Govt to stick with 3 anti-money laundering supervisors as it moves to drag real estate agents, lawyers, accountants and others into the anti-money laundering net

The Government has rejected the idea of introducing a single Australian-style supervisor as it moves to extend anti-money laundering laws to real estate agents, lawyers, accountants, the New Zealand Racing Board and high-value goods dealers.

Rather, the Government plans to retain the existing anti-money laundering supervision model, which features the Reserve Bank (RBNZ), Financial Markets Authority (FMA) and Department of Internal Affairs (DIA). The DIA will take on supervision for compliance by real estate agents, lawyers, conveyancers, accountants and businesses that trade in high value goods such as jewellery, precious metals, precious stones, watches, motor vehicles, boats, art or antiquities.

The Government has also rejected the idea that industry bodies such as the New Zealand Law Society could supervise their own industry as it moves to introduce so-called phase two of the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act).

"Retaining the existing model supports consistent supervision by limiting the number of supervisors. Cabinet proposed not to proceed with a single supervisor to cover all sectors. Establishing a new, single supervisor would be more costly in the short term and would require significant time to build the expertise, systems and structures required for effective supervision. This option would also not leverage the existing relationships the current supervisors have with their sectors," a Ministry of Justice information paper says.

"Having multiple agency supervision by self-regulatory bodies isn’t considered appropriate in New Zealand. Although self-regulatory bodies could utilise the existing relationships they have with their entities, they have no experience in AML/CFT supervision and would need to build capability to ensure effective, risk-based, proactive monitoring and enforcement. Establishing a wider group of supervisors also increases the risk of inconsistency across supervisors. This risk has been realised in the UK where such an approach has led to inconsistent levels of supervision between sectors." 

Justice Minister Amy Adams says the Government’s plans to introduce the AML/CFT Amendment Bill early next year and have it passed by mid-2017. Adams released an exposure draft of the Bill, and a phase two information paper on Tuesday.

Six months for lawyers, 24 months for the NZ Racing Board

It's proposed that lawyers and conveyancers will have to comply with the amendment Act six months after it's passed, accountants will get 12 months to comply. Real estate agents, who will be covered by the Act when they represent either a seller or buyer in the sale or purchase of real estate, will get 18 months to comply. The New Zealand Racing Board will also get 18 months, and high value dealers will get 24 months.

The Police Financial Intelligence Unit (FIU) last year noted real estate remains an attractive option for money launderers, both in the layering and integrating of the proceeds of crime. Further, real estate was "increasingly becoming an international business which creates the opportunity for complex transactions, and to layer real estate deals across many jurisdictions."

The information paper notes racing and sports betting is illegal in NZ unless offered by the NZ Racing Board under the Racing Act 2003. Although the Board already has limited AML/CFT obligations under the Financial Transactions Reporting Act 1996, it currently has a ministerial exemption from the AML/CFT Act which will expire when Phase 2 comes into force. The Board would be covered by the Act when it operates accounts on behalf of customers or carries out large cash transactions over $10,000.

Meanwhile, businesses that trade in high value goods will only be covered by the Act if they: trade in jewellery, precious metals, precious stones, watches, motor vehicles, boats, art or antiquities, and accept cash of $15,000 or more for single transactions or a series of related transactions. 

'A very ambitious timetable'

AML expert Ron Pol suggests the Government is pursuing a very ambitious policy development timetable that's perhaps too ambitious. Pol says many businesses will be unable to prepare their systems or train staff in time. Although there are "many sensible elements" to the proposals, Pol says some of the work being done by the Police and the Ministry of Business, Innovation & Employment "at the AML coalface" is well ahead of the policy settings. 

"So the new rules perhaps represent a missed opportunity to capitalise on that leadership, and for New Zealand to help other countries, and itself, achieve significantly better outcomes, beyond the basic output measures and ‘tick-box’ compliance of incrementally adding a few more rules every few years," says Pol. (There are longer, more detailed comments from Pol at the foot of this article).

In a press release Adams says $1.3 billion is laundered each year by criminals. She also says the Government commissioned EY to provide a report on compliance costs, which shows the AML/CFT Act reforms "may" impose up to $1.6 billion over ten years on New Zealanders. The information paper says initial estimates suggest the maximum cost to business could be $1.6 billion over a decade.

“Money laundering is the life-blood of profit-motivated crime. It allows criminals to fund their lifestyle and it fuels re-investment in criminal ventures,” says Adams.

“Our goal is to make sure the regime is as effective as possible, while minimising the impact on businesses and their customers. We need to address the real risks money laundering and terrorist financing pose, while also ensuring compliance costs are as low as possible."

'Protect and help New Zealand live up to its reputation'

Adams says consultation on the exposure draft will give affected sectors, businesses and New Zealanders with the chance to have their say.

"It is estimated that around $1.3 billion from the proceeds of fraud and drug offending is laundered each year in New Zealand. “These reforms alone have the potential to disrupt up to $1.7 billion in fraud and drug crime over the next decade. This will mean less crime and fewer victims. Estimates also suggest it may prevent up to $5 billion in broader criminal activity and reduce about $800 million in social harm related to the illegal drug trade," says Adams.

“The reforms will also protect and help New Zealand live up to its reputation as being corruption free and a good place to do business. They will bring us into line with international standards, and help prevent New Zealand becoming a target for overseas money launderers and terrorist financers."

The information paper says a statutory review of the AML/CFT Act will take place after New Zealand's AML/CFT regime is evaluated by international body the Financial Action Task Force, which is expected to take place in 2020.

The Bill also includes a series of other changes to the AML/CFT regime. Among these is a proposal to broaden suspicious transaction reporting requirements to include "suspicious activities."

"Reporting of suspicious transactions is already part of the AML/CFT regime. However, there are limitations. Currently, important information isn’t being reported to the Police Financial Intelligence Unit (FIU) because it’s not directly related to a transaction. For example, a business may suspect a customer is seeking to establish trusts or company structures in order to launder money or evade tax. But if no underlying transaction has been carried out yet, currently the business doesn’t have to report this to the FIU. This change will affect both Phase 1 and Phase 2 reporting entities. The draft amendments would require businesses to report suspicious activities related to the services covered by the AML/CFT laws. For example, where a business offers money remittance and is also a supermarket, it should only be required to report suspicious transactions or activities related to money remittance," the information paper says.

Phase one of the AML/CFT Act took effect in 2013. Under the Act as it currently stands, the RBNZ supervises compliance by banks, life insurers, and non-bank deposit takers. The FMA supervises issuers of securities, trustee corporations, futures dealers, collective investment schemes, brokers and financial advisers. And the DIA supervises casinos, money changers, trust and company service providers, and what are described as "reporting entities" not covered by the RBNZ and FMA.

Consultation on the Government's phase two plans is open until 5pm on Friday, January 27.

Ron Pol's comments

Below is a detailed initial response to the Government's proposals from Ron Pol. Formerly a lawyer in New Zealand and the UK, Pol is a crime prevention and money laundering specialist with AMLassurance.com. He is completing a political science doctorate on money laundering, crime prevention and policy effectiveness, with particular emphasis on more effective ways to cut the money laundering risks of lawyers, accountants and real estate agents. Pol has written several articles for interest.co.nz, which can be found here.

They are meeting a very ambitious policy development timetable. Perhaps too ambitious in some respects. The simple reality is that many businesses will be unable to prepare their systems or train staff in time. Eighteen months for real estate agents is ambitious, six months for lawyers means that a great many will likely be completely unprepared, and many others poorly prepared, to meet new obligations. A timetable that ignores reality simply guarantees non-compliance. 

There are, however, many sensible elements to the proposals, including aligning legal professional privilege provisions with its scope elsewhere. That should help reduce confusion, argument and unnecessary cost. 

Likewise, expanding information sharing capabilities and broadening the reporting requirement from suspicious transactions to suspicious activities. My doctoral research, which uncovered ways that lawyers, accountants and real estate agents have been used by criminals to launder the proceeds of serious crime, revealed cases where professionals faced situations that might not be classified ‘transactions’ within the specific lists of activities covered by the Financial Transactions Reporting Act. That means there may have been no obligation (at least under that legislation) to report suspicious activities, even in some cases where professionals’ services were used to help facilitate large importations of methamphetamine. Closing the ‘transactions’ versus ‘activities’ loophole should help. 

The evidence of how professionals have been used to facilitate financial transactions involving the proceeds of serious crime also revealed criminals compartmentalising knowledge of their activities between the various professionals involved in each transaction. It also showed ‘displacement’ effects, where criminals used professionals in different ways than before, evidently trying not to trigger reporting obligations. The list of services proposed to be covered has been extended, so criminals not paying attention to these changes may be caught out. Criminals who know how to read, however, might be expected to continue adjusting how they use professionals, just as the evidence shows they have been doing for the past two decades, in slightly different ways less likely to trigger reporting obligations. 

In that regard, a few hours with the evidence-base should reveal any gaps in the present proposals that criminals have already used, and others they might be able to move into. Six months won’t be long enough for most lawyers to be ready, but it’s plenty of time for criminal networks to adjust their methods, a technique that the New Zealand evidence reveals they’re already familiar with. 

Overall, the New Zealand proposal fills some gaps, but doesn’t address any of the fundamental issues that policymakers in other countries have started to address. An obvious area is retaining the fragmented supervision of multiple supervisors. More fundamentally, from a policy effectiveness perspective, is that the proposals continue the “incremental approach” (of every few years filling more gaps by adding businesses and services covered, and doing enough to meet the latest FATF rules) that is regarded simply “no longer appropriate” by parliamentarians overseas.  

The proposals are notably unimaginative in that regard, and seemingly ignore contemporary and emerging anti-money laundering best practices. Broadly speaking, in addition to filling a few of the most obvious gaps, the proposals follow the old approach of doing enough to meet international standards, without thinking too much about the emerging policy effectiveness and outcomes-focused practices. The new approach doesn’t just ask ‘do we have rules’ or ‘do they meet international standards’? It also asks ‘do they work?’ and focuses less on the ‘outputs’ of a set of rules, against which bureaucrats can tick boxes. It asks whether any new rules will materially and substantially improve New Zealand’s capacity to detect and deter crime. On that front, the new rules should help, a little, but they risk achieving an underwhelming policy objective, at considerable cost, notwithstanding some cost-reduction rhetoric. 

That’s a shame, because against some of the best available international comparators, in a book due out next year, it seems that on some key measures New Zealand already fares better than most countries, in many cases very considerably better. Quite simply, it seems, because some of the work being done by Police and MBIE at the anti-money laundering coalface is well ahead of the policy settings. So the new rules perhaps represent a missed opportunity to capitalise on that leadership, and for New Zealand to help other countries, and itself, achieve significantly better outcomes, beyond the basic output measures and ‘tick-box’ compliance of incrementally adding a few more rules every few years.