The Ministry of Justice has now released its consultation document on proposed regulations and codes of practice under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 ("AML/CFT Act").  The consultation document can be downloaded here.

AML/CFT Act

Reporting entities (essentially, casinos and financial institutions) have the following obligations under the AML/CFT Act:

• Developing and maintaining a risk assessment and risk-based AML/CFT programme;
• Customer identification and identity verification;
• Ongoing customer due diligence ("CDD");
• Suspicious transaction reporting ("STR");
• Record keeping; and
• Auditing and annual reports.

"Financial institution" is broadly defined to include persons who carry on one or more of a wide range of financial activities including accepting deposits; lending; issuing or managing means of payment (e.g. credit cards); trading in (amongst other things) securities; money market instruments; investing, administering, or managing funds or money on behalf of other persons; underwriting or placement of life insurance or other investment related insurance.

The AML/CFT Act adopts a "risk-based" approach.  The onus is on reporting entities to manage and mitigate their AML/CFT risk according to the size, nature, and complexity of their business. 

Commencement

The consultation document clarifies the commencement date for reporting entities' obligations, which is likely to be November/December 2012.  The Ministry has signalled that it considers reporting entities now have enough information to be compliant on the commencement date.   

Who is covered?

The regime will be implemented in two phases.  The first phase covers casinos and most financial institutions.  The second phase will capture other sectors such as lawyers, accountants, real estate agents and certain high value asset dealers.

The consultation document makes a number of sector specific proposals regarding the application of the AML/CFT Act to first phase reporting entities.

Financial advisers

The Ministry proposes to expand the application of the AML/CFT Act by:

• Including within the definition of "reporting entity" persons expressly required to be authorised financial advisers under the Financial Advisers Act 2008 ("FAA")  to the extent they arrange for other reporting entities to provide financial services to a customer. 
• Including persons who provide financial adviser services to wholesale clients as they are not required to be authorised financial advisers under the FAA.
• The rationale for this broadening of scope is that:
• Financial advisers are best placed to undertake CDD and submit STRs because "[t]hey will have a holistic view of a single customer's investment transaction behaviour". 
• Wholesale clients are not seen as presenting any lesser degree of AML/CFT risk and the Ministry is concerned that, if advisers of wholesale clients are included, there may be a loophole for clients and/or their advisers to avoid the AML/CFT Act by defining themselves as wholesale clients. 

Financial advisers will therefore not be exempt from the core obligations of CDD and STR.  However, it is proposed that financial advisers will only be required to comply with their AML/CFT obligations when they arrange for another reporting entity to provide a financial service to a customer.  AML/CFT obligations will not apply when an adviser is simply providing financial advice or financial planning services.

There is a suggestion that a code of practice may be issued for financial advisers setting out the expectations of a risk assessment proportionate to the nature of a financial adviser's business.

Securities Sector               

It is proposed to exempt securities registries from all obligations except STR.  The logic behind the limited exemption is that although the registry itself is not involved in any transaction, it is still in a position to observe those transactions.

Insurance Sector

The consultation document discusses a number of proposals in relation to the insurance sector.  Some of the key proposals include:

• Whole life insurance, endowment and annuity products are particularly attractive to money launderers because they can provide a "clean" income stream.  However, other products such as general risk based insurance and underwriting in relation to risk based insurance are considered to be of lower risk and accordingly are proposed to be exempt from the regime;
• Purely risk-based life insurance products are proposed to be exempt as they have no surrender value and therefore cancellation of the policy does not result in a return of funds; and
• Commercial premium funding agreements are proposed to be exempt (arrangements where the premium funder pays the premiums to the insurer and the customer then repays the loan over time to the premium funder).

Superannuation Sector

The key proposals in relation to superannuation schemes are:

• Reduced obligations will be imposed on schemes which are considered low risk (eg workplace based schemes, statute based schemes & Kiwisaver schemes for employees);
• Low-value superannuation accounts will be exempt (ie below $NZ1000), as they have a low ML risk profile; and
• Overseas pension accounts will be exempt as they are already strictly controlled and the Director-General of Social Welfare will have already verified the identity of the pensioner.

Private banking

It is proposed that banks and other financial institutions must consider the risks associated with 'private banking' relationships when formulating their AML/CFT programme.  'Private banking' customers are those who have a dedicated service representative, where their details are shielded or not fully available to other parts of the business, and have either a high level of wealth or conduct frequent high value transactions.

The rationale is that private banking is internationally recognised as a risk area due to the combination of high net wealth and possibility of customer anonymity.

General

Threshold values

The consultation document proposes the following threshold values, below which customer due diligence obligations do not apply:

Alignment with Australia

One of the key policy considerations behind the consultation document is the desire to achieve compatibility with Australian regulatory requirements where possible.  This is thought to assist with minimising compliance costs for businesses generally, particularly those that operate on both sides of the Tasman. 

Four areas have been specifically identified as areas where direct alignment is most necessary:

Customer due diligence

The AML/CFT Act prescribes three standards of CDD: simplified, standard and enhanced.  Each prescribes minimum standards for collecting and verifying identity information.  For identity verification, it is proposed to use a generic code of practice which will apply to all sectors equally and operate as a "safe harbour" for reporting entities.  These 'know your customer' obligations are aimed at reducing customer anonymity which is seen as a cloak for money launderers.

In essence, for low to moderate risk customers it is recommended that customer verification require one form of primary photo identification (a drivers license must be accompanied by a validation document), or one form of non-photo identification in combination with a secondary form of identification (eg drivers licence and birth certificate).

The consultation document also proposes codes of practice for non-face-to-face verification by a trusted referee or electronic verification. 

The consultation document also contains guidance in relation to customers requiring enhanced due diligence, including trusts, politically exposed persons, correspondent banking relationships, wire transfers, and new & developing technologies.  In respect of enhanced due diligence, the Act will require reporting entities to obtain information about the source of the funds and nature of the proposed business relationship.  In respect of trusts, it is proposed that reporting entities will need to collect, but not verify, the name and date of birth of beneficiaries.  Reporting entities will be required to identify the nature (or class) of beneficiaries of discretionary trusts or trusts with a large number of beneficiaries and, where possible, the number of beneficiaries within each class.  Trusts are a specific category widely considered to be at high risk because of the associated beneficial ownership relationships.

Beneficial ownership

The document proposes a beneficial ownership threshold of 25%.  This means that individuals who own 25% or more of a customer, would be subjected to customer due diligence requirements.  This threshold is proposed in order to capture various beneficial ownership arrangements which can be used to disguise criminal activities.

Address verification

The Act requires reporting entities to take reasonable steps to satisfy themselves that address information provided by customers is accurate.  There will, however, be exemptions in respect of non-New Zealand residents, and for casinos in relation to customers undertaking occasional transactions.

Who is not covered?

If a reporting entity is not expressly carved out in the regulations, it will be covered by the AML/CFT Act.  Ministerial exemptions can be applied for on a case by case basis. 

Conclusion

For better or for worse, the Ministry has given an unequivocal signal that it considers reporting entities now have enough detail to ready their compliance programmes by the time their obligations commence in November/December 2012.

Reporting entities hoping for greater detail on how to comply with their obligations will be disappointed by the consultation document.  However, the "high level" approach is consistent with the underlying "risk based" approach. 

National and sector risk assessments are still to come.  However, the message to industry has consistently been not to expect these risk assessments to shed significant light on compliance obligations.  Sector-specific codes of practice and less formal guidance from the supervisors may well assist, but reporting entities should not hold their breath or preparation of their compliance programmes. 

Where to from here?

6 September 2010	Submissions on consultation document close
End of September 2010	Final decisions on regulations expected
November-December 2010	Regulations to be Gazetted
November-December 2010	National and sector-specific risk assessments expected
Ongoing during implementation period	Development of guidance notes and sector specific codes of practice by supervisors
November-December 2012	Commencement of reporting entities' obligations

 

© Russell McVeagh 2009. All rights reserved. www.russellmcveagh.com