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Opinion: Why NZ's anti-money laundering and countering the financing of terrorism laws are seriously flawed

Posted in Opinion

By Gareth Vaughan

New Zealand's reputation as a safe and reliable provider of dairy products to the world has rightfully come under scrutiny this week. But it's also worth putting our reputation in the financial sector under the microscope.

The Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act) came into effect on June 30. Passed by Parliament in 2009, this Act has been a long time coming and has wide ranging implications.

It has the lofty aims of detecting and deterring money laundering and the financing of terrorism, and maintaining and enhancing New Zealand’s international reputation by adopting, where appropriate in the New Zealand context, recommendations issued by the Financial Action Task Force (FATF). The FATF is an inter-governmental body established by the Group of Seven (G7).

It's also hoped the AML/CFT Act will help get New Zealand back onto the European Union's so-called White List, which provides guidance for EU banks and financial institutions about countries with EU equivalent money laundering and anti-terrorist financing laws. New Zealand was dumped from the List in June 2011.

Flawed legislation

The AML/CFT Act has a clear and notable flaw. It has no explicit territorial clause in it. So that means the Act doesn't tell you what its territorial scope is. There are brief guidelines on the territorial scope of the AML/CFT Act issued by the three authorities tasked with overseeing compliance with it in the form of the Reserve Bank, Financial Markets Authority and Department of Internal Affairs.

The key paragraph in the guidelines appears to be this one; "An entity incorporated or formed in New Zealand, which carries on financial activities wholly outside New Zealand, will not be a 'reporting entity' under the AML/CFT Act."

Now this is guidance only, rather than statute. If the authorities were trying to prosecute someone we don't know what a court would decide. However, there's a fundamental principle that the New Zealand Parliament doesn't intend laws to have extra-territorial effect unless it explicitly says so.

So we have a situation where entities operating in New Zealand including banks, building societies, credit unions, sharebrokers, fund managers, financial advisers, trustees and casinos must now work to comply with the AML/CFT Act, and at times put their customers and clients through the ringer as they do so, but entities incorporated in New Zealand but offering financial services overseas, can ignore it.

They're free to do business overseas, piggybacking on New Zealand's largely good reputation, without complying with key New Zealand laws.

As Lloyd Kavanagh, a partner at law firm Minter Ellison Rudd Watts and a specialist in banking and financial services, puts it: "It is unfortunate that the AML/CFT Act does not have an explicit territoriality provision given the importance of certainty in applying a regime like that."

"The guidance states that even if you are incorporated in New Zealand, if you carry on your financial activities wholly outside New Zealand, that you're not subject to New Zealand AML,"  Kavanagh added. "I wonder whether from a policy perspective that is the right answer, (or) whether New Zealand shouldn't take a broader responsibility for entities who have chosen to incorporate themselves here?"

A paper prepared for Commerce Minister Craig Foss by the Ministry of Business, Innovation & Employment last year entitled Overview of organised crime and the misuse of corporate structures put a $1.5 billion estimate on annual money laundering in New Zealand, excluding laundered funds relating to tax evasion. But who knows how accurate that estimate is?

Infamous NZ registered companies & their offshore antics

Given the criminal behaviour of several companies registered in New Zealand but operating offshore, these guidelines are unsatisfactory. In terms of the activities of some such companies, here's but three examples.

1) SP Trading Ltd, whose activities were extensively covered by Fairfax's Mike Field. SP Trading made international headlines after its involvement in the charter of a plane intercepted at Bangkok airport - having come from North Korea - with a cargo of weapons aboard.

2) The Organized Crime and Corruption Reporting Project reported on how the New Zealand registered Tormex Ltd allegedly laundered some US$680 million a year through a Latvian bank account.

3) Interest.co.nz reported last year how Jeffery Lowrance, a US citizen based in Panama operating the New Zealand registered First Capital Savings & Loan Ltd, pilfered about US$31 million from 452 investors via a Ponzi scheme. After being arrested in Peru and extradited to Chicago, Lowrance was sentenced to more than 14 years in prison and ordered to repay more than US$17 million.

More broadly there's no shortage of New Zealand registered entities who are apparently peddling financial services overseas. Some of the ones to have graced this website include City Savings "Bank" which has become Friends Mutual, Century Finance Ltd, the Elite Bank Group, and the Crimson Group.

Then there are building societies such as General Equity (which now has naming rights on a downtown Auckland building), Safe and Sound, and the now being dissolved Kiwi Deposit, whose affiliated entity apparently manages €5 billion worth of assets on behalf of some of the world's richest people.

Then there are numerous entities that did, or do, set up New Zealand registered companies - for a fee - to serve overseas masters as finance companies and financial services providers. These include Atrium Incorporation Services LLC, Zealand Financial Group LP, Freedom Offshore and OffshoreBankers.

Now, I'm not saying any of these entities are laundering money or financing terrorism. In most cases we simply don't know what they're doing in Panama or Belize or wherever they're actually located.

The Government is looking to force New Zealand incorporated companies to either have a New Zealand resident director or a resident agent, which it says, will provide "improved ability" to de-register companies and limited partnerships for overseas criminal activity. It's doing this through the Companies and Limited Partnerships Amendment Bill. The Government has also moved to strengthen the financial service providers registration regime.

But wouldn't making New Zealand registered but overseas operating companies subject to the AML/CFT Act also be a good idea?

An undesirable form of regulatory arbitrage

Effectively we have a significant number of companies that are incorporated in New Zealand, and claim to have a place of business in New Zealand so they can be registered under the Financial Service Providers (Registration and Dispute Resolution) Act, one purpose of which is to conform with New Zealand’s FATF obligations. But they then claim that, while they have a place of business in New Zealand, they actually conduct no financial services business in New Zealand. This appears to be a very undesirable form of regulatory arbitrage.

Wouldn't it be better if our authorities said; "If you have incorporated in New Zealand we expect you to be subject to the New Zealand AML/CFT Act because you have chosen to incorporate here and we will supervise you."

If they don't like this they can go look for another country to incorporate in.

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14 Comments

Ah C''mon now did you not

Ah C''mon now did you not realise  the deliberate absence of such clauses in the Money Laundering Act were possibly intended as enabling legislation for foreign domiciled and operated companies to set up the Holding Company here?
Its designed to  mirror the goings on in  :

  • The Bahamas
  • Caymand Islands
  • Isle of Man
  • The Isle of Wight
  • The Island of Jersey
  • The Islands of Seychelles
  • Guersney
  • British Virgin Islands
  • Turks and Caicos Islands
  • The Island of Hong Kong
  • Ireland (9 Irish Republic)

And Now the Island of New Zealand  .
Lets not be naive , we are trying to get the current and capital accounts  back to surplus and we need foreign money because the all the cows in NZ and Fonterra cant do it , and the loons won't allow mining
So we are keeping the budget in sync with hot Chinese money right now , and we cannot afford to ask too many silly questions when they want a Mandarin Speaking banker to open account, or a solicitor to form a holding Company here . 
Yip , if we want real foreign investment to keep us going we have to become  a Tax Haven
And as long as its not funding terrorism ..... then  why not ?

it's a BS piece of

it's a BS piece of legislation that penalises good people, adding cost to routine transactions. If the state was doing its job, then this layer of compliance would not be required.

Typical of a bureacracy that

Typical of a bureacracy that has reached the tipping point where it no longer serves the people, but serves it self. The individuals just want to keep their jobs and force the hard work onto everyone else. If its to hard but the right thing to do, too hard wins out every time with this new generation of bureacrats, which all seem to come from overseas, where the public service ceased to be a service many years ago.

As Nick Hodge from Wealth

As Nick Hodge from Wealth Daily Aug 8th 2013 quotes:
Your life and finances have been hijacked. Sold to the highest bidder.
Your rights and ability to save and earn have been slowly eroded, picked apart by bankers, lobbyists, and politicians.
It's not those who work hard and obey the rules that get ahead, but rather those who make the rules, and change them as they see fit.
 
Politicians and Bureaucrats can never serve the people as they are too busy serving themselves and know the general populace is too apathetic and/or divided to ever have meaningful change.  Citizenships means that you must keep complying and paying regardless.
 
 
 

100% Pure NZ, any one ?

100% Pure NZ, any one ?

100% Pure anyone? Please,

100% Pure anyone? Please, Please, Please.
Our guardians have no idea what is happening and what is being lost.

Let me tell you a story which you never see talked about.
One of the most beautiful places in new zealand is Lake Waikaremoana located in the Urewera's. It's remote and difficult to get to. I have been there a number of times. The Rakaia river is a small tributary running from Waikaremoana into Lake Aniwhenua, a second choice to Waikaremoana, and easier to get to from Auckland via Whakatane. Used to go Laser sailing there. Was worth the trip to tow the Laser from Auckland to Aniwhenua. Easy, tranquil summer days.
 
Two years ago, went back to visit my past. The place was empty. Unoccupied. No visitors. No holiday makers frollicking in the sun and on the water. The entire Lake was covered by a mattress of brown algae 1 metre deep. It was so dense you could walk on it. You could walk accross what was once a sparkling lake.
 
The following year we did a tour around the lakes district of southland. Everywhere we went there were signs warning about the presence of didymo (rock-snot to the uninitiated) infesting the lakes
 
I am saddened by what is happening.
Unless you knew what it "was" once like you will never know what has been lost
That loss is continuing at a greater pace
 
The changing face of Aniwhenua. Fish and Game New Zealand by G. Thomas.
Hydrodictyon Reticulatum
The large biomass of H.reticulatum had growth rates of 30% day recorded in the lake. The large turnover of algal biomass and fast growth rate affected management operations at the Lake Aniwhenua hydro-electric power station.
http://www.nzes.org.nz/nzje/free_issues/NZJEcol25_2_55.pdf

The marketing gurus should

The marketing gurus should rename it 95% pure NZ. it would go down a treat. The English press would look like prized pri^%#%s

Interestingly this piece from

Interestingly this piece from interest.co a couple of years ago is doing the rounds on facebook.
 
http://www.interest.co.nz/news/56209/finance-companies-collapsed-because-regulators-courts-lawyers-and-accountants-were-unread

Wonder what happened

Wonder what happened ..
 
Parliament's commerce select committee ...
The committee, chaired by Labour MP and former Minister of Commerce Lianne Dalziel ....
The select committee recommended that Parliament pass legislation to give disgruntled finance company investors the option of taking class actions against the likes of directors, trustees and auditors to try and recoup some of their losses

Iain Parker has written to

Iain Parker has written to Malloy, and wants others to write to him, to see if he will use his skills to stop asset sales under the pretense they are being stolen under false pretenses. He wants to start up a fighting fund as well. Only on facebook at the moment but hopefully it will be up on his blogsite soon. http://publiccreditorbust.blogspot.co.nz/
 
https://www.facebook.com/IainParkerMonetaryReformAdvocate/posts/10200887216197036

Mr scarfie : You have a

Mr scarfie : You have a greater chance of success at re-inserting bovine faeces up a diarrhrectic cow's bottom with a teaspoon , than Mr Iain Parker has of succeeding in his mission to lead NZ to his vision of fiscal rectitude ....
 
... it's a slow Saturday night , do you mind if the rest of us watch whilst you have a go ...... wanna borrow a Gummy teaspoon , or gotcha own ? ...

I tend to agree Gummy and I

I tend to agree Gummy and I have told Iain that you can't play with the monopoly money while we still need it to buy oil. Anything that upsets the applecart and the people that keep loaning us money will turn the taps off to the supply. Energy independence has to come first, meanwhile we just have to suck it up.
 
But I will still take your free spoon :-) Shame it wasn't a beer on offer.

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