The Ministry of Justice is developing a set of proposals for release in May on first priority matters in relation to the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act).
This will provide an important opportunity to influence key design elements of the new regime; including which entities and transactions should be exempt, customer due diligence (CDD), third party reliance and designated business group issues.
The Ministry has provided an early guide to its thinking in a preliminary scoping paper and will incorporate any feedback from this into the May discussion document. This Brief Counsel summarises the contents of the preliminary paper. We will provide a more comprehensive analysis of the detailed consultation document when it is released in May.
Formal consultation document on first priority matters released in May.
Final proposals put to Ministers and Cabinet in July.
Full implementation timeframes announced in July.
Second priority matters (including risk assessment and compliance programmes, record keeping, and annual reporting) considered from May to December.
Key issue - reliance on third parties
The ability of a reporting entity to rely on another entity’s customer due diligence investigations will be central to the efficient operation of the Act. The Act permits a reporting entity to rely on some third parties’ due diligence investigations in certain circumstances. However, the Act also provides that the reporting entity remains liable for ensuring due diligence is carried out in accordance with the Act. The CDD issues that arise where intermediaries and pooled or nominee account structures are involved, and where face to face verification is not possible (such as for online businesses), have been recognised. Proposals include:
a code of practice for non-face-to-face verification of customers, and
for pooled or nominee accounts, an exemption from due diligence, account monitoring and record keeping obligations.
Extending the scope of “designated business groups” that can share anti-money laundering compliance, and conditions for group membership have also been suggested.
These regulations and codes of practice will be helpful, but broader third party reliance issues should also be considered. Retaining liability for CDD with a reporting entity that relies on a third party is consistent with the international Financial Action Task Force’s recommendations, but without more general guidance on when reliance will be reasonable (and so potentially within the immunity and defences in the Act), reporting entities may be reluctant to risk liability based on another’s actions or inactions.
Customer due diligence
The discussion document canvasses in considerable detail the basis on which a customer’s identity should be verified. It considers documentary, electronic and various other non face-to-face verification procedures. The preference is for a minimum standard for documentary identify verification to be set by regulations. However, again consistent with the risk based approach intended for the Act, the possibility of a code of practice to require or permit different standards depending on the customer’s risk is discussed.
Adjustments to the scope of the three due diligence levels - standard, simplified (for low risk customers) and enhanced (for high risk customers) - are proposed. Standard CDD is proposed to be extended to existing anonymous accounts. Simplified due diligence is proposed to also be available when dealing with Crown entities, trustees and statutory supervisors, Crown research institutions, organisations named in Schedule 4 of the Public Finance Act and certain statutory charitable trusts.
The difficulties inherent in identifying and verifying the beneficiaries of certain trusts (currently requiring enhanced due diligence) has been recognised. Consideration is being given to whether reporting entities should be required to identify, but not verify, the name and date of birth of certain beneficiaries of trusts. Reporting entities would be required to identify ten beneficiaries and then describe the number and nature of the remaining beneficiaries. Where a reporting entity might reasonably require a discretionary trust to identify the beneficiary of a payment, it is suggested that it should be required to do so.
Who is in and who is out?
Recognising the risk based approach intended by the Act, exemptions are being considered for a number of entities and products, including:
entities which engage in financial activities on only a very limited basis, such as retailers and other non-financial service providers (full exemption, on a class or individual basis)
low risk products and services, such as pure-risk life insurance products, insurance products which are closed to new customers or premiums, and funeral policies (full exemption)
corporate treasury functions provided within corporate groups (full exemption)
debt collection agencies (required only to report and keep records relating to suspicious transactions)
certain low value life insurance products (exempted from CDD verification until cash-out)
workplace-based superannuation funds (exempted from CDD verification until cash-out)
low-value superannuation funds (full exemption)
overseas pension accounts for certain countries (exempted from CDD verification), and
non-bank deposit takers in the process of being wound up (reduced CDD obligations).
“Second phase” entities
Further transitional exemptions are proposed for “second phase” entities, such as those which:
fall within the Act’s definition of “financial institution” but which are intended to be subject to the Act only in the second phase of reforms (such as real estate agents, lawyers, accountants and conveyancing practitioners)
carry out activities which are subject to the Act but are not captured by the Financial Transactions Reporting Act 1996
trade in certain wholesale market instruments (such as electricity futures, fishing quotas and emissions trading), and
are government entities and which provide central banking, settlement or funds management services.
Thresholds and inclusions
Consideration is being given to whether New Zealand’s current occasional transactions threshold for financial institutions of NZ$10,000 should be raised to match that in Australia (AU$10,000). A lower threshold is being considered for casinos.
Several values (20%, 25% and 50%) have been suggested as possible thresholds for deeming a person to be the beneficial owner of a customer and so requiring a due diligence investigation, with 25% the preferred option. This is consistent with the Australian and UK thresholds.
A threshold of NZ$1,000 has been proposed for requiring due diligence in relation to foreign currency exchange services and money and postal orders. NZ$5,000 has been proposed as the threshold for travellers’ cheques.
A NZ$2,500 maximum value threshold is proposed for non-cash redeemable stored value cards, which are proposed to be included within the Act’s scope under regulations. For cash redeemable cards, two thresholds would need to be met - a maximum value of NZ$1,000 at any one time, together with a NZ$10,000 annual maximum value.
Partial exemptions are proposed for wire transactions, including for wire transfers below NZ$1,000 (exempt from CDD on customer and originator information), and for intermediaries for international wire transfers (from maintaining originator information for the domestic leg of an incoming international transfer where it is not reasonable to attach the originator information). For domestic wire transfers, the transfer itself would be considered to constitute sufficient verification.