By Gareth Vaughan
The industry bodies for both banks and accountants are calling on the Government to establish a new, single supervisor to oversee compliance with the Anti-Money Laundering and Countering the Financing of Terrorism Act as it moves to extend the Act. In contrast, the New Zealand Law Society wants to supervise lawyers' compliance itself.
These positions are set out in the three groups' submissions to a Ministry of Justice consultation paper on implementing so-called phase two of the AML/CFT Act.
Phase two, which the Government wants to pass into law by July next year, comes three years after the AML/CFT Act took effect. It proposes bringing lawyers, accountants, real estate agents, conveyancers, some high-value goods dealers, and the New Zealand Racing Board and the New Zealand Lotteries Commission into the AML/CFT Act regulatory net.
However, the key issue of who will supervise all these groups for compliance remains unclear, and the Ministry of Justice 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 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.
The Ministry of Justice has suggested either a single supervisor model, such as Australia has with AUSTRAC, or using a combination of the existing supervisors plus self-regulatory bodies as Britain does.
'Look beyond short term establishment costs and consider the longer term benefits'
In its submission bank lobby group the New Zealand Bankers' Association (NZBA) says the existing multi-agency supervisory model presents challenges. These include slow publication of regulatory guidance, and inconsistencies in approaches to supervision across the three. Thus NZBA argues a model similar to those in Australia with AUSTRAC and Canada with FINTRAC should be adopted in NZ.
"NZBA appreciates that the creation of a single supervisor will have resourcing and cost challenges. However, the fundamental goal of legislative reform should be to enhance the current AML/CFT regime. It is therefore important to look beyond short term establishment costs and consider the longer term benefits to New Zealand, and ensure an effective, equitable and sustainable model," NZBA says.
"NZBA recommends that the Ministry of Justice requests an appropriate allocation of funds for the financing of a single supervisor model from the Proceeds of Crime Fund (per the Criminal Proceeds Recovery Act 2009) as part of this review."
"NZBA supports the inclusion of lawyers, accountants, real estate agents, conveyancers, high value goods dealers and additional gambling service providers as reporting entities under the AML/CFT Act. In the view of NZBA and its members, these businesses and professions potentially present an inherently high risk of money laundering and accordingly NZBA submits that it is appropriate for them to be subject to the AML/CFT Act," NZBA says.
The bank lobby group suggests the professions being dragged into the AML/CFT net through phase two are given an implementation timeframe of two years. And NZBA is also calling for a centralised public register of all reporting entities.
'It's critical that there's a single supervisor'
In its submission Chartered Accountants Australia and New Zealand says it's "critical" given the national importance of AML/CFT issues that there's a single supervisor.
"We note that Australia has a single supervisor (AUSTRAC) and there may be benefit in an aligned trans-Tasman approach," Chartered Accountants Australia and New Zealand argues.
"In our view, consistency across all reporting entities should be the primary factor when considering the most appropriate supervisory model. Under the current multi-agency model, disparity among supervisors' interpretation and application of the AML/CFT Act is an additional cost to business."
Chartered Accountants Australia and New Zealand goes on to say it's vital that supervisors are adequately funded, noting the Ministry of Justice paper is "silent" on whether phase two of the AML/CFT Act will be government funded.
"We believe that these costs should be fairly and proportionately borne by those who benefit according to the user pays principle. We note that the objectives of the regime, particularly 'contribute to public confidence in New Zealand's financial system' are public benefits. Given this, we consider it to be appropriate for the taxpayer (ie through the Government) to meet this cost."
The group says it does support the extension of the AML/CFT Act to cover the accounting profession in principle, as this is in the public interest.
"However, our support is contingent on the regime being practical and cost-effective. This balance is best achieved through ongoing consultation with stakeholders, and appropriate and reasonable transitional timetables being agreed on."
Chartered Accountants Australia and New Zealand wants a "robust awareness campaign" and practical training for its members, offering to help with this.
'Insufficient evidence justifying lawyers inclusion'
In its submission the NZ Law Society says its "preliminary view" is the best supervisory model for phase two of the AML/CFT Act would be multiple agencies with self-regulatory bodies.
"In relation to lawyers, the Law Society considers it has the necessary experience and capabilities to be the supervisor of the legal profession for AML/CFT purposes, and the supervisor role logically fits with the Law Society's current regulatory responsibilities for the profession."
The Law Society does, however, note a concern over how the Law Society would be funded to carry out this supervisory role.
Interestingly, the group notes that while it recognises the case for lawyers being reporting entities under the AML/CFT Act, some lawyers question this claiming there's insufficient evidence justifying their inclusion.
Nonetheless the Law Society itself "accepts that the New Zealand legal profession is not immune from the mischief which the AML/CFT regime is designed to deter and detect and has a responsibility to co-operate in the global response to money laundering and terrorist financing."
The NZ Herald recently reported that reports released under the Official Information Act show police believe lawyers, accountants and real estate agents are being increasingly used to launder $1.6 billion in dirty money annually.
Meanwhile, the Law Society argues the proposed AML/CFT obligations for lawyers are fundamentally inconsistent with the traditional solicitor/client relationship of trust and confidence.
"The new obligations will need to be carefully crafted to ensure the solicitor/client relationship is preserved to the greatest extent possible, while still delivering on New Zealand's AML/CFT commitments to the international community."
(Also see: If you're going to do something, do it properly).
*This article was first published in our email for paying subscribers early on Tuesday morning. See here for more details and how to subscribe.
31 Comments
Normally I loathe Monty Python, but like that one. It's subtle.
But yeah, on topic, it's absolutely bottom-line for effective regulation that the regulators have to be independent, and maintain that distance from the industry so that they can't be compromised and the regulation regime isn't undermined through conflicts of interest or misplaced loyalties.
Of course there should be one supervisor - the benefit is that if two separate entities pick up a dodgy transaction and log it with the Regulator - this should raise a flag. With the current set-up this aspect is missing, and is therefore a major weakness.
No participants should be able to self-regulate. This will only create the potential for misadventure, and manipulation. Independence is compromised.
I can't see how a body such as the Law Society can actually regulate themselves on this - let alone real estate agents. I work in the finance sector and talking to lawyers their understanding of AML/CFT is actually rather woeful on the day to day matters. There needs to be one Regulator who has one interest, and one interest alone, and that is to prevent and detect ML/FT. The Law Society has too many interests as it is.
A good question. But I would say that. I've nearly completed three years of PhD research on just that, should be completed next few months. It goes right back to the first proceeds of crime legialstion (1992) and picks up the introduction of AML controls on lawyers, accountants and real estate agents (from 1996). Fair to say "if any" is not quite right. When it works it has worked spectacularly well, but finding such examples has proven the rarity. A great many lessons for policy effectiveness in all the others though.
Ron, you've been a frequent commentator on this and other related matters. Your commentary has been an extremely valuable contribution to the debate.
I, and possibly others, would be extremely interested in your PhD thesis. How can I/we get hold of a copy when it finally arrives?
Thanks so much Henry, actual data not always welcome in some quarters, so its great to enage with those on this site and elsewhere who prefer objective debate, as informed best we can. Disagreement still fine of course, just a better basis for discussion than unassisted dogma alone.
As a grizzled mostly legal & commercial bod in past life, I'm relatively new to this world of academia, so not sure the protocols. I think there's several months of hiatus once submitted, so realistically early next year I reckon for the thesis to see the light of day.
Assuming the physical, emotional and financial energy banks aren't all drained, I'm planning a book, which should be a much better read. In any event, will put up whatever I can, when I can to the website at AMLassurance.com if that helps, and the mailing list.
Speaking of more entertaining, the people who did "Outrageous Fortune" are launching the "Dirty Laundry" TV drama tonight. I've seen a couple of scripts. I'm no expert in that stuff but they looked like fun, and I'm hoping it might be a lighthearted way for regular people to help understand that this stuff is real, everyday NZ, not the "James Bond-like, palm trees and over there" thinking that still permeates. Caroline Courtney did a great job with a North & South feature piece likewise last year (also a link at the articles page).
Good morning Ron,
Thanks. That would be splendid.
The last time I laundered any money was the time I left my wallet in my pants pocket, but I do plough through a few international transactions from time to time, and it's always interesting to see the new hoops set up for me to jump through.
Thanks again
Why go slow when you can go fast ?
The AU banks and other Financial Institutions automatically send to AUSTRAC on a daily basis all transactions above $9999 - it's automatic - its electronic - AUSTRAC then collate it all
Why have 3 separate supervisors in NZ using different systems beats me when the banks and most of the instos are the same currently using the AUSTRAC systems (in AU)
I agree with a single regulator, but (in my view) it's important but secondary.
The real issue is policy effectiveness. Not whether we have rules, but if they actually work.
If the policy objective is to give the appearance of meeting international standards, the proposals will do so, and the supervisory model (whether the window is dressed in blue or pink) doesn't much matter.
But if the policy objective is to materially, significantly and demonstrably improve the capacity to detect, prosecute and prevent serious crime, something different than the unimaginative application of basic rules already shown not to have been successful ought to be implemented. And with that goal, a single supervisor makes sense, for all the reasons expressed here.
I separated my own submissions accordingly. Primary submission (focus on policy effectiveness, 5pp) and secondary submission (supervision model and other issues, 3pp), which I suggested policy officials needn't bother reading if they disagreed with the former.
[PS: Unfortunately, I couldn't put much data into it without risking being unable to submit the thesis as original, but tried to make the import as clear as possible]
Absolutely. Effective policy and effective supervision is ideal. Although even the most effective supervisor can't do much with ineffective laws.
There are many measures illustrating policy effectiveness. A simple one suffices to illustrate. With AML laws in place 30 years now and globally ubiquitous more than a decade, say $2T laundered globally and the UN reckons less than 1% is interdicted. Hardly a great indicator of effectiveness.
In NZ if we use the conservative $1.6B estimate (which excludes some serious crime, so $2-4B is perhaps more in keeping with international benchmarks), and if we use a fairly generous $30m on average being recovered each year (excluding last month's $43m blip, as the previous biggest single forfeiture was $5m, although to be fair NZ Police figures are ramping up each year, but that remains a generous average) using generous figures at both sides that's still just 2%.
That suggests that NZ Police is hitting above the international benchmark, but even on these figures, 98% gets through. And of course, the 98% that slipped though last year, and the year before, etc, continues to invest cumulatively. So even if we step up to a heady 4%, well above international efforts (and NZ Police is well on track for this) it's almost completely irrelevant. The message is still that crime pays, and serious crime pays seriously.
To make a difference, we need to inderdict above 50%, when the most serious criminals affecting our communities and society with their activities really will be flipping a coin every time to see whether crime pays, or not. To achieve that requires a step-change, something different. I'm sure the policy wonks are genuine in their belief that it 'should' make a difference, but a watered down version of what has proven in many countries not to have worked as well as hoped, isn't somehow magically going to work now, just because we wish it so, at least if we are to look at it brutally objectively.
Ron
Read your submission on policy and policy effectiveness
Lost me along the way - not quite sure what you are getting at
In a past life I worked for a Government Department as an enforcer of the law and was at ease understanding and intepreting Acts and Regulations
Can you reduce that down to one or two simple sentences
Thanks iconoclast, a useful test (if disappointing for me personally!). If put into legislation as proposed, I agree there'd be no trouble people like you and me understanding, interpreting and enforcing it. The essence of what I tried to say (ineptly as it was) is that a growing body of evidence is starting to show that applying 'the usual' rules doesn't actually work as well as intended, if the policy objective is to make a significant dent in crime. If the intention is just to meet international rules, it'll do that fine, and will probably help catch a few more crims, but no more than anyone else.
And some more explanation, for context:
FATF recognises the issues of countries just following 'the usual'. They first moved to a new 'effectiveness' regime. Arguably this remains 'output' rather than outcomes-oriented notwithstanding its language, but was a step forward. FATF move glacially, and I can't predict the future, but by the time of NZ's next evaluation I would be surprised if FATF hasn't moved forward another step, incorporating the effectiveness evidence so that the rules work much better at detecting and preventing much more crime than now.
It seems to me NZ has an opportunity to do something that looks good but won't make much difference, and we'll have to fix it later when FATF chides us gently. Or, as a small country with serious crime arguably less intractable, and comparatively more joined-together agencies able to work cohesively, we have a unique opportunity to help lead the way.
Other countries, and FATF, are heading that way anyway. We could be one of the first, or a follower, whichever the politicians select. And that's what I also suggested, to select transparently. It is of course their call, whether to just "meet international standards", or to make a serious, demonstrable, materially significant push into crime detection, prosecution and prevention. It would be naive to think they'll say it's only the former. Of course any politician would say its both, but the result, either way, will speak for itself.
I understand. You are discussing it from a top down point of view
I have a different view.
I have given some thought about systems for detecting and policing of money laundering. Have not yet seen any results of Phase I operations. What has been in the news are the results of police prosecutions. It appears the police achieve their discoveries as an adjunct to the pursuit of some other crime which in turn uncovers illegal proceeds of crime and money laundering.
Without a long boring dissertation, what will be necessary will be systems and procedures that identify probable money laundering events that can be audited from beginning to end, right across a range of money-laundering techniques
Once the risk areas are identified, and using a bottom-up approach, then design and enact the necessary laws that enable those processes
Yes (top down, to an extent), but I agree, much in the news has been the results of police prosecutions. I do look at the policy side (top down), but very much practically focused (so started from bottom up, analysing and assessing the involvement of all professional facilitators involved in a defined subset of financial transactions for which I was able to identify a clear dataset). I've also analysed just how much is driven by what you note as the adjunct to traditional policing, and how to 'design in' crime detection/prevention. I sometimes express it as a distinction between 'backwards' follow-the-money policing (when asset recovery specialists strip assets from crims found with traditional policing methods) and 'forwards' follow-the-money policing (when we look in the right places, by design, to detect, prosecute and prevent crime that might not have been found by those traditional methods, or to get it earlier, such as $100m shipment number two rather than shipment number seven [the research has uncovered examples just like this, with professional facilitators used along the way] and with the 'design' element involving 'next generation', ie beyond simple STR-responsive, policing. And wrapping that back up into what laws/systems enable policy effectiveness (ie substantial, demonstrable, crime detection/prevention capacity). Sounds a bit like what you've been doing too. Happy to chat over a coffee sometime, if you like.
Great simple and practical thoughts Ron, pity it will disqualify you from any Govt position requiring honesty, integrity and recommending (certainly not implementing ) rules that actually work and improve things. I suspect you book will become a best seller then unavailable!!
The lawyers have mostly been slow in picking up the crooks among themselves and the chances are they have missed quite a few.
Apart from any other trait the law is a reactionary profession and to be proactive in ferreting out the crooks amongst themselves must be an anathema to them.
Don't know. Have only had one personal experience where I took a complaint to them about a bill I felt was wildly overcharged. They ruled in my favour and it was against one of the biggies, RMcV. The reduction in the bill was dramatic, and I mean dramatic - 90% of the invoice value knocked off.
Next the Law society will want to audit their own tax compliance... Tui.
See http://www.nzherald.co.nz/nz/news/article.cfm?c_id=1&objectid=11462191 scroll down to see where lawyers rank. Not high, only ahead of Local Council members, Parliamentarians, and bringing up the rear - Journalists.
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