By Jenée Tibshraeny
Anti-money laundering and countering the financing of terrorism (AML/CFT) laws have sparked a major New Zealand money transfer operator to consider going back to the dark ages of shipping cash around the world.
KlickEx, which also processes transactions for a number of other remitters in New Zealand, is planning to transport what could be hundreds of millions of dollars of cash, mainly between New Zealand and the Pacific Islands, each year.
Its founder and chief executive, Rob Bell, wants to use 130 foot “high speed vessels” to transfer funds KlickEx can’t balance using its currency clearing system.
He claims the company’s being forced to use an archaic system to stay in business, due to banks’ “de-risking” policies.
The (unintended) consequences of AML/CFT
Banks around the world have systemically been ditching their remittance clients, in fear of being held responsible for soliciting any illegal transactions under tough AML/CFT rules.
The issue is that if a remitter gathers funds from a number of people in New Zealand, puts these in a bank account, and then transfers the funds to recipients overseas, their bank doesn’t necessarily know where the money is coming from and who it’s being sent to. It could therefore be breaching AML/CFT rules.
Yet if remitters go out of business, consumers will pay the price. Migrants in particular rely on remitters to transfer money to their homelands, paying much lower fees than what the banks charge.
While the Reserve Bank has spoken out against banks’ blanket de-risking, Finance Minister Bill English has ruled out “radical” policy changes to shield money remitters from banks' blanket de-risking policies.
A High Court judge in May also set a precedent by clearing Kiwibank of any wrong-doing in closing the accounts of one of its remaining few remittance clients, E-Trans International.
KlickEx has since backed away from the legal action it threatened Kiwibank with, and has had its accounts with the bank closed.
While some banks still service remitters, Kiwibank had been considered the “last bank standing” in New Zealand.
Replicating the international banking system
Speaking to Interest.co.nz in a Double Shot Interview, Bell explains that in the absence of a bank account, KlickEx is emulating the cash clearing system banks use to balance payments coming and going between countries.
“What we try to do is balance the number of payments coming in to New Zealand with the ones going out,” he says.
“Generally when someone sends money to Tonga or Samoa, we have someone on the other side wanting to bring money out. So you have lots of people sending money home for food. Then you have lots of the purchasers of food, the importers there, needing to pay for that food back in New Zealand. So we just manually manage that.”
Without being able to tap into the economies of scale of a banking system, Bell says it’s “kind of ridiculous the lengths that we’re going to”.
“When we had banks, we could actually go to the banks and offset that ourselves and just purchase from the wholesale market. But as the banks are shutting out our access to first of all the wholesale market, we then approach the commercial clients and say, ‘Hey do you want free FX?’.”
Bell says KlickEx’s “commercial clients” include “every business you can imagine. Just regular businesses… Supermarkets, importers, just normal, everyday, very low risk people”.
It collects cash from around 80 locations in New Zealand, including shops offering remittance services. Due to commercial sensitivity, Bell won’t reveal which remittance brands use KlickEx’s netting system, but says it’s a large bulk of those operating in New Zealand.
While KlickEx has been using its own cash clearing system in a limited capacity since 2007, it has this year rolled it out across the business more broadly.
Using boats to become a 'necessity'
Bell recognises it can be difficult for the company to balance the funds going in and out of a country, as the quantities don’t always match up.
This is where the boat idea comes in.
“If you can’t use a monetary exchange or an arrangement with a bank, you have to go to physical shipping.
“We need to be able to move collateral. If we have a surplus of say New Zealand dollars, we need to be able to get some sort of collateral up to say Tonga to do payouts, and that might mean shifting pallets of cash, which is crazy.”
KlickEx’s financial results aren’t publicly available, but Bell says the company transferred $400 million during its “peak year”.
Asked how much of this may be considered “collateral” and could therefore be moved on boats, he says: “A very small percentage of the total daily movement would need to be exposed to this.”
Bell says he can’t go into more detail. “I can’t tell you what’s going to be sitting on ships - that’s too dangerous.
“Everything that we don’t net, has to move eventually, or wait. We have synthetic liquidity systems that can bridge those shortfalls.”
Asked how seriously he is taking this proposal, Bell says: “It will become a necessity.
“We need options because we can’t be seen, or known to put large amounts of value transit onto Air New Zealand or Virgin flights.”
Going into more detail on the boats he wants to use, Bell says: “We need a couple of them, because you can’t have one because everyone will know that might be the one that has cash on it. You have to run decoys.
“It sounds a little crazy, but… we spend more money on our cyber security than it would cost to run a big diesel engine like that, so it’s not actually a big cost increase.”
Bell concludes: “It doesn’t really increase the risk that much.”
Department of Internal Affairs 'not responsible for ensuring the safe transportation of the cash'
The Department of Internal Affairs - the supervisor responsible for monitoring remitters’ compliance with the AML/CFT Act - says: "The DIA is aware that KlickEx has proposed using boats to transport cash as part of their money remittance services.
"The Department is not responsible for ensuring the safe transportation of the cash. That would be a business decision for and responsibility of KlickEx.
"As with any reporting entity, KlickEx must maintain an adequate and effective AML/CFT programme. This includes the requirement to update their AML/CFT risk assessment and procedures to address any changes to their business model.
"The AML/CFT Act also has specific reporting requirements (sections 68-71) relating to the transportation of cash into or out of New Zealand."
It also confirms: “We do not have any current or previous investigations relating to KlickEx. In 2014, we completed a desk-based review of Klickex’s written risk assessment and AML/CFT programme and were satisfied with the level of compliance of these documents."
KlickEx: 'Everyone knows what we're doing is not the solution'
Bell says there’s a requirement for KlickEx to undergo an external audit every two years. While it had bank accounts, banks also did “quarterly reviews” of its business.
Since using all its own systems, KlickEx has not been audited.
“I feel for the regulators… they want a solution. Everyone knows what we’re doing is not the solution,” Bell says.
He maintains being ditched by banks is an unintended consequence of the AML/CFT legislation.
“Because there’s this ambiguity [around the legislation], you’re forcing peripheral people like us… to go to these really archaic systems. We’re stepping back in process, but applying wonderful technology to it.
“And the regulators are looking at us going, ‘You’re buying ships - this is crazy, but solve the problem. It is better to do this than it is to see the prices [consumers pay] go up’.”
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