Ministry of Justice non-committal on who will supervise newcomers to Anti-Money Laundering & Countering Financing of Terrorism Act

By Gareth Vaughan

The Ministry of Justice has issued a consultation paper on phase two of the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act), but made no recommendation of who will supervise - for compliance - the lawyers, accountants and real estate agents who are being dragged into the regulatory net.

Phase two coming three years after the AML/CFT Act took effect, will bring New Zealand into line with international best practice, the Ministry of Justice (MoJ) says. It proposes lawyers, accountants, real estate agents, conveyancers, some high-value goods dealers, and the New Zealand Racing Board and the New Zealand Lotteries Commission will have to put AML/CFT measures in place.

However, the key issue of who will supervise all these groups for compliance remains unclear, and MoJ has not proposed a preferred method.

Currently NZ has a multi-agency AML/CFT Act supervision model with three supervisors. The Reserve Bank (RBNZ) supervises banks, life insurers, and non-bank deposit takers. The Financial Markets Authority (FMA) supervises issuers of securities, trustee corporations, futures dealers, collective investment schemes, brokers and financial advisers. The Department of Internal Affairs (DIA) supervises casinos, money changers, trust and company service providers, and what are described as "reporting entities" not covered by the RBNZ and FMA.

A dedicated supervisor taking a holistic approach or Uncle Tom Cobley & all

The MoJ rightly points out the existing three supervisors may have limited expertise in some of the sectors being brought under the AML/CFT Act by phase two, and limited engagement with them. Thus it raises the idea of "alternative one", moving to a single supervisor model, as Australia has with AUSTRAC. This option, MoJ notes, ensures there's a dedicated supervisor taking a holistic approach to risk-based supervision across different business sectors.

"We recognise that establishing a single supervisor would be resource intensive and involve a lengthy implementation period. Significant establishment costs would be involved in either establishing a new agency or significantly enhancing the capability of an existing sector supervisor," MoJ says.

MoJ also throws up "alternative two", the possibility of using a combination of the existing supervisors plus self-regulatory bodies. Here it points to Britain where there are 27 AML/CFT supervisors including 22 professional associations in the legal, conveyancing, accounting and real estate sectors. Other entities that don't have a professional association, such as high value dealers, are supervised by HM Revenue & Customs.

An "alternative two" scenario could see the likes of the New Zealand Law Society and Auckland District Law Society as AML/CFT Act supervisors for lawyers, and the Real Estate Agents Authority overseeing real estate agents for compliance.

But MoJ does point out an obvious flaw in this approach, noting Britain acknowledges the large number of supervisors leads to overlaps and inconsistencies in supervision. Additionally Britain's National Risk Assessment also found a risk 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 Act compliance.

The supervision section of the consultation paper asks just two questions:

1. Do you think any of our existing sector supervisors (the Reserve Bank, the Financial Markets Authority and the Department of Internal Affairs) are appropriate agencies for the supervision of Phase Two businesses? If not, what other agencies do you think should be considered? Please tell us why.

2. Are there other advantages or disadvantages to the options in addition to those outlined above?

'Vulnerable to misuse by criminals' but AML/CFT 'obligations would be limited to activities that criminals are known to exploit'

Phase two of the AML/CFT Act proposes to drag in some professions currently exempt including those in the legal profession, accountants, real estate and conveyancing, some high-value goods dealers, and some additional parts of the gambling sector. This comes after the Police Financial Intelligence Unit (FIU) in 2010 conducted a national risk assessment on money laundering and identified that businesses and professions in these sectors are vulnerable to misuse by criminals. These findings, the MoJ notes, are in line with international research.

That said, it's not intended that all services provided by these sectors will be included within the scope of the AML/CFT Act. Rather, businesses’ AML/CFT obligations would be limited to activities that criminals are known to exploit, MoJ says.

"Based on identified risks and international standards, it’s proposed that real estate agents and conveyancers will be subject to AML/CFT requirements when providing the following services in their ordinary course of business; when an agent is engaged, they represent either the purchaser or vendor in the purchase and sale of real estate (both commercial and residential); providing conveyancing services as part of the sale or purchase of real estate; [and] the purchase and sale of properties for development purposes," MoJ says.

"Based on identified risks and international standards, it’s proposed that lawyers will be subject to AML/CFT requirements when providing the following services in the ordinary course of business; acting as a formation agent of legal persons or arrangements; arranging for a person to act as a nominee director or nominee shareholder or trustee in relation to legal persons or arrangements; providing a registered office, a business address, a correspondence address, or an administrative address for a company, a partnership, or any other legal person or arrangement; managing client funds, accounts, securities or other assets; preparing for or carrying out real estate transactions on behalf of a customer; and preparing for or carrying out transactions for customers related to creating, operating or managing companies."

"Based on identified risks and international standards, it’s proposed that accountants be subject to the Act when providing the following services in the ordinary course of business; acting as a formation agent of legal persons or arrangements; arranging for a person to act as a nominee director or nominee shareholder or trustee in relation to legal persons or arrangements; providing a registered office, a business address, a correspondence address, or an administrative address for a company, a partnership, or any other legal person or arrangement; managing client funds, accounts, securities or other assets; preparing for or carrying out real estate transactions on behalf of a customer; and preparing for or carrying out transactions for a customer related to creating, operating or managing companies," MoJ says.

The consultation paper also asks; "Given the level of risk associated with advisory and assurance services (for example, tax advice, bookkeeping and auditing), should these activities be subject to AML/CFT obligations even where the business is not involved in a transaction for their client?"

Options for high value goods dealers

In terms of high value goods dealers, MoJ has thrown up two options.

Option one is for dealers in particular high-risk goods.

"One approach is to require businesses that deal in particular high-risk goods to comply with AML/CFT requirements when selling or buying goods, and when the transaction is made using an amount of cash (physical currency) above an specific threshold. This may mean the laws would only apply to dealers of precious metals and stones, jewellery, motor vehicles and boats, which are high-value goods that have been identified in criminal cases and proceeds of crime actions," MoJ says.

"Under an international standard recommended by the Financial Action Task Force, dealers in precious metals and stones are required to undertake customer identity verification on cash transactions above US$/€15,000. However...there may be other high-risk goods in New Zealand. This approach of focusing on particular high-value goods would address the known risks. However, it may have a displacement effect where criminals buy other high-value goods to avoid detection when using illicit cash."

"In considering an appropriate cash threshold, one approach may be to choose the same threshold - $10,000 - as under new prescribed transaction reporting requirements," says MoJ.

Option two is to extend AML/CFT obligations to all businesses that engage in cash transactions above an applicable threshold. 

"The scope of this sector could include auctioneers, brokers, bullion dealers, jewellers, precious metal and stone dealers, motor vehicle and boat dealers, antique and art dealers, and any other business that accepts or provides large amounts of cash such as pawnbrokers. This approach was adopted in the United Kingdom, where any business that accepts or provides cash of €15,000 must register with HM Revenue and Customs and implement AML/CFT requirements. In the UK, businesses that don’t accept cash above this threshold aren’t subject to AML/CFT regulations," MoJ says.

"This approach of focusing on all high-value goods would ensure protections are in place for all high-value goods which may be misused by criminals. However, it may be challenging to ensure the wide range of businesses that may be affected by this approach are aware of and put in place AML/CFT requirements. As with Option 1, in considering an appropriate cash threshold, one approach may be to choose the same threshold - $10,000 - as under new prescribed transaction reporting requirements, which are yet to come into effect."

Extension for trust & company service providers

MoJ also plans to extend the AML/CFT Act obligations of trust and company service providers, bringing them into line with the rest of the Act, and to ensure their obligations are the same as other professions such as lawyers and accountants, who provide trust and company services.

"Money launderers may use legal structures such as trusts and shell companies to hide the beneficial ownership of criminal assets. In addition to NZ-based criminals, money launderers based overseas may seek to set up legal structures here to make it more difficult for overseas authorities to trace their funds," MoJ says.

NZ Racing Board and the NZ Lotteries Commission to be dragged in; More info sharing with IRD

Meanwhile, MoJ says "it’s intended" that the NZ Racing Board and the NZ Lotteries Commission should be subject to the AML/CFT regime.

"The Racing Board was granted an exemption from the obligations of the AML/CFT Act until either Phase Two comes into force or five years from the date of exemption (8 September 2013). Similarly, the Lotteries Commission was granted a ministerial exemption from the Act. These exemptions were granted partly because Cabinet explicitly agreed to include the Board and the Commission in Phase Two of the AML/CFT reforms. It’s now appropriate to consider whether these organisations should be fully covered by the Act."

The Financial Transactions Reporting Act already requires lawyers, conveyancers, real estate agents and accountants to comply with obligations such as identity verification, record-keeping and reporting suspicious transactions. And some high-value dealers have obligations under the Secondhand Dealers and Pawnbrokers Act 2004. 

The consultation paper also proposes boosting information sharing arrangements. For example, this could bolster the Inland Revenue Department's access to Police FIU data resulting in more tax being collected, MoJ suggests. And the paper also suggests expanding the information sharing arrangements allowing financial institutions to share information about their customers with the Police FIU. This could include the option of widening the protection so reporting entities can confidently engage with the Commissioner of Police and the FIU, the MoJ says.

'Hard to quantify how much money is laundered in New Zealand'

MoJ, meanwhile, points out 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 offending, organised crime and tax evasion.

"It’s hard to quantify how much money is laundered in New Zealand, but it’s been estimated at about $1.5 billion each year," MoJ says.

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.

"Money laundering is the process criminals use to ‘clean’ money made from illegal activity to conceal its criminal origins so it looks like it comes from a legitimate source. People and groups who finance terrorism often use similar methods to avoid detection. A business’ reputation and trade can be badly damaged if it is used to launder money," says MoJ.

To counter money laundering and financing of terrorism the AML/CFT Act was introduced with the aims of; detecting and deterring money laundering and the financing of terrorism; contributing to public confidence in NZ’s financial system; and bringing NZ into line with international AML/CFT standards.

In 2013 phase one of NZ’s AML/CFT Act took effect, placing obligations on financial institutions and casinos, and tasking government agencies with overseeing and enforcing the regime and helping businesses to comply with it. Consultation on the MoJ paper closes at 5pm on September 16. After that MoJ will provide final policy options to Justice Minister Amy Adams on implementing phase two. As the MoJ puts it, Adams may then seek Cabinet’s agreement to her preferred options, and if cabinet agrees, a Bill will be drafted. 

"It’s expected the Bill will be introduced to Parliament later this year. You will then have an opportunity to comment on the specific proposals in the Bill when it is considered by a parliamentary Select Committee. The Government intends to have the Bill passed by July 2017. After that, businesses will need a period of time to prepare for the changes, but the extended Act will come into force as soon as practically feasible," MoJ says.

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