Strewth mate! Why New Zealand should embark down the Australian anti-money laundering regulatory path rather than the British one

By Gareth Vaughan

If something's worth doing it's worth doing properly. So said my parents, ad nauseam, when I was a child and reluctantly doing household chores.

This saying came to mind on Friday when I was reading the Ministry of Justice's consultation paper on phase two of the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act). The so-called phase two of the AML/CFT Act means lawyers, accountants real estate agents, conveyancers and high-value goods dealers will have to comply. This is an important move both for the tackling of crime, and for New Zealand's international reputation.

Already AML/CFT laws touch the lives of many New Zealanders. For example, when opening a KiwiSaver account or changing provider, money remittance, and in some cases even taking money out of your own bank account. The impact of these laws on our lives is only going to grow as a wide range of professions are dragged into this particular regulatory net, as I outlined here.

One of the key issues, as detailed in the Ministry of Justice's consultation paper, is who will supervise compliance with the AML/CFT laws by the new entities and professions forced to comply. Currently New Zealand has three supervisors in the Reserve Bank (RBNZ), Financial Markets Authority (FMA) and Department of Internal Affairs (DIA). The Ministry of Justice is suggesting either retaining this model with broader oversight roles for one or more of the three, moving to a single supervisor model like Australia, or adopting what it terms a multiple agencies with self-regulatory bodies model like Britain has.

The issue that concerns me is the possibility of going down the British path, and adopting a smorgasbord of AML/CFT Act supervisors once Parliament passes phase two sometime next year. This smorgasbord could even include self regulation by some professions. 

The very suggestion the Government is even considering adding to our three current supervisors is worrying. In Britain they have a staggering 27 AML/CFT supervisors including 22 professional associations across the likes of the legal, conveyancing, accounting and real estate sectors. In New Zealand this could, for example, see the New Zealand Law Society overseeing compliance by lawyers, and the Real Estate Agents Authority overseeing compliance by real estate agents.

This does not sound like doing the job properly to me.

Rather, it sounds like a patchwork approach done on the cheap to try and fool international observers that you have your AML/CFT house in order. New Zealand must do better.

Heads in the sand

One look at the cover (see picture below) of a Transparency International UK report on the British approach paints a damning picture. The report, entitled Don't Look, won't find: Weaknesses in the supervision of the UK's Anti-Money Laundering Rules, concludes that the UK’s current system is "inconsistent and generally failing to meet the standards of effective regulation."

"Our findings show that the vast majority of sectors are performing very badly in terms of identifying and reporting money laundering. Major concerns have been identified by law enforcement authorities over the quality, as well as the quantity, of reports coming out of the legal, accountancy and [real] estate agency sectors," Transparency International UK says. 

"The UK Prime Minister has rightly said that dirty cash is not welcome in the UK. However, without tackling poor supervision and enforcement of anti-money laundering rules across the economy, a torrent of stolen money will continue to be allowed to find a safe haven in the UK," Transparency International UK adds.

It recommends the replacement of the existing "patchwork and inconsistent" structure with a single, well resourced "super" supervisor.

Transparency International UK is not alone with its concerns. Here's HM Treasury in a UK national risk assessment of money laundering and terrorist financing:

"The effectiveness of the supervisory regime in the UK is inconsistent. Some supervisors are highly effective in certain areas, but there is room for improvement across the board, including in understanding and applying a risk-based approach to supervision and in providing a credible deterrent. The large number of professional body supervisors in some sectors risks inconsistencies of approach. Data is not yet shared between supervisors freely or frequently enough, which exposes some supervised sectors where there are overlaps in supervision."

Conflicts of interest

In its consultation paper the Ministry of Justice does at least point out an obvious flaw in the British approach, noting the clear risk that conflicts of interest could compromise professional body supervision, given these bodies represent and are funded by the very firms they are supposed to supervise for AML/CFT compliance.

As things stand in New Zealand now the RBNZ supervises banks, life insurers, and non-bank deposit takers. The FMA supervises securities issuers, 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.

This system already has scope for things to slip through the cracks, or for supervisors to abdicate their responsibilities claiming they thought one of their counterparts was doing it. This was highlighted last year in Justice Timothy Brewer's judgment in the Vivier and Company versus FMA High Court case. The judgment outlines that the compliance officer at the DIA's financial integrity unit had told Vivier's executive chairman if the company was subject to the AML/CFT Act, it was supervised by the Reserve Bank or the FMA rather than the DIA, when in fact if Vivier was to be supervised by anyone it could only be by the DIA. 

Following the Aussie path

Clearly a key question then as the Government moves to extend the AML/CFT Act regulatory net, is who will supervise the new professions being made to comply? It doesn't make sense for the RBNZ to do it given the newcomers aren't in the banking, insurance or finance company sectors. And the RBNZ has its hands full with monetary policy and financial stability issues. The FMA also has much on its plate, including enforcing the freshly minted Financial Markets Conduct Act, the cornerstone of its regulatory regime. 

So that leaves DIA, adding additional AML/CFT supervisors along the lines of the very flawed British model, or following the Australian example.

Australia has just just one supervisor of its AML/CFT laws, the Australian Transaction Reports and Analysis Centre or AUSTRAC. Thus everything is under one umbrella and it's clear where the buck stops.

AUSTRAC's latest annual report claims a contribution to tax assessment and debt collections of nearly A$2.5 billion over 10 years. AUSTRAC says it received A$54.940 million in annual taxpayer funding and has 262 staff. By way of comparison, annual AML/CFT Act supervisory budget figures provided to interest.co.nz by the RBNZ, FMA and DIA, combined, come in at just NZ$3.48 million. The DIA has nine AML/CFT staff, the RBNZ four plus one-third of a manager's time, and the FMA six part time AML/CFT staff plus others helping out as required.

Certainly not perfect

Of course no regulatory model is perfect or infallible. In a major report last year by the Financial Action Taskforce (FATF), the key global anti-money laundering oversight body, AUSTRAC certainly came in for some criticism, as did Australia's AML/CFT laws. FATF noted neither real estate agents nor lawyers, both having been identified to be of high money laundering risk in Australia’s National Threat Assessment, are subject to AML/CFT requirements.

Transparency International Australia was not impressed, pointing out - among other things - that at no time has a corporation been prosecuted by AUSTRAC or any other authority for money laundering breaches in Australia. Over the past two years AUSTRAC has, however, embarked on a range of enforcement action including against gambling group Tabcorp and remittance service provider MoneyGram Payment Systems, which is detailed here. 

However, FATF also said AUSTRAC had done a good job in promoting compliance with the AML/CFT standards by the vast amount of entities under its supervision, describing AUSTRAC as "a well-functioning financial intelligence unit." Additionally the amount of financial transaction data in the AUSTRAC database, and the fact all relevant authorities have access to it and can use AUSTRAC's integrated analytical tool, is a strength of Australia’s AML/CFT system, FATF said.

Incidentally, here's what FATF said about New Zealand last time it looked. It's next due to assess this country's AML/CFT regime in 2020.

A one stop shop

AML/CFT laws are complex and challenging for those tasked with complying with them, and those tasked with enforcing them. And they'll become an increasing frustration for the general public as they touch more parts of our lives. 

So surely having a one stop shop for all AML/CFT Act supervision makes much more sense than a whole series of half-hearted, poorly funded supervisors going about supervision in different ways. The Government would need to find a decent wad of taxpayer funding for a Kiwi AUSTRAC, but this is a serious issue and requires serious effort.

Because as the Ministry of Justice puts it; money laundering and terrorist financing are significant problems both here and worldwide, allowing criminals to hide the proceeds of their illegal activities and to fund serious crimes such as drug dealing, organised crime and tax evasion.

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22 Comments

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John Key does not want to act and if situation forces them, than will do things half heartdly symbolically only with no real intention.

Leagacy of national government - Deny and Lie.

I appreciate where the observation comes from Reena, but to be fair in this case it was actually the PM who pushed along the AML second tranche. A money laundering purist might argue it was for the 'wrong' reasons (to stifle political noise over the Panama Papers), but a political scientist might just call that the reality of politics. Either way, on this occasion, the PM and Minister of Justice gave this one a very solid kick along.

Then maybe it is time politics had a different reality, because we are getting pretty tired of the current one.

C'mon Ron - John Key and co stonewalled the introduction of phase 2 until the panama saga caught up - sudden change of heart - and now you accord him accolades of alacrity

Good point. Personally, I reckon there should never have been a tranche 2. All in from the outset and we'd have had none of the obvious substitution effect into these other sectors.

True too it's been like treacle, with T2 drifting out each time as the next FATF evaluation date for NZ drifted out, from 2017 now to 2020, suggesting the policy objective may have had at least as much to do with international comity as serious crime prevention.

The reason for the PM's sudden change seemed to be a red-herring political ploy to cauterise the foreign trusts issue. And having called out all 6 political parties for blocking effective debate on foreign trusts, and try as I might to be even-handed the PM personally seemed to want to own most of the myths bandied about the Panama Papers, so I doubt I'll get any invites to the 9th floor anytime soon, but I do try to call it as I see it without fear or favour.

I may well be wrong, and sure I will be many times more, but without the PM giving it a kick, for whatever reason, I certainly hadn't discerned much traction in Wellington to seriously get things moving anytime soon before that.

I agree with REENA, RON,
Even though it has taken a bit of "prompting" for you to accept the old age - " If it looks like a duck, quacks like a duck etc" - well, you finally got there.
Don't worry too much about your "invites to the 9th floor."
There's some well researched, knowledgable commentators on this site, who have tried very hard to be practical and non-partisan, regarding the agendas of JK and his Acolytes.
The "penny has dropped" and no amount of Spin and tricky psychological machinations can mask the corruption and "love affair" JK has with BIG International business - particularly American.
The evidence of this just keeps 'piling up,' and is now so easy to find.
The public has been fed so much BS - and many still choose to believe it- to the degree where it can only be called WILFUL BLINDNESS, - the definition of which can be found in the publications, YouTube addresses, and workshops of one well known, revered, amazing, straight-shooting international businesswoman, MARGARET
HEFFERNAN.
We still need to read and research, especially Political Scientists/ Commentators, but when short on time, a well developed 'gut instinct' (intuition) which is natural to all animal species, still serves us well.
"In this time of universal deceit - telling the truth becomes a revolutionary act." George Orwell
Examples : the Dirty Politics displayed by JK and his henchmen.
The law passed to Jail Whistleblowers who report the atrocities on Manus Island.

Fair enough louienz!

& I'll stick with the PolSci/Commentary, whoever happens to be on the 9th floor :-)

Does anyone trust real estate agents? Enough said really.

William Yan or whatever his name is these days, laundered $293 Million via SkyCity and bribed his way into a passport and now the justice system only wants $43 million back. The country could start by sending him back to China. Switzerland of the south pacific they say.

John Key said this was a police decision which I thought strange.
In Oz they get rid of Kiwis who belong to gangs, this surely is a bit more important than a few tatts.

Has a deal been done to avoid the hassle of arguing about sending him home where he might have to join the kidney donation team?

With the benefit of having read many of the judgments (except the latest, not yet released), [and formerly a lawyer, and having spent nearly the past 3 years on PhD money laundering research analysing cases like these]:

Yes, the Police conduct forfeiture cases. The type of forfeiture sought here is conducted entirely in the civil courts, to the civil standard (balance of probabilities). It is common also to have criminal proceedings as well (asessed to the higher standard, beyond reasonable doubt), but it's not necessary, as here. 

The difficulty of proving criminal activity overseas (the so called predicate crime preceding money laundering allegations) meant this was always going to be complex. A measure of that is that the hearings for most cases are measured in days, but this was going to take 5 months of court time, some time in late 2017. It has already been fought in the Court of Appeal and Supreme Court.

Settlements between the parties aren't political, nor is any settlement just between them. They must be approved by the High Court, ie independent judicial consideration to ensure it's consistent with the legislation. Any extradition process is completely independent of that process.

As to where the proceeds go, I've not seen the final judgment, but it's not so much about any 'sharing' (ie between NZ and China), but who actually owns the relevant assets/funds. It is very common, for example, for a forfeited house to have a mortgage, or a bank account or other asset to have co-owners. In those cases, the court will preserve the bank's interests, and any co-owner (who wasn't involved in the criminal activity) may have their portion returned to them when the property is forfeited. The Act is designed to remove the profit from alleged criminal activities, stripping assets directly or indirectly derived from crime (as determined on the balance of probabilites), not to unjustly enrich the government at the expense of innocent parties.

Whether there is enough evidence to also pursue criminal charges, to the much higher standard (beyond reasonable doubt), is a separate issue. The complexity of proving criminal activity overseas will always be difficult.

Didn't he money launder $293 million through Sky City (that we know about) How much other money has he hidden away and was any of it legal. On the surface of it he appears to bought off the justice system rather cheaply.

No .. the $293 million is not his stake .. it's his turnover over 12 years

How many washes does it take to clean your laundry? I would have thought one would do.

Three should do it.
Rinse, wash and repeat.

Our system is gutless // witless to have been bought off like this. The threat of deporting him for poor charcater should have been enough to scare the bejesus out of him yet there he was on tv acting as if he had just completed a very sucessful business deal.
Do you remember the S. African chef who was to be deported because he was too fat, yet here we have a launderer of massive amounts and there is no talk of throwing him out.

I pay more tax on my hard worked income than a money launderer does on his stolen money. What a great country.

I was asked about the "bought off" aspect on Radio NZ's Morning Report. It's a short clip:

Record forfeiture for alleged money laundering Radio NZ Morning Report, 24 August 2016 (Ron Pol says Chinese fugitive ordered to pay $43 million cannot be said to have bought his way out of jail as politicians and some media assert, and puts NZ's biggest forfeiture into perspective against scale of laundering even on conservative official figures)

Nanny State who can't' follow the constitutional rights of the people causes problems which are then supposedly solved by more Nanny State solutions..........ah the left wingers are an unusual unusable bunch!!!

Either an activity is criminal or it is not! Billions of dollars of taxpayers money gets laundered annually through the public system and no journalist raises their brow...........Parliament fails to uphold the 1688 Bill of Rights and even allows illegal changes and journalists turn the other cheek.........NZ is operating under a plethora of illegally introduced legislation and my children and grandchildrens futures are at stake here and anyone who encourages more Nanny State should be tried for crimes of treason!!!!

If people are laundering dirty money it is an offence, if someone is assisting in this process then it is a offence......

The very core of our justice system is totally undermined when it is not used for the purposes it was designed for and anyone who wishes to bypass criminal process using some form of other regulator is missing the key elements of constitutional and criminal law............and journalists are condoning this behaviour!!! Have they thought about where all this is leading and what the future holds.......too busy eating the chocolate fish now........so how are you all going to tell your grandchildren how NZ was once reasonably free but you liked chocolate fish and that's how communism took over NZ.......

Why is everyone criticizing our PM. He has succeeded in achieving his goal of creating a situation where Aucklanders are forced to leave Auckland.

http://www.nzherald.co.nz/property/news/article.cfm?c_id=8&objectid=1169...

His Agenda has been achieved and now give him one more term and will do the same to entire NZ. New Zealand is a very small beautifully Island and will not be hard for him to sell it to the world specially his friends from China.

Vote with responsibility or the entire generation of Kiwi will have to face the consequence.

One should remember that NZ is so small that it could be bought number of time by foreigners and is the best place to park their money - safe and Tax free.

Many kiwi will now have to migrate to give way to immigrants who are strongly supported by National Government.

LOL 650,000 Kiwis live in Australia or 15% of the NZ population. Aucklanders leaving Auckland to live in the regions is a good thing in my opinion. 40,000-50,000 Kiwis moved to Australia annually over the last 15 years.

New Zealand isn't that beautiful when it has been environmentally ruined by both Maori & Pakeha for 800 years wiping out 50-60% of the total native NZ fauna, deforesting 76% of the total NZ landmass, destroying 90% of the original wetlands,polluting 60% of all the NZ waterways.

NZ dumps double the chemicals into its soil than the USA does. NZ has the most introduced & endangered species of any other country in the world.

Canada is the top foreign investor country in New Zealand not China.

American investors were the biggest land buyers in New Zealand in 2014 buying about 115,000 hectares, mainly reflecting forestry giant Rayonier buying an extra 74 per cent in Matariki and Waimarie forests.

Chinese investors bought only 27,000 hectares of land.

About 59% of all foreign direct investment into New Zealand came from North America, Australia and Europe.

New Zealand isn't that small either New Zealand is around the same size as The United Kingdom in landmass size.

If you're going to do something, do it property!