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Plugging the anti-money laundering loophole should be the key plank of combating misuse of the Financial Service Providers Register

Plugging the anti-money laundering loophole should be the key plank of combating misuse of the Financial Service Providers Register

This article is a submission to the Ministry of Business, Innovation & Employment (MBIE) on the misuse of New Zealand's Financial Service Providers Register. MBIE called for submissions on options it set out to tackle this misuse by January 29.

By Gareth Vaughan

Any government crackdown on abuse of New Zealand's Financial Service Providers Register (FSPR) simply must plug the anti-money laundering law loophole that allows companies to register in New Zealand and operate overseas without being supervised for compliance with our anti-money laundering laws. 

This is a no brainer and it's very disappointing not to see this issue specifically addressed in the six options outlined by the Ministry of Business, Innovation & Employment (MBIE) as potential ways to tackle abuse of the FSPR. 

That said, it's heartening to see the Government finally appears to be moving with urgency to tackle the stain on NZ's international reputation caused by the FSPR.  

MBIE's options paper does encouragingly say it's working with the Ministry of Justice looking at how the preferred option settled upon would work alongside anti-money laundering and countering financing of terrorism legislation, and whether any changes to the Anti-Money Laundering and Countering the Financing of Terrorism Act (AML/CFT Act) would help resolve misuse issues. 

I am concerned however, that by not being a specific option itself, plugging the hole in the anti-money laundering law isn't being prioritised highly enough. As the situation stands, there's a massive arbitrage opportunity for NZ registered, but overseas operating entities. 

The problem

The problem is that the existing territorial guidance for the AML/CFT Act means NZ registered financial services providers that operate overseas but not within NZ, aren't supervised by our regulators for compliance with the AML/CFT Act. The guidance says, "An entity incorporated or formed in New Zealand, which carries on financial activities wholly outside New Zealand, will not be a 'reporting entity' under the AML/CFT Act." 

In articles I have quoted NZ's AML/CFT Act supervisors specifically saying locally registered but offshore operating financial service providers such as Breder Suasso and Vivier and Company are not supervised for compliance with the AML/CFT Act. (The latter denies allegations made in a programme by Irish broadcaster RTE linking it to tax fraud and money laundering. Despite Vivier's promise of legal action RTE’s programme remains available on its website).  

Ironically one of the purposes of the Financial Service Providers Act is to help NZ meet its Financial Action Task Force (FATF) obligations. FATF is an inter-governmental body established by the Group of Seven that sets international policies and standards on anti-money laundering and combating terrorist financing. How can NZ possibly be meeting FATF obligations when dozens, if not hundreds, of NZ registered financial service providers are operating overseas without needing to comply with our AML/CFT Act? 

These financial services providers are promoting themselves overseas as NZ registered, NZ companies, and in some cases NZ regulated even though the latter claim simply isn’t true. 

To give some idea of the scale of money laundering globally, the United Nations estimates the volume of money laundered in one year is between 2% and 5% of global Gross Domestic Product, or US$800 billion to US$2 trillion. I outlined my views on NZ's significant potential as a money laundering jurisdiction here

NZ bank accounts as backstops

In the first instance the Ministry of Justice, which leads the development of NZ's AML/CFT policy, and the three entities that supervise compliance with the AML/CFT Act being the Reserve Bank, Financial Markets Authority (FMA) and Department of Internal Affairs, simply must get their heads together, agree on and issue updated territorial guidance that spells out any entity registered as a NZ financial service provider must comply with the AML/CFT Act even if its customers are overseas. And the supervisors must vigorously apply the laws.  

Additionally, as a backstop, make NZ registered financial service providers use NZ banks. The latter simply must take their AML/CFT Act compliance seriously and are overseen for compliance by the Reserve Bank.

This, I believe, is the starting point for fixing abuse of the FSPR, the extent of which I highlighted in my previous submission to MBIE here, and is starkly demonstrated in these subsequent articles about Euro Forex, which misled its mainly Chinese clients into believing it was a fully fledged licensed and regulated NZ financial service provider, here and here. Euro Forex is now under investigation by the City of London Police.  

In terms of the actual options suggested by MBIE in the options paper they are:

Option 1: Include stronger registration requirements

Option 2: Amend the grounds for de-registration

Option 3: Amend the territorial scope of the legislation to require a legitimate connection to New Zealand

Option 4: Require trust and company service providers to register

Option 5: Limit public access to all or parts of the FSP Register

Option 6: Convert the current FSP Register into a non-public notification list 

(Full detail on the six options can be found here).

'No' to restricting public access

Below is my take on the options in reverse order. 

I don't want to see options five and six implemented, even if they may have some merit in tackling misuse. Limiting public access and/or making the FSPR non-public smacks of being the wrong thing to do in a democracy where freedom of information must remain paramount. It could potentially also open a can of worms leading to allegations of secretive bureaucratic deals with questionable companies. Sunlight is the best disinfectant. 

On the other hand option four has much merit. It's past time trust and company service providers were forced to take responsibility for their actions. I support aligning registration obligations with the AML/CFT Act with trust and company service providers “reporting entities”, given they currently act as directors and nominee shareholders providing anonymous registration for overseas clients.

As noted in my previous submission, a 2012 Cabinet paper said the Companies Office monitored 77 trust and company service providers actively working with NZ registered, but overseas operating companies. These are located all around the world as highlighted by the Israel-based Archer Consultants, which touted NZ registration for online forex and binary options companies as its "flagship solution." 

Why not also make it that any trust and company service providers who want to provide the service of registering NZ companies must also be based in NZ? 

Beware of complexity

Option three, proposing that NZ registered financial service providers must have customers in NZ or must carry on the business of providing a financial service here, is potentially problematic. How many NZ customers would they require? Would one or two be enough? Could they be wholesale or retail customers? And what might such a rule mean for a bona fide fund manager, for example, who solely wanted to provide services to overseas clients?  

The risk is option three may create too much complexity ripe for exploitation. 

And I'm not in favour of option two. Whilst the FMA's power to direct the Registrar of Companies to remove companies from the FSPR where it's likely the company is giving a false or misleading impression about the extent to which it’s regulated in NZ follows a painstaking natural justice process, it’s the correct path for a self-respecting democracy. The onus is on the FMA to get it right when it moves to deregister a company, something highlighted in the regulator's to be appealed court defeat to Vivier.

How about a black list? 

Lastly to option one. I am in favour of tougher registration requirements. However, making applicants confirm and provide proof they're licensed and/or properly supervised in their home jurisdiction and in any other jurisdictions they want to offer services in, could create banana skins. Not all jurisdictions have reliable regulators up to the standards we should require. A black list of jurisdictions could be drawn up, meaning if an applicant was based in a black listed location or wanted to provide services to it, the applicant would be denied NZ registration. FATF has such a list, which would be a good starting point. 

Another factor to consider is that companies currently registered as NZ financial service providers are operating overseas in a range of different languages including Spanish, Chinese and Arabic that few, if any, NZ bureaucrats may speak or read. Therefore a rule could be introduced so all information about a registered NZ financial service provider must be available in English, including a full and proper English language version of any website.

Ultimately there's probably no silver bullet to solve the problem of abuse of the FSPR. However, I believe the steps endorsed above would see NZ able to combat this misuse without having one hand tied behind our collective back, which is certainly how things currently stand.

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What does this mean for stopping illegal money from China?

Fine details of 'illegal money' have different interpretations in different jurisdiction plus it is always easy to tweak or sugar coating the layer of the capital especially coming from China.

Track record is, sometime during the journey, from departing China, to landing in Auckland it becomes miraculously squeaky clean - welcomed with open arms and blind eyes - who cares

Thanks to the well established good rapport between Private wealth managers and their high net-worth clients!

Excellent write up Gareth. We have a problem with our Bureaucrats who want the salary but won't do the hard stuff. We are more used to that than we should be.
That said it doesn't seem hard. Why would we even bother to provide this service at all to people who have no connection in New Zealand, and indeed no interest at all. They have no rights at all actually.

Where would HSBC fit in this loop closure endeavour?

After all, it was only three years ago that HSBC was hit with a massive $1.9 billion fine for laundering around $1 billion on behalf of some of the world’s most vicious gangsters.

According to US Assistant Attorney General Lanny Breuer, "from 2006 to 2010, the Sinaloa cartel in Mexico, the Norte del Valle cartel in Colombia, and other drug traffickers laundered at least $881 million in illegal narcotics trafficking proceeds through HSBC Bank USA. These traffickers didn't have to try very hard."

Given that this has all now been established in court, were the rule of law actually applied, the bank’s Charter would have been revoked, and its directors (including former Tory Trade Minister Stephen Green) would now be in jail. The reason this did not happen is that the sheer size of HSBC’s operations make it too strategically important to close down.

“Had the US authorities decided to press charges”, explained Assistant Attorney General Lenny Breuer, “HSBC would almost certainly have lost its banking license in the US, the future of the institution would have been under threat and the entire banking system would have been destabilised.” Read more

The process of destabilisation is well underway. Read more

Still, closing HSBC down would create huge benefit for the whole system. And closing them down would create ripples, but not as much as HSBC would claim. The other financial services would happily step up and do the job. Few months down the track they would be forgotten.

This is crazy, haven't they come to understand that rogue traders registered in NZ, and using that credential, but operating without our regulators oversight reflects badly on our entire national reputation?!! This makes us look entirely corrupt.

And SH's piece above, it is clear that the US hasn't learned the lessons about vested interests and the "too big to fail" syndrome as well. Corporates running the world, not the regulators representing the people.

In response to SpaceX. It's interesting too after a brief cooling period there are now predictions in this morning’s Herald that NZ’s property market is about "to go bananas" with a big influx of Chinese money expected from around mid year. If so, this fiddling at the edges of financial services registration won't do much to close the most obvious loopholes.

And at least in a relative sense, the problem might just get worse (not a good look when NZ is due to be evaluated by FATF, much as murray86 noted). This is because if as might be expected China's tightening capital controls are more effective against legitimately earned money leaving the country, it could have the effect of lifting the proportion of criminal funds coming into New Zealand.

So, a wealthy businesswoman may find it more difficult to parcel up smaller amounts in the names of friends and family members, for example to buy a house or two in Auckland. Criminal funds, however, such as the profits of drug cartels and corrupt officials, will likely continue to bypass capital controls in much the same ways they always have.

And if the New York, Miami, Vancouver and London markets are getting more difficult because those authorities are finally starting to get serious, it's still pretty easy to buy a few dozen houses every month or so here.

That said, although local drug dealers and overseas corrupt officials may still prefer houses, there may not yet be enough pressure for the Sinaloa types to spread their risk while they still have virtually risk free ways to shift billions, simply because relatively few customs and law enforcement agencies have the resources to even recognise it let alone stop trade-based laundering. Stop a few of them with a massive asset forfeiture at the border and the Minister of Finance could just about declare a tax holiday for every taxpayer

Nothing to back it up of course, except the opinion of some two bit property spruiker.

The herald will publish whatever garbage gets page impressions.

If his prediction doesn't pan out and legitimate inflows reduce, the proportion of dirty money may be higher still. But I'm not sure what that might mean in terms of effectiveness and outcomes. Will it make it easier to spot, or might people be even less likely to ask questions...

he may need the property market to keep rising to make money, his method is high leverage, that's what he preaches to his disciples.
I will watch with interest if the market turns what his future turns out to be.

And add into the mix the SFO's ongoing property probe, where they're investigating alleged collusion between “highly organised teams of property developers, shell company directors, property valuers and lawyers” in Auckland's real estate market, as reported in today's NBR, and it makes for interesting times....

We need to have a organisation that makes rules about this for the collective good of all NZers.


Isn't the Government supposed to do that?
Oh, the MP's all have investment properties you say?
Oh well, then I guess NZ is well and truly screwed on the way up and on the way down as well.

I was disgusted that John Key's Government looked the other way when hundreds of millions of dollars were being laundered through housing in Auckland.
Because it was money coming into NZ and pushing up prices, our Government did not care where all this money came from.
It was only last October, after the Chinese Government put pressure on NZ that John Key decided to do something to appease China. The Chinese Government is cracking down on all this corrupt money leaving China. These Chinese property investors do not want their money tracked back to China which could be the case now. This is why the housing market in Auckland has slowed so much.

Corruption is alive and well in New Zealand

Announced on the news last night with great fanfare

Corruption in action - no Moral Compass - they have no idea

In its haste and fervour to be seen to be building more houses, as promised, the Government has lost its moral compass, so blinded by it that it is using its powers to get into the fray "at the behest of" Fletcher Building

Blatant abuse of power - this would be evident to even "blind freddy" - this should be evident to a hands-off government. But it doesn't see it - It should steer well away from this

They are onto it

Nick Smith's support for Fletchers labelled "bullying"

Local Board deputy chairman describes Dr Smith's decision to join a legal case over the housing development in support of Fletchers development represented "central government bullying and stand-over tactics".

Senior Auckland councillors have told us that for some time that central government has been threatening the council with action unless it agreed to the developer's proposal, and now it is clear that the Govt wishes to also intimidate local residents who are utilising their legal rights through the courts"

...when you strip it down to the heart of the matter, the bullying is not about this housing development (this is just an outcome) the real bullying is this Govt imposing 60k immigrants per year on us. .... so why don't MM or Labour (where are you ???) stop dillying around and actually front this issue?

If Nick Smith and his mates put the brakes on this crazy open door immigration policy, then we would not have to develop quarries etc for housing. There would not be a housing shortage.

More corruption and fraud revealed
Happens on a daily basis - NZ Herald
It's there - If you look for it
It's just not called that

NZ has got itself a poor reputation for money laundering which needs sorting out ASAP.
A retrospective IRD Number for all properties should now be introduced as well.

call me a cynic but how much of this was poored into our Auckland housing market
12000 transactions worth $545 million were reported in 2012-13.
86500 transactions worth $3.5 billion were reported in 2013-14.