Martin Dilly & Fiona Hall warn job cuts for anti-money laundering staff at the Department of Internal Affairs risk putting New Zealand on a path to the dreaded 'grey list'

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.