PM says Government to accelerate introduction of second round of Anti-Money Laundering rules to include solicitors, accountants and real estate agents after Panama Papers; Dunne concerned about reputational damage to NZ from tax haven talk

By Bernard Hickey

Prime Minister John Key has announced the Government will accelerate the introduction of stalled plans to pull trust lawyers, solicitors, accountants and real estate agents into the tough Anti-Money Laundering (AML) regime that was launched in 2013 to force banks and fund managers to ensure money they handle is legitimate.

The Government has talked for over two years about planning this second round of extending these tough new AML rules to all those lawyers setting up foreign trusts, as well as to solicitors and real estate agents, but the reforms have been stalled at the officials level since 2013. See more here on that delay in Gareth Vaughan's piece from October 2015 asking "whether a sign saying 'welcome to John Key's South Pacific money laundering paradise' should be hoisted at Auckland International Airport." I called for an acceleration of round two of the AML reforms in this opinion piece from June 7 last year.

Now the intense pressure over the Government's slow response to the highlighting of New Zealand's roles in the Panama Papers as a destination for the questionable use of foreign trusts by Mexican property developers, Venezuelan bankers, Columbian car dealers and Israeli drone exporters has caused the Government to think again. The Government was also criticised for stalling a planned IRD review of foreign trusts in late 2014 and early 2015, which it is now doing in a review by John Shewan announced after the release of the Panama Papers.

I asked Key at his post-cabinet news conference if the Government would now accelerate the second round of the AML reforms, given that currently some trust lawyers are not subject to the more stringent AML rules relating to identifying the source and legitimacy of funds.

"I think so. I think part two of the anti-money laundering legislation does need to be brought forward on the (Parliamentary) order paper," Key said.

"The focus was always rightfully so on part one because that was where the bulk of the work was done, but part two needs to move forward," he said.

I then asked when this would happen, given repeated talk by Justice Minister Amy Adams in 2014 and 2015 of plans for round two, but no confirmation they would go ahead.

"Justice has always thought there were other priorities and like anything, higher priorities, but we're encouraging Justice to see it a slightly different way," Key said.

"We've been arguing that (to bring it forward). They've been arguing there's other priorities," he said.

Asked how soon it would happen, he said: "As soon as we rapidly can."

Banks wanted speedier Round II of AML

Bankers and others have been arguing for the earlier introduction of round two, although real estate industry and accounting industry lobbies are understood to have argued for delays, given the extra compliance costs involved.

The New Zealand Bankers' Association (NZBA) and ANZ argued last year that new disclosure rules for home buyers should be accompanied by the second round of AML rules, to take some of the onus for identifying the source of funds for property purchases off banks.

"NZBA strongly submits that the intention of the Bill would be better achieved by considering amendments that place the onus of identifying and verifying the participants in a transaction on those people who have the direct relationship with the prospective purchasers, in this case this may be parties such as real estate agents and lawyers," the NZBA argued last year in a submission to the select committee considering the new disclosure rules that applied from October 1.

ANZ suggested in its submission the Government should speed up plans to introduce Phase 2 of the AML/CFT Act.

"ANZ queries whether the intention of the Bill would be better achieved by amendments that focus on legislation addressing other parties' involvement in the property transactions and transfer of funds, as in many cases banks will not be directly, if at all, involved in the transaction. This would be addressed by development of Phase 2 of the AML-CFT Act. ANZ submits that Phase 2 should be expedited," ANZ said.

Justice delayed

Gareth Vaughan reported in May last year the Government had not decided when to push ahead with the second round of anti-money laundering legislation.

A Ministry of Justice spokesman told interest.co.nz then that the Ministry had begun initial policy work for the so-called phase two of the AML-Countering Financing of Terrorism Act (AML/CFT).

"But) the timing and scope for this work is yet to be determined. We will communicate with the legal profession and other sectors about phase two at the appropriate time," the Ministry of Justice spokesman said.

These comments suggested little or no progress since October 2014 when the Ministry of Justice said initial policy work for phase two was underway, but no decisions had been made on the exact timing of this, or the specific sectors that will be brought within the Act's scope.

Phase two is expected to extend AML/CFT obligations to businesses and professions including lawyers, accountants, conveyancing practitioners, real estate agents and businesses that deal in high-value goods such as auctioneers and bullion dealers.

"Lawyers’ and accountants’ obligations under the Financial Transactions Reporting Act 1996, which includes requirements such as carrying out due diligence on customers’ identities and reporting suspicious transactions, will continue until phase two reforms are implemented," the Ministry spokesman said.

The AML/CFT Act took effect from July 2013.

Amy Adams commented in a July 2015 speech that "the Ministry of Justice has begun preliminary policy work considering a second tranche of AML/CFT reform to extend coverage to additional Designated Non-Financial Professions and Businesses, including lawyers, accountants, conveyancing practitioners, real estate agents and businesses that deal in high-value goods."

The preliminary work seemed to have been ongoing for over a year at that stage.

"You can expect more of an update on this work as it progresses," Adams said in July 2015.

International pressure too

The Financial Action Task Force (FATF), an inter-governmental body established by the Group of Seven that sets policies and standards on anti-money laundering and combating terrorist financing, effectively removed New Zealand from the international anti-money laundering dogbox upon the enactment of the AML/CFT Act in 2013. However, FATF said it expected to see the AML/CFT net widened to by the phase two initiative by 2017.

FATF recently published a mutual evaluation report on Australia's AML-CFT regime that provides some insights for New Zealand.

"The report underscores the importance FATF places on ensuring that all relevant sectors, eg: lawyers, accountants, real estate agents and high-value dealers, are fully covered under AML/CFT regimes in order to reduce the ability of criminals and criminal organisations to launder money, which in many cases will be the proceeds of crime," the Ministry spokesman said.

Dunne worried too

Meanwhile, Key again denied New Zealand was a tax haven and said international media had not reported that New Zealand was a tax haven. The Australian Financial Review and Reuters have both reported on New Zealand's role in the Panama Papers.

However, former Revenue Minister Peter Dunne took the unusual step of issuing a statement today saying the Panama Papers raised some serious questions.

"I am especially concerned at the revelation that the numbers of foreign trusts established in New Zealand has gone up almost four-fold in the last decade. That explosion inevitably raises perceptions that New Zealand is being used a tax haven, and that is not good for our international reputation," Dunne said.

"These revelations challenge the identity of New Zealand - we do not want to be seen as a country that enables tax evasion. We know how we regard other countries traditionally labelled tax havens - it is more than a little galling to think New Zealand might now be regarded in that light," he said.

Dunne, who was Minister of Revenue from 2005 to 2013, said he could not recall being advised by IRD about New Zealand having a problem or becoming a tax haven.

"That concerns me too, in the light of current revelations. Was Inland Revenue not aware of what was going on, or did they genuinely perceive the issue to be unimportant?," he said.

"The bottom line is that being labelled a tax haven has in transparency and reputation terms, the same impact that an outbreak of foot and mouth disease would have on our reputation as viable primary producer."