Attention! Does your PI cover protect you from the new AML regime? Don’t be the next company to be caught out with a $5.3 million fine! Below is an interesting article from Nigel Grantham, National Manager, FINEX (Financial and Executive Risk), from our partners at Willis Towers Watson.
Although the Financial Transaction Reporting Act 1996 has been in place for 20 years, many entities which are now encompassed under the Anti-Money Laundering and Countering of the Financing of Terrorism Act 2009 (the AML) were not previously covered. This explicitly incudes lawyers and conveyancers from 1 July 2018. Those covered are known as “reporting entities”.
Once an entity becomes a reporting entity, they are then obliged to undertake three practices:
- Have a compliance programme in place;
- Customer due diligence; and
- Reporting of “prescribed” and “suspicious”
However, the AML is a “risk-based” regime whereby such businesses will only be covered to the extent that they engage in certain “captured activities” (identified in the Act) in the “ordinary course of business”, and whether a business is a reporting entity must be assessed by that business on a case by case basis. What encompasses the “ordinary course of business” will depend on a number of factors such as the frequency and regularity of an activity; the financial scale of the activity; the revenue generated by the activity and the resources committed to it; whether it is advertised to customers, and the like.
The Department of Internal Affairs has undertaken a risk assessment which concludes that, of the 1,919 legal practices in New Zealand, approximately 1,570 are expected to be reporting entities, and the sector has been identified as mid to high risk. This is due, in large part, to the fact that the transfer of money through professionals can lend legitimacy to criminal activity, and allows criminals access to more resources than they may otherwise have. The use of entities such as trusts and companies further allows entities to distance the proceeds of crime from their original sources, both of which lawyers can be regularly called upon to set up and administer.
The potential liabilities arising out of the AML regime for lawyers are vast. For direct civil offences under the AML (such as failing to have an adequate compliance programme in place), individuals incur a civil pecuniary penalty of up to $200,000 and up to $2 million for companies. A repeated failure to comply with AML obligations, or providing false or misleading information and other criminal offences can be prosecuted as an offence under the act and result in fines up to $5 million for businesses, while individuals can be fined up to $300,000 or sentenced to up to 2 years in prison.
You will not be entitled to cover for any fines or penalties under your liability policies. However, you may be entitled to certain defence costs for prosecution depending on the terms of your statutory liability or D&O policy. We recommend that this you discuss this with your broker.
It is unlikely for a lawyer to be liable for an incorrect report under the AML, as anyone making a report is granted an immunity for civil and/or criminal liability for losses arising from a report made of suspicious activity (although it must be based on reasonable grounds). However, there are complex privilege issues which could be involved in reporting activities, as lawyers are not permitted to report privileged communications (except where those communications were made or reported for the pursuit of the commission of a crime, as well as receipts and trust accounting records). There is the possibility for civil claims to arise out of these issues (from clients or third parties) for which you may have cover under your professional indemnity policy.
Finally, professionals will increasingly be called upon to advise upon AML obligations for other sectors, and also to act as auditors for other businesses (it is a requirement that those within the regime undergo independent auditing). This would also be likely to trigger your professional indemnity policy. All coverage is subject to policy terms, and we encourage you to discuss the implications of the AML specific to your particular policy wording with your broker.