6 Key AML Red Flags New Zealand Law Firms and Accountants Need to Watch For

As designated non-financial businesses and professions (DNFBPs), law firms and accounting practices in New Zealand play a critical role in detecting and reporting suspicious activities under the AML/CFT Act. Their involvement in high-value transactions makes them prime targets for money laundering (ML) and terrorism financing (TF) schemes. To comply with New Zealand's AML standards, DNFBPs need to stay alert for specific AML red flags that may indicate potential money laundering risks and require suspicious activity reporting.

In this post, we’ll explore six essential AML risks for law firms and accounting practices, covering unusual transaction patterns, complex ownership structures, and client behaviours.

1.     Unusual or Complex Transactions

AML Risk: Transactions are unusually complex or not logically connected to the client’s stated business purpose.

Transactions involving multiple intermediaries, offshore accounts, or unusual structures can be designed to obscure the true source of funds, a common tactic for money launderers. Examples include:

• Transactions that involve unnecessary intermediaries or unexplained cross-border transfers.

• High-value transactions that don’t match the client’s typical business activities, such as purchasing assets unrelated to the client’s main operations.

Tip: Always document the rationale for each step of a complex transaction and seek clarity on atypical activities. If answers remain vague, it may indicate potential AML compliance risks.

2.     High Use of Cash or Unexplained Third-Party Funding

AML Risk: Clients insist on using cash for large transactions or rely heavily on third-party funding.

Substantial cash transactions are unusual in many industries, particularly professional services. If a client consistently uses cash or funds from unrelated third parties, it raises money laundering red flags.

Tip: Record detailed information on the source of funds, especially when third parties are involved. Clients should provide clear, documented explanations for third-party involvement.

3.     Concealed Identities or Beneficial Ownership

AML Risk: Clients are reluctant to provide identification, or beneficial ownership information is obscured.

AML compliance regulations in New Zealand require transparency around client identities. Common red flags include:

• Clients who resist providing basic identity information.

• Beneficial ownership structures that use shell companies or offshore entities to obscure ownership.

Tip: New Zealand’s AML/CFT Act mandates the identification of beneficial owners. Obtain and verify beneficial ownership details, and if clients are resistant, consider conducting enhanced due diligence.

4.     Politically Exposed Persons (PEPs)

AML Risk: Transactions involving politically exposed persons (PEPs), their family members, or close associates.

PEPs are individuals holding high-level public positions such as government officials or military officers and pose higher money laundering and terrorism financing risks due to their influence. Working with PEPs or their associates requires heightened due diligence to meet New Zealand AML standards.

Tip: For PEPs, implement enhanced due diligence (EDD) as required by the AML/CFT Act. Obtain verification on the source of funds, source of wealth, and carefully scrutinise transactions involving PEPs.

5.     Clients from High-Risk Jurisdictions

AML Risk: Clients or funds from countries with inadequate AML/CFT regulations.

Jurisdictions with weak AML controls can be channels for laundering illicit funds. New Zealand’s AML compliance framework encourages additional scrutiny of transactions linked to these regions.

Tip: Regularly review high-risk jurisdictions lists from the Financial Action Task Force (FATF) and New Zealand’s Financial Intelligence Unit (FIU). Apply enhanced due diligence for clients from these countries, including gathering additional information on the purpose and source of funds.

6.     Rapid or Frequent Account Transfers

AML Risk: Frequent or rapid transfers between accounts without clear business purpose.

Repeatedly moving funds between accounts without a logical business purpose is a common tactic in money laundering schemes, especially within financial and legal services.

Tip: Identify unusual account behaviours and patterns during both client onboarding and ongoing monitoring. Document these patterns, seek clarification, and consider submitting a suspicious activity report (SAR) to New Zealand’s FIU if concerns remain.

Final Thoughts on AML Compliance for Law Firms and Accountants

Law firms and accounting practices play a vital role in New Zealand's efforts to combat financial crime by staying alert to AML red flags and documenting due diligence practices. Recognising suspicious activities is key to AML compliance, as is timely reporting of potential issues to New Zealand’s FIU.

For additional guidance on AML/CFT obligations, refer to resources from New Zealand AML/CFT supervisors. Remember, recognising and addressing suspicious activities early is essential to protect your firm from becoming a conduit for illicit transactions, maintaining AML compliance, and supporting New Zealand's financial system integrity.