Gary Hughes says perhaps the AML/CFT Statutory Review is a prime opportunity to remind policy-makers that small steps can be taken to ‘right-size’ the rules for local conditions

In this second of a two part series looking at the review of our anti-money laundering rules, barrister Gary Hughes takes us further through what some of the key issues are. Part one is here.

By Gary Hughes

Many issues raised in the Consultation Paper for the Review of the AML/CFT Act  trace back to the Financial Action Task Force (“FATF”) Mutual Evaluation report, which was finalised earlier in 2021.

Amongst other things, that Evaluation called out New Zealand’s lack of a properly functioning set of rules (or regulator) for international Sanctions or weapons Proliferation Financing – so that is one large area of law certain to change.

Other areas where New Zealand rated only “Partly Compliant” with FATF recommendations indicate where the Ministry of Justice may feel most compelled to take action:

• PEPs and High Risk Countries

• Wire Transfers

• Money and Value Transfer firms

• Group-wide and branch/subsidiary controls

• DNFBPS (phase 2 entities)

• Transparency of beneficial owners

When implementing the FATF global recommendations, each nation is permitted flexibility to adjust the rules in order to best align with local law and circumstances.

Perhaps this Review is a prime opportunity to remind policy-makers that small steps can be taken then to ‘right-size’ the rules for local conditions, and to weigh up whether strict adherence to ever-changing FATF specific requirements may clash with Kiwi business needs?

What is off the discussion table (for now)?

Other important parts of New Zealand’s financial crime framework are outside the scope of this Review. The criminal money-laundering parts of the Crimes Act 1961, financing/support of terrorism offences in theTerrorism Suppression Act 2002, and the expansive asset recovery regime under the Criminal Proceeds(Recovery) Act 2009 are not included. They each raise separate concerns, but the AML/CFT issues are enough already to deal with, spread across 130 pages of things proposed in this Consultation Paper.

As mentioned, there will be many topics causing uncertainty or irritation to private sector reporting entities that have not yet made it to the table. Additionally, the Supervisors’ Guidance notes are not up for debate, even though some are contentious, or try to elevate ‘best practice’ compliance above that set out in the Act.

Key themes emerging

The Terms of Reference document may seem a boring, mechanical part of this Statutory Review. But it has clues to the embedded governmental approach, such as this statement of aspiration: “that New Zealand becomes the hardest place in the world for money laundering, terrorism financing, proliferation” etc.

As someone who was involved back in 2008-9 when the AML/CFT Act was first passed, I know that a careful balancing exercise went into the statutory purpose statement in s 3. It aims to achieve a compromise between various countervailing factors of cost, complexity, international pressure and local regulatory suffocation. Superficially, it is hard to argue with the “hardest place” goal. But, left unqualified, it could be a touchstone to add obligations regardless of commercial cost burden, or whether the goal is even attainable.

It is pleasing to see compliance issues such as Beneficial Ownership, PTRs, De-Banking, and Reliance on Third Parties, addressed in the Paper. Along with the wretched number of confusing exemptions, these all create variable levels of practical implementation for entities and discourage their staff. But if we are to improve the AML/CFT regime (rather than tinkering at the edges) the work ahead requires serious attention to:

• Reducing complexity, duplication, and difficulty finding, let alone understanding the law. This can damage a firm’s willingness to comply, undermine the collaborative purposes of the Act, and lead to more costs increasingly passed on to unhappy consumers.

• Striving for greater consistency of regulatory outcomes, including how to corral the various agencies involved, and whether all of them need be involved. The Act operates at the level of high-principles only. That means guidance notes have assumed undue importance, and often too much discretionary power falls to staff within the 3 Supervisors to re-interpret the law.

• Integrating coming technology developments – data warehousing and sharing, facial recognition, artificial intelligence, deep faking of ID, and digital identity rights which place some level of data sovereignty back with the consumer. How to harness these trends the right way is critical.

• Balancing privacy and information-sharing problems. Those same technology factors make it important to monitor the increasing demands of law enforcement agencies for more and better data. Reporting entities are often trying to discharge their ‘unpaid financial detective’ job effectively, gathering and monitoring information as required by law. But risk of leak, hacking, public interest concerns and reputational risk from privacy calamities, all tends to land on the business, not its regulator.

• As the Pandora Papers again reminds us (like the Panama and the Paradise Papers exposes before it) New Zealand still needs better mechanisms to handle risks around beneficial ownership secrecy and misuse of opaque structures. Trusts and Limited Partnerships remain in the spotlight.

Next Steps, and Resources to Help

There are an awful lot of proposals, questions for comment, and potentially controversial issues in the Paper.

Different sectors and reporting entities will want to focus on the matters most critical to their own industry.

But the big-picture topics of general application matter too, if we want an AML regime that is fit for purpose.

Time is also in short supply. The MoJ wants submissions in by 3 December 2021. Private sector experts had asked for longer, given the amount to absorb in the Paper. But MoJ is itself on a tight deadline, with end-date in s 156A of the Act to report to the Minister by end of June 2022. Working to that time-line, key dates are:

• Public consultation closes – 3 December 2021

• Analysis and selective further targeted consultation – to March 2022

• Decisions/advice to Minister on possible quick-fix Regulations – March 2022

• Advice/decisions to Minister on big legislative reforms awaiting Parliamentary time – June 2022

• A co-presentation on this Review coming up on 26–27 October at the FIU/ACAMS annual conference

• A ½ day intensive workshop led by Gary and other experts, organised by Thomson Reuters, for dates in late November (possibly virtual, possibly in person - Covid dependent).

NOTE: this is a news article, not legal advice; specific advice for your situation should always be sought.

*Gary Hughes, barrister at Akarana Chambers, specialises in regulatory investigations and cases, especially involving Commerce Commission, FMA, SFO, Police FIU and AML/CFT supervisors. Hughes is a member of the MoJ Industry Advisory Group on this statutory review project. He is Chair of the International Bar Association AML & Sanctions committee, Advisory Director to ACAMS (Australasia chapter), and an internationally-recognised AML/CFT expert.