Modernising Australia’s anti-money laundering regime: Extending AML obligations to lawyers

The increasing involvement of lawyers in money laundering (‘ML’) activities has raised significant concerns (D Goldbarsht, ‘Reverse engineering legal professional privilege in a globalising world – the Australian case’ 23(3) Journal of Money Laundering Control 677, 678). One of the key recommendations from the Financial Action Task Force (‘FATF’), the organisation that set the global standard in anti-money laundering (‘AML’), is that it urged all countries to ensure that lawyers thoroughly identify, assess and mitigate ML risks. This includes documenting their assessments, maintaining their currency, and establishing appropriate mechanisms to share risk assessment information with competent authorities and self-regulatory bodies.

However, aspects of this recommendation pose challenges due to conflicts with legal professional privilege, a fundamental right that is crucial in upholding justice. Despite these challenges, over 200 jurisdictions worldwide have implemented new or amended regulatory frameworks to include lawyers, aligning themselves, in some manner, with FATF standards. Australia currently finds itself among a small group of five nations – China, the United States, Haiti and Madagascar – that has yet to regulate lawyers in line with FATF’s standard.

Recent events suggest this may soon change. In March 2022, the Senate Legal and Constitutional Affairs Committee recommended extending the AML regime to include the legal profession. This commitment to strengthen Australia’s AML framework was further emphasised in the 2023 Budget where the Australian Government allocated $14.3 million over four years to support policy development and legislative reforms aimed at bolstering the country’s defences against illicit financing. Notably, $8.6 million over three years has been dedicated to AUSTRAC, the financial intelligence agency, to enable it to drive change. This funding will facilitate the development of regulation and consultation with stakeholders to bring Australia’s AML regime into line with contemporary standards.

The funding will also enable AUSTRAC to prepare for and actively participate in the evaluation of Australia’s Anti-Money Laundering/Counter Terror Financing (‘AML/CTF’) regime against global standards by the FATF. This evaluation serves as an important benchmark for ensuring the effectiveness and compliance of Australia’s anti-money laundering efforts.

However, the debate regarding the implementation of these measures continues, with representatives from the legal profession expressing their concerns. A key concern is the potential conflict with legal professional privilege. This reflects the delicate balance between reinforcing AML measures and preserving the fundamental principles and privileges associated with the legal profession and the administration of justice.

During a meeting of the Legal and Constitutional Affairs Legislation Committee on 25 May 2023, Senator Paul Scarr described his review of the Canadian model and how it differed from the United Kingdom and New Zealand models. Senator Scarr asked whether discussions with the legal profession actively considered the Canadian approach. In response, a government representative confirmed the legal professional privilege aspect of the New Zealand and UK models had been examined and the Canadian model was also under consideration (Senate Legal and Constitutional Affairs Legislation Committee).

In light of this, we consider how other common law jurisdictions, specifically the UK, Canada and New Zealand, have addressed the FATF recommendations pertaining to the legal profession (for the role of lawyers in ML, and the costs and benefits of extending AML obligations to the legal profession see Doron Goldbarsht ‘Tranche II is coming: Legal professionals as gatekeepers’ 85 Law Society Journal 73. For the detailed models, see the Financial Integrity Hub’s submission to the Attorney General, June 2023). Drawing on these models, we propose the development of an Australian model.

The United Kingdom model

In the UK, lawyers fall under the purview of the Money Laundering, Terrorist Financing and Transfer of Funds (Information on the Payer) Regulations 2017 when they engage in financial or real property transactions; assist in their planning, execution or act on behalf of a client in such transactions (regulation 12). These regulations impose obligations on lawyers to adopt risk-based customer due diligence measures and take action to prevent their services from being exploited for ML purposes.

Lawyers are also subject to the Proceeds of Crime Act 2002 (UK) (‘POCA UK’), which establishes the primary criminal ML offences in the UK. Section 330 of POCA UK, ‘Failure to disclose: regulated sector’, provides for the disclosure of suspicious transactions by members of the regulated sector, including lawyers. It is an offence to fail to promptly disclose information obtained while conducting business, which gives a person reasonable ground to suspect another individual’s involvement in ML.

Under POCA UK, any suspicions of ML must be reported and information relating to the clients involved must be disclosed to the relevant authorities. The identity of the authority to be advised is currently the subject of a public consultation. This obligation can override the duty of confidentiality. However, there are exemptions from aspects of POCA UK, and a defence to the associated reporting requirements, where certain communications are received by lawyers in ‘privileged circumstances’ (POCA UK, s 330(6)(b), (10)). However, an exception applies where the communication was made with a view to furthering a criminal purpose.

The structure of legislation in the UK introduces considerable complexity, as lawyers must actively assess whether legal professional privilege applies, rather than presuming its automatic application.

The New Zealand model

In New Zealand, the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (‘AML/CFT Act’) sets out the country’s AML regime. Since 1 July 2018, the AML/CFT Act has applied to law firms of all sizes that offer any of the ‘captured’ services.

For the legal profession, designated or captured activities are defined in the AML/CFT Act. These include most property and corporate legal work. Full AML obligations apply to the following legal services; establishing trusts and companies, administration of corporate entities, provision of transactional and trust account services, and substantive legal work for clients in real estate, business sales and mergers, trust, trustee, asset planning or tax structuring fields.

Lawyers face a real challenge due to their ethical obligations to clients, which include maintaining client confidences and maintaining legal professional privilege. Recognising this challenge, the AML regime in New Zealand ensures that both legal advice and litigation privilege is protected provided that privilege genuinely applies.

For lawyers, the most significant obligation under the New Zealand AML regime is the requirement to file a Suspicious Activity Report (‘SAR’) (see sections 39A and 40 of the AML/CFT Act). In simple terms, if a lawyer has ‘reasonable grounds to suspect’ that an activity, transaction, proposed transaction, or even a mere inquiry about legal services may be linked to ML, they must promptly report the matter to the police. However, a SAR submission is not required where legal privilege or confidentiality genuinely applies.

The Canadian model

In Canada (Attorney General) v Federation of Law Societies of Canada [2015] 1 SCR 401, the Supreme Court of Canada held that lawyers were exempt from the regulatory regime governing other financial intermediaries, such as accountants (at [110]). The Court found the constitutional entitlement of clients to solicitor-client confidentiality rendered the application of the AML regime to lawyers unconstitutional.

The regulations attempted to impose requirements on lawyers to collect client information, including details about their financial transactions. Lawyers were obliged to disclose this information to federal authorities upon request. In its decision, the Court concluded that these provisions violated certain protections enshrined in the Charter of Rights and Freedoms (at [9]).

The decision also confirmed the responsibility of Canada’s provincial law societies to effectively regulate lawyers’ conduct to prevent and mitigate their involvement in ML activities.

Under the Model Code of Professional Conduct for Legal Professionals, lawyers are explicitly prohibited from knowingly assisting in any illegal conduct or engaging in actions or omissions that would aid in the commission of a crime (Rule 3.2 – 3.7 and s 11(1) of the Client Identification and Verification Model Rule). If a lawyer had suspicions or doubts as to whether their activities may be facilitating ML, they have an obligation to conduct reasonable inquiries to gather information about the nature and objectives of the client’s engagement. Lawyers are also required to document this information and consider whether it is necessary to withdraw from the matter.

The suggested Australian model

Our consideration of the three jurisdictions demonstrates many similarities with Australia. Each has a common law system and faces the challenge of balancing compliance with global norms with legal professional privilege. It also demonstrates that the regulation of lawyers under the AML regime varies across jurisdictions and can be influenced by constitutional provisions, cultural traditions, and the bargaining power and social prestige of the legal profession.

In developing an Australian model, we recognise there is no one-size-fits-all solution and consider the experiences and approach of other similar jurisdictions that have already met the FATF recommendations. By leveraging the lessons learned and understanding the challenges faced by these jurisdictions, Australia can design a tailored model that enhances its AML regime, instils greater confidence in the financial systems, improves national security, achieves a favourable FATF rating, and ensures that legal professional privilege is not unduly compromised.

We propose a model that will not only achieve those goals but can also be implemented by all lawyers regardless of their firm’s size, expertise or turnover.

Specifically:

• lawyers should be required to conduct client due diligence procedures when undertaking core property and corporate legal work, based on the ML risk associated with such activities (‘Designated Legal Service’);
• a prescribed form should be used for collecting client information. Lawyers should then conduct a risk assessment of clients using that information measured against ‘red flag’ criteria provided by AUSTRAC;
• the client should provide the requisite information before receiving legal services for the first time and limited disclosure is required if subsequent legal services are provided to the same client. For existing clients, customer due diligence should be conducted within six months of the introduction of the regime;
• the information to be gathered should include the client’s personal details, information about the ultimate beneficial owner of the property relevant to the Designated Legal Service and the source of funds. The completion date and time should be documented and the information retained for five years;
• lawyers would not be obligated to report a client’s suspicious transactions. However, if the information provided suggests a risk of ML associated with the Designated Legal Service, the lawyer would be obliged to refrain from providing those services to the client;
• lawyers would be required to disclose the information to AUSTRAC upon request. AUSTRAC would have the authority to conduct audits, request relevant documents and perform physical inspections of lawyers’ offices if there are concerns about potential violations of the AML/CTF Act; and
• a failure to collect, maintain or provide accurate information, or a failure to cooperate with AUSTRAC may lead to the imposition of financial sanctions on the lawyer. Additionally, if concerns arise regarding the provision of a Designated Legal Service with a high risk of ML, AUSTRAC would have the authority to refer that concern to the relevant law society, which could initiate disciplinary proceedings against the lawyer for professional misconduct. Those proceedings may result in a range of sanctions up to and including striking the practitioner’s name off the roll of practitioners.

Conclusion

Incorporating lawyers into the AML regime poses significant challenges, primarily related to potential infringements of lawyer-client privilege and confidentiality, particularly in reporting suspicious transactions. At the same time, addressing the concerns identified by FATF should be a priority for the Australian government, given the substantial implications of a continued failure to comply.

Addressing FATF’s concerns is not a question of ‘if’ they should be addressed, but rather a matter of ‘when’. Our proposed model offers a framework that demonstrates how Australia can address those concerns, incorporate lawyers into the AML regime and preserve vital legal principles and protections.

Doron Goldbarsht is a senior lecturer at Macquarie Law School and is the Director of the Financial Integrity Hub. Stuart Clark AM is an Honorary Professor at Macquarie Law School, Financial Integrity Hub Board member and former President of the Law Council of Australia.