Lawyers warn our regulators are upping the ante in their fight against money launderers and terrorists, as a big review of our AML/CFT regime looms and the issue gets more media scrutiny

If the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act hasn’t done enough to transform the way financial service providers operate, they need to brace themselves for more scrutiny.

The honeymoon period is over and it’s crunch time for New Zealand regulators, scrambling to get ready for a major review of our compliance with the global AML/CFT regime in 2020.

The review will be done by the Financial Action Task Force (FATF) - an inter-governmental policy-making body focussed on cracking down on fraudsters, tax evaders, drug traders, terrorists and others illegally transferring money around the world.

The problem, according to Minister Ellison Rudd Watts partners Lloyd Kavanagh and Aaron Lloyd, is that New Zealand scored terribly in the last review conducted in 2009.

Our regulators know they haven’t been on track towards meeting international standards, so are upping the ante now.

With the AML/CFT regime having been in place for three years, Kavanagh told those gathered at this year's Financial Markets Law Conference, New Zealand regulators are signalling they are more willing to take enforcement action for non-compliance.

“Governments get quite embarrassed if the [FATF] reports are not strong”, he says.

While back in 2009 FAFT only required regulators to “show capability”, this time around they have to “demonstrate compliance”. In other words demonstrate the law is working.

The Government is also talking tough about rolling out the so-called phase two of the AML/CFT Act, which would extend it to the likes of real estate agents, lawyers and accountants, but there's still a lot of work to do, and decisions to be made, for this to actually happen.

Kavanagh says heightened media focus around AML/CFT issues here and abroad is also putting pressure on regulators to respond - the Panama Papers saga escalating this even more.  

Lloyd says regulators are becoming less tolerant of financial service providers, or ‘reporting entities’, using under resourcing as an excuse for not complying with the AML/CFT Act.  

“In our view this is still a problem for many smaller businesses and the response that it’s too expensive to put the systems in place is not going to be acceptable with supervisors moving forward.

“The response that customers don’t like the intrusiveness of the regime is not going to be acceptable either.”

Regulator report card

Yet Kavanagh points out: “While the supervisors are undoubtedly working together, we are still seeing significant differences of emphasis and approach. All three are primarily concentrating on education and the facilitation of compliance from those reporting entities, but some supervisors have moved more strongly than others towards enforcement.”

Having caught up with New Zealand’s three AML/CFT supervisors - the Reserve Bank (RBNZ), Financial Markets Authority (FMA) and Department of Internal Affairs (DIA) - he gives them the following report card:

RBNZ: Player of the day

The reporting entities the RBNZ supervises include: banks, life insurers, and non-bank deposit takers.

Kavanagh says the RBNZ has historically been the most active supervisor, successfully issuing formal and non-formal warnings and reiterating the seriousness of the AML/CFT Act.

In fact, the RBNZ just last month updated its ‘Guidelines on AML/CFT', having sought feedback from the industry. And in January last year it released a statement warning banks they can’t use a blanket de-risking policy to get rid of an entire category of clients - namely money remitters - due to AML/CFT risk.

While the RBNZ has been focussed on larger entities, Kavanagh says it’s now more focussed on supervising smaller non-bank deposit takers, “many of whom are striving to comply but not always getting there”.

It also warns reporting entities need to pay more attention to countering the financing of terrorism. 

“We tend to think that doesn’t touch New Zealand, but they [the RBNZ] were pointing out reporting entities should be aware of the events in Paris late last year, in Brussels earlier this year, which highlight that terrorism is a global issue," Kavanagh says.

“They pointed out that given the ease of transmitting funds around the world, New Zealand reporting entities need to be aware of the risk of potentially becoming a conduit for neighbouring countries to those in conflict zones. We shouldn’t take the fact that we are at the bottom of the Pacific as meaning there’s no risk here.”

Kavanagh adds that as ‘Phase 2’ of the AML/CFT Act accelerates, the RBNZ is also likely to re-emphasise its ‘Phase 1’ responsibilities.  

FMA: Most improved

The FMA supervises issuers of securities, licensed supervisors, fund managers, brokers and custodians, financial advisers, derivatives issuers, DIMS providers and peer to peer lending and equity crowd funding service providers.

Kavanagh says the FMA is aware many of the reporting entities it takes care of are behind the banks in terms of their compliance with AML. It’s particularly acknowledged the need for securities markets participants to up their game.

While the regulator has been willing to help where possible, it’s recently shown a greater willingness to take a strong enforcement line.

For example, it last year made a public warning to a niche investment bank, MSL Capital Markets, for not doing a compulsory AML audit the previous year. And in May it issued Craigs Investment Partners a formal warning for not doing enough due diligence on one of its clients.

DIA: Extra coaching needed

The DIA supervises casinos, non-deposit taking lenders, money changers, money remitters, payroll remitters, debt collectors, factors, financial leasors, safe deposit box vaults, non-bank credit card providers, stored value card providers and cash transporters.

Kavanagh says: “They’re conscious they’ve been less active in enforcement to date, compared to the other supervisors and have not publicly taken enforcement action, despite having the most diverse and frankly most difficult sectors to supervise.”

Yet he says the DIA has indicated it will start taking more enforcement action within the next three to six months, with “pecuniary penalties” potentially being on the table.

As the default regulator for AML/CFT, Kavanagh points out the DIA is likely to be the regulator that picks up any new entrants to the regime. However the Government remains tight-lipped on whether a new regulator will be created or the DIA simply beefed up, once Phase 2 is expected to kick in next year.

The environment is becoming more litigious

Lloyd maintains both regulators and reporting entities are increasingly willing to settle any gripes they have with the AML/CFT regime in court.

“This is reflective, we think, of an increasingly litigious environment that’s likely to continue, in part because of the regulator attitudes, and in part because of the significance of some of these [precedent-setting court] decisions.”

For example, the Court of Appeal in May backed the FMA's move to deregister Luigi Wewege’s Vivier & Co from the Financial Service Providers Register, on the basis the company was not providing services to New Zealand.  

The High Court in June also backed Kiwibank in its move to close the accounts of one of its money remittance clients, E-Trans International, as it deemed the company too risky under the AML/CFT.

“There is a real and genuine emphasis on de-risking, and the obligation to de-risk, being created by the Act. Both the FMA case and the money remitter case have at their core a concern to ensure that regulators and reporting entities are free to respond to AML/CFT risks as they see fit,” Lloyd says.

He says the best thing reporting entities can do is keep lines of communication with their supervisors open. Being principles-based, the New Zealand regime still has a number of ambiguities, so it is essential reporting entities understand what their supervisors expect of them.

“Gone are the days of where we think it’s better to lie in hiding and hope they don’t notice you.”

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7 Comments

I still can't see how any regulations are going to reduce money laundering in NZ?

Even if the Government is also talking tough about rolling out the so-called phase two of the AML/CFT Act, which would extend it to the likes of real estate agents, lawyers and accountants.

There are so may flaws in the AML/CFT Act that are big enough to drive a bus through it.
So for instance are all banks present in NZ going to conform to the new AML or will certain international banks be exempt? We know that the New Zealand and Australian banks will co-operate but what about the new international banks that have recently setup here or at least in Auckland?

And trusting Estate Agents to follow the AML regulations is laughable, considering how regularly they appear in the press about some new corrupt sales scheme and how they've been found out. It's like giving the mice keys to the pantry and then wondering where all the cheese has gone!

And that's just for starters.

It will come down to enforcement and penalties. If a bank wants to operate here they must abide by our rules, all rules, including AML legislation. And as for real estate agents, follow a few, sting them and the company and see if the rest tow the line. Everyone can dodge AML at any point, but it depends on how strict they take compliance and if they want to risk non-compliance. Generally if fines and penalties are of an extreme nature that to ignore the rules would mean almost ruin, then most will fall in to line.

My research on AML effectiveness is finding a series of gaps many of which have not traditionally been considered by countries' policymakers when implementing FATF recommendations in the usual way to meet 'compliance' for forthcoming mutual evaluations.

The irony of a divergence between compliance and effectiveness is that achieving the former doesn't necessarily have the same impact on effectiveness. Other countries have found that even having all the rules in place doesn't achieve the results they'd hoped for in terms of effectiveness. They get the big tick from FATF, but organised crime groups continue financing their operations seemingly undeterred.

Even aside from a series of identifiable effectiveness gaps in relation to FATF recommendations themselves (and domestic legislation based on it), which represent some 'easy' fixes to boost effectiveness, it seems that application of the usual rules-based drafting methodology with which policymakers are familiar may also play a part in helping move a country towards compliance without necessarily having the same impact on effectiveness.

In one sense the choice sounds simple. (We can have the rules, or we can formulate them to work more effectively). But actually getting to the latter seems to need a different mindset than most countries have adopted so far in this space. That's the hard bit, but there are some signs of change in some countries and globally. For many of those I know behind the scenes, the passion to make a difference is certainly there. If they're permitted actually to do so, NZ could be a world leader, because these are issues that other countries are grappling with too.

Addressing the gap between compliance and effectiveness offers biggest bang for buck. In a practical sense, this suggests not putting all our eggs into the increasingly heavy handed application of the rules basket, as ensuring the rules themselves are better tuned towards effectiveness.

the scheme has been going for a number of years now

how many prosecutions have there been?

I cant recall seeing any in the Press, apart from Kiwibank being slapped over the wrist with a wet bus ticket, and KB taking a position over a Remitter resulting in legal action

Anything else?

Under AML/CFT (effective from 2013) Kiwibank, & Craigs and MSL warnings.

Under FTRA ('AML-lite', in place since 1996, & which still applies to lawyers, accountants, real estate agents), two lawyers were prosecuted for failing to file suspicious transaction reports, and (little known) the owner of an accountancy business was jailed for money laundering.

I await the poor guy/gal sending money home to Vanuatu getting put through the wringer, cause that is all this BS will end up targeting. The little guy/gal sending some money back to family.
My partner sends money back to the US to support her family. I bet we end up being targeted. If we do you will hear about it first.