Taking on the dodgy offshore financial service providers; One lawyer's recipe to remove their stain from NZ's reputation

Taking on the dodgy offshore financial service providers; One lawyer's recipe to remove their stain from NZ's reputation

By Gareth Vaughan

Cleaning the stain off New Zealand's international reputation put there by misbehaving NZ registered but overseas operating financial service providers could be accomplished quite simply, says Minter Ellison Rudd Watts partner Lloyd Kavanagh.

"I think the solution is simple. If you're on the Financial Service Providers Register (FSPR), I think you should have to do NZ style AML (anti-money laundering) compliance, no matter where you customers are," Kavanagh says. 

This, he says, immediately gets to the core of what's concerning people "i.e. NZ registered operators dealing with shady individuals in far flung corners of the world. They won’t do that if the platforms are required to do proper customer due diligence, and monitor transactions as required by the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Act." 

Ongoing problem

The Government is reviewing the Financial Service Providers (Registration and Dispute Resolution) Act 2008 that saw the establishment of the FSPR. In an issues paper released in late May the Ministry of Business, Innovation & Employment (MBIE) noted a large number of offshore financial service providers have attempted to register in NZ (successfully in many cases) in order to give the misleading impression that they are regulated here.

This has enabled undesirable regulatory arbitrage by NZ registered but unregulated companies all over the world. Interest.co.nz has highlighted many of these companies, and the broader issues, over the past four years since then-Commerce Minister Simon Power said 143 NZ registered companies over four years had been implicated in criminal activities overseas including smuggling, money laundering and tax fraud. At the same time, 2011, the Reserve Bank estimated 1,000 companies incorporated in NZ over three years had been used to carry out banking activities free of regulatory oversight and "many" seemed to be undertaking fraudulent activities.

"While changes have been made to the legislation to address this problem, it appears to be an ongoing issue. We are seeking stakeholder views of the significance of the problem and whether further changes are needed to address it," MBIE's issues paper says.

The FATF link

Kavanagh told interest.co.nz one of the key purposes of the FSPR has faded into the background and this is at the root of the challenges NZ has. This is that a key purpose of the FSP Registration Act is to conform with NZ’s obligations under Financial Action Taskforce (FATF) recommendations. FATF is an inter-governmental body established by the Group of Seven that sets policies and standards on anti-money laundering and combating terrorist financing.

Having the register in the first place was one of the FATF recommendations in the run up to NZ's AML/CFT Act, which took effect from mid-2013.

"Somehow through the NZ process of splitting responsibility for the two Acts between the Ministry of Justice in the AML/CFT Act's case and MBIE in the case of the FSP Registration Act, we then have gone on a path of amending definitions which were originally pretty similar because they were all based on the FATF recommendations. So now there are lots of strange anomalies where you've got people who are supposed to be FSP registered but are not AML reporting entities, and people who are AML reporting entities that are not FSP registered," says Kavanagh.

"Frankly I think there's a really easy fix for this which is if the two pieces of legislation were relinked. So that if you're on the FSPR then you are an AML/CFT reporting entity and you have to do all of the things that you're required to do in terms of analysing your customer risk, having a full compliance programme which is really quite an onerous obligation, being subject to the annual reporting obligation and two yearly audits."

Such a move would put the focus on the real concerns, which are who those businesses are dealing with, and are the customers’ transactions legitimate, the essence of AML/CFT, Kavanagh adds.

The reason a requirement that entities on the FSPR should have to comply with the AML/CFT Act is necessary is because the Act itself has no explicit territorial clause in it, as we reported in 2013.  Effectively what this means is entities incorporated in NZ and registered on the FSPR but only offering financial services overseas, can thumb their noses at the NZ AML/CFT Act.

What about licensing?

The MBIE issues paper, meanwhile, goes on to point out other similar jurisdictions to NZ don't have problems to the same extent with their FSPRs, because typically they licence all types of financial service providers.

"In contrast New Zealand opted largely for a registration regime because licensing can impose significant costs on financial service providers, thereby creating a barrier to entry and reducing competition," says MBIE.

The paper asks; "Do you consider misuse of the Register by offshore financial service providers is a significant risk to New Zealand’s reputation as a well-regulated jurisdiction and/or to New Zealand businesses?" And; "Are there any changes to the scope of the registration requirements or the powers of regulators that should be considered in response to this issue?"

Kavanagh says a financial service provider licensing regime, such as the one Australia has, wouldn't address the core of what the NZ problem is, which is trying to get those off the FSPR who want to say they are registered in NZ but don't want to have any processes in place to make sure they know who their customers are and ensure their transactions are legitimate.

"Licensing, the alternative solution that has been floated, is typically focussed on the capability of the service provider, not the integrity of the customer and their transactions. So if we take that route we risk incurring a lot of regulatory cost, and not solving the real problem," says Kavanagh.

Further, he points out almost all legitimate financial service providers dealing with retail customers are already licensed through the likes of authorised financial adviser, qualified financial entity, discretionary investment management service (DIMS) and Reserve Bank deposit taker licensing requirements. 

"For me it's a classic case of having forgotten what a key purpose of the FSP Register was in the first place, to comply with the FATF requirement to register financial service providers," Kavanagh adds.

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4 Comments

The law of unintened consequences. Regulators took out the major banks providing legit offshore services and now have to deal with two bit operaters, thus thier job has turned into a game of whack-a-mole.

Gareth,

Well done in covering the whole subject, and not letting it go. I had personally been blissfully unaware of the issue, but now understand it is has serious brand implications for New Zealand, while inevitably with any scammers, there is real pain caused to their targets, and all of that needs to stop.

Thanks Stephen. I do think it's an issue worth covering. Cheers.

Whether Kavanagh's solution addresses the problem depends on what one thinks the problem is. Is it that these providers "want to say they are registered in NZ but don't want to have any processes in place to make sure they know who their customers are and ensure their transactions are legitimate" ? Or is it that they are quite happy to have AML/CFT processes in place - and do so - but most of all what they want is to be able to say they are "a registered financial service provider in New Zealand" because that gives them credibility offshore - their customers and others dealing with them mistakenly assume "registered" means "licensed" and subject to regulatory oversight, when in fact the FSP Register is little more that a telephone directory. My solution ? No registration of providers that will have only offshore customers (because having NZ resident customers will bring them within the scope of the Financial Advisers Act and other legislation).