The breadth and depth of anti-money laundering and countering the financing of terrorism oversight of New Zealand banks doesn't adequately reflect the risk and complexity of the banks partly because the Reserve Bank of New Zealand (RBNZ) isn't well resourced enough, the Financial Action Task Force says.
The Paris-based Financial Action Task Force, or FATF, is an inter-governmental body that sets international standards, and is considered the global money laundering and terrorist financing watchdog.
It makes this comment about the RBNZ and its oversight of NZ banks in its latest country assessment, or mutual evaluation, of NZ released Thursday evening NZ time.
The RBNZ is one of three NZ supervisors under the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act, alongside the Financial Markets Authority and Department of Internal Affairs. The RBNZ is tasked with overseeing AML/CFT Act compliance by banks, non-bank deposit takers such as building societies, credit unions and finance companies, plus life insurers.
"The AML/CFT supervisors maintain an overall good understanding of the inherent money laundering [and] terrorist financing risk profiles of their respective sectors. The scope and depth of supervision for each financial sector is broadly commensurate with their respective risk levels, except for the banking sector, where the scope and depth of inspections does not adequately reflect the risk and complexity of the banks inspected, due in part to a lack of adequate resources available to conduct AML/CFT inspections in [the] RBNZ," FATF says.
Banks 'demonstrated a good understanding'
FATF notes the dominance of the NZ banking sector by the Australian owned ANZ, ASB, BNZ and Westpac. It says banks demonstrated a good understanding of their money laundering and terrorist financing risks.
"They [the Aussie owned banks] mostly operate under their group policies that set the broader frameworks, principles, high-level documents and group-wide risk assessments. They develop their New Zealand-specific compliance programs to meet the specific AML/CFT Act requirements. Some obligations may be carried out in Australia or another country in a centralised manner, e.g. transaction monitoring," FATF says.
"Banks have assigned resources to implement processes and procedures to pro-actively identify, assess and document these risks based on various risk factors. Risk assessments are documented and reviewed annually as well as on ad hoc basis in response to specific risk events. For example, banks updated their risk assessments after the Christchurch [terrorist] attacks in 2019 and following the issues identified around smart ATMs in Australia [with ASB's parent Commonwealth Bank of Australia] in 2017."
"Banks also have a comprehensive understanding of their AML/CFT obligations. Banks that are part of international financial groups are able to leverage on the knowledge and compliance infrastructure available from their overseas parent companies. However, they were able to demonstrate that their compliance programs are independent and tailored to the specific New Zealand requirements. The Financial Crime Prevention Network contributed to the information sharing and their understanding of new and emerging money laundering and terrorist financing risks," says FATF.
"As for smaller banks, non-bank deposit takers and life insurers, the RBNZ noted that there are some issues in money laundering and terrorist financing risk assessment process. These were mainly attributed to the reporting entities’ lack of distinction between the inherent versus residual risk concepts. This resulted in inaccurate assessment of risks, and inconsistent ratings with RBNZ’s sectoral risk assessments."
The RBNZ last year said it was "finalising enforcement action against TSB" over alleged non-compliance with the AML/CFT Act. TSB said it was "actively remediating" problems with its programme to comply with the AML/CFT Act that were identified by the RBNZ. TSB said civil legal proceedings could stem from discussions with the RBNZ, and it made a provision to cover a potential liability. Should the case go to court, it will be the first time the RBNZ has ever taken a bank to court.
Among the priority actions FATF recommends, it suggests ensuring the RBNZ "has adequate resources to apply the appropriate scope and depth of supervision to banks."
An RBNZ spokesperson said that RBNZ’s AML/CFT supervision is mainly carried out by five full-time dedicated AML/CFT supervisors, with the support of around 20 prudential supervisors who also take part in AML/CFT on-site inspection and general relationship management.
They said the RBNZ is addressing the report's recommendations "to the extent feasible" within the scope of the regulator's funding agreement.
Last June Finance Minister Grant Robertson unveiled a new five-year funding agreement with the RBNZ giving it an annual average budget of $115 million, a $35 million increase, with staff levels expected to rise by 172, or 58%, to 468.
More broadly, the RBNZ spokesperson said the Bank "welcomes" the Taskforce’s findings.
"We are particularly encouraged to hear that New Zealand is seen as a very strong international partner in the fight against money laundering and the financing of terrorism and that we were judged as effective in doing so," they said.
Extension of AML/CFT Act to lawyers, accountants & real estate agents 'effective and well-managed so far,' but at an early stage
It's the first FATF review of NZ since 2013 when the AML/CFT Act took effect, and has been delayed by the COVID-19 pandemic, having originally been due out last year. The 2013 FATF review helped usher in the extension of the AML/CFT Act to lawyers, conveyancers and accountants in 2018, and real estate agents from 2019.
FATF says the extension of the AML/CFT Act to lawyers, accountants and real estate agents, has been conducted in an effective and well-managed way so far, but remains at an early stage. FATF notes that NZ real estate agents made just one suspicious activity report or suspicious transaction report to the Police Financial Intelligence Unit in each of 2016, 2017 and 2018, then 166 in 2019. Banks meanwhile, submitted 26,215 suspicious activity and suspicious transaction reports between 2016 and 2019.
FATF has 11 key goals it says an effective AML/CFT framework should achieve. NZ is considered to have achieved a "high level of effectiveness" on just two of these, a "substantial level of effectiveness" on four, and a "moderate level of effectiveness" on five. NZ wasn't considered to have "a low level of effectiveness" on any of the 11 key goals. Additionally FATF has 40 recommendations, or technical requirements. NZ was judged "compliant" on eight of these, "largely compliant" on 21, and "partially compliant" on 11. NZ wasn't viewed as being non-compliant on any of the 40.
FATF says NZ has achieved "notable results" tackling money laundering, especially in recovering the proceeds of crime. NZ has a good understanding of the money laundering and terrorist financing risks it faces and has effective domestic coordination across all relevant agencies. This, FATF says, results in financial intelligence being used regularly to support investigations and trace and seize illicit assets.
"However, key areas need to improve, including: Improving transparency about the true ‘beneficial’ owners of companies, such as shell companies and trusts that can be used to launder illicit funds; Improving supervision of the private sector, including financial institutions, lawyers and accountants, to detect and prevent money laundering as anti-money laundering measures in this sector are very new; And closing gaps in the implementation of some counter-terrorist financing measures, particularly the supervision of targeted financial sanctions."