By Martin Dilly & Fiona Hall*
We have previously put out a series of articles challenging the stance of the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT) supervisors on certain areas. We aim for these to be constructive, after all we are all working towards the same goal – a robust, international standard AML/CFT framework. So we will call out the supervisors where we consider the application of the AML/CFT Act is not in line with the wording of the legislation or our international requirements.
It is therefore equally important to call out an absolute travesty seemingly occurring at the Department of Internal Affairs (DIA). Media reporting highlights proposed changes to the DIA’s AML/CFT directorate:
- Directorate being reduced from 51 to 30 (24 roles disestablished and three new roles established in an investigations function)
- Removal of the deputy director and principal advisor roles
- The Auckland team being reduced from 16 staff to 10, losing one manager (operations), two senior anti-money laundering regulators, an anti-money laundering regulator and two graduate regulators
- The Wellington team being reduced from 10 staff to six, losing a senior anti-money laundering regulator, two anti-money laundering regulators and a graduate regulator
- The service design team being cut by six roles, including a forensic accountant, with the remainder being reassigned to another team
- The number of practice leaders being reduced from two to one
- The nine-person strategy and capability team within regulatory services is being proposed for disestablishment.
And of note until recently the DIA were actively recruiting so these numbers don’t even represent the full team that was needed.
The number of people is not the story, although the loss in numbers alone will deal a crippling blow to the effectiveness of the DIA as an AML/CFT supervisor. The story is the people. Judging from the roles described, these people include many of those we consider to be key leaders in the supervisory field, and the people best placed to manage the significant challenges this area of law faces in the years ahead.
Of the three AML/CFT supervisors, (the other two are the Financial Markets Authority and Reserve Bank), we are unreservedly of the view the DIA - with its current managerial experience - is the most insightful and transparent. It has demonstrated the best balance of enforcement, support and education across its wide range of sectors. From a more selfish point of view, they are also the only supervisor who currently seems willing to actively engage with consultants and auditors working in the area.
We have also been vocal about our support for a move to a single dedicated AML/CFT regulator as part of a restructuring of the regime to one properly focussed on risk and practical implementation. The loss of so many senior people at the DIA, who we consider represent the backbone of the current regime, would be a death blow to any hopes of achieving this.
Quite simply, the potential loss of this wealth of knowledge and experience represents a huge backward step for the country. The AML/CFT Act is complicated, risk-based legislation that demands a nuanced response if the intention is to drive engagement and willing compliance. The team best placed to deliver this is, or perhaps sadly was, the DIA.
The effect on reporting entities
Some reporting entities supervised by the DIA that might be clapping their hands and thinking that it all means less focus on them - less staff will equal less effective supervision. However, if you are one of the, albeit smaller, numbers pulled from the hat for a review, those reviewing your AML/CFT programme will have much less understanding and experience of not just the law, but your sector. Take it from those of us who deal with supervisors on a regular basis – you want to deal with individuals who understand your sector and have a deep knowledge of the practical application of the legislation. Again, looking at the roles described above, these are the very people that are in the firing line.
These are also the people that produce the bulk of the guidance on the DIA website. The loss of these roles will mean less guidance and therefore less certainty for businesses in meeting their obligations.
International implications
The "grey list" is the colloquial term for those jurisdictions under increased monitoring by the Financial Action Task Force (FATF), an inter-governmental body that sets international standards and is considered the global money laundering and terrorist financing watchdog. This is where strategic deficiencies have been identified, usually as part of a mutual evaluation undertaken by FATF, in a country’s regime to counter money laundering, terrorist financing, and proliferation financing.
In New Zealand’s most recent mutual evaluation in 2021, the supervision requirements were scored as ‘partially compliant’ in regards to technical requirements (see Recommendations 26 and 28) and only ‘moderately effective’ (the second lowest out of four levels) for effectiveness measures (see Immediate Outcome 3). As stated above, the proposed cuts to the DIA will, in our view, have a substantial effect on the supervisory effectiveness of NZ’s AML/CFT framework, putting us at risk of an overall view of low supervisory effectiveness. This puts us at significant risk of increased monitoring by FATF, i.e. being grey listed.
You are probably thinking; "that’s all well and good, egghead, but what does that mean in practice?." A study by the International Monetary Fund (IMF), finds a large, significant negative effect of grey listing on capital inflows. The results suggest that:
- capital inflows decline on average by 7.6% of GDP when the country is grey listed;
- foreign direct investment inflows decline on average by 3% of GDP;
- portfolio inflows decline on average by 2.9% of GDP; and
- other investment inflows decline on average by 3.6% of GDP.
In short, grey listing is very bad business for NZ Inc.
Conclusion
The proposed cuts bode poorly for our international commitments, for our ability to actually target money laundering and financing of terrorism, and for the restructuring of the AML/CFT supervisory regime to one properly focussed on risk and practical implementation. This may ultimately end up hitting us in the pocket.
Equally importantly, the private sector spends a lot of time and money on AML/CFT compliance. Such proposed cuts signal to businesses that the public sector is not interested in doing its part to ensure success of the AML/CFT regime.
*Martin Dilly is director of MD/AML, providing AML/CFT consulting, auditing and training.
Fiona Hall is a barrister and solicitor specialising in regulatory law, particularly AML/CFT, consumer credit and privacy law.
This article was first published here and is used by interest.co.nz with permission.
37 Comments
This government seems to be penny wise and pound foolish in many areas with its cuts to border security and DOC workers as well.
Well after recently go to Oz and back twice...maybe we could implement some of their technology at customs..it was a breeze logging into the kiosk picking up your bit of paper and going through customs. On arrival back in NZ...line up for 35 mins wait to see someone (only two on the desk) and then go through.
Also the other question when flying out in CHC, why do you go through security for the flights to Akl or Wel....nothing if you flying to one of the regional airports?
I understand that the lack of security on regional flights is due to smaller aircraft being used on those routes that fly at a lower altitude than the bigger aircraft that fly between Auckland, Wellington and Christchurch. The lower altitude means the cabin is less pressurised (or not pressurised?) and the effects of an explosion on board would be less dramatic. As such, security is less. Could be totally wrong, but this is what I was once told.
People should remember that it is not just criminals and terrorists who launder money.
Rich people do this too. They have numerous reasons. And some are criminal, e.g. tax evasion. Others are tax avoidance, asset 'protection' from creditors, spouses, family, etc. An entire industry exists to do this and it includes lawyers, accountants, and of course, banks.
My personal view is that this team should be beefed up - not cut down. And their remit is expanded to gain far greater visibility of who is doing what, and for which reasons. I'd also like them to take a greater interest of where the money goes when people are scammed out of millions. I mean - aren't scammers are terrorists too?
And...don't forget the gangs..
Cannot really tell from the article who made the decision to reduce - and at what level this is happening - positions filled versus vacancies cancelled.
However an observation from someone who imports and exports and deals with legal staff is that the current process appears pretty clunky and ineffective - and as was reported in an earlier article even stats has a poor understanding as to where money is going to or coming from
and scams continue unabated - not quite the same field but a regulatory failure nevertheless
This is prime example of what I've been saying about how shit the approach is to just tell departments to cut with no actual direction on where to cut and what to prioritise.
100% guarantee that the minister responsible will say this is an operational decision. It is not. It is an outcome of the government "target to achieve 6.5% savings". When you direct departments to make cuts before you have even had a chance to understand what it is that the department does you are literally f****ING the system.
To make it easy for the New Zealand public to understand. What NACT have done would be the equivalent of the government coming in and saying the All Blacks aren't doing great, they get paid too much and their squad is too big. Please cut all salaries and also cut the squad by X please to improve performance.
I don't think they said Please
It's not so simple. Government departments have been stocking up on more staff for years with minimal productivity improvement
When told to cut back the first thing they all do is to complain how it will affect front line services.
Taxpayer money isn't an endless ATM for the ceos of the different departments to spend. Just like private business they have to work out how to hit their KPIs with less.... or get another job and find a ceo who wants the money and will sort it out... and tbh any ceo who is whining about it and not making it happen is probably the wrong person.
Then we will have more tax take and can finally ensure tax brackets are adjusted and the private business people of nz can actually keep a fair chunk of what they earn. I don't see why they should get big salaries unkess they are performing. Its all at our expense.
The government doesn't spend our taxes it deletes them. The governments spends by issuing its own currency, but that's not to say that it shouldn't spend wisely or willy nilly.
https://ourmoneyus.org/money-creation-through-public-spending/
Well said .
This article is about just one government department operating in a growing area of malfesence.
General references to the totality of public services are misplaced and illogical in this context.
One step closer to balanced budget and the new era of living within our means
better get used to it as more is coming
Problem with that is that in this specific sense, the harm to our 'means' (ability to live with maximum well-being for our society as a whole) is impacted very negatively. If we turn our backs on international law in order to 'live within our means' - our multi-lateral and bi-lateral trade and defense partners will go 'off' us. In other words, if we are so poor as to be unable to implement and monitor our obligations to the international community (remember, money-laundering hurts all countries-of-origin of the illicit/illegal gains), then we move toward being viewed as a "failed state" (also referred to a "fragile" state in a different index) in international terms.
Exactly, if we can't live meet our international obligations the only countries that will trade with us will be North Korea, Russia, Iran and maybe China. I'm not keen on being exclusively reliant on those regimes for our ongoing prosperity, I've seen how they treat their neighbours and allies.
Amazing is'nt it, where I work , in the private sector, if the revenue goes down and stays down and is forecasted to stay down, we have to cut costs, been through this process three times in last 14 years, usually we look at everything, but if Labour is one of your major costs, then unfortunately you do need to right size for the conditions.
I think you meant to have a lower case letter to the word 'labour' in the above comment.
That said. a labour unit in the public sector cannot be thought of (and dealt with) in the same way as a labour unit in the private sector. There are many good work/productivity assessment tools that can be deployed/run in the public service, to determine what roles can be 'done without' and not effect the level of service provided. Problem is, these 'blanket percentage' savings (as instructed by the new government) do not allow for (as a criteria) or give CEOs the time needed (as a process) to undertake those proper assessments.
Basically, this new government's approach is like a 'bull in a china shop' - best analogy I can think of. It assumes we as a nation were going to go broke tomorrow - which was more the case when Lange took over from Muldoon. Certainly, no such similar urgency presently.
Also, I didn't think NZ's tax take (revenue) was going or trending downwards - was it?
Tax revenue will show a large fall when announced, sheep and beef farmers only breaking even.
We are linked to sheep farming, our turnover down 40% for the 23-24 financial year.
I suspect retailers are also suffering.
I always expect that, but then something unusual happens (such as the Cullen Fund paying a sizeable dividend, or the like). And there's always the growing excise tax on tobacco to rely on too.
Yes S&B receipts will be down, but then dairy payouts are looking okay (I think) and (I assume) we'll have the insurance payouts relative to AKL and Hawkes Bay. Disaster recovery normally increases GST receipts.
Should be interesting.
A 'balanced budget' for the government would mean as increasingly unbalanced budget for the private sector and households though when viewed through the lens of sectoral balances and with increasing household debt and decreasing net savings. So not really living within our means, just more unemployment and poverty.
They should cut things that make sense, you'd think, rather than cutting anti-money-laundering enforcement capability. It's very strange, and seems not the sort of thing votaries should be having such blind faith in.
Whatever happened to tough on crime?
(Not crimes preferred by donors and property, perhaps?)
Hey look I just cut my eyes out, that'll save the Netflix subscription.
Whitney,
Just read Kate's post and think-engage some brain cells.
My brother works in public sector in Wellington. He came over from private and says there is huge wastage, lots of people who do nothing but have meetings and file reports, lots of meaningless layers, and no focus on delivery. His opinion is the sector can easily shrink this much if they fire the right people.
Every department will be issuing the same warnings. Nobody will put their hands up and say "no worries we will be fine in 12 months". The Anti money Laundering stuff is 95% nonsense that was foisted on us after the Panama papers by the USA, in order to maintain trade relationships we had to get on board.
"The Anti money Laundering stuff is 95% nonsense that was foisted on us after the Panama papers by the USA, in order to maintain trade relationships we had to get on board."
1 - what evidence do you have that anti-money laundering is nonsense?
2 - even if it is foisted on us by the US we have to suck it up to continue to deal with the US led international regime, ignoring it will just mean we get poorer. The salaries of a few staff to enable us to meet our international obligations seems good value for the ability to do international trade.
But hey you know ideology and feels....
I have to conduct AML on clients and it is a cost layer that has been added to all transactions and I see how much is being spent and the level of gouging from consultants and software providers in this new cottage industry. I appreciate that you jumped to the ideology conclusion. Judgements on character based on an opinion on a business website. Nice one.
I've worked in a few govt departments and DIA was always the best of them. They had a very practical and structured approach to getting things done and had good communication from the bottom to the top which was refreshingly responsive. Shame to see they'll be getting large cut backs in this area.
Apologies for making assumptions about your ideology. My bad.
How many money laundering cases have been brought before the courts here in NZ in the last 10 years? If you have staff in government allocated to this area, you expect that action needs to be taken. And if no cases have been prosecuted, is this because there are no money laundering activities actually happening or is it because the officials have just not been active? Either way, paying people to do nothing is not a smart look but perhaps it is the way things are in the civil service these days.
I thought the banks were the first port of call for AML. Is the govt AML not duplicating what the banks are doing? Maybe when banks find it the the too messy/hard basket to sort out they pass the problem onto the govt. Property is another AML area and is that not down to REA or the conveyancer rather than the govt to sort out?
Banks, Lawyers, RE agents (which is interesting, considering the minimal training you go through to be a licensed agent), brokers. There is talk that property managers will soon be asked to audit how tenants can afford to rent a property. Regulation is like GST, the scope of everything always creeps as people try to expand their influence and power.
This is a prime example of a story without all the information needed to be truly objective. For all we know NZ's AML/CFT may be increasing despite the high staffing levels. We just don't know all the details.
WJohn. WGN scuttlebutt has it there is a large backlog of transactions flagged as possible ML incidents to DIA but which are yet to be investigated.
Nu Zlillun relies on money laundering. Has done for quite some time. The idea of busloads of Chinese with suitcases of cash willing to pay a king's ransom for your suburban home might be funny for some (and a fantasy for others), but it's somewhat ludicrous given that there are limits on how much capital Chinese citizens can take out of China (approx USD50K).
"Fei Ch'ien" is the the physical movement of cash domestically and internationally. It is based on trust among participants. Money is not physically moved, but its value is transferred from one party to another. It is a global network that is particularly prominent in the Anglosphere and for which the bureaucrats have little understanding about and little power to to stop.
But they don't want to stop it. Aussie, NZ, Canada rely on it.
Interesting, I'd not heard of that before. Good paper on it here: https://regtechtimes.com/exclusive-guide-to-chinese-underground-banking/
If the two authors make their income off those under the regulator's microscope, they would not be writing this article. My suspicion is that their income comes from the regulator; specifically, the people being disestablished. Maybe NZ does not need so many government entities keeping an eye on money and it's flows. Maybe NZ doesn't need so many consultants feeding off them either.
Sit23. It's 'roles' being disestablished, not 'people'. A reasonable number of those roles were already vacant and DIA is creating some new roles in its structure (as the authors acknowledge). So not quite the wholesale evisceration of the existing staff complement that the article seeks to portray. But there's no doubt the authors are correct in forecasting a reduction in investigative capacity, this at a time when it's believed a lot of suspicious ML activity goes uninvestigated by DIA for lack of resources. I have business interests that are subject to extensive AML compliance requirements and which are very dependent on consultants to facilitate our compliance. They provide an essential service. NZ definitely needs both Govt entities and external contractors to 'keep an eye on money flows'. The world is a shark tank in which tiny NZ is a highly vulnerable mackerel.
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