Overseas funds, a third-party payment and a five-day settlement
Wei Zhang, a New Zealand resident, is buying a $1.65 million house in Auckland; the agreement is unconditional and settlement is in five working days. The deposit was paid by his sister. The balance is to come from an account in Hong Kong in the name of Golden Harbour Trading Ltd; Wei says it is a loan from his family's company and produces an unsigned one-page document in Chinese headed 'loan agreement'. He asks that $250,000 of the purchase price be paid to a third party's New Zealand bank account for 'renovation work already done', and that the firm hold $90,000 of his money in its trust account 'until he decides what to do with it'. He is impatient: the vendor's solicitor is pressing for an undertaking that the purchase price will be paid on settlement, and Wei says his cousin, a lawyer in Hong Kong, has already 'checked everything'. The firm has not yet completed customer due diligence.
1. Set out the firm's AML/CFT obligations on this transaction, the due diligence required, and what the firm must do about the red flags.
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Reporting entity. Law firms carrying out conveyancing and managing client funds are reporting entities under the AML/CFT Act 2009 (Phase 2 has applied since 1 July 2018), supervised by the Department of Internal Affairs. The firm needs a risk assessment and compliance programme, and must complete customer due diligence before carrying out the transaction, with ongoing due diligence afterwards.
What CDD requires here. (1) Wei: identity, address and date of birth, verified from reliable independent documents. (2) Source of funds: an unsigned one-page document in Chinese is not verification - obtain the executed loan agreement, the lender's company documents, the bank transfer trail from Golden Harbour Trading Ltd, and evidence of the family relationship. (3) Beneficial ownership: identify who ultimately owns or controls the Hong Kong company (25 per cent or more); if any of them is a politically exposed person or the jurisdiction is higher risk, enhanced CDD applies. (4) The third-party payee.
Red flags. Funds from an overseas company; an undocumented 'loan'; $250,000 to an unrelated third party for works said to be already done; a request to park $90,000 'until he decides'; a five-day deadline; and reliance on a foreign lawyer's assurance. Urgency and pressure are classic indicators.
Consequence. If CDD cannot be completed, the firm must not carry out the transaction and should consider a suspicious activity report to the Financial Intelligence Unit through goAML. It must not tell Wei a report has been made - tipping off is an offence. The five-day deadline is the client's problem, not a reason to skip CDD.
2. Advise on the trust account issues raised by the $90,000 and the $250,000 payment, and on whether the firm can give the undertaking the vendor seeks.
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The $90,000. Trust money must be held for a specific client purpose and recorded in the trust ledger (Lawyers and Conveyancers Act 2006 and the Trust Account Regulations 2008). A solicitor is not a bank. Holding $90,000 indefinitely 'until he decides' is not a proper trust purpose, defeats the audit trail and creates a real risk that the funds are proceeds of an offence. Refuse, or accept only against a specific documented purpose with a written direction and an agreed return date.
The $250,000. Paying part of the purchase price to an unrelated third party is not the same as paying the vendor. Before doing so the firm needs the vendor's written direction, the underlying contract for the renovation work, invoices, and confirmation that the payment will be credited against the purchase price under the agreement. Without those, do not pay: the firm could be moving value to an undisclosed party and could be liable to the vendor.
The undertaking. Do not undertake to pay the purchase price until the funds are in the firm's trust account and cleared, or the payment is secured by an unconditional and irrevocable arrangement. An undertaking binds the firm personally and is enforceable independently of the transaction; a shortfall is the firm's loss.
Records. Keep a written record of every request, refusal and direction. The Inspectorate will ask for it.
3. Wei demands that the firm proceed immediately. Advise on whether the firm can continue to act, the reporting and privilege issues, and the consequences of getting it wrong.
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Can the firm continue? Only if it can complete CDD and obtain a satisfactory explanation. The client's impatience, the cousin's assurance and the size of the third-party payment are not answers. If explanations are not forthcoming, decline or terminate the retainer, return any funds held, and preserve the records. Withdrawing at short notice is uncomfortable, but the AML obligations prevail, and the firm can help the client instruct another lawyer.
Reporting. If the firm has reasonable grounds to suspect the funds are the proceeds of an offence, it must report to the Financial Intelligence Unit. That obligation is not satisfied by telling the vendor's solicitor or by asking for more documents. Take care with privilege: the Act limits the use of privileged communications, so consult the compliance officer and, if necessary, the Department before deciding what may go into a report.
No tipping off. Do not tell Wei, his sister, his cousin or the vendor that a report has been made or is contemplated. The firm may say it cannot proceed until CDD is complete, and may ask questions, but must not explain why.
Consequences of error. Knowingly dealing with the proceeds of crime is an offence under s 243 of the Crimes Act 1961; failing to comply with the AML/CFT Act exposes the firm to civil penalties and to disciplinary consequences. Slow the transaction down, document everything and escalate internally.