Anti-Money Laundering and Countering Financing of Terrorism Bill

Recommendation

The Foreign Affairs, Defence and Trade Committee has examined the Anti-Money Laundering and Countering Financing of Terrorism Bill and recommends that it be passed with the amendments shown.

Introduction

The Anti-Money Laundering and Countering Financing of Terrorism Bill represents the first comprehensive anti-money laundering and countering financing of terrorism (AML/CFT) reforms since 1996. The bill seeks to bring New Zealand into line with the international standards for AML/CFT frameworks, as set out by the Financial Action Task Force (FATF).

It is apparent to us that New Zealand’s AML/CFT framework needs upgrading to meet New Zealand’s international obligations in areas including customer due diligence, record-keeping standards, and in the supervision of AML/CFT activity.

We set out to ensure that the Draft legislation was forward-looking (future-proofed), risk-based (to minimise compliance costs) and as far as practicable harmonised with Australian legislation. We have also worked to ensure that the legislation now being returned to the House with our recommendations meets New Zealand’s international obligations set out in recommendations from the FATF.

The draft bill provides the following:

• •a set of reporting requirements for entities covered by the bill

• •a risk-based approach to tracking possible money laundering and terrorism financing activity, which is intended to minimise compliance costs

• •an enforcement regime, including new civil and criminal offences

• •a regime for supervision, monitoring and enforcement of AML/CFT obligations involving four supervisors—the Reserve Bank of New Zealand, the Securities Commission, the Police, and the Department of Internal Affairs.

Following consultation with submitters and four banking experts appointed to assist us, we formed the view that the bill as introduced did not give sufficient emphasis to a risk-based framework for countering money laundering and the financing of terrorism. Accordingly we recommend amendments to enhance the bill and to ensure that it is closely aligned with the Australian AML/CFT regime.

While this is beyond the scope of the bill, we note that Australia has a single supervisory agency, the Australian Transactions Reports and Analysis Centre (AUSTRAC). We think this arrangement is preferable to the situation applying in New Zealand where four entities, the Reserve Bank of New Zealand, the Securities Commission, the Department of Internal Affairs, and Police are all involved. Consideration should be given to consolidating supervision arrangements in one body which has a close relationship with AUSTRAC. The proposed arrangement seems administratively untidy.

Furthermore New Zealand needs seamless links with the Australian financial sector, and as both countries are working towards a single market, it would make sense to provide for the exchange of intelligence between agencies in both countries. The Government might consider evaluating the possible benefits that would accrue from adopting a national transaction database, similar to that supporting the Australian regulatory environment, and any differences in privacy considerations notwithstanding. Our commentary focuses only on the substantive issues considered.

Commencement

The bill is complex. Banks and financial entities required to comply with the legislation would need reasonable time to develop systems and procedures to comply with its provisions.

Accordingly the bill provides for commencement by Royal assent and Order in Council. The explanatory note signals a 2-year timeframe for implementation. We considered whether the bill should state commencement dates for the entry into force of segments of the legislation. Representations by the Regulations Review Committee were relevant to this part of our deliberation.

A majority of submitters sought a flexible approach to implementation, particularly to allow time for the financial and casino sectors to implement their AML/CFT regimes.

We recommend that the AML/CFT coordination committee ensure that regulators and supervisors issue a coordinated timetable for issuing regulations and adopting codes of practice. We consider that the implementation of the AML/CFT regime should be staggered and allow reasonable time between the issuing of regulations and the commencement of obligations under the new AML/CFT regime.

To implement effectively an AML/CFT regime, the various regulators and supervisors would need to coordinate their pre-commencement work. Reporting entities would need to receive clear time tables for the introduction of regulations, supervisory arrangements, and codes of practice as soon as practicable if they are to manage the transition to the new regime efficiently. We are advised that the Government will cooperate with the sector regarding the sequencing and implementation of the legislation.

We recommend amending clause 2 to allow the following matters to come into force upon enactment:

• •the financial intelligence functions of the Police Commissioner, to enable the immediate development of guidance material

• •the definition, functions, and powers of AML/CFT supervisors

• •the establishment and operation of the AML/CFT coordination committee

• •the activation of regulation and exemption-making powers.

We also recommend a further amendment to clause 2 to allow provisions relating to cross-border transportation of cash duties and obligations to come into effect 1 year after enactment of the bill.

Purpose and overview

Committee members were impressed by the clarity given to Australian legislation by simplified outlines of the intention of each part of the Australian Act. We would have liked to follow this example, but were told by Parliamentary Counsel that such a step did not align with current New Zealand practice. We recommend that New Zealand’s practice be changed. The use of simplified outlines of the purpose of a part of a bill would make New Zealand legislation more user-friendly and comprehensible to the public.

We recommend amending the bill’s purpose (clause 3) to make it clear that one of the main objects of the bill is to detect and deter money laundering and the financing of terrorism, and that the bill is designed to facilitate cooperation between reporting entities, AML/CFT supervisors, and Government agencies, particularly law enforcement and regulatory agencies.

We also recommend inserting an overview clause (new clause 3A) to set out, in plain English, the contents of the bill. The bill and the obligations it imposes are complex, and we consider that an overview clause would help readers understand its content and structure.

Politically exposed persons

Clause 4 of the bill defines “politically exposed persons” (PEPs). Canada, the United Kingdom, and Europe define foreign national PEPs in law and Australia defines foreign PEPs in guidelines. None of these countries define domestic PEPS in law.

We gave considerable thought to this question and recommends there be no definition of domestic PEPs in the bill or in guidelines.

We consider that New Zealand-based PEPs are already required to conform to robust accounting, audit, company and trust legislation, practice, and procedures. We were also told that banks subscribe to commercial lists of PEPs containing more than 55,000 names, including the names of all parliamentarians and other PEPs in New Zealand. Submitters also informed us on “backroom”, systems used to monitor transactions and to identify money laundering.

Given the strength and robust nature of New Zealand’s existing financial monitoring systems, we recommend against requiring the application of the FATF definition of PEPs to New Zealand nationals domiciled in New Zealand. The definition and enhanced scrutiny should, however, be applied to foreign PEPs conducting transactions in the New Zealand financial sector.

New Zealand’s plans to ratify the United Nations Convention Against Corruption (UNCAC) are before us. Each State party to the convention must require financial institutions within its jurisdiction to conduct enhanced scrutiny of accounts sought or maintained by or on behalf of individuals who are, or have performed, prominent public functions, and their family members, and close associates. Without prejudging consideration of UNCAC which is still to occur, we were inclined to the view that this scrutiny may already apply to PEPs with New Zealand nationality domiciled in New Zealand, and accordingly recommend that these persons not be included in the AML/CFT framework. We agree that foreign PEPs should be included in the CML/CFT framework, however.

We recommend amending clause 23. We think that requiring checks on PEPs before conducting occasional transactions would be too onerous. Our recommended amendment of clause 23 would allow due diligence regarding PEPs to be conducted after they had carried out occasional transactions. Once a reporting entity had determined that a person who had conducted a transaction was politically exposed, they would then be required to take reasonable steps to ascertain the source of that person’s wealth or funds.

Application of legislation to reporting entities

We recommend inserting new clause 4A to clarify that the bill would apply to a financial institution only to the extent that the financial activities undertaken fell into the definition of financial institution. For a non-financial institution, such as a casino, the bill would apply to the extent that the activities that are carried out may give rise to risk of money laundering or the financing of terrorism. This amendment would provide certainty to the reporting entities as to which of their activities were covered by the bill.

Customer due diligence

We consider that entities covered by this legislation should take a risk-based approach to the conduct of customer due diligence for transactions. A risk-based approach would enable financial institutions to focus resources on areas of higher risk and thereby meet the objectives of AML/CFT activity efficiently and cost-effectively. Customer due diligence provisions should also be harmonised with Australian law.

This legislation requires a minimum standard of identification and verification of the bona fides of a customer. We recommend a change to clause 9 (4) to avoid the need to obtain or verify existing information held by the reporting entity unless the information held is deficient.

Treatment of existing customers

We considered the proposed trigger point for moving existing customers to the new regime is too low. The compliance cost of moving low-risk customers into the proposed regime is high, and not justified by the risk of money laundering, which is already monitored by bank “back room”, systems. Accordingly we recommend amendments to clause 12(e) to require customer due diligence to be carried out when there is a material change in the nature or purpose of the relationship and the reporting entity considers it has insufficient information about the customer.

Wire transfers

We recommend amending clause 24(5) to require a beneficiary institution to adopt effective risk-based procedures for processing wire transfers that are not accompanied by complete originator information. We also recommend amending clause 24(6) to require intermediary institutions processing cross-border and domestic wire transfers to maintain the originator information received from the previous institution, rather than to obtain information that might be missing.

Reliance on third parties

We recommend greater flexibility for entities and classes of entities to become part of the regime by joining a designated business group. As introduced, clause 29 would allow a reporting entity to rely on another member of its designated business group to conduct customer due diligence. We recommend inserting a new clause 29(1A) to clarify that the reporting entity, and not the member of the designated business group, would be responsible for ensuring that customer due diligence was carried out in accordance with this legislation.

Disclosure of information

Clause 43 sets out the requirements regarding the disclosure of information about a suspicious transaction report. We recommend amending clause 43(2)(e) to allow the disclosure of information to a member of a designated business group where it is necessary to make a suspicious transaction report. This amendment would ensure that the reporting entity would have the necessary information to make a suspicious transaction report.

Removal of civil or criminal liability for senior management

We consider that holding individual senior managers civilly or criminally liable under the regime is not consistent with the intention of the bill. The legislation should create a cooperative relationship between reporting entities, and law enforcement and supervisory agencies. We therefore recommend the removal of explicit senior management liability of reporting entities when exercising their functions under this bill. The existing common law liability of senior managers is sufficient to ensure that reporting entities meet their obligations.

AML/CFT supervisory arrangements for reporting entities

Under the multiple supervisor model some reporting entities may end up having responsibility for two or more kinds of financial operations under the legislation, and so might come under the jurisdiction of more than one supervisory agency. We understand that an AML/CFT coordination committee proposed by the bill would be responsible for ensuring consistency in the application of the regime between supervisory agencies, and decide who should supervise each agency business group. We are concerned that reporting entities might “shop” around for the least restrictive supervisory agency. Accordingly we recommend an amendment to make clear that the AML/CFT supervisors will agree between them who will responsible for supervising the reporting entity.

Delegation of functions and powers by AML/CFT supervisor

We recommend inserting new clauses 130A, 130B, and 130C into the bill to enable an AML/CFT supervisor to delegate specified functions and powers to a suitably trained or experienced person. New clause 130B includes provisions regarding the authority to act as a delegate, and new clause 130C details the effect of the delegation. We consider that this amendment is necessary to ensure the efficient administration of the regime.

Regulation-making powers relating to politically exposed persons, AML/CFT programmes, and offences and fines

We consider that citizens and reporting entities need absolute clarity about what constitutes an offence and the penalties they would incur. We do not consider it appropriate to be able to create offences (or fines) in regulation.

We recommend removing the regulation-making powers in clauses 23(b) and 147(2)(j) for additional requirements relating to politically exposed persons, clauses 54(n), 54(o), and 147(a)(vi) for additional requirements in AML/CFT programmes, and clause 147(n) for prescribing offences and fines.

Because the requirements of AML/CFT programmes are fundamental to the purpose and operation of the legislation, these requirements should be set in statute rather than regulation. We consider that the regulation-making powers contained in the bill as introduced might allow these requirements to expand inappropriately beyond the intent of the legislation. The minimum requirements for the AML/CFT programmes would also attract significant compliance costs for reporting entities. We consider that requirements should be clear, certain, and subject to robust scrutiny.

Exemptions regulations