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AML – PHASE TWO IS ON THE WAY
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The ‘Panama Papers’ released earlier this year threw a spotlight onto the weaknesses of New Zealand’s approach to preventing money laundering. One of the Government’s actions in response was to propose the acceleration of Phase Two of the AML/CFT Act. We’ve had a look at the proposed reforms. In addition to bringing many more businesses and professions into scope, there are some key issues for existing AML reporting entities to be thinking about.

Background

It has been estimated that the proceeds of criminal conduct valued at over USD 1.6 trillion are laundered through the international financial system every year. This movement of ill-gotten wealth is considered to be the world’s third largest industry after forex and the oil trade. A global fight against money laundering has developed over several decades, centred around:

  • Legislation to criminalise money laundering, to make the prosecution process easier and to provide the necessary investigative and prosecution powers; and
  • Due diligence procedures employed by the financial services community to reveal and report suspected dirty money entering the financial system.

Counter-measures have had to be uniform, not just at a national level, but at an international level in order to prevent arbitrage between jurisdictions, given the international nature of the organisations involved. A major focus of supra-national bodies such as the Financial Action Task Force is to devise a comprehensive global framework of laws and regulations.

It is against this context that in 2013, Phase One of New Zealand’s Anti-Money Laundering and Countering Financing of Terrorism Act (‘AML/CFT Act’) came into effect, placing obligations on financial institutions and casinos, and tasking government agencies with overseeing and enforcing the regime.

Phase Two of the AML/CFT Act will extend its reach to lawyers, accountants, real estate agents, conveyancers, some additional parts of the gambling sector, and some high value goods dealers.

For financial institutions and others already subject to the AML/CFT regime, Phase Two will likely cause less disruption to the ordinary course of business than Phase One may have done. Nevertheless some of the changes contemplated will require a shift in mind set, and may open the door to fix some aspects of Phase One that aren’t working so well.

The Ministry of Justice has now issued a Consultation Paper on Phase Two of the AML/CFT Act and is seeking submissions by 16 September 2016. In this Financial Law Insight, we focus on the proposals to enhance two aspects of the current AML regime – the proposed expanded suspicious reporting obligations, and reliance on third parties.

Expanded suspicious reporting obligations

One of the more substantive proposed changes is to require all reporting entities to report to the financial intelligence unit of the Police (the FIU) on suspicious activities, not just on suspicious transactions

This proposed change was partly prompted by concerns that valuable financial intelligence for detecting crime was not being passed onto the FIU in circumstances where suspicious or unusual activities did not involve a transaction, or the transaction did not go through a New Zealand bank. 

Issues may arise in practice if the concept of ’suspicious activity‘ is not clearly defined or understood by the market, leading to confusion around when a report should be made and potential underreporting.  The Consultation Paper itself sheds very little light on this question.

If supervisors provide clear guidance on this issue, setting out scenarios and circumstances which could indicate suspicious activity, then market confusion is unlikely to occur.  If guidance is unclear, we see real problems with the practical application of the proposed extension of the reporting regime.

New Zealand would not be on its own in taking an activities-based approach to reporting, if this proposal goes ahead.  Supervisors should therefore be able to draw upon the body of guidance which exists in Australia and the United Kingdom on this issue, given that both of these jurisdictions already require suspicious activities to be reported.  
If New Zealand supervisors issue guidance which is broadly consistent with that issued by AUSTRAC and HM Revenue & Customs, the following circumstances may need reporting:

  • A customer provides cash which has a distinct or unusual odour.
  • The customer is in a hurry to rush a transaction through with promises made to provide the information later.
  • A customer becomes irate when questioned over financial transactions.
  • A customer is unwilling or reluctant to produce identification or other information when requested by reporting entity staff.
  • Spurious litigation claims are made, with the parties agreeing to a cash settlement of their claims with minimal legal rationale.
  • A customer’s area of residence is inconsistent with other profile details such as employment.
  • A customer’s address appears vague or unusual, or is frequently changed.
  • A charitable organisation is being used, despite a lack of rationale for the use of such a vehicle.
  • The customer is unable to satisfactorily explain the source of funds.

If the obligation to report on suspicious activities is adopted, significant changes will need to be made to AML/CFT systems, and monitoring and compliance programmes, to ensure that a much wider range of information is captured and considered for possible reporting to supervisors and/or the FIU.

Reliance on third parties

Currently, the AML/CFT Act provides for the ability of reporting entities to rely on third parties to conduct customer due diligence in 3 circumstances:

  • reliance on members of a designated business group;
  • reliance on other reporting entitles or persons in another country; and
  • reliance on agents.

The consultation paper seeks feedback on whether the existing provisions are sufficient and appropriate, and what, if any, changes should be made. 

The relief provided under the Anti-Money Laundering and Countering Financing of Terrorism (Class Exemptions) Notice 2014 for licensed managing intermediaries and specified managing intermediaries has been accessed by a number of reporting entities, but has its limitations. The Consultation Paper provides opportunity to address some of those limitations in the legislation itself.

Kensington Swan supports changes to the current reliance on third party provisions, to ensure they are workable and effective in practice. In particular, we encourage stakeholders to submit where the current reliance powers do not fit their business model, or could be streamlined or enhanced to be more effective.

Concluding observations

The AML/CFT regime introduced into New Zealand by Phase One, and to be enhanced by Phase Two, is generally comparable to regimes which have existed in other jurisdictions (including nearly all of our major trading partners) for several years. The ultimate goal is for there to be a level playing field globally.

The disadvantage of this is that certain obligations will be imposed in New Zealand which may seem excessive and intrusive in our generally open and trusting society where corruption is less prevalent than elsewhere. The counter to that often-voiced complaint, as highlighted by the Panama Papers, is that New Zealand is far from immune from the mischief which the AML/CFT regime is designed to prevent and detect.

As a global citizen, New Zealand has a responsibility to co-operate with international initiatives to complement the laws and regulations of other responsible nations, and ensure our regime is not seen as a soft touch by the international criminal community. Failure to do so could result in offshore market access being denied to New Zealand businesses, as well as reputational damage.

Businesses within the scope of the regime need to be prepared, take advice, and implement systems to ensure compliance and best practice. The good news is that there is no need to reinvent the wheel. We can learn from other jurisdictions.

Assistance with AML issues

Kensington Swan has extensive local and international experience, and is well placed to assist reporting entities address their obligations. If you would like a specific briefing on the implications of Phase Two for your business, or would like our assistance in preparing a submission, please contact David Ireland on +64 4 498 0840, Henry Brandts-Giesen on +64 9 375 1109, Karen Mace on +64 4 496 5941, or email the team at financialmarkets@kensingtonswan.com.

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