Proctor – May 2017 – Vol.37 No.4 The reality of AML for solicitors

Christine Smyth

‘A fundamental attack on the civil rights of clients’

Anti-money laundering (AML) regulation may soon become a reality for Australian solicitors, with a strong call for its implementation following the 2013 report of the Financial Action Task Force.

The implications of this proposal are of grave concern to Queensland Law Society, as it will attack the heart of the solicitor-client relationship. While this is not breaking news for the profession and has been in the pipeline for many years, it is closer to implementation.

A brief history

Nearly 30 years ago the Financial Tractions Reports Act 1988 (Cth) was introduced to monitor the flow of money in Australia. The year after this legislation was introduced, the task force was formed by several nations to further address this issue in the illicit drug trade. Australia is now one of 34 members of the task force.

It was not until 2003 that the task force included lawyers within the scope of its ‘non-financial business and professions’ ambit, and it was recommended that this group undertake measures such as due diligence and record keeping.

Three years later, in 2006, the Anti-Money Laundering/Counter-Terrorism Financing Act 2006 was passed by the Australian Government to ensure that the nation aligned with the task force’s requirements. This Act established a reporting regime that originally targeted the financial and gambling sectors, and bullion dealers.

It was also anticipated that lawyers would be brought into the regime after the initial legislation was introduced, however this did not occur. One possible reason for the delay may have been the 2007 federal election, which saw a change of government.

Most recently, the task force released the 2013 report which referred to the “vulnerabilities of legal professionals to money laundering and terrorism financing”. This brought the focus back to Australian solicitors and there is now a strong call for legal practitioners to be brought into the AML/CTF regime.

The Society holds portentous concerns about the effects of this proposal. Citizens have a right to the protection of their confidences – particularly when it comes to legal professional privilege. These changes will undermine the integrity of the solicitor-client relationship if implemented as currently proposed.

Current obligations  for solicitors

It is important to note that the legal profession in Australia is already heavily regulated when it comes to ethical and professional obligations concerning a client’s criminal activity. The Australian Solicitors Conduct Rules 2012 contain a number of fundamental duties.

These include the first and paramount duty to the administration of justice, avoiding compromise to integrity or professional independence, following a client’s lawful proper and competent instructions, and the right to terminate the engagement for just cause and on reasonable notice. Breaching any of these rules may constitute “unsatisfactory professional conduct” or “professional misconduct”.

A solicitor can – in certain circumstances – terminate the client engagement for just cause on reasonable notice.

Legal practitioners are required to treat client money as trust money across all Australian jurisdictions. The receipt and use of trust money is also heavily regulated in this country and there are already obligations in place to report irregularity within lawyers’ trust accounts, which are held by banking institutions, who are subject to this scheme.

Under the current arrangements, when a legal services commissioner or similar authority learns that a practitioner has committed a breach, they must report the person to the relevant law enforcement or prosecution authority.

There are also obligations set out for reporting under the Property Exchange Australia.

It is important to recognise that lawyers are already aware – and there are substantial professional obligations in place – that they must manage the risk of being an instrument to a client achieving an illegal or improper purpose.

Although it is obvious, it is also important to note that lawyers as individuals are subject to Division 400 of the Criminal Code Act 1995 (Cth). The offences under this division apply to a lawyer who inadvertently or unwittingly allows an act of money laundering to occur as a result of failing to make proper enquiries.

Obligations under AML/CTF

It is vital that Australian legal practitioners understand what will be required of them under the AML/CTF regime ahead of the potential changes. There are significant offences, sanctions and risks for “reporting entities” who fail to meet their obligations. General obligations include:

  • identification and verification – Reporting entities must identify and verify a customer’s identity before providing the customer with a designated service and also must carry out ongoing due diligence on clients.
  • reporting – Reporting entities must register and report to AUSTRAC suspicious matters, certain transactions above a threshold amount, and international funds transfer instructions. AUSTRAC is, in turn, authorised in certain circumstances to provide that information to domestic regulatory, national security and law enforcement agencies and certain international counterparts.
  • developing and maintaining an AML/ CTF program – Reporting entities must introduce into their businesses, and comply with, AML/CTF programs which are designed to identify, mitigate and manage money laundering, terrorist financing and other risks that the reporting entity might reasonably face in its business.
  • record keeping – Reporting entities must make and retain certain records, and retain certain documents given to them by customers, for seven years.

In particular, the reporting regime will place solicitors in an untenable position in which they are no longer able to protect the client’s entitlement to open and reasoned advice. This system creates an inherent and intolerable conflict for a practitioner to represent the client without the intrusion of the state into that relationship.

Queensland Law Society president Christine Smyth says the proposed inclusion of Australian solicitors in the reporting regime for the Anti-Money Laundering/Counter-Terrorism Financing Act 2006 (AML/CTF) will likely lead to higher costs, loss of business and, most importantly, challenge legal professional privilege and the sanctity of solicitor-client confidentiality.

These proposed changes to AML/CTF regime will mean that solicitors cannot discharge a fundamental ethical obligation to serve their clients loyally and to protect their confidences, as the changes to the legislation will mean that solicitors become an agent of the state rather than an agent of the client.

The potential costs

Queensland Law Society members and staff worked with the Law Council of Australia (LCA) and other state law societies to draft the LCA’s ‘Response to Consultation Paper: Legal practitioners and conveyancers: a model for regulation under Australia’s anti-money laundering and counter-terrorism financing regime’. Provided to the Commonwealth AttorneyGeneral’s Department on 7 February 2017, the response included the results of a survey conducted by Queensland Law Society. The survey was run in December 2016 and January 2017, and asked law firms to assess the likely implementation costs of an AML/CTFegime akin to the existing Australian scheme.

Key highlights from the survey results indicated that establishment and annual compliance costs for the AML/CTF regime for legal practices extraordinarily high. For larger firms, figures look to be around $748,000 a year; for medium-sized firms around $523,000, and for smaller firms around $119,000. In addition to the cost implication, lawyers in the United Kingdom, under the same scheme, report turning down work and losing significant business. Queensland Law Society is concerned that the establishment, maintenance and loss of business costs could significantly affect solicitors in Queensland and the nation.

The Society is opposed to the AML/CTF applying to legal practitioners in Australia for four main reasons:

  • strain on the principles of confidentiality and client legal privilege
  • erosion of the client-lawyer relationship and the independence of the legal profession
  • imposition of additional onerous regulatory burdens that will likely impact on the ability of Australian law practices to remain viable in the international legal market
  • addition of an unnecessary additional cost burden for regulatory compliance, which  is likely to significantly increase the cost of legal services and make access to legal services less affordable for Australians.

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