By Gareth Vaughan
The country's big five banks all say they'll be ready for the introduction of anti-money laundering legislation next June as the international spotlight on bank involvement in the way criminals disguise the illegal origins of their money shines brightly following recent humiliations for HSBC and Standard Chartered.
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009, (the Act), is due to come into force from June 30, 2013. A recent paper prepared for Commerce Minister Craig Foss by the Ministry of Business, Innovation & Employment entitled Overview of organised crime and the misuse of corporate structures puts a NZ$1.5 billion estimate on annual money laundering in New Zealand, excluding laundered funds relating to tax evasion.
Passed by Parliament in October 2009, the Act's lofty aims are to detect and deter money laundering and the financing of terrorism, maintain and enhance NZ’s international reputation by adopting, where appropriate in the NZ context, recommendations issued by the Financial Action Task Force (FATF), an inter-governmental body established by the Group of Seven (G7), and contribute to public confidence in the financial system.
The government paper says independent advice on the implementation costs of the regime picks one-off start-up costs of NZ$97 million and NZ$21 million a year in ongoing costs to industry, with the bulk falling on banks due to their scale. However, the Ministry of Business, Innovation & Employment notes some of the cost banks face will be offset because NZ subsidiaries of Australian banks should've already had to implement equivalent measures. NZ Bankers' Association chief executive Kirk Hope puts compliance costs for the industry at between NZ$75 million and NZ$90 million.
The new legislation upgrades the Financial Transactions Reporting Act 1996 and many aspects are aligned with the Australian Anti-Money Laundering and Counter-Terrorism Financing Act, which dates from 2006.
The Reserve Bank will oversee compliance with the Act by banks, life insurers and non-bank deposit takers such as finance companies, building societies and credit unions. The Financial Markets Authority (FMA) is tasked with overseeing the compliance by issuers of securities, trustee companies, futures dealers, collective investment schemes, brokers, and financial advisers. And the Department of Internal Affairs will oversee compliance by casinos, non-deposit taking lenders, money changers, and any other financial institutions not supervised by the Reserve Bank or FMA.
Banks can be used at 'all stages' of money laundering
A Reserve Bank sector risk assessment report suggests banks are a "high" money laundering risk, finance companies and building societies medium, credit unions low and life insurers medium/low. It says the high rating for banks is consistent with the characteristics of the banking sector in the absence of anti money laundering and countering financing of terrorism requirements.
"This is to be expected given the relative size of the banking sub-sector and the large number and value of transactions compared to other areas," the Reserve Bank says.
It notes that banks may be used at "all stages" of money laundering.
"Because of the relatively wide availability and easy accessibility of products and services of banks, the banking sub-sector is considered a primary avenue for money laundering. The higher risk based on structural indicators can be attributed to millions of dollars and transactions that flow through the banking sub-sector to a variety of countries, including to possibly high risk countries," the Reserve Bank says.
"When supervisory powers are in force and testing of controls can be completed, the high risk rating for registered banks may be reviewed."
Hope said he expected all banks to be compliant with the new regime and spokespeople for ANZ NZ, ASB, BNZ, Kiwibank and Westpac NZ all told interest.co.nz their banks planned to be compliant with the Act by its June 30, 2013 introduction, although interest.co.nz understands some are aiming to be compliant ahead of June 30. ASB chief risk officer Kevin McDonald said work ASB's doing includes promoting staff awareness of the Act and offering associated training.
"We will also communicate with our customers about what it means for them," McDonald said.
A BNZ spokeswoman said BNZ was upgrading its existing anti money laundering and countering financing of terrorism programme to comply with the new, additional requirements.
"We're working to have it implemented and fine-tuned before the AML/CFT Act comes into force on 30 June," the BNZ spokeswoman said.
Damage done to NZ's international reputation
Implementation of the Act comes as the government strives to improve NZ's waning international reputation for anti-money laundering and counter-terrorism financing after it was kicked off a European Union "White List" providing guidance for EU banks and financial institutions about countries with EU equivalent money laundering and anti-terrorist financing laws in June 2011. New Zealand was on the list from its 2008 inception. Although the list doesn't have legal status, customers and financial institutions from non-EU countries on it are viewed as being subject to EU equivalent anti-money laundering and counter-terrorism financing standards.
NZ's reputation has also taken a hit from the growing list of NZ registered companies, often so-called offshore finance companies, committing crimes overseas. In but one example two men associated with a raft of offshore NZ finance companies and an online banking platform apparently based in NZ but run from Panama, were arrested by Panama’s Special Prosecutor’s Office against Organised Crime for allegedly laundering more than US$100 million (about NZ$122 million) as part of an international criminal group.
The Ministry of Business, Innovation & Employment paper notes that under the Act trust and company service providers will be regulated from mid-2013 and will have to conduct due diligence on clients including "shell companies" by verifying the identity of the individuals who ultimately control their customers, and establishing the source of their clients' funds if they open a bank account for them in NZ and operate that bank account on their client's behalf.
US money laundering crack down hits big global banks
Money laundering is currently a hot topic in international banking following the recent high profile embarrassments for HSBC and Standard Chartered in the United States. And the New York Times reported this week that Federal and state prosecutors are investigating Deutsche Bank and several other non-US banks over accusations they funnelled billions of dollars through US branches for Iran, Sudan and other sanctioned nations.
This comes after Standard Chartered agreed to cough up US$340 million to settle claims made by New York authorities that it laundered money for Iran. The settlement saw Standard Chartered accept the New York State Department of Financial Services' position that the conduct at issue involved transactions of at least US$250 billion. And HSBC has been forced to apologise and set aside US$700 million to cover potential fines after a US Senate committee investigating money laundering claims said the bank had provided a conduit for "drug kingpins and rogue nations" involving money from Mexico, Iran and Syria.
Separately, since 2009 US authorities have brought charges against five other foreign banks, saying they moved billions of dollars through US subsidiaries on behalf of Iran, Cuba and North Korea, sponsors of terrorism and drug cartels. The cases against the five banks all included deferred prosecution agreements and required the banks - ABN Amro, Barclays, Credit Suisse, Lloyds and most recently ING - to forfeit a combined US$2.3 billion.
ANZ boss warns of 'contagion risk'
Mike Smith, CEO of Australia's ANZ Banking Group which owns New Zealand's ANZ and National banks, warned last week there was "contagion risk" from the reputational knocks some international banks are taking. ANZ had to strive to maintain its own reputation, he said.
However, asked whether ANZ could profit from HSBC and Standard Chartered's woes Smith said it was in a good position to do so.
"When organisations do have problems, when these things do happen, it does provide opportunity for others and I think we're very well placed right now to take advantage of those situations."
The Act will impose a number of obligations on banks. These include: carrying out an assessment of money laundering and terrorism financing risk; establishing, implementing and maintaining a compliance programme that includes internal procedures, policies and controls that will detect, manage and mitigate this risk; carrying out customer due diligence including customer identification and verification; and ongoing customer due diligence; undertaking suspicious transaction reporting; and robust record keeping.
In an article published in the Reserve Bank Bulletin in June adviser Hamish Armstrong said the Reserve Bank will supervise entities according to the risks they present to the objectives of the Act.
"Namely: to detect and deter money laundering and the financing of terrorism; to maintain and enhance New Zealand’s international reputation; and to contribute to public confidence in the financial system," Armstrong wrote.
Reserve Bank to assess each bank individually
He said the Reserve Bank had started developing an "entity risk assessment model" that assesses the business of each bank, insurer and non-bank deposit taker against criteria or characteristics that may make that business more susceptible to being used for money laundering or financing of terrorism.
"This involves an assessment of their customer types, product/services, delivery channels, and the countries and institutions they deal with. These characteristics are based on international experience and information from NZ Police as set out in the first NZ National Risk Assessment," Armstrong wrote.
"For example, a financial product that allows third party payments is considered higher risk than a pure 'savings' product; a corporate customer with an opaque or complex ownership structure is considered higher risk than a natural person; and an overseas customer in a jurisdictions with high levels of corruption is considered higher risk than a domestic customer."
The nature and extent of the Reserve Bank's supervisory relationship with any individual reporting entity will depend on how much of a risk its staff believe the entity poses.
Under the Act the Reserve Bank has the power to: On notice, require production of, or access to, all records, documents, or information relevant to its supervision and monitoring of entities for compliance with the Act; conduct on-site inspections, and use methods of supervision not involving the formal exercise of statutory powers such as reviewing annual reports; issuing questionnaires and/or conducting surveys, desk-based reviews of risk assessments, policies, procedures or audit reports, meetings with firm's staff and/or presentations, and analysis of data from external sources.
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