.com

In essence...
"Barclays Bank trader, on life after jail: 'we didn't understand that what we were doing was wrong' "
http://www.telegraph.co.uk/business/2017/09/02/libor-trader-alex-pabon-l...

Great point. Let's hope no lawyers, accountants, estate agents here have to say that in a few years time. Hence my articles over the years, and this one. Clinging to myths can be dangerous.

The simple point is - lawyers and real estate agents should have been brought into the AML system right from the start and the only reason they weren't was due to well placed lobbying. Just get it done - pronto.

Agree they should have been part of it from the beginning. And the staggered approach now bringing each profession in (seemingly sensible, from a regulatory workload perspective) provides a bevy of opportunity (from the criminal perspective).

But the real question, it seems to me, is what is the 'it' to which they're drawn into. If the present system is almost completely ineffective, adding more reporting entities will make it "almost completely ineffective, plus a tad".

Scientists have long known this. Parliamentarians elsewhere have begun to question it. And a few pockets of regulatory and enforcement agencies elsewhere have recently started new programs seeking to dramatically ramp up effectiveness. But I've not yet observed much evidence of it here.

I know frank commentary can be perceived critical, but I'm not critical of the people involved.

Ironically, the huge success of the global diffusion of AML/CFT rules has become its own Achilles heel.

Officials and advisers appear genuinely to believe that adopting the rules as mandated, and incremental extensions to new reporting entities (such as lawyers etc) is the answer. And Ministers presumably accept that advice. It certainly seems plausible.

Strong beliefs permeating the system, however, driven by the fantastic success of the global policy diffusion, often appears to result in a lack of any perceived need for empirical evidence, so none is sought. Nor any perceived need to test assumptions and ask the hard questions, eg whether the policy prescription is (or proposed policy initiative will be) effective. Beyond mandated cost-benefit analyses, themselves suffused with the same assumptions, the hard questions remain unasked.

That's what a policy effectiveness/outcomes framework is all about. Not so much concerned with whether we have rules. Or if they meet specified standards. Or if they cover the entities mandated. Nor even if firms comply with them. Instead, the question is, does it work? Does it meet intended policy objectives?

That, I believe, is the ultimate question for all policy making. And in the ML space, when the hard question is asked, and assumptions drilled into, as scientists began about two decades ago and a growing number are now doing, the answer's not pretty.

The next obvious question is what might work? That's the next step in policy effectiveness.

And, interestingly, it's beginning to look like that doesn't involve more regulation. It is likely to be markedly cheaper AND more effective. But, at this stage, it seems only the scientists are interested. Also, many of the answers already exist, they're just unevenly distributed. So, back to the strands...

I have one simple question for you

Have the current "rules" in operation since 2013 resulted in any enforcements

No names, no pack drill, just a Yes or no will do

Since the 2013 Act (actually dated 2009, but commenced 2013):
Separating enforcement (police) and regulatory (FMA, DIA, RBNZ)
1. Enforcement (underlying crime): Yes. STR's have led to o/wise undetected crime.
2. Enforcement (against banks): No
3. Enforcement (against lawyers etc, under 1996 Act, post 2013): No
4. Regulatory (against banks etc): Yes. A few gentle slaps, publicly (eg latest here: http://bit.ly/2eXDrtZ). Some more, behind the scenes.
5. Regulatory (against lawyers etc, under 1996 Act, post 2013): N/A (no regulator, so only enforcement is relevant, as #3 above).

In 2010 the CBA bank followed later by Westpac started rolling out IDM's which are now the subject of serious actions in Australia by both ASIC and AUSTRAC

Are we to believe that CBA and Westpac did not roll these ATMs out in New Zealand
Logic tells me they did. NZ tends to be either the bleeding edge or the guinea pig
What actions are being taken here in New Zealand, the land of muzzlement
The least I would have expected was a categorical denial be the banks and RBNZ
Zero. Nothing. Total Silence

The AU press are doing all the heavy lifting here, including about NZ links and similarities. (Nathan Lynch, Michael West, Brett Chenoweth, Patrick Durkin, and others). Difficult for Kiwis to see though, because (a) Reuters & AFR behind paywalls, (b) there's been a very muted press coverage here by comparison, and (c) NZ regulatory and enforcement agencies have a very different approach than their AU counterparts.