Anti-Money Laundering and Countering Financing of Terrorism Bill

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Explanatory note

General policy statement

The purpose of this Bill is to enhance New Zealand’s anti-money laundering and countering the financing of terrorism (AML/CFT) framework, and in doing so, progress compliance with the Financial Action Task Force’s (FATF) AML/CFT Recommendations and assure the robustness of New Zealand’s financial system.

The FATF Recommendations, which have widespread support as being the international standard for AML/CFT, provide the reference point for the changes proposed by the Bill. The FATF was created in 1989 by the then G-7 group of countries in response to the threat that money laundering posed to the international financial system. New Zealand has been an active member of the FATF since 1991. Member countries are routinely assessed via a Mutual Evaluation process for compliance with the FATF Recommendations. New Zealand’s third Mutual Evaluation is currently underway. New Zealand’s compliance with the FATF Recommendations will be publicly reported on in October 2009.

The overarching objectives of the Bill are to—

  • improve the detection and deterrence of money laundering and the financing of terrorism:

  • enhance New Zealand’s international reputation:

  • contribute to public confidence in the financial system:

  • realise these objectives with minimum cost through providing that the AML/CFT framework is appropriate to New Zealand’s broader financial system, is compatible with international AML/CFT frameworks (particularly that of Australia), and incorporates a risk based approach that provides businesses scope for assessing and responding to the risks of their particular operating environment.

The Bill requires that businesses covered by the AML/CFT reforms, which in this first phase include casinos and businesses providing financial services (reporting entities), assess the AML/CFT risks that they may face in their business, establish and implement measures to appropriately manage those risks, and report any suspicious financial transaction activity that they identify to law enforcement. To do so effectively, the Bill requires reporting entities to—

  • establish, implement, maintain, and regularly audit an AML/CFT programme and undertake more rigorous customer due diligence measures (improving upon those set out in the Financial Transactions Reporting Act 1996):

  • implement enhanced due diligence measures relating to customers, business relationships, and transactions presenting higher AML/CFT risks. A notable measure in the Bill, in this respect, is the inclusion of enhanced measures relating to people responsible for prominent public functions, the intention being to enhance anti-corruption measures relating to such prominent public roles:

  • undertake ongoing account and transaction monitoring:

  • maintain records of account transaction activity for 5 years:

  • more systematically report suspicious transactions to the Financial Intelligence Unit (again, improving upon the requirements set out in the Financial Transactions Reporting Act 1996).

To support the overall functioning of the AML/CFT system, the Bill creates a AML/CFT supervisory regime to monitor, assist, and enforce reporting entities’ compliance with their AML/CFT obligations, and maintain systems to identify and manage national level AML/CFT risks. A supervisory regime involves multiple existing government agencies, as this approach minimises establishment costs and builds on existing capabilities so that ongoing delivery is cost effective. Supervisory agencies include the following:

  • the Securities Commission for issuers of securities, trustee companies, futures dealers, collective investment schemes, brokers, and financial advisers:

  • the Reserve Bank of New Zealand (RBNZ) for banks, life insurers, and non-bank deposit takers:

  • the Department of Internal Affairs for casinos, non-deposit taking lenders, and money changers, and other financial institutions not supervised by the Securities Commission or RBNZ.

The Bill provides supervising agencies with additional powers to undertake their new role, and establishes governance and accountability, and information sharing arrangements to help ensure consistency and effectiveness of implementation across the AML/CFT regime. Key provisions include—

  • powers to monitor, inspect, and sanction reporting entities so that supervisors can properly enforce reporting entities’ compliance with AML/CFT obligations. The effectiveness of the AML/CFT reforms is dependent on the willingness and ability of reporting entities to comply with the regime. The powers are designed to be facilitative in the first instance, but include a range of civil and criminal offence and penalty provisions to reinforce compliance:

  • conditions on the use of AML/CFT information, including provision for supervisors and the Police and Financial Intelligence Unit (FIU) to request and share AML/CFT compliance information and money laundering and terrorism financing-related information with each other in both domestic and international contexts. This would be subject to a proper interest protection:

  • the creation of an AFL/CFT co-ordination committee, comprising agencies involved in the operation of the AML/CFT regime, tasked with ensuring the regime is implemented efficiently and effectively:

  • measures to exempt certain financial products justified as being of low risk, and certain businesses inadvertently caught by the Bill.

The Bill also extends the cross-border cash reporting regime administered by the New Zealand Customs Service.

Clause by clause analysis

Clause 1 is the Title clause.

Clause 2 is the commencement clause. It provides for the Bill, and for different provisions of the Bill, to be brought into force by Orders in Council.

Part 1
Preliminary provisions

Clause 3 states the purpose of the Bill.

Clause 4 relates to interpretation and defines certain terms used in the Bill.

Clause 5 effectively provides that cash denominated in a currency other than a New Zealand currency is taken to be the equivalent in New Zealand currency.

Clause 6 provides that the Act binds the Crown.

Part 2
AML/CFT requirements and compliance

Clause 7 provides that the Bill has effect despite anything to the contrary in any contract or agreement.

Subpart 1Customer due diligence

Subpart 1 of Part 2 (clauses 8 to 36) sets out the process by which a reporting entity satisfies itself that its customers are who they purport to be and that their financial transactions are legitimate. This process is known as customer due diligence and there are different forms of customer due diligence depending on the type of customer, the nature or circumstances of the transaction, and the level of risk involved.

Clause 8 defines the various forms of customer due diligence with reference to the sections that set out the requirements for each type. The types of customer due diligence are enhanced, simplified, and standard.

Clause 9 provides that customer due diligence must be conducted not only on the customer but on any beneficial owner of a customer or any person acting on behalf of a customer. The clause also indicates when the different types of customer due diligence must be conducted.

Clause 10 requires a reporting entity to rely on its risk assessment (undertaken in accordance with clauses 54(c) and (f) and 55) in order to establish the level of risk involved when conducting customer due diligence

Clause 11 describes the basis on which customer identity is to be verified.

Standard customer due diligence

Clause 12 sets out the circumstances in which a reporting entity must conduct standard customer due diligence.

Clause 13 sets out the information a reporting entity must obtain in order to identify a customer when conducting standard customer due diligence.

Clause 14 sets out the process for verifying the identity of a customer when conducting standard customer due diligence.

Clause 15 sets out some additional information a reporting entity must obtain when conducting standard customer due diligence.

Simplified customer due diligence

Clause 16 sets out the circumstances in which a reporting entity may conduct simplified customer due diligence. This type of due diligence may be conducted in place of standard customer due diligence if the customer is a company listed on an exchange registered under Part 2B of the Securities Markets Act 1988, a government department, a local government organisation, the New Zealand Police, the New Zealand Security Intelligence Service, or an entity specified in regulations.

Clause 17 sets out the information a reporting entity must obtain in order to identify a customer when conducting simplified customer due diligence.

Clause 18 sets out the process for verifying the identity of a customer when conducting simplified customer due diligence.

Clause 19 sets out some additional information a reporting entity must obtain when conducting simplified customer due diligence.

Enhanced customer due diligence

Clause 20 sets out the circumstances in which a reporting entity must conduct enhanced customer due diligence. The types of circumstances listed are those that involve customers or situations that, by their nature, are considered to have a high risk of money laundering or the financing of terrorism. This includes customers who are trusts, are not resident in New Zealand and come from countries that have insufficient anti-money laundering or counter-terrorism financing systems or measures in place, companies with nominee shareholders or shares in bearer form, or politically exposed persons. Transactions regarded as high risk are wire transfers, or transactions that are complex and unusually large or that show an unusual pattern that appears to have no economic or lawful purpose. Other situations in which enhanced customer due diligence must be conducted are those involving a correspondent banking relationship, those that the reporting entity considers should be subject to enhanced customer due diligence because of the level of risk involved, or those that involve new or developing technologies and products that may favour anonymity. Regulations may also be made to cover other circumstances that must be subject to enhanced customer due diligence.

Clause 21 sets out the information a reporting entity must obtain in order to identify a customer when conducting enhanced customer due diligence.

Clause 22 sets out the process for verifying the identity of a customer when conducting enhanced customer due diligence.

Clauses 23 to 27 set out additional requirements for enhanced customer due diligence in situations involving politically exposed persons, wire transfers, correspondent banking relationships, and new or developing technologies and products.

Ongoing customer due diligence and account monitoring

Clause 28 requires reporting entities to continue to conduct due diligence and to monitor accounts. It sets out the minimum requirements for ongoing customer due diligence. This includes a review of customer account activity and transaction behaviour and customer information held by a reporting entity.

Reliance on third parties

Clause 29 allows one member of a designated business group to rely on another member of that group to perform certain aspects of the AML/CFT requirements. In particular, one member of the group may rely on another member to conduct customer due diligence procedures if certain conditions are met. In addition, it may adopt part of another member of the group's AML/CFT programme relating to record keeping, account monitoring, ongoing customer due diligence, and annual reporting of the group (subject to any conditions) or, if relevant to the member's business, use another member's risk assessment. One member of the group may also make a suspicious transaction report on behalf of another member or all members of the group. The clause is subject to clause 33, which relates to the protection of personal information.

Clause 30 allows a reporting entity to rely on a third party in another country to conduct customer due diligence procedures subject to certain conditions. In particular, the third party being relied on must either be a reporting entity or be resident in a country with sufficient anti-money laundering and countering the financing of terrorism systems and measures in place and be supervised or regulated for AML/CFT purposes. The reporting entity, however, remains responsible for ensuring that customer due diligence is conducted in accordance with the Bill.

Clause 31 allows a reporting entity to authorise a person to be its agent and to rely on that agent to conduct customer due diligence on its behalf and to obtain information for that purpose.

Clause 32 provides that the information obtained from a third party conducting customer due diligence procedures for a reporting entity may only be used by that entity for the purposes of complying with the Bill and the regulations.

Clause 33 provides for the protection of personal information supplied by one member of a designated business group to another member of that group. The protection is limited to personal information provided for the purposes of establishing identity or verification of identity when conducting customer due diligence on behalf of another member of the group or for the purposes of adopting part of one member's AML/CFT programme. The information must be subject to privacy protections at least equivalent to those set out in privacy principles 5 to 11 in section 6 of the Privacy Act 1993. The reporting entity providing the information, however, remains responsible for the use or disclosure of that information.

Prohibitions

Clauses 34 to 36 contain prohibitions on establishing or continuing a business relationship in certain circumstances or in relation to certain transactions.

Subpart 2Suspicious transaction reports

Subpart 2 of Part 2 (clauses 37 to 45) deals with the reporting of suspicious transactions by reporting entities to the Commissioner of Police and restricts the disclosure of information relating to a suspicious transaction report.

Subpart 3Record keeping

Subpart 3 of Part 2 (clauses 46 to 52) sets out the requirements for a reporting entity to keep records relating to transactions and business relationships.

Subpart 4Compliance with AML/CFT requirements

Subpart 4 of Part 2 (clauses 53 to 58) deals with internal procedures, policies, and controls that a reporting entity must have in order to prevent activities related to money laundering and the financing of terrorism. In particular, a reporting entity must have an AML/CFT compliance programme and an AML/CFT compliance officer, and staff must receive appropriate AML/CFT training. Before conducting customer due diligence or establishing an AML/CFT programme, a reporting entity must undertake an assessment of the risk of money laundering and financing of terrorism (a risk assessment). This risk assessment is used to determine the level of risk when conducting different types of customer due diligence. A reporting entity must review both its risk assessment and AML/CFT programme and ensure that they are audited every 2 years or at any time if a request for an audit is made by the reporting entity's AML/CFT supervisor. A reporting entity is also required to provide an annual report on its risk assessment and AML/CFT programme to its AML/CFT supervisor. The report must take into account the results and implications of any review or audit. Reporting entities must ensure that their branches and subsidiaries comply with AML/CFT requirements.

Subpart 5Codes of practice

Subpart 5 of Part 2 (clauses 59 to 64) provides for the preparation, approval, and publication of codes of practice.

Clause 59 provides definitions of codes of practice and proposed codes of practice.

Clause 60 provides that AML/CFT supervisors must prepare codes of practice for their sectors if directed to do so by their Minister. The purpose of the code is to provide a statement of practice to assist reporting entities to comply with their obligations under the Bill and the regulations.

Clause 61 sets out the procedure for approval and publication of codes of practice. Before recommending a code of practice to the Minister for approval, the AML/CFT supervisor must consult with persons and organisations that the Minister thinks have an interest in the subject matter of the code. The Minister may direct the AML/CFT supervisor to reconsider any aspect of the code of practice and make amendments. In the event that the AML/CFT supervisor does not amend the code of practice as directed by the Minister, the Minister may make those amendments as well as any other amendments that the Minister, after consultation with the AML/CFT supervisor, considers necessary.

Clause 62 provides for the amendment and revocation of codes of practice.

Clause 63 provides that publication in the Gazette of a notice of a code of practice is conclusive evidence that the procedural requirements for approval and publication of the code have been complied with.

Clause 64 provides for the legal effect of codes of practice.

Subpart 6Cross-border transportation of cash

Subpart 6 of Part 2 (clauses 65 to 68) deals with cross-border transportation of cash. This subpart requires a person who brings cash (which includes physical currency and bearer-negotiable instruments) into, or takes cash out of, New Zealand (whether accompanied or unaccompanied) to make a cash report to the New Zealand Customs Service if the cash amount is over the applicable threshold value. The applicable threshold value will be prescribed in regulations made under the Bill. A person in New Zealand who receives cash over the applicable threshold value from overseas will also be required to make a cash report. The Customs officer who receives a report must forward that report to the Commissioner of Police. The chief executive of the New Zealand Customs Service is required to keep records of cash reports. The report must include details of the identity of the person making the report and the date on which it is made. These records are to be retained for at least 1 year.

Part 3
Enforcement

Part 3 sets out the enforcement regime (which consists of civil and criminal enforcement) relating to non-compliance with the AML/CFT requirements set out in Part 2.

Subpart 1General provisions relating to Part

Proceedings for civil penalties

Clause 69 provides that applications for a civil penalty under this Part must be made within 6 years after the conduct giving rise to the liability occurred, and provides for the standard of proof and procedural matters in civil penalty proceedings.

Relationship between civil penalty and criminal proceedings

Clause 70 allows criminal proceedings for an offence under this Part to commence against a person even if proceedings for a civil penalty have commenced against that person for the same conduct. However, proceedings under this Part for a civil penalty against a person are stayed if criminal proceedings against the person for the same conduct have been commenced.

Clause 71 provides that a person may not be penalised more than once for the same conduct.

Clause 72 provides that evidence given in civil penalty proceedings is not generally admissible in subsequent criminal proceedings relating to the same conduct.

Liability of senior managers

Clause 73 provides that a senior manager of a body corporate commits an offence if—

  • the body corporate commits an offence under this Part; and

  • the manager knew that the offence was being or would be committed; and

  • the manager was in a position to influence the conduct of the body corporate in relation to the commission of the offence; and

  • the manager failed to take all reasonable steps to prevent the commission of the offence.

Clause 74 provides for the civil liability of a senior manager of a body corporate along the same lines set out in clause 73.

Clause 75 prescribes criteria for establishing whether a senior manager failed to take all reasonable steps to prevent the commission of an offence or a civil liability act.

Subpart 2Civil liability

Clause 76 defines a civil liability act, which is effectively when a reporting entity fails to comply with any of its AML/CFT requirements under Part 2.

Clauses 77 to 88 set out what an AML/CFT supervisor may do in response to an alleged civil liability act. AN AML/CFT supervisor may do 1 or more of the following:

  • issue a formal warning under clause 78:

  • accept an enforceable undertaking under clause 79 and seek an order in the court for breach of that undertaking under clause 80:

  • seek an injunction from the High Court under clause 83 or 85:

  • apply to the court for a pecuniary penalty under clause 88.

The maximum pecuniary penalty for the following civil liability acts is $100,000 in the case of an individual and $1 million in the case of a body corporate:

  • failing to adequately monitor accounts and transactions:

  • entering into, or continuing, a business relationship with a person who does not produce or provide satisfactory evidence of that person's identity:

  • entering into, or continuing, a correspondent banking relationship with a shell bank:

  • failing to ensure that the reporting entity's branches and subsidiaries comply with the relevant AML/CFT requirements.

The maximum pecuniary penalty for the following civil liability acts is $200,000 in the case of an individual and $2 million in the case of a body corporate:

  • failing to conduct customer due diligence as required by subpart 1 of Part 2:

  • failing to keep records in accordance with the requirements of subpart 3 of Part 2:

  • failing to establish, implement, or maintain an AML/CFT programme.

Subpart 3Offences

Subpart 3 of Part 3 (clauses 89 to 112) deals with offences, which relate mainly to non-compliance with the AML requirements that are set out in Part 2.

A person who commits an offence relating to a civil liability act or relating to suspicious transactions reports (except unlawful disclosure of information relating to a suspicious transaction report) is liable, on conviction, to,—

  • in the case of an individual, either or both of the following:

    • a term of imprisonment of not more than 2 years:

    • a fine of up to $300,000; and

  • in the case of a body corporate, a fine of up to $5 million.

The time limit for bringing a prosecution in relation to these offences is within 6 months of the date on which the prosecutor is satisfied that there is sufficient evidence to warrant commencement of proceedings. However, proceedings may not be commenced if more than 3 years have passed since the offence was committed.

A person who unlawfully discloses information relating to a suspicious transaction report is liable, on summary conviction, to,—

  • in the case of an individual, a fine of up to $10,000; and

  • in the case of a body corporate, a fine of up to $100,000.

A person who commits an offence relating to the structuring of transactions to avoid application of AML/CFT requirements (other than a transaction involving cross-border transportation of cash) is liable, on conviction, to,—

  • in the case of an individual, either or both of the following:

    • a term of imprisonment of not more than 2 years:

    • a fine of up to $300,000; and

  • in the case of a body corporate, a fine of up to $5 million.

A person who commits an offence of obstructing an AML/CFT supervisor or providing false or misleading information to an AML/CFT supervisor is liable, on conviction, to,—

  • in the case of an individual, either or both of the following:

    • a term of imprisonment of not more than 3 months:

    • a fine of up to $10,000; and

  • in the case of a body corporate, a fine of up to $50,000.

The time limit for bringing a prosecution in relation to these offences is the same as that provided for offences relating to a civil liability act or suspicious transactions reports (except unlawful disclosure of information relating to a suspicious transaction report).

A person who commits an offence relating to cross-border transportation of cash is liable, on summary conviction, to—

  • in the case of an individual, either or both of the following:

    • a term of imprisonment of not more than 3 months:

    • a fine of up to $10,000; and

  • in the case of a body corporate, a fine of up to $50,000.

Clause 111 allows the chief executive of the New Zealand Customs Service to deal summarily with certain reporting offences relating to failure to report cash over the applicable threshold value. The chief executive may also, at any time before an information has been laid in respect of an offence, accept from the person who failed to report a sum, not exceeding $500, in full satisfaction of any fine the person would otherwise be liable to pay.

Clause 112 provides that nothing in the Bill limits or affects the Customs and Excise Act 1996. It also imposes a duty on Customs officers to prevent the movement of cash in breach of any requirements of the Bill or regulations and enables them to exercise powers under certain sections of the Customs and Excise Act 1996 in order to discharge that duty.

Subpart 4Search and seizure

Subpart 4 of Part 3 (clauses 113 to 126) sets out the provisions for search and seizure. Searches may only be conducted with a warrant.

Part 4
Institutional arrangements and miscellaneous provisions

Subpart 1Institutional arrangements

AML/CFT supervisors

Clause 127 provides that there will be 3 AML/CFT supervisors as follows:

  • the Reserve Bank will be the AML/CFT supervisor for banks, life insurers, and non-bank deposit takers:

  • the Securities Commission will be the AML/CFT supervisor for issuers of securities, trustee companies, futures dealers, collective investment schemes, brokers, and financial advisers:

  • the Department of Internal Affairs will be the AML/CFT supervisor for casinos, non-deposit-taking lenders, money changers, and other reporting entities that are not covered by the other 2 AML/CFT supervisors.

If a reporting entity provides products or services that are covered by more than 1 AML/CFT supervisor, then the supervisors may agree between them who will be the reporting entity's AML/CFT supervisor. In the absence of agreement, the AML/CFT co-ordination committee will appoint the AML/CFT supervisor.

Clause 128 sets out the functions of an AML/CFT supervisor.

Clause 129 sets out the powers of an AML/CFT supervisor.

Clause 130 relates to the conduct of on-site inspections of reporting entities by their AML/CFT supervisors. An AML/CFT supervisor may require a reporting entity to answer questions relating to its records and documents and to provide further information in the course of an on-site inspection.

Use and disclosure of information

Clause 131 allows an AML/CFT supervisor to use information (other than personal information) that it has obtained in another capacity for the purpose of exercising its powers or performing its functions and duties as an AML/CFT supervisor and vice versa.

Clause 132 places a restriction on the AML/CFT supervisors' powers to use information obtained under clause 131. They may only use that information if the person providing the information was advised of the purpose for which it was obtained at the time he or she provided it.

Clause 133 provides for the disclosure of information (other than personal information) by the Commissioner of Police, the New Zealand Customs Service, and AML/CFT supervisors to government agencies for law enforcement purposes.

Clause 134 provides for the use and disclosure of information by a government agency or an AML/CFT supervisor to another government agency or AML/CFT supervisor.

Clause 135 enables an AML/CFT supervisor to appoint enforcement officers.

Financial intelligence functions of Commissioner

Clause 136 sets out the financial intelligence functions of the Commissioner of Police.

Clause 137 sets out the financial intelligence powers of the Commissioner of Police.

Clause 138 provides for the Commissioner of Police's delegation powers.

Clauses 139 to 142 sets out the process for issuing suspicious transactions guidelines.

Co-ordination

Clause 143 sets out the co-ordination role of the Ministry responsible for the administration of the Bill (the Ministry) in relation to the AML/CFT regulatory system.

Clause 144 requires the chief executive of the Ministry to establish an AML/CFT co-ordination committee. The committee must consist of—

  • a representative from the Ministry; and

  • a representative from the New Zealand Customs Service; and

  • every AML/CFT supervisor; and

  • a representative of the Commissioner of Police; and

  • such other persons (who must be from a government agency) who may be invited by the chief executive to attend from time to time.

Clause 145 provides that the role of the AML/CFT co-ordination committee is to ensure that the necessary connections are made between the various supervisors and agencies so that the AML/CFT regulatory system operates consistently, effectively, and efficiently.

Clause 146 sets out the functions of the AML/CFT co-ordination committee.

Subpart 2Miscellaneous provisions

Regulations

Clauses 147 to 150 relate to the regulation-making power.

Ministerial exemptions

Clause 151 allows the Minister to exempt reporting entities or transactions, or classes of reporting entities or transactions, from all or any provisions of the Bill. The exemption may be unconditional or subject to conditions. The Minister must have regard to certain matters before granting the exemption.

Clause 152 requires the Minister to consult with the relevant AML/CFT supervisor and other interested persons before granting an exemption.

Clause 153 provides that every exemption must include a reason for the granting of the exemption and be notified in the Gazette

Transitional and savings provisions

Clause 154 and Schedule 1 deal with transitional and savings provisions.

Consequential amendments, repeals, and revocations

Clause 155 and Schedule 2 deal with amendments, repeals, and revocations to other enactments.

Regulatory impact statement

The Financial Action Task Force (FATF), of which New Zealand is a member, has developed Recommendations to guide member countries in implementing anti-money laundering and counter-terrorist financing (AML/CFT) measures.

Member countries’ compliance with these Recommendations is routinely evaluated. New Zealand’s compliance with the Recommendations will be evaluated by the FATF in 2009. There are significant deficiencies in New Zealand’s AML/CFT regime in respect of the standard established by the FATF Recommendations. The main gaps in New Zealand’s AML/CFT regime are as follows:

  • financial and non-financial businesses are not required to implement AML/CFT systems, involving, for example, customer due diligence and record keeping procedures, to the standard established according to the FATF Recommendations:

  • not all businesses included in the scope of FATF Recommendations fall within New Zealand’s regime:

  • there is no mandatory supervision and monitoring of reporting entities (businesses determined as having AML/CFT responsibilities) to ensure that they are carrying out their AML/CFT obligations.

The status quo is not preferred as it would see New Zealand continue to have a deficient AML/CFT regime in respect of the internationally accepted standard. [Information deleted in order to maintain the effective conduct of public affairs through the free and frank expression of opinions between officials and Ministers.]

The expected costs of the proposed AML/CFT reform include—

  • costs to reporting entities and their customers of new and extended regulatory requirements related to customer due diligence, transaction monitoring, transaction reporting, record keeping, and implementation of AML/CFT compliance programmes:

  • costs to the Crown of monitoring and supervising reporting entities, assessing money laundering risks at national and sector levels, analysing an increased volume and variety of suspicious transaction reports, and ensuring adequate co-ordination of regulatory functions across multiple supervisors.

Over time, the expected benefits of the proposed AML/CFT reform include—

  • supporting and protecting New Zealand’s international trade, borrowing, investment, and business objectives:

  • strengthening the ability of law enforcement agencies to detect, investigate, prosecute, and recover the proceeds of serious crime:

  • deterring predicate offending by ensuring that any proceeds of crime are more difficult to launder, therefore reducing the crime incentive:

  • supporting counter-terrorism efforts in New Zealand and the Asia Pacific region.

Officials have consulted on options for compliance with the FATF Recommendations that seek to avoid excessive compliance burdens, are effective in their resolve, and are appropriate to New Zealand circumstances.

Adequacy statement

The Regulatory Impact Analysis Team has reviewed this regulatory impact statement (RIS) and considers that it contains the required information and accurately reflects the regulatory impact analysis undertaken in relation to the proposal, which we also consider to be adequate according to the criteria set out in the CabGuide. As a result, we consider that this RIS is adequate.

Status quo and problem

Money laundering and the financing of terrorism are global problems.

The FATF, associated with the OECD, was established by the G-7 countries in 1989 to develop and promote policies and legislation to combat money laundering and terrorist financing. In April 1990, the FATF issued Forty Recommendations to guide governments in their implementation of laws and regulations to combat money laundering. In response to the attacks in the United States on 11 September 2001, the FATF issued an additional 8 special Recommendations to guide governments in their implementation of laws and regulations to combat terrorist financing (with a ninth added in 2004).

New Zealand is a member of the FATF and, while they are not legally binding, there is a strong impetus for compliance with the Recommendations. There is widespread acceptance of the Recommendations as a robust standard of AML/CFT measures, with FATF membership extending well beyond the OECD membership (32 jurisdictions and 2 regional organisations including the European Commission and the Gulf Cooperation Council).

New Zealand voted in favour of the revised Recommendations in 2004, and the United Nations (UN) Security Council has strongly urged UN member states to comply with FATF standards (Security Council Resolution No 1617, 29 July 2005). Implementing the FATF recommendations would also enable New Zealand to demonstrate its compliance with the UN Convention Against Trans-national Organized Crime (ratified in 2002) and the International Convention for the Suppression of the Financing of Terrorism (to which New Zealand is a State Party) and progress compliance with the UN Convention Against Corruption (signed in December 2003).

Member countries’ compliance with the FATF Recommendations is routinely evaluated. New Zealand’s compliance with the Recommendations will be evaluated by a FATF/Asia Pacific Group (APG) Mutual Evaluation process commencing in April 2009 and later publicised in October 2009.

New Zealand to some degree achieves compliance with the Recommendations via the Financial Transactions Reporting Act 1996 (FTRA), which places obligations on financial institutions to undertake measures, such as verifying the identity of customers, keeping records of transactions and verifications of identity, and reporting suspicious transactions to the Commissioner of Police. Compliance with the 9 Special Recommendations relating to terrorist financing is achieved primarily through the Terrorism Suppression Act 2002.

A 2003 assessment of New Zealand’s implementation of FATF’s Recommendations found New Zealand to be non-compliant or materially non-compliant with 8 of the 40 Recommendations and 2 of 8 (latterly extended to 9) Special Recommendations, including core requirements of the regime, which are accorded additional scrutiny and weight. Significant deficiencies in New Zealand’s AML/CFT regime remain, including—

  • financial and non-financial businesses are not required to implement AML/CFT systems, involving, for example, customer due diligence and record keeping procedures, to the standards set out in the FATF Recommendations:

  • not all businesses included in the scope of FATF Recommendations fall within New Zealand’s regime:

  • there is no mandatory supervision and monitoring of reporting entities to ensure that they are carrying out their AML/CFT obligations.

Objectives

The objectives proposed for New Zealand’s AML/CFT regulatory framework are to—

  • detect and deter money laundering and terrorist financing:

  • maintain and enhance New Zealand’s international reputation:

  • contribute to public confidence in the financial system:

  • realise these objectives with minimum cost to industry.

Alternative options

[Information deleted in order to maintain the effective conduct of public affairs through the free and frank expression of opinions between officials and Ministers.]

Status quo

Retaining the status quo is not appropriate given New Zealand’s current system (established in 1996) is not equipped to deal with the technological and international regulatory developments along with the greater interconnectedness of jurisdictions and transactional activity, and the associated risk of domestic and cross-jurisdictional money laundering and terrorism financing. Neither would this option satisfy the objective of progressing New Zealand’s compliance with our international obligations. There have been a number of extensions to the current legislative and administrative framework in recent years, however, the extent to which the current framework needs to change rules out the option of a simple patch.

Implementation without supervisory system

An alternative approach would be to introduce the AML/CFT obligations for financial institutions and casinos as per the preferred option set out below, without a supervision system to support and enforce the implementation of those obligations. This approach, while providing savings to the Crown in the short term, would not satisfy the FATF’s test of having an effective regime. FATF recommends explicitly that countries ensure that reporting entities are adequately supervised for compliance with their AML/CFT obligations (Recommendations 23 and 24), competent authorities (including supervisors) are provided with appropriate financial, human, and technical resources (Recommendation 30), and the effectiveness of AML/CFT systems is kept under review (Recommendation 32).

This option is therefore not preferred as it would not satisfy the standard established by the FATF recommendations and, most importantly, would impose compliance costs on compliant businesses for little intelligence benefit. This approach would raise fundamental questions about the integrity of New Zealand’s AML/CFT measures and its commitment to international AML/CFT efforts, and would therefore fail to satisfy the policy objectives of detecting money laundering and terrorist financing and maintaining New Zealand’s international reputation, at minimum cost to industry.

Deferral

An alternative approach would be to defer the proposed legislative AML/CFT reform until 2010, to ensure that business costs are kept to a minimum and allow businesses to attend to managing the most pressing commercial challenges posed by the current financial climate.

This would mean that legislation would not be in force until late 2012 at the earliest. [Information deleted in order to maintain the effective conduct of public affairs through the free and frank expression of opinions between officials and Ministers.]

Immediate full compliance

A fourth alternative approach is to provide for the proposed reforms to take effect at the enactment of the legislation, and at the same time extend the obligations to other industries that the FATF recommendations indicate should be covered by a country’s AML/CFT measures (eg, lawyers, real estate agents, accountants, and other industries considered to be at risk of abuse by money launderers and terrorist financiers). This option is not preferred as it would significantly exacerbate the cost to businesses during the establishment phase through heightening the competition for AML/CFT systems development expertise.

Preferred option

The preferred option is to progress compliance with the FATF Recommendations. The preferred option would see the implementation of a new AML/CFT regime in late 2011 (ie, 2 years following legislative assent) requiring financial institutions and casinos to undertake to—

  • assess their business operating environment (including, for example, product/service offerings and customer base) for money laundering and terrorism financing risks:

  • based on the assessment of risks, and legislative obligations, implement AML/CFT policies and procedures to identify, mitigate, and report suspicious activity, including—

    • identification and verification of customers identities and beneficial ownership considerations:

    • monitoring transactions for unusual or suspicious transactions:

    • established reporting processes:

    • store records of account files, business correspondence, and transactions for 5 years:

  • conduct annual assessments and 2 yearly independent audits of their AML/CFT systems.

Other relevant reporting entities would be brought within scope of the regime in a second phase.

The reform would also see the establishment of a new AML/CFT supervisory regime, involving monitoring and enforcement (with recourse to civil and criminal penalties) of reporting entities’ compliance with their AML/CFT regulatory obligations by the—

  • Securities Commission for issuers of securities, trustee companies, futures dealers, collective investment schemes, brokers, and financial advisers:

  • Reserve Bank of New Zealand (RBNZ) for banks, life insurers, and non-bank deposit takers:

  • Department of Internal Affairs for casinos, non-deposit taking lenders, and money changers, and other financial institutions not supervised by the Securities Commission or RBNZ.

A National Co-ordination Committee, comprising the supervisors, FIU, Ministry of Justice and other agencies involved in the operation of the AML/CFT regime, would be established as a central point of operational co-ordination of the regime to ensure gaps and duplication of supervisory activity are minimised, and that supervisory activity is applied consistency and proportionately.

Costs and benefits

The costs of the overall proposal are estimated as being—

  • (1)Compliance costs for reporting entities, of complying with additional and strengthened AML/CFT requirements.

  • An independent cost estimation (undertaken by Deloitte for the Ministry of Justice in 2008) assessed the start-up costs across financial institutions and casinos as $97 million (to be spread over a 2-year implementation period), with ongoing costs of $21 million per year thereafter. These adjusted figures should be treated with some caution. The data indicated an upper end cost estimate of $249 million for start up costs and $103 million for ongoing costs. However, Deloitte assessed the probable cost being at the lower end of surveyed range, bringing the probable cost more into line with actual experience from overseas jurisdictions; particularly that of Australia.

  • These costs will vary across sectors. Variables include the size and nature of a business, its transaction volumes, its customer base, its current level of compliance with existing AML/CFT requirements, and its ability to share technology and training materials with an overseas parent (depending upon the degree of common platforms). The level of start-up cost is also expected to be directly proportionate to the current preparedness of sectors.

Estimate of business compliance costs (adjusted) ($million)

   Totals by sectorAverage per entity
by sector
   Start-up total across years 1 and 2
($)
Ongoing (year 3 and beyond)
($)
Start-up total across years 1 and 2
($)
Ongoing (year 3 and beyond)
($)
 Registered banks1781.6015.604.800.92
 Non-bank deposit takers700.400.070.010.00
 Life insurers411.800.400.040.01
 Trustee companies3 256 services to finance and investment companies2.200.14N/AN/A
 Other financial institutions9.804.10N/AN/A
 Casinos61.500.900.250.15
 Total 97.3021.21  
  • Of the affected sectors, the banking sector is expected to bear 84% of the start-up cost, and 74% of the ongoing costs, mainly because this sector undertakes the bulk of the transactional activity in the economy. The median estimate of the ongoing cost to the banking sector is 0.12% of gross revenue per year.

  • The banking sector is expected to have lower per transaction costs than other sectors, given economies of scale considerations, it having existing responsibilities under the Financial Transactions Reporting Act 1996 (which is based on earlier FATF recommendations), and that a number of the banks are headquartered in jurisdictions that have already updated their AML/CFT laws to fully meet FATF requirements. The ability to leverage a fully developed parent AML/CFT programme is often one of the single biggest catalysts to reducing costs and ensuring timeliness of programme completion.

  • Across most sectors, account and transaction monitoring and AML/CFT compliance programmes are expected to account for around 90% of start-up costs and 80% of ongoing costs. However, again given the varying transactional environments and readiness of existing systems and capabilities, the sectors will bear costs differently across the various elements of the proposed regime, as illustrated in the table below.

Estimate of compliance burdens across AML/CFT obligations by sector

  Customer IDAccount & transaction monitoringRecord keepingAML programmes
  Start-up totalOngoingStart-up totalOngoingStart-up totalOngoingStart-up totalOngoing
 Registered banks5%5%71%69%7%24%19%
 Non-bank deposit takers0%18%29%75%71%
 Life insurers0%89%75%9%25%
 Trustee companies1%50%77%50%
 Other financial institutions1%16%4%84%71%
 Casinos40%44%13%1%1%47%56%
  • (2)Costs to the Crown of new regulatory functions—

  • [Information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials.]

  • monitoring and supervising reporting entities, as entities are not currently supervised in New Zealand for compliance with all AML/CFT requirements. The costs of supervision will be spread across the Securities Commission, RBNZ and the Department of Internal Affairs and will include the costs of performing each of the following functions:

    • issuing guidelines to assist reporting entities to meet their obligations:

    • conducting onsite visits, or commissioning expert third parties to do so:

    • providing feedback to reporting entities on their compliance:

    • taking actions, including enforcement actions, to effect compliance:

  • assessing money laundering risks at national and sector levels, because this assessment is necessary for risk based implementation of regulatory requirements and is not currently undertaken:

  • analysing an increased volume and variety of suspicious transaction reports, (STRs) – because more entities will be required to file suspicious transaction reports, and because all entities will be supervised and monitored in their filing of suspicious transaction reports:

  • ensuring adequate co-ordination of regulatory functions across multiple supervisors, the FIU and other agencies performing AML/CFT regulatory functions, so as to ensure an effective and efficient approach to regulation.

The benefits of implementing the proposed reform are expected to include (once fully implemented)—

  • greater ability of law enforcement agencies to detect, investigate, prosecute, and recover the proceeds of serious crime. Through firms having more systematic and robust risk identification and reporting, the reporting of suspicious transaction activity is expected to increase by between 232% (based on UK’s experience in enacting similar legislation) and 350% (based on Australia’s experience in enacting similar legislation) [information deleted in order to maintain the effective conduct of public affairs through the free and frank expression of opinions between officials and Ministers]:

  • deterrence of serious crime, tax evasion, and the facilitation of terrorism, to the extent that the reform makes the laundering of proceeds of crime and terrorism financing more difficult and costly, and impacts the returns to crime and the capacity to reinvest in further criminal activity. This includes transnational organised crime and international tax evasion, which is expected to become more rather than less prevalent over time given the globalisation of goods, capital, and people is anticipated to grow, rather than shrink. Evidence suggests that robust AML/CFT regimes reduce crime through detection and deterrence mechanisms. A value to this particular benefit is difficult to quantify, [information deleted in order to maintain the effective conduct of public affairs through the free and frank expression of opinions between officials and Ministers]:

  • better compliance with our international obligations, which in turn contributes to New Zealand’s good name and our trade, foreign direct investment, and borrowing interests in the medium term (particularly important goals in the present context of international capital constraints):

  • improved efficiency in the economy through improving market integrity, business and industry reputations, reducing costs to law-abiding businesses and citizens from being exploited and defrauded by criminal interests, and the diversion of resources to uses that would not otherwise be chosen other than for the objective of obscuring criminal offending:

  • improved risk management in New Zealand businesses and industries, with the result of increased fraud detection and deterrence, better bad debt management, and improved domestic investor confidence (particularly important goals in the present context of revelations of financial fraud). International experience suggests that, despite increased compliance costs, firms regard the regulatory burden as acceptable given the benefits in terms of protecting the integrity of their firms. For example, good risk assessment, customer due diligence, and monitoring measures are important from a wider prudential management perspective. Without such measures, financial institutions can become subject to reputation, credit, operational, and legal risks, which can result in significant costs:

  • improved competitiveness for New Zealand based businesses dealing internationally due to reduced risk premium and transaction costs ascribed to those businesses.

The benefits of the proposed reform are considered to outweigh the costs of its implementation.

The reform is estimated to entail a significant net direct quantifiable cost across industry and government in each of the 2 establishment years of approximately [information deleted in order to maintain the current constitutional conventions protecting the confidentiality of advice tendered by ministers and officials] per year. However, while difficult to quantify, the benefits of introducing and passing legislation in 2009 are substantial, particularly in terms of protecting New Zealand’s international reputation and associated medium-term trade and other economic objectives.

In year 3, when the reform takes effect, while the net quantifiable benefit of the proposed reform could range substantially (between a net cost of $17 million and a net benefit of $59 million per year), overall, the benefit of progressing the reform is considered to be substantial to the national interest. The benefits of the reform, particularly in maintaining New Zealand’s international reputation and the flow-on benefits associated with this, while at this point are unquantified, are considered substantial and justify progressing the proposed reform.

Steps taken to minimise compliance costs

A number of countries have implemented AML/CFT reforms in recent years to comply with the revised FATF Recommendations, and have incurred costs in doing so as there is limited scope for discretion in the FATF Recommendations. Recognising the limited discretion available in complying with the Recommendations, the proposal will minimise compliance costs by way of an approach that provides for—

  • a phased implementation, in which financial institutions and casinos are covered by the reform in the first period, whereas certain non-financial institutions (such as the Racing Board and dealers in precious metals and stones) and designated professions (such as lawyers and real estate agents) would be covered in a second phase of reform. These latter groups will be the subject of subsequent Cabinet approval and amendment to the regime and will therefore have a longer period to prepare for new AML/CFT requirements:

  • the establishment of a supervision framework comprising multiple existing regulatory agencies (as opposed to a new dedicated agency), that have existing comparable responsibilities and existing relationships with industry sectors for which they will be responsible for AML/CFT. This benefits industry, by minimising duplication of reporting measures, and ensuring the development of regulation that has benefited from familiarity with sector specific operating environments, and government, by enabling a single agency to undertake multiple functions in relation to a reporting entity or sector:

  • following from the above point, to ensure that a co-ordinated approach to supervision and regulation is taken, a robust governance arrangement is proposed, comprising a legislated operational co-ordination committee, and strategic oversight and monitoring being co-ordinated by the Ministry of Justice:

  • a risk based approach to implementation, so that the resources of reporting entities and supervisors can be concentrated on higher risk situations and saved in lower risk situations:

  • based on the proposed risk assessment exercise, identification of areas where it might be justifiable for New Zealand to aim for a lower cost approach to some low risk activities and customer types:

  • collaboration with industry on developing detailed regulatory provisions.

Implementation and review

Provided the proposed legislative reform receives assent by October 2009, the new regulatory regime would be brought into force 2 years after legislation is passed. The 2-year lead time is to provide for—

  • supervisors and other agencies to increase their capacities and capabilities to undertake additional AML/CFT functions:

  • the Ministry of Justice, in consultation with supervisors, the FIU, and other agencies to finalise any necessary regulations:

  • supervisors and other agencies to develop guidance materials (enforceable and non-enforceable) and to work with reporting entities so that all are aware of their AML/CFT regulatory obligations and of what they must do to achieve compliance:

  • reporting entities to make necessary adjustments and additions to their internal systems and procedures so that they are able to achieve compliance.

A phased approach is also provided for implementation, whereby the regulatory requirements will initially apply to financial institutions and casinos, with a second phase of businesses being brought under the regime at a later date. This will initially mean that New Zealand will not be compliant with FATF Recommendations with respect to these entities.

The Ministry of Justice will monitor and evaluate the overall performance and effectiveness of the new regulatory system, and advise the Minister of Justice on any issues with its performance and options for addressing any such issues.

Consultation

The proposals for a new AML/CFT regulatory system were developed in consultation with the Ministry of Economic Development, the Department of Internal Affairs, the Financial Intelligence Unit of the New Zealand Police, the Customs Service, the Inland Revenue Department, the State Services Commission, the Treasury, the Ministry of Foreign Affairs and Trade, the Reserve Bank of New Zealand, and the Securities Commission. The Department of the Prime Minister and Cabinet has been informed of the proposals.

Financial services providers and members of the public were consulted on the proposals as they were developed. Five consultation documents have been issued for public comment—

  • Money Laundering and New Zealand’s Compliance with FATF Recommendations released in August 2005:

  • a second document entitled Anti-Money Laundering and Countering the Financing of Terrorism: New Zealand’s Compliance with FATF Recommendations released in June 2006:

  • a third discussion document entitled Anti-Money Laundering and Countering the Financing of Terrorism Supervisory Framework released in October 2006.

About 30 submissions from mainly financial institutions and their representatives were received on each of the consultations and incorporated into the policy development. Submitters were also provided with the opportunity to comment on officials’ consideration of their submissions and regular meetings were held with businesses and industry associations during the different phases of consultation and policy development.

Key issues raised by submitters included—

  • supervisory framework—While some indicated support for a single supervisor on the basis of consistency and effectiveness, the majority favoured the multi-supervisor model to minimise compliance associated with duplication of reporting measures. The proposal seeks to manage disadvantages of a multi-supervisory model through the establishment of a national co-ordination committee to manage operational co-ordination of the regime, and the provision of mechanisms to designate responsibility where multi-supervisory responsibilities become apparent:

  • that the framework be appropriate to New Zealand’s broader financial framework, and compatible with international AML/CFT frameworks (particularly that of Australia). These objectives have been key criteria guiding the policy development:

  • support for a risk based approach, provided the approach is supported by regulators with appropriate expectations and guidance provided, particularly for small and medium enterprises. Regulators would inform and provide feedback to businesses about the risk environment, and regulatory expectations. The proposed legislation also provides for the establishment of codes of practice setting out good practice interpretation of legislative requirements. A key goal for the codes is to provide regulatory certainty to reporting entities in areas where uncertainty exists. Codes would provide a legal defence against prosecution but would not be mandatory; reporting entities would have the flexibility to either follow a relevant code or develop their own AML/CFT programme as per their statutory responsibilities.

In addition, in response to requests from submitters—

  • an independent compliance cost estimation was undertaken in 2008 to assess the start-up and ongoing costs across affected sectors (discussed in the cost benefit section above); and

  • a draft Bill setting out key elements of the proposal was released in October 2008 for comment.

Feedback on the compliance cost estimation and exposure draft of legislation has been incorporated into the development of the policy proposal.