The Anti-Money Laundering and Sanctions Experts Subcommittee

Gary Hughes

Akarana Chambers, Auckland

gary@garyhughes.nz

Housed within the IBA Regulation of Lawyers' Compliance Committee is a small, focused subcommittee of anti-money laundering (AML), countering financing of terrorism (CFT) and targeted financial sanctions specialist lawyers.

Comprising experts in the technical aspects of financial crime regulation and international law frameworks led by the Financial Action Task Force (FATF), this subcommittee includes private practice, academic and in-house counsel specialists.

Purpose of the AML and Sanctions Experts Subcommittee

All the lawyers have direct experience of how the application of AML regulatory regimes to law firms affects legal practice and compliance obligations, and most also have experience, by comparison, of the impact of those laws on banks, casinos and financial sector firms. Among our group, some experts are currently serving as heads of compliance or risk, or general counsel for international law firms.

A key function of the AML and Sanctions Experts Sub-committee (the 'Subcommittee') is to help the International Bar Association (IBA) liaise with FATF and other regional FATF-styled bodies on matters affecting the legal profession.

FATF has not traditionally been strong at private sector outreach and consultation but, pleasingly, that is changing. The IBA is sometimes invited to participate in targeted consultation aspects that specially relate to the profession; at other times it may join in general public consultation on possible FATF changes and policy evolution.

We draw from various country representatives, or invited experts, depending on the needs of a particular project or submission.

Around the world, nations sit at different places on the spectrum of how much they apply AML rules to lawyers; most of Europe has it as mainstream and well-established features of law firm regulated conduct. The United States has recently made moves towards greater client due diligence expectations for attorneys. Meanwhile, in other territories, such as Australia and British Columbia, Canada, the profession is currently not subject to AML rules, but is under increasing political pressure in high-profile public inquiries that may lead to reform.

This inevitably leads to a range of views about whether AML regulation of lawyers is needed at all, and – if there is a need – to what extent existing financial sector obligations should be grafted on to the legal profession.

FATF's traditional tendency has been to see the banking, managed funds, money remittance and insurance sectors as rather generic or structurally homogeneous. This approach does not extrapolate well to the huge variety of lawyer practising arrangements and firm formats.

Collaborative input into FATF liaison workstreams

A good example of the Subcommittee's flexible and collaborative work was its participation in the FATF private sector consultation on planned changes to Recommendations 18 and 23 in September 2021. These are FATF exhortations to member countries to arrange their domestic law so that 'designated non-financial businesses and professions' (DNFBP), including law firms, must apply group-wide internal controls and AML compliance programmes across all branches and subsidiaries, much like an international bank might do.

Our work included having input at online meetings and in writing to amendments that were adopted by the FATF Plenary Meeting in October 2021. In that process, the Subcommittee worked closely with the IBA's Anti-Corruption Committee, and was supported by other senior IBA officers from the IBA's Bar Issues Commission, Legal Practice Division and Section on Public and Professional Interest.

These amendments were to the Interpretive Note to Recommendations 22 and 23, which FATF describes as 'unconventional DNFBP groups' in comparison to how financial services business groups tend to organise themselves.

One theme the IBA pushed in submission was that a 'one-size-fits-all approach' will not work effectively for the legal profession. There are wide national differences in local ethical and regulatory rules, and the structural types of law firm groupings or professional-related parties around the world are equally diverse.

The amendments confirm that FATF expects group-wide requirements to apply to DNFBP groups operating under the same structure as financial groups. However, FATF now understands what a huge range of informal referral networks exist for cross-border legal work, and for arranging instructions to/with other lawyers. These often mean smaller firms participate in networks, alongside those of large multi-national law firms. So FATF has agreed that applying this Recommendation to 'unconventional DNFBP groups' is not mandatory and is proposed only 'to the extent that those structures could better mitigate money laundering risks by applying group-wide programmes'. This is designed to provide countries with the flexibility to address client criminal risks without overburdening law firms that do not present risks that need to be mitigated by group-wide uniform measures.

FATF also published explanatory materials[1] alongside the amendments, taking into account much of the feedback we provided. Among the usual FATF jargon, it includes key points:

• clarifying that FATF Recommendations do apply to law firms operating under the same structures as a financial group or bank, with a vertical ownership structure or parent entity;
• recommending that countries also consider applying those requirements to structures that share 'common ownership, management or compliance control';
• acknowledging that a diverse range of structures and professional networks exists, such that it is not appropriate to develop standardised rules for each sector – instead, individual member countries are encouraged to do more work to understand those structures and identify high-risk ones;
• setting out a list of features that FATF considers could indicate a relevant form of common ownership, management or compliance control; and
• elaborating on perceived money laundering and terrorism financing risks arising with international law firm groups or structures.

FATF also agreed, in principle, that these clarifications on 'unconventional DNFBP groups' will not begin to face evaluation until the next round of country mutual evaluations, probably after 2024. 

This all confirmed useful progress made in 2021 against one of our ongoing goals, to maintain constructive engagement with the FATF Secretariat, so that its staff come to see value in regularly seeking the IBA's views on issues that affect the profession and other so-called 'gatekeeper' sectors.

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