Money Laundering and Terrorism Financing Law Firm Risks

A new report commissioned by the Law Council of Australia shows the Australian legal profession is proactively working to mitigate the risk of being a party to money laundering and that where vulnerabilities exist, those not already being addressed can be addressed through augmentation of existing controls to which the profession is already subject.

“The Government is currently considering how best to achieve the existing anti‑money laundering and terrorism financing (AML/CTF) regime objectives in relation to the legal profession,” Law Council of Australia President, Luke Murphy, said.

“The Law Council has always believed that due to the strict rules and regulations under which the Australian profession operates, the potential for lawyers being used to facilitate AML/CTF is small. To test the validity of that belief, we engaged Russ + Associates to undertake an independent review of the profession’s vulnerability to being an unwitting party to money laundering and terrorism financing.

“Russ + Associates is a specialist tax and AML law practice who are recognised experts in AML/CTF advice.

“To our knowledge, the examination of vulnerabilities Russ + Associates were engaged to undertake is a world‑first. We believe this highlights the commitment the Australian legal profession brings to understanding and minimising AML/CTF risks and provides a strong evidence base upon which effective decisions and changes can be made.

“What the report found is that beyond the regulations and professional requirements lawyers are subject to, they have taken additional steps to reduce risks. These include limited receipt of cash, particularly when it comes to funds from overseas, not holding assets for clients, and ensuring they meet all reporting obligations.

“That is not to say that no vulnerabilities exist, and we thank the firms who participated in this study for being frank about the risks they have identified in their practices.”

Vulnerabilities identified included lawyers not routinely making enquiries about a client’s source of wealth and difficulty in confirming the provenance of funds, with differences in risk between jurisdictions.

“Knowing where vulnerabilities exist, we can be even more vigilant in addressing them through training and education; working with the banking sector to improve transparency; harmonising practices, regulations and requirements; and increasing use of technology such as electronic conveyancing,” Murphy said.

“The report highlights the positive attitudes and behaviours among the legal profession towards integrity, risk awareness and aversion, and to fulfilling statutory and professional obligations.  It shows vulnerabilities are present, but they can be managed through augmentation of existing controls.

“There are other considerations that cannot be ignored as we consider an extension of the AML/CTF regime. The most serious issue is the financial and regulatory burden that a disproportionate and overly burdensome regime would impose on small law firms. We know from experience overseas, such as in New Zealand, that a number of legal practices chose to close their doors following the imposition of disproportionate AML/CTF reforms.

“The vast majority of the Australian legal profession, 92 per cent, operates through practices with less than four principals. These are classic small businesses scattered across the country, in the suburbs and the regions. Compliance costs in both time and money would potentially cast doubt on the ongoing viability of these firms.

“What that may mean for our community is when someone needs legal services, they will either not be available or will be more expensive. It is likely to hit hardest in rural and regional communities where there may already be a shortage of legal professionals.

“Legal services would be less affordable and even more out-of-reach for Australians, generating more demand on the underfunded legal assistance sector and potentially having a chilling effect on access to justice in this already challenging economic climate.

“Extension of the AML/CTF regime also potentially presents a threat to client legal privilege, which underpins the administration of justice in this country.

“The Law Council deplores financial criminality and recognises the importance of a regulatory regime to mitigate the risk of Australians engaging in, or being used to facilitate, money laundering and terrorism financing. The Russ + Associates report provides evidence that these risks do not require the imposition of an extreme, disproportional and potentially damaging AML/CTF regime. The report provides a clear road map for addressing our areas of vulnerability.”