Govt to stick with 3 anti-money laundering supervisors as it moves to drag real estate agents, lawyers, accountants and others into the anti-money laundering net

The Government has rejected the idea of introducing a single Australian-style supervisor as it moves to extend anti-money laundering laws to real estate agents, lawyers, accountants, the New Zealand Racing Board and high-value goods dealers.

Rather, the Government plans to retain the existing anti-money laundering supervision model, which features the Reserve Bank (RBNZ), Financial Markets Authority (FMA) and Department of Internal Affairs (DIA). The DIA will take on supervision for compliance by real estate agents, lawyers, conveyancers, accountants and businesses that trade in high value goods such as jewellery, precious metals, precious stones, watches, motor vehicles, boats, art or antiquities.

The Government has also rejected the idea that industry bodies such as the New Zealand Law Society could supervise their own industry as it moves to introduce so-called phase two of the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act).

"Retaining the existing model supports consistent supervision by limiting the number of supervisors. Cabinet proposed not to proceed with a single supervisor to cover all sectors. Establishing a new, single supervisor would be more costly in the short term and would require significant time to build the expertise, systems and structures required for effective supervision. This option would also not leverage the existing relationships the current supervisors have with their sectors," a Ministry of Justice information paper says.

"Having multiple agency supervision by self-regulatory bodies isn’t considered appropriate in New Zealand. Although self-regulatory bodies could utilise the existing relationships they have with their entities, they have no experience in AML/CFT supervision and would need to build capability to ensure effective, risk-based, proactive monitoring and enforcement. Establishing a wider group of supervisors also increases the risk of inconsistency across supervisors. This risk has been realised in the UK where such an approach has led to inconsistent levels of supervision between sectors." 

Justice Minister Amy Adams says the Government’s plans to introduce the AML/CFT Amendment Bill early next year and have it passed by mid-2017. Adams released an exposure draft of the Bill, and a phase two information paper on Tuesday.

Six months for lawyers, 24 months for the NZ Racing Board

It's proposed that lawyers and conveyancers will have to comply with the amendment Act six months after it's passed, accountants will get 12 months to comply. Real estate agents, who will be covered by the Act when they represent either a seller or buyer in the sale or purchase of real estate, will get 18 months to comply. The New Zealand Racing Board will also get 18 months, and high value dealers will get 24 months.

The Police Financial Intelligence Unit (FIU) last year noted real estate remains an attractive option for money launderers, both in the layering and integrating of the proceeds of crime. Further, real estate was "increasingly becoming an international business which creates the opportunity for complex transactions, and to layer real estate deals across many jurisdictions."

The information paper notes racing and sports betting is illegal in NZ unless offered by the NZ Racing Board under the Racing Act 2003. Although the Board already has limited AML/CFT obligations under the Financial Transactions Reporting Act 1996, it currently has a ministerial exemption from the AML/CFT Act which will expire when Phase 2 comes into force. The Board would be covered by the Act when it operates accounts on behalf of customers or carries out large cash transactions over $10,000.

Meanwhile, businesses that trade in high value goods will only be covered by the Act if they: trade in jewellery, precious metals, precious stones, watches, motor vehicles, boats, art or antiquities, and accept cash of $15,000 or more for single transactions or a series of related transactions. 

'A very ambitious timetable'

AML expert Ron Pol suggests the Government is pursuing a very ambitious policy development timetable that's perhaps too ambitious. Pol says many businesses will be unable to prepare their systems or train staff in time. Although there are "many sensible elements" to the proposals, Pol says some of the work being done by the Police and the Ministry of Business, Innovation & Employment "at the AML coalface" is well ahead of the policy settings. 

"So the new rules perhaps represent a missed opportunity to capitalise on that leadership, and for New Zealand to help other countries, and itself, achieve significantly better outcomes, beyond the basic output measures and ‘tick-box’ compliance of incrementally adding a few more rules every few years," says Pol. (There are longer, more detailed comments from Pol at the foot of this article).

In a press release Adams says $1.3 billion is laundered each year by criminals. She also says the Government commissioned EY to provide a report on compliance costs, which shows the AML/CFT Act reforms "may" impose up to $1.6 billion over ten years on New Zealanders. The information paper says initial estimates suggest the maximum cost to business could be $1.6 billion over a decade.

“Money laundering is the life-blood of profit-motivated crime. It allows criminals to fund their lifestyle and it fuels re-investment in criminal ventures,” says Adams.

“Our goal is to make sure the regime is as effective as possible, while minimising the impact on businesses and their customers. We need to address the real risks money laundering and terrorist financing pose, while also ensuring compliance costs are as low as possible."

'Protect and help New Zealand live up to its reputation'

Adams says consultation on the exposure draft will give affected sectors, businesses and New Zealanders with the chance to have their say.

"It is estimated that around $1.3 billion from the proceeds of fraud and drug offending is laundered each year in New Zealand. “These reforms alone have the potential to disrupt up to $1.7 billion in fraud and drug crime over the next decade. This will mean less crime and fewer victims. Estimates also suggest it may prevent up to $5 billion in broader criminal activity and reduce about $800 million in social harm related to the illegal drug trade," says Adams.

“The reforms will also protect and help New Zealand live up to its reputation as being corruption free and a good place to do business. They will bring us into line with international standards, and help prevent New Zealand becoming a target for overseas money launderers and terrorist financers."

The information paper says a statutory review of the AML/CFT Act will take place after New Zealand's AML/CFT regime is evaluated by international body the Financial Action Task Force, which is expected to take place in 2020.

The Bill also includes a series of other changes to the AML/CFT regime. Among these is a proposal to broaden suspicious transaction reporting requirements to include "suspicious activities."

"Reporting of suspicious transactions is already part of the AML/CFT regime. However, there are limitations. Currently, important information isn’t being reported to the Police Financial Intelligence Unit (FIU) because it’s not directly related to a transaction. For example, a business may suspect a customer is seeking to establish trusts or company structures in order to launder money or evade tax. But if no underlying transaction has been carried out yet, currently the business doesn’t have to report this to the FIU. This change will affect both Phase 1 and Phase 2 reporting entities. The draft amendments would require businesses to report suspicious activities related to the services covered by the AML/CFT laws. For example, where a business offers money remittance and is also a supermarket, it should only be required to report suspicious transactions or activities related to money remittance," the information paper says.

Phase one of the AML/CFT Act took effect in 2013. Under the Act as it currently stands, the RBNZ supervises compliance by banks, life insurers, and non-bank deposit takers. The FMA supervises issuers of securities, trustee corporations, futures dealers, collective investment schemes, brokers and financial advisers. And the DIA supervises casinos, money changers, trust and company service providers, and what are described as "reporting entities" not covered by the RBNZ and FMA.

Consultation on the Government's phase two plans is open until 5pm on Friday, January 27.

Ron Pol's comments

Below is a detailed initial response to the Government's proposals from Ron Pol. Formerly a lawyer in New Zealand and the UK, Pol is a crime prevention and money laundering specialist with AMLassurance.com. He is completing a political science doctorate on money laundering, crime prevention and policy effectiveness, with particular emphasis on more effective ways to cut the money laundering risks of lawyers, accountants and real estate agents. Pol has written several articles for interest.co.nz, which can be found here.

They are meeting a very ambitious policy development timetable. Perhaps too ambitious in some respects. The simple reality is that many businesses will be unable to prepare their systems or train staff in time. Eighteen months for real estate agents is ambitious, six months for lawyers means that a great many will likely be completely unprepared, and many others poorly prepared, to meet new obligations. A timetable that ignores reality simply guarantees non-compliance. 

There are, however, many sensible elements to the proposals, including aligning legal professional privilege provisions with its scope elsewhere. That should help reduce confusion, argument and unnecessary cost. 

Likewise, expanding information sharing capabilities and broadening the reporting requirement from suspicious transactions to suspicious activities. My doctoral research, which uncovered ways that lawyers, accountants and real estate agents have been used by criminals to launder the proceeds of serious crime, revealed cases where professionals faced situations that might not be classified ‘transactions’ within the specific lists of activities covered by the Financial Transactions Reporting Act. That means there may have been no obligation (at least under that legislation) to report suspicious activities, even in some cases where professionals’ services were used to help facilitate large importations of methamphetamine. Closing the ‘transactions’ versus ‘activities’ loophole should help. 

The evidence of how professionals have been used to facilitate financial transactions involving the proceeds of serious crime also revealed criminals compartmentalising knowledge of their activities between the various professionals involved in each transaction. It also showed ‘displacement’ effects, where criminals used professionals in different ways than before, evidently trying not to trigger reporting obligations. The list of services proposed to be covered has been extended, so criminals not paying attention to these changes may be caught out. Criminals who know how to read, however, might be expected to continue adjusting how they use professionals, just as the evidence shows they have been doing for the past two decades, in slightly different ways less likely to trigger reporting obligations. 

In that regard, a few hours with the evidence-base should reveal any gaps in the present proposals that criminals have already used, and others they might be able to move into. Six months won’t be long enough for most lawyers to be ready, but it’s plenty of time for criminal networks to adjust their methods, a technique that the New Zealand evidence reveals they’re already familiar with. 

Overall, the New Zealand proposal fills some gaps, but doesn’t address any of the fundamental issues that policymakers in other countries have started to address. An obvious area is retaining the fragmented supervision of multiple supervisors. More fundamentally, from a policy effectiveness perspective, is that the proposals continue the “incremental approach” (of every few years filling more gaps by adding businesses and services covered, and doing enough to meet the latest FATF rules) that is regarded simply “no longer appropriate” by parliamentarians overseas.  

The proposals are notably unimaginative in that regard, and seemingly ignore contemporary and emerging anti-money laundering best practices. Broadly speaking, in addition to filling a few of the most obvious gaps, the proposals follow the old approach of doing enough to meet international standards, without thinking too much about the emerging policy effectiveness and outcomes-focused practices. The new approach doesn’t just ask ‘do we have rules’ or ‘do they meet international standards’? It also asks ‘do they work?’ and focuses less on the ‘outputs’ of a set of rules, against which bureaucrats can tick boxes. It asks whether any new rules will materially and substantially improve New Zealand’s capacity to detect and deter crime. On that front, the new rules should help, a little, but they risk achieving an underwhelming policy objective, at considerable cost, notwithstanding some cost-reduction rhetoric. 

That’s a shame, because against some of the best available international comparators, in a book due out next year, it seems that on some key measures New Zealand already fares better than most countries, in many cases very considerably better. Quite simply, it seems, because some of the work being done by Police and MBIE at the anti-money laundering coalface is well ahead of the policy settings. So the new rules perhaps represent a missed opportunity to capitalise on that leadership, and for New Zealand to help other countries, and itself, achieve significantly better outcomes, beyond the basic output measures and ‘tick-box’ compliance of incrementally adding a few more rules every few years.

We welcome your help to improve our coverage of this issue. Any examples or experiences to relate? Any links to other news, data or research to shed more light on this? Any insight or views on what might happen next or what should happen next? Any errors to correct?

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39 Comments

Tortoises are not a threatened species then.

Why go fast when you can go slow

Why go fast when you have an election next year. Leaders lead so what does that make National?

Why would Real Estate Agents get longer to implement than Lawyers and Accountants?

First - it's not exactly a surprise - they have known for years this was coming

Second - RE agents handling property transactions handle far less transactions above $10,000 than Lawyers and Accountants

Third - nearly every property transaction involves parallel transactions with 2 lawyers in some way (buyers lawyer, sellers lawyer) - so it's not as if RE agents have to do more work - in fact there is duplication with the possibility of load-sharing

@otherguys , I think you are making some assumptions that may be flawed . The RE agents often take deposits of between 10% and 20% , and sometimes the full purchase price in cash , so its very important that we know where the money has come from .

yep, and more often it's not about cash. The crims know these days that will stand out. So they use different methods. And those who do use cash are prepared with explanations, that sometimes a single question would reveal false.

I agree twootherguys, a differentiated implementation period might make sense to spread the load to help out the consultants. At least two CA firms are helping MOJ, but I'm no conspiracy theorist, so I'm sure there's a better reason, but I can't think of it offhand.

My doctoral research developed a methodology to identify, examine and assess property transactions where professionals faciliated financial transactions with criminal proceeds. It revealed an interesting divergence between information visible to each of multiple facilitators involved (typically 3-4).

Make work

Everything being equal, one single property transaction will go through the hands of

(a) Buyer's bank
(b) Buyer's lawyer
(c) Real Estate Agent
(d) RE agents bank for deposit
(e) Vendor's Lawyer
(f) Vendor's Bank

That's 3 banks, 2 Lawyers and 1 RE agent - each reporting separately to their own regulator

You are right to a point - but there are anecdotal evidence to suggest that some purchasers are turning up with cash - actually cash - to buy houses. No CDD is done and no source of wealth checks.

Can just picture granny getting around with her wheely-walker and a sack full of $500,000 in notes

AK79, There's now empirical evidence too

and your point is? AML is carried out by the Bank, why not the professional bodies - the lawyers and accountants. These groups are Professionals have ethical standards to abide by and are up to their eyeballs in the transaction. why they have been let off to this point is beyond me.

Wow, this stretches the imagination. How is a real estate agent going to identify a criminal laundering money?
If the agent asks nicely, will the criminal break down and reveal all?
The agent will presumably ask the client to fill out a questionnaire, Won't criminals just lie?
Surely the tax department is best equipped to means test property ownership?

Not a chance , there is so much money that in being "gamed" through bypassing forex rules in China , that they have lost control of it , and its unstoppable

All of that money is crooked , its either the CCP elite , or business that are entering transfer pricing arrangements thereby avoiding tax in China and avoiding paying full customs duties and GST here and in Oz .

Then there are P2P arrangements to get money out of China , and all manner of methods and ways to game the system

yey, and often corrupt money is never 'in' China, and thus much easier to invest globally. Say, manager responsible for approving coal fired power station contract. Would be foolish to have $10m bribe paid into local bank account. Let alone due to the hassle getting it out. It's presence locally just marks him out. If paid directly into accounts elsewhere, or into real estate in London, Vancouver, Auckland, it was never in his local account, never had to bypass domestic controls, and if local professionals are looking for briefcases full of cash, they'll miss what's under their noses so it's an easy way to park criminal wealth and make capital gains, never mind what effect it might have on local markets.

There are examples where agents can identify it, although agents often do have less visibility than other professionals. Including outside the 'generic' stuff. For example, if a client says not interested in any houses with indoor meters, and not finding any, buys a house for his grow operation and soon after gets electrician in to move meter outside (lest meter reader stumble on house full of cannabis plants). One indicator isn't (usually) sufficient, and the agent may not have noticed the electrician's van right afterwards, but some of the evidence is fairly stark, especially when the red-flag indicators start to pile up.

Ron: Given that, shouldn't electricians and power co's be pulled into the net also

That's a logical extension of the current model. Counter-intuitively, there's a good argument for not casting the AML/CFT net over any legitimate businesses, at least not the way its done now, if policy effectiveness (actually achieving policy outcomes) is the objective. A side-effect  would be considerably less cost for all concerned.

If average Joe Bloggs goes into a bank to buy foreign currency over $1000 he is put thru the ringer about time the big boys played the game too.

yep, a by-product of a regulatory model enforcing tick-box compliance

THERE IS AN EASY SOLUTION ............Real Estate agents should not receipt proceeds or deposits for the sale of any property .

They should simply lodge all funds for property sales in a trust Account with a reputable law firm that specializes in property law , and shift the AML compliance to the settling solicitors .

PROBLEM SOLVED

Solicitors will indeed often have more info, unavailable to agent (so quite fair enough if agent not see some red flags), but if the intention is to detect/deter serious crime affecting our communities [many cases involve methamphetamine, in very large amounts], the evidence shows that agents can have a valuable part to play. 

Na, they'll simply add another step.. Such as start a cash based business and cash sales go through the roof. Ever wondered how some of these little kiosk shops make a living, paying $50k plus to lease a space in a mall? Takes longer, but does the trick.

But then how can the Agents deduct their commission from the deposit?

FYI, I've now updated this article with some comments from Ron Pol.

Sometimes I wonder if it wouldn't be simpler and a better option for all Kiwis if we just handed the keys to the country , to Australia ...

... and tell them , " Here , you lot have a go .... stuffed if we know how to run New Zealand properly " ....

You are onto it - Far better option

Outsourcing to ASIC, and AUSTRAC, and APRA has been suggested before

Beats me why NZ has to keep trying to invent the wheel when AU has already done it.

I can't comment on the general sentiment, but ironically on ML this is an area where in some respects NZ is ahead. Not, as many might think on policy just because we're doing T2 while Aussies haven't yet. That's illusory. Look at UK. Gold-plated for years. All professions. But crunch the figures and any effectiveness premium? Nada. But the number crunching does show NZ, curiously, ahead of the pack on coal-face stuff. But when policymakers in gilded theoretical towers offer old-style incremental tinkering that sprays out vast cost, it's a lead that may not last long. Other countries have started to think more imaginatively about ways to actually achieve ambitious crime prevention policy objectives, beyond ambitious rule generation activity.

message in a bottle strategy,appears like they are doing something but in effect for the RE the AML/CFT will be ATE (after the election.)

Are not the Lawyers and Real estate agents a bit downstream? The banks must be better placed to verifiy good money?

Exactly. The bank's own compliance departments should be able to pick up most of this stuff.
Under the "Know the Customer" mantra.

For basic stuff, such as crims depositing wads of oddly smelling $20 bills, for sure. But for higher-order criminal transactions, often requiring the services of professional facilitators, the dynamics shift. The banks process financial transactions. Amongst millions of transactions, a few may be criminal. They may see it for fleeting milliseconds. Sometimes its amazing they spot anything at all. Lawyers, accountants and real estate agents involvement, often over several weeks or many months, is involved with designing, structuring and implementing those financial transactions banks see only fleetingly. They are often duped too of course, and sometimes red-flags aren't apparent to them either, but with the bigger deals, professional enablers are typically much closer to the ultimate client, and have far more visibility of, or the capacity to question unusual activity, than banks. And, oftentimes, the professional facilitators are the ones instructing banks to process the transaction, further shielding banks' visibility from what might really be going on.

Ok i can see that... still sounds very haphazard and dont ask, dont tell type thing... If banks are processing dirty money, are they not an accomplice to the crime?

Banks are not a moral compass.
They are a business.
Every opportunity they have, they clip the ticket.

Yep you are right and they have been fined for doing so...

http://www.bbc.co.uk/news/business-20673466
HSBC has confirmed it is to pay US authorities $1.9bn (£1.2bn) in a settlement over money laundering, the largest paid in such a case.

Hi Camel's back, sometimes, yes, if banks, professionals, etc are exposed to obvious red flags, and choose not to ask, it can be 'wilful blindness'. In many countries, that's reckless disregard, and deemed knowledge of the criminality that their actions (and omissions, not asking in the face of obvious red flags) enable.

But, oftentimes, there may be some red flags, but not enough to raise suspicions by any reasonable person/bank/professional. They may have been unwittingly used, and ought not be tarred with being an accomplice.

Likewise, those occasions there are no red flag indicators visible, and they've just been conned by criminals. They may have facilitated transactions with criminal proceeds, but no liability should be imposed if they genuinely saw nothing because there really was nothing visible to anyone in their position.

The real issue then is those actually complicit (knowingly involved) and those wilfully blind (deliberately not asking questions in the face of obvious red flags). So, those who 'don't ask, don't tell' may be liable in this camp, whether as party or as failure of AML obligations. Joe Public rightly points out HSBC. But not those who (reasonably) fail to recognise the significance of fewer, less obvious, red flag indicators.

Thank you! I just get the feeling that nobody (regulators) are asking them (the banks) to look properly. Sort of like a house inspector who stands on the street and says "she looks all good mate" Be nice to see some due diligence.

You've hit one of the most difficult nails squarely on the head. The regulators are genuine. They want to make sure the banks look properly. Ditto the banks. They want to too.

Trouble is, when the regulators ping banks for not having quite as many tick-boxes that look just like everyone else's tick-boxes, it generates a hiring fenzy, and a veritable cascade of tick-box generators, tick-box tickers, tick-box auditors, and a circle back to more tick-box creators. And the crims are laughing.

I'm privileged to help train investigators, from here and overseas. I usually start by saying that if I wanted to launder proceeds of serious crime, it just depends how much I have each year. If a few million, tens of millions, or hundreds of millions, there's a method for each, pretty much impossible to detect under current settings (none of which affected much by the proposals, so my slides hardly need tweaking), as long as I dont make any dumb mistakes.

And the more tick-box generating regulatory action taking place, the more 'noise' it generates, distracting banks, regulators, professional facilitators, etc, making it a little easier to slip through the holes already there.

The trick, it seems to me, is to create less noise that's music to my (criminal impersonator) ears and actually nab those using methods obvious to anyone willing to scratch an admittedly gritty surface that some bureacrats seem unwilling to sully themselves with, to actually be effective. In this world, gritty is not something to be insulated from by flashy suits bearing eye-wateringly large invoices that put most of our domestic crims to shame, in a league matched only by the biggest cartels. Gritty reality is part of the territory. The cops get that. The banks sometimes glimpse it. Regulators and policymakers might benefit from dipping into it too, just occasionally. And if they did, I'd be delighted to retire some of my opening slides, as gaping holes of historical interest only. Apart from a minor tweak in one, those slides are still safe for now.

Good news I guess least they government will monitor and they haven't been allowed to self govern.