The Reserve Bank has again asked banks not to impose a blanket ban on taking money remittance service providers and virtual asset service providers on as customers in the name of de-risking themselves from money laundering and terrorism financing risks.
In an industry update the Reserve Bank, which supervises banks, non-bank deposit takers and life insurers under the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act), asks for risk to be managed, not avoided. It notes remittances to Pacific economies can represent up to 40% of Gross Domestic Product (GDP), and says it's working with both domestic and international stakeholders to develop guidance.
"We believe that a blanket ban on money transfer operators and fintech businesses including virtual asset service providers goes against the purpose of the AML/CFT Act, as it erodes confidence in the financial system by delegitimising these businesses as well as impairing the detection and deterrence of money laundering/terrorist financing by forcing activity underground."
"The Reserve Bank is committed to working with banks and where appropriate with money transfer operators and virtual asset service providers, to address concerns and break down barriers to financial inclusion and innovation that are negatively impacting New Zealanders and particularly the Pacific Island communities," the Reserve Bank says.
"While it might seem like a strong risk appetite for banks to say that they don’t provide banking services to money transfer operators or virtual asset service providers, in many cases this doesn’t actually lead to good outcomes for all stakeholders, especially people who need those banking services."
"Based on observations seen in the industry, money transfer operators who have their accounts closed by a bank, do not tend to disappear. Instead, they find other avenues to operate their business, and continue to send funds. Those money transfer operators will open accounts at other banks, they will open accounts in business names that claim to be something they are not or they will start utilising personal accounts and the accounts of family members," the Reserve Bank says.
If a money transfer operator is forced to move ‘underground’, then their activity begins to look more unusual or suspicious. By being underground and trying to avoid detection, the nature of their payments get masked and can make transaction monitoring and sanctions screening more difficult."
"Reporting Entities [such as banks] are constantly playing catch up, identifying accounts operated by money transfer operators and going through a closure process, only for the activity to move to a different account until it is discovered. Evidence shows that this is a timely and costly process and the Reserve Bank believes this time could be better spent elsewhere," the Reserve Bank says.
In 2016, in what was seen as a precedent setting case, the High Court ruled that Kiwibank was allowed to close the accounts of remittance company customer E-Trans International Finance to reduce its exposure to money laundering risks. The ruling effectively endorsed Kiwibank’s right to choose who it does business with, and decide whether or not it wants to invest in the systems necessary to monitor its remittance clients in line with the AML/CFT Act.
The judgment came after the Reserve Bank had, in 2015, warned banks they must have good reason to deprive money remitters of access to financial services, adding blanket de-risking wasn't acceptable.
In its new industry update, the Reserve Bank refers to its 2015 statement, saying it remains true today.
"But there are concerns that there is a lack of awareness about these messages," the Reserve Bank says.
And it reiterates a paragraph from 2015: "Money remitters present varying degrees of risk. The Reserve Bank considers that banks’ obligations under the AML/CFT Act require measured risk management and do not justify blanket de-risking. With appropriate systems and controls in place, banks should be able to manage and mitigate the money laundering and terrorism financing risks posed by many money remitters. If banks are de-risking to avoid rather than manage and mitigate those risks, then that would be inconsistent with the intended effect of the AML/CFT Act."
The Reserve Bank notes that remittances to Pacific economies can represent up to 40% of GDP. The Reserve Bank says it's working with both domestic and international stakeholders to develop guidance and work with remitters in the Pacific to help them be more compliant with regional legal obligations.
"This includes exploring potential policy, legislative and regulatory changes to facilitate reduction in de-risking, and providing coordination and subject matter expertise around digital identity verification and payment and settlement systems."
"There are three key messages for industry on this important issue – please speak to the Reserve Bank as early as possible if reviewing your risk appetite for these sectors. Challenge your ability to manage the risk rather than simply avoid it, and talk to us you see options where we could help influence the risk reward proposition you are facing," the Reserve Bank says.
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