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Money laundering, and what New Zealand is doing about it

25 September 2008

The Ministry of Justice has just released an exposure draft of the Anti-Money Laundering and Countering Financing of Terrorism Bill. Many affected parties will have to pour considerable energy and resource into getting their business systems sorted out to comply with the rigours of the new law. A few firms, and quite possibly the new regulators themselves, will be scrambling at first given the scale of change.In this Counsel we look at the implications of the draft Bill.

The financial sector reform will involve new due diligence and reporting processes on a scale of intrusiveness not seen before in New Zealand. It should, however, be familiar to financial institutions and firms already conducting business in the USA or elsewhere (including, more recently, Australia).

Submissions on the draft Bill close on 10 October 2008. A view has already been expressed to the Ministry that this is a very short timeframe for a Bill of 131 clauses and over 80 pages in length. But the Ministry is adamant it is on a very tight time-line. Let us hope the degree of consultation is to be more than token.

Timing of reform

Anti-Money Laundering (AML) reform was originally supposed to happen this year but the Ministry recently announced that it will delay introduction of the Bill until early 2009. Over the intervening months there will be further information releases and drafts of the detailed regulations that will prescribe the technical matters covered in broad-brush by the statutory obligations.

The Bill broadly has bi-partisan political support, and is driven by offshore pressure, so it seems certain to proceed post-election regardless of the particular colour of government in 2009.

Compliance cost

Many financial institutions are very concerned about the cost, and the Government commissioned Deloitte to report to it independently on compliance cost. That report suggested headline compliance costs of $111.8 million for initial start-up cost, and potentially $42.7 million incremental cost per annum. Interestingly, that was a moderated/adjusted view by Deloitte: some participants surveyed suggested compliance costs could be more than double those amounts.

Australia has had AML laws for over a year now – and while it is hard to predict the parallels accurately yet, some major banks there anecdotally had between 40-60 staff internally working on AML implementation for nearly a year.

Some immediate issues for affected parties to consider include:

  • strategy to take on the Bill passage/submission process
  • education and compliance system implementation – which is where 90% of the cost may lie, in IT and software system enhancements
  • internal procedures, staff training, forms and documentation, reporting lines and customer/marketing interface
  • ongoing regulatory issues as and when money-laundering issues, or "false positive" issues, crop up for newly-regulated businesses.

 

 Who is affected?

Banks

Casinos

Other financial institutions

TAB

Finance companies

Racing/gaming sector

Fund managers

Sharebrokers

Building societies

Managed fund companies and trust companies

Credit unions

Accountants

Credit card companies

Real estate agents/brokers

Securities issue particpants and exchanges

Lawyers

FX money changers

Jewellers and precious metals dealers

Insurers/brokers

 

The international background

Make no mistake, this new regulation is driven from offshore. Multilateral co-ordination of efforts to eradicate money-laundering (and to ostracise countries who are complacent about it) is led through the Financial Action Task Force (FATF). This is an international body to which New Zealand has signed up as a member, with laudable goals which New Zealand supports.In 2003 the FATF reviewed New Zealand’s compliance with international obligations to combat money laundering/terrorist financing. It found our law, principally the Financial Transactions Reporting Act 1996, wanting.

Since then the Ministry of Justice has been reviewing, analysing, consulting, and more recently drafting new legislation designed to fix the deficiencies, and introduce a new tougher AML regulatory regime.

Laudable goals have to be put into action at some stage. The FATF is due to revisit New Zealand’s compliance in April 2009. The best practice espoused by FATF’s 40+9 Recommendations has got more stringent since our last review. This is the sharp end of the ‘international peer pressure’ to conform with global best practice (largely, US best practice) to combat money laundering and terrorism financing.

The Government acknowledges that New Zealand will still not pass the "compliance" aspect of the FATF review because the new Bill will not be in force by April, but draft laws may at least earn us a tick in the "commitment and willingness to implement" box. It will be a political disaster if the new Act is not at least introduced to Parliament, even if not passed, by the time of the FATF’s review.

The main changes

A key change is to extend the reach of reporting and compliance obligations beyond the banks and core financial institutions into other sectors, to ensure there are no weak links in the AML deterrence chain.Stage one implementation will cover banks, financial institutions and casinos. There is a two-stage implementation for a second tranche of non-financial firms/professions (e.g. accountants, lawyers, real estate sector) coming under the regulatory umbrella a year or so later, probably in 2010.

The Government is proposing that there be a "multiple supervisory" model comprising a number of AML regulators who currently oversee each sector for other purposes (e.g. Reserve Bank of New Zealand for banks and insurers, the Department of Internal Affairs for casinos). While fine in theory, there is risk of inconsistency and uncertainty of approach by each body adding complexity and cost in the long run.

Some supervisors/enforcers, such as the Reserve Bank, have not previously been called upon to act as quite such a hands-on ‘corporate cop’, in the same way that regulators like the Commerce Commission or Securities Commission are accustomed.

The main AML obligations have been well-signalled to stakeholders, and via the FATF Recommendations, but, as ever, the devil resides in the detail. Key points include:

  • more intensive initial or "standard" customer due diligence, before any business relationship is commenced
  • enhanced due diligence, on a risk-based approach, for high-risk situations such as cross-border or correspondent banking, politically-exposed persons, and new and anonymous technologies or products
  • enhanced reporting of suspicious transactions
  • fuller record-keeping to ensure transactions can be reconstructed or traced
  • internal policies and procedures for AML compliance, staff training and auditing
  • new provisions on cross-border cash movements.

These aspects will be backed up in varying ways with a raft of civil penalties and criminal offences for non-compliance. Pecuniary penalties may carry a maximum of $300,000 for individuals, or $5 million for corporations, and criminal offences threaten up to two years’ imprisonment.

Conclusion: how much of a problem is AML?

There is often initial scepticism in some quarters that money laundering even exists in New Zealand. So, is this a piece of new regulation in search of a problem, or additional compliance cost without any defined "mischief"?

Perhaps it is fair to say it is unlikely that Al Qaeda is lurking in New Zealand’s banking system, but a number of serious domestic issues exist (for instance, big money is being made from methamphetamine dealing, and is being recycled somewhere).

More sobering still, visiting AML experts have noted that while New Zealand is not a large financial hub of any sort, our stable democracy combined with efficient banking systems, membership of all the big international "clubs" and location/time zone actually make us potentially highly attractive to the sophisticated international money-launderer or terrorist financier.

Overall, it will not pay to be too complacent about implementing AML reforms in the longer term. Any developed nation that does so runs the risk of garnering financial "pariah" status, losing international confidence and credibility in its markets/ratings, and perhaps facing higher fund-raising costs.

If the Government can ensure these reforms get the "ticks" in the right international "boxes", at a compliance cost that doesn’t further damage New Zealand’s financial sector when it is already reeling from several market shocks, that should be applauded. But that is, quite squarely, the challenge that lies ahead.

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