The Justice Committee has examined the Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill and recommends that it be passed. We recommend all amendments unanimously.

The bill is one of four bills that would amend regulatory systems administered by the Ministry of Justice.¹ The amendments in the bill are designed to ensure that the anti-money-laundering and countering financing of terrorism (AML/CFT) legislation remains fit for purpose. It would do so by making improvements to the legislation that do not involve major changes to the policy or the system’s design, or have significant financial implications.

This bill would amend the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 and make consequential amendments to the associated regulations. It aims to make the AML/CFT regime more risk-based, efficient, and effective at addressing organised crime by:

• clarifying existing obligations to help businesses apply rules with more certainty

• strengthening enforcement provisions so that New Zealand can increase compliance with international standards

• providing relief for businesses

• reducing compliance costs.

The amendments are informed by the findings of two recent reviews of the regime, which include the 2019–2021 assessment of New Zealand by the global Financial Action Task Force. The majority of the bill’s amendments stem from recommendations that followed a statutory review of the Act, which concluded in 2022. For a summary of the amendments, we refer readers to the Ministry of Justice’s initial briefing to this committee.

As part of our consideration of the bill, we have examined its consistency with principles of legislative quality. We have no issues regarding the legislation’s design to bring to the attention of the House.

This commentary covers the main amendments we recommend to the bill as introduced. We do not discuss minor or technical amendments.

Clause 4 would amend section 5 of the Act, which contains the interpretation provisions.

Clause 4(4) of the bill as introduced defines “money or value transfer service”. It includes a service that accepts funds or value, whether in cash, or by electronic or other non-physical means, or in other stores of value. We consider that this definition could imply that the way in which payments are made and the different types of stores of value are related concepts. To avoid conflating the two, we recommend restructuring the definition to separate the stores of value (that is, funds or value), and the means of making payment (for example, cash or electronically). The definition has also been updated to ensure that it covers informal money or value transfer services, which may not directly include the acceptance of funds. This is reflected by the addition of the phrase “or is involved in the acceptance of”.

At present, three entities—the Reserve Bank, the Financial Markets Authority, and the Department of Internal Affairs—have responsibilities for supervising reporting entities under the Act. Clause 4(4) would insert a new definition of “life insurer”. We note that this term is only used in section 130(1)(a) of the Act, which lists the entities that the Reserve Bank supervises. We understand that the Government has decided to move to a single supervisor model as part of a broader work programme to reform the AML/CFT system. We were advised that, consequently, this section will be repealed, removing the only reference to the term in the Act. We recommend that, if section 130(1)(a) is set to be repealed, the new definition of “life insurer” be deleted.

Section 26 of the Act provides that a reporting entity must take reasonable steps to determine whether the customer or any beneficial owner is a “politically exposed person”, as defined in section 5. This must occur as soon as practicable after establishing a business relationship or conducting an occasional transaction or activity.

Clause 10 would replace section 26. Proposed new section 26(1) would require a reporting entity to have an appropriate risk management system to determine whether any customer or beneficial owner is a politically exposed person. Under proposed new section 26(1A), when establishing a business relationship or conducting an occasional transaction or activity, the reporting entity would need to apply that system in its determination.

Several submitters expressed concern that the term “risk management system” is not defined or used in any other part of the Act, which creates uncertainty. We understand that the proposed changes in clause 10 were intended to insert an element of a risk-based approach to the requirement for determining a politically exposed person. However, we recognise submitters’ concerns. Therefore, we recommend deleting section 26(1) and (1A) of the bill as introduced and retaining existing section 26(1) in the Act. We also recommend adding the phrase “in accordance with the level of risk involved” to section 26(1). This would replicate the common risk-based language used throughout the Act, such as in section 20(1), which uses this phrasing to indicate the level of identity verification required is proportionate to the level of risk.

Clause 13 would amend section 52, which deals with how reporting entities must keep records. It would insert section 52(2) to provide that a reporting entity that is required to produce records under this Act or any other enactment would need to do so swiftly.

We acknowledge the importance of ensuring that information is provided to the relevant authorities in a timely way. However, we consider that this should be balanced against the burden that information requests can place on reporting entities. We therefore think that time frames for responding to information requests should be proportionate to the urgency, risk, and expected burden of the request. Accordingly, we recommend amending section 52 to introduce a tiered approach, which would provide for the following:

• If the person requiring records considered that they were needed urgently, the records should be produced as soon as possible after notifying the reporting entity. We expect that this would cover situations such as when information is needed to stop an imminent threat or the dissipation of assets.

• In any other case, the records should be produced by a specified date that the requester considers reasonable in the circumstances. If the requester did not specify a date, the time frame would be 20 working days.

Section 58 of the Act relates to risk assessment. Section 58(2)(g) provides that the reporting entity, when assessing risk, must have regard to any applicable material produced by AML/CFT supervisors or the Commissioner of Police.

Clause 15 would amend section 58 by repealing section 58(2)(g) and inserting new section 58(2A). It would require a reporting entity to undertake its risk assessment according to any applicable guidance material related to risk assessments produced by AML/CFT supervisors or the Commissioner.

Some submitters were strongly opposed to this provision. Their concerns included that it would impose costs on businesses and that prescribed compliance laws are less effective. They were also concerned that the amendment appeared to make guidance material mandatory, giving it the force of law. To prevent these unintended consequences, we recommend deleting clause 15(1), thereby retaining section 58(2)(g). We also recommend inserting section 58(3)(ba), to require reporting entities to incorporate the relevant risks identified in the risk assessments produced by the supervisors and the Commissioner.

We note that this guidance will not be subject to select committee review. We consider that it is vital that this guidance provides sufficient clarity to those subject to the provisions of this bill so that it can meaningfully be implemented at a practical level, often by very small entities.

Section 80 of the Act specifies that the relevant AML/CFT supervisor may issue one or more formal warnings to a person. The supervisor must have reasonable grounds to believe that the person engaged in conduct that constituted a civil liability act. The formal warning must be in the prescribed form and issued in the manner specified in regulations (if any).

Clauses 23, 24, and 28 of the bill would replace the references to “formal warnings” with “censures” in sections 79, 80, and 153 respectively. Clauses 36 and 38 would make similar amendments to section 36 and Schedule 3 of the Anti-Money Laundering and Countering Financing of Terrorism (Requirements and Compliance) Regulations 2011.

Several submitters considered that formal warnings should not be replaced by censures. They noted that formal warnings are allegations, and recipients are invited to contact supervisors if the facts stated in the notice are inaccurate or incomplete. Conversely, censures are typically penalties that follow evidential findings about conduct. They involve a process of inquiry or investigation and an opportunity for an affected person to defend themselves. The bill, however, contains no process for this. A submitter suggested that, if censures are retained, the bill should include a process for investigations and findings, which would precede formal censures. Submitters also proposed that formal warnings should be retained as a first enforcement measure.

We agree with submitters’ concerns and consider that the bill should be amended to add censures as a new sanction while retaining formal warnings. To this effect, we recommend amending clauses 23, 24, and 28, and deleting clauses 36 and 38. We also recommend inserting section 80A, which would provide for a process to issue censures, and section 80B, to enable a person to appeal a censure decision to the District Court.