Bill English rules out 'radical' policy changes to shield money remitters from banks' blanket de-risking policies

Bill English

Finance Minister Bill English admits there are no “radical solutions” to keeping money remitters in business while banks want nothing to do with them.

English has told Interest.co.nz it would be difficult for the Government to prevent banks from ditching remitters to reduce their exposures to money laundering risks, as this would counter the crack-down regulators here and around the world are making on money launderers.

“The challenge here is that the direction of the Anti-Money Laundering / Countering Financing of Terrorism (AML/CFT) Act 2008, the automatic exchange of information – the transparency around the tax system – and phase 2 of the AML Act, are sending a pretty strong signal to all financial institutions and professional groups that they will be responsible for knowing who’s paying what to who,” English says.

“So that’s creating a fairly careful, conservative environment and it would be difficult to put in place legislation that pushed against that tide. We don’t really know the answer yet.”

High Court judge: Government could intervene

The Minister makes these comments further to a High Court judge last week suggesting it’s possible for the Government to help keep remitters afloat as banks use a blanket de-risking policy to systematically close their accounts.

In his landmark decision that ruled Kiwibank was lawful in trying to close the accounts of money remitter E-Trans International Finance, Justice Heath says:

“The policy choices to be made are ones for Government. It is conceivable that they could be given effect through exemptions, guidance from a supervisor, some other existing statutory mechanism or a specific amendment to the Anti-Money Laundering Act.”

He suggests the Government could:

1. Exempt banks from meeting their usual reporting requirements when dealing with money remitters. In other words, take away the layer of responsibility banks have to ensure the transfer of funds they are soliciting through remitters, isn’t being done to buy drugs, dodge tax or finance terrorism for example. 

Justice Heath suggests banks could be made to rely on the reporting money remitters already do to the Department of Internal Affairs, as a stamp of approval the funds have gone through all the necessary AML/CFT checks.

2. Give banks guidance around how they should assess remitters’ risk profiles on a case by case basis. Justice Heath acknowledges this would be “consistent with views expressed internationally, and by the Reserve Bank and the Minister of Finance in this country”.

The RBNZ for example in January last year issued a statement saying “banks’ obligations under the AML/CFT Act require measured risk management and do not justify blanket de-risking”.

English: Our hands are tied by the international AML model

English says the Government is still “well short of considering what – if any – legislative change” it could make to address these unintended consequences of the AML/CFT Act.  

“We haven’t got to that stage,” he says.

“We are essentially importing quite high levels of regulation around financial transactions with FATF [the Financial Action Task Force international governing entity] and AML, and it is bringing high compliance costs into our system. But this is all part of maintaining reputation.

“There’s not a lot of scope for variation on the international model, without creating holes in the system.”

These comments coincide with the advice an Official Information Act request reveals Treasury has provided English. Treasury officials say:

“We believe that a shift in the international AML-CFT system would be the area most likely to impact on banks’ treatment of MTOs [money transfer operators] (which may in turn affect the cost of remittances).

“However, the speed and strength of change in the international system remains unclear and New Zealand has less leverage to shape the direction of that change, versus the ability to alter the domestic settings.”

Yet Treasury notes the Ministry of Foreign Affairs and Trade is doing something to address international pressures on banks.

“The US Treasury has requested that New Zealand officials collate any evidence from New Zealand banks of pressure they have received from correspondent banks to retain or close MTO bank accounts,” it says.

English: You have to be careful forcing institutions to take on risk

As for Justice Heath’s suggestion around coercing banks to behave in a certain way when it comes to dealing with remitters, English says: “You have to be careful about forcing institutions to take on risk they don’t want to take. We haven’t found the solution to that yet.”

English acknowledges the Government could be opening a can of worms, making AML exemptions for money remitters.

“There would also be the risk that people with ill intent would crowd into whatever exemption is available,” he says.

“Government, the Pacific governments, the World Bank have an interest in finding a way of improving the current situation.

“That’s why there’s quite a bit of effort going into it because it would be pretty difficult – particularly for the Pacific Islands and some of the South East Asian countries – if the whole remittance system shut down. No one wants to see that happen.”

The World Bank estimates the value of remittances to the Pacific to be around $470 million a year. Samoa and Tonga are among the top 10 global recipients of migrant remittances as a share of GDP.

“We’ve got a common interest in finding better solutions, although I don’t think there are radical solutions,” English says.

“Generally we’ve found banks are not that flexible. They have been keen to de-risk anything that might have reputational impact.”

English has drawn this conclusion further to asking the chief executives of Kiwibank, ANZ, Westpac, ASB and BNZ for their feedback on the handling of remitters in December last year.

Justice Heath in his judgement acknowledges the magnitude of the reputational damage banks are concerned about, explaining how the AML Act provides for both criminal and civil sanctions.

“Examples of offences in respect of which criminal proceedings may be brought include a failure to report a suspicious transaction, providing false or misleading information in connection with a suspicious transaction report, and unlawful disclosure of a suspicious transaction report,” he says.

“Any person, including a reporting entity [IE a bank], who commits any of those offences is liable to a term of imprisonment of not more than two years and to a fine not exceeding $300,000, if an individual. In the case of a body corporate, a fine of up to $5 million may be imposed. Those maximum penalties reflect the importance of the reporting requirements.”

English aware the cost of remittances from NZ has increased

English acknowledged in his correspondence to bank CEOs that the average cost of sending money from New Zealand to Samoa for example via a money transfer operator is around 7.3% compared to the bank average of 17.5%.

Treasury has also advised him: “A 2014 World Bank assessment of the New Zealand remittance market points to recent increases in remittance costs, and notes that the only major market development in recent months has been the closure of MTOs.”

Treasury says the small scale of remittances from New Zealand, relative to other parts of the world, coupled with the small number of banks in the New Zealand market, means remittance costs are already higher here than in other parts of the world.

“The global average cost of sending USD 200 is 8.91% vs 9.23% for New Zealand. Remitting money from New Zealand to the Pacific Islands is more expensive than to other destinations [Samoa (9.49%), Tonga (10.61%) and Vanuatu (12.09%)],” Treasury says.

“In developing states, including the Pacific, people outside main urban areas generally have limited access to banking services and therefore MTOs are often the only viable way of transferring money.

“In these circumstances most MTOs need to deal with their customers in cash, which also brings higher handling costs.

“Even in the case of those Pacific Islanders with bank accounts, most countries in the region do not have electronic payment systems or clearing systems. As a result interbank payments must be manually processed, which increases risks and transaction costs.”

*This article first appeared in our email for paying subscribers early on Thursday morning. See here for more details and how to subscribe.

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3 Comments

The Minister of Finance is right that blanket exemptions or forcing banks to retain remitters is not the answer, and the FATF rules appear restrictive in some ways. But these so-called unintended consequences have been known about a long time, a significant body of work is growing in this area, and there are a range of ways in which a smart regulatory system can amelirorate them. 

One of the issues I'm seeing in my research is that a focus on outputs rather than the ultimate regulatory outcomes sought is creating a 'compliance' culture in which banks and regulators look at whether the AML systems tick all the boxes of the legislation.

A failure to meet all of that results in regulatory action (eg Kiwibank?), whether or not it represented any real and material ML exposure.

Ditto many of the overseas penalty cases. Not HSBC, but a lot of others were for systems that didn't tick all the boxes. That approach is likely increasingly to prove counterproductive, as the banks hire ever more compliance staff to create ever more boxes to tick.

The risk-based system itself was supposed to enable effective and commensurate risk management. Properly implemented, that means that some stuff will get through, and regulators should be brave enough not to manage with hindsight. We haven't seen much evidence of that yet. And that's the irony, recognising the reality that some will get through even with good systems will be more effective, because the banks will be emboldened to focus on the ultimate policy objective, preventing crime, rather than (as now) increasingly focused on compliance (not getting pinged by the reguilators). All that does is ramp up their de-risking.

The de-risking process is one we've seen developing over several years. Remittances are first (for NZ, Somali remittances was our primary example a few years back, most were completely legitimate but the trail they had to take was circuitous, which 'looked' like ML). Next, the remitters themselves. Ordinary customers also end up in bizarre Catch-22 situations, in which the banks know they're legitimate but 'compliance' culture (rather than crime prevention) in banks and regulators drives behaviour that, in turn, inadvertently reduces the effectiveness of the AML regime.

So, there are answers, but it requires looking at them squarely, and identifying the ultimate policy objectives intended. Done well, we could lead the world.

In my own discussions with FATF in Paris, they know that their recommendatioons aren't perfect. NZ could help with that. Or we could sit on our hands and say it's all forced on us by FATF. The reality, of course, is that we choose how to implement it. We could do so as a compliance exercise focused on meaningless outputs. As, arguably, we have, like many other countries. Or we could refocus it as an effectiveness exercise, focused on achieving the intended outcomes.

If the latter, done well, we should see many of the 'unintended consequences' disappear, and it would certainly result in more effective crime prevention.

Wow - this is hands in the pocket stuff. The Pacific has been in a leadership position in AML and Payment Systems for most of this decade. In fact - the cross border payment systems in the pacific are faster than in New Zealand.

And in many ways, the Pacific Islands regulators have a far better supervision regime in place than most of the send countries (NZ included).

http://www.int-comp.org/insight/2015/july/13/mtos-in-the-pacific-rising-...

And the Minister is woefully ill informed in his sound-bytes. The solution is not to place risk on banks - it's to advocate the already existing deferral of risk away from banks, and to MTO operators.

Sounds to me like Bill has been drinking the bank's coolaid from a bank-provided silver cup.

In the AML act in NZ - it specifically says that banks may treat certain customers as 'low risk' - and that list includes MTOs. Blatantly. About 4 times (once you read through the links).

With efforts like this - all the minister is doing is super-charging the fear that banks have because they don't read the rules. The rulebook actually says verbatim:

"The primary purpose of ... managing intermediaries ... is to reduce the compliance burden from multiple reporting entities in a chain of transactions having the same CDD obligations. This will also ensure that the CDD obligations fall on the reporting entity best placed to identify the customers’ beneficial owners IN ANY SITUATION".

The banks are already COMPLETELY absolved by the act and its annexes. The specified action to gain this absolution is this:

"Specifically, the reporting entity (the bank) must obtain written confirmation from a senior manager of the customer (the MTO) to the effect that it (the MTO):
 has an AML/CFT programme in place (or a foreign equivalent)
 is supervised for AML/CFT purposes
 is doing CDD in accordance with the AML/CFT Act (or its foreign equivalent)
 has its principal place of business in a jurisdiction with sufficient AML/CFT systems and measures in place.

"A senior manager of a specified managing intermediary refers to a senior manager to whom a reporting entity’s
AML/CFT compliance officer must report under section 56(4) of the AML/CFT Act...If the entity is New Zealand-based, written confirmation of this is sufficient. A reporting entity (the bank) is not required to verify the written confirmation described above, unless there are reasonable grounds for the reporting entity (the bank) to doubt the adequacy or veracity of the written confirmation (by the MTO)."

How hard is that to comprehend?

So the law already states that this risk is NOT the banks risk.

Unless they close down all the MTOs.... then the risk becomes the bank risk - because the banks cannot hide behind the regulatory indemnity that the MTOs provide....

So the truth is - that if banks are really scared of the customers that send money overseas - then they should get on the phone and call their local MTO - and ask the MTO to do ALL the bank processing for them.

But the opposite is happening. And FATF (mentioned in the article) even state that banks are closing accounts for reasons that don't include AML concerns - even if that is what they are saying...

Sigh... where's the ComCom???