The Ministry of Justice has released a draft 'Anti-Money Laundering and Countering Financing of Terrorism Bill' (AML/CFT Bill). The Bill will apply to financial institutions and casinos and is expected to be introduced in Parliament in April 2009.
The Bill represents phase one in the introduction of a new regulatory framework designed to detect and deter money laundering and prevent the financing of terrorism in New Zealand. Phase two of the regime will involve extending coverage of the Bill to other designated non-financial businesses and professions, including lawyers, accountants and real estate agents.
The Government's stated aim is to introduce a regime that is effective, of low cost to industry, is a 'best fit' to New Zealand's institutional environment, to the greatest extent possible aligns with the Australian anti-money laundering regime, and meets New Zealand's international obligations as a member of the Financial Action Task Force (FATF). Key features of the Bill are as follows:
WHO DOES THE BILL APPLY TO?
The Bill refers to a 'reporting entity' as a catch-all label for those institutions that must comply with the compliance requirements. This is defined as a financial institution, casino, or any other person that is required by any enactment to comply with the Act.
Financial institution is broadly defined and includes any person who, in the ordinary course of business, carries on one of a number of specific financial activities for or on behalf of a customer.
These include accepting deposits, lending, financial leasing, money or value transfer, issuing means of payment (such as credit cards), financial guarantees, trading in financial instruments (such as derivatives and foreign exchange), participation in securities issues, portfolio management, investing, administering or managing funds on behalf of another person, custody, and underwriting or placing life insurance. This will encompass a broad range of financial services industry participants, including banks, finance companies, fund managers, superannuation trustees, insurance companies, brokers and non-bank deposit takers.
The reference to 'participation in securities issues' is vague. As currently drafted it could include employers who assist in the formulation of a superannuation offering, but handle no funds other than in their capacity as employer contributing, and forwarding employee contributions, to the scheme.
The references to insurance-related activities are also vague and need clarification. Issuance of insurance policies is caught under the broad heading 'participation in securities issues' and would therefore exclude term life policies. The activity of underwriting and placement of insurance refers to 'life insurance' which is not defined and could therefore include term life policies.
WHAT MUST A REPORTING ENTITY DO?
Carry out customer due diligence
Reporting entities will be required to apply three different levels of 'due diligence' depending on the nature of the transaction concerned. These are:
- Standard customer due diligence: which must be applied before a reporting entity establishes a business relationship with a new customer, conducts an occasional transaction (whether or not in cash, but excluding cheque deposits) over a threshold that is still to be set, and in relation to any customer where suspicions arise as to the customer's identity, the data previously obtained, or where the reporting entity suspects that AML/CTF may be involved.
- Enhanced customer due diligence: which must be applied when establishing a business relationship with, or conducting occasional transactions that involve, a customer or beneficial owner who is a politically exposed person, cross-border or correspondent banking, technology that 'might favour anonymity', a country that is not a member of FATF, or is otherwise by its nature high risk.
- Simplified customer due diligence: which can be applied to a situation that by its nature constitutes a low risk of AML/CTF, or is specified by regulations to be low risk. Due diligence involves identifying and verifying the customer's identity and the identity of the beneficial owner. 'Beneficial owner' means the individual who ultimately owns or controls a customer, and will extend to the shareholders and directors of a company and probably the beneficiaries of a trust, though this is not entirely clear from the draft Bill.
The main determinant of what level of due diligence is required is the level of risk inherent in the transaction - guidance on this is provided in the Bill and will also be detailed/expanded in any future regulations. There is also a requirement for ongoing customer due diligence to ensure that a customer's transactions are consistent with the customer's business and risk profile.
Report suspicious transactions
Reporting entities must report suspicious transactions to the Commissioner of Police. A 'suspicious transaction' is one where the reporting entity has reasonable grounds to suspect that the transaction or proposed transaction is or may be relevant to the investigation or prosecution of any person for a money laundering offence, or relevant to the enforcement of the Misuse of Drugs Act, the Terrorism Suppression Act or the Proceeds of Crime Act. The Bill provides protection from civil, criminal and disciplinary proceedings to any person who reports suspicious transactions.
Assimilation and application of the reporting obligation in terms of tranches of legislation will be a major challenge for financial institutions, which will require considerable assistance from the AML supervisors (see below) if they are to be equipped to apply the Bill in its current form.
Reporting entities are obliged to keep transaction records in a prescribed form. Identification and verification records must also be kept (where applicable).
Have an AML/CTF compliance programme
Reporting entities must establish, implement and maintain an anti-money laundering compliance programme (AML Programme). The AML Programme must include procedures, policies and controls that enable the reporting entity to comply with the Act. Reporting entities must also appoint an anti-money laundering compliance officer to administer the AML Programme.
The Bill introduces both civil and criminal penalties for breaches of the Act. The maximum pecuniary civil penalty is $300,000 for an individual and $5,000,000 for a body corporate. The maximum criminal penalty is the civil pecuniary penalty and a term of imprisonment of not more than two years.
Under the Bill one cannot be found to be both civilly and criminally liable. Civil breaches will broadly relate to evidence of identity, monitoring, enhanced customer due diligence, establishment of AML Programmes, and record keeping. Criminal offences will broadly relate to suspicious transaction reporting, structuring transactions to avoid triggering threshold AML/CFT requirements, information about beneficial ownership/control of a legal entity, and declarations of cross-border transportation of money.
Criminal liability can attach to executive officers of a body corporate. There is a defence if the defendant can prove they took all reasonable steps to comply with AML/CFT requirements or could not have reasonably been expected to comply.
The Bill appoints the Reserve Bank (banks and non-bank deposit takers), the Securities Commission (securities issuers, trustee companies, futures dealers, collective investment schemes, brokers and financial advisers) and the Department of Internal Affairs (casinos, non-deposit taking lenders, money changers, and other reporting entities) as AML supervisors. The role of the AML supervisors is to monitor reporting entities and enforce compliance obligations. They will also issue guidelines and undertake other activities necessary for helping their reporting entities understand, and achieve compliance with, their obligations under the Act. Reporting entities will ignore that guidance at their peril.
A particular challenge for the regime and for financial institutions will be resolving best practice for dealing with financial institutions, and groups of financial institutions, that undertake activities that fall within the remit of more than one AML supervisor - such as a bank which has a funds management or insurance arm.
AML supervisors have wide ranging powers, including the power to carry out on-site inspections of reporting entities and compel production of documents with or without a court order.
AML supervisors may also use information obtained as an AML supervisor in performance of their other functions and duties (ie under the Reserve Bank Act, Securities Act or Gambling Act).
The financial industry has expressed concern as to the expected costs associated with implementation of, and ongoing compliance with, the AML/CFT regime. Deloitte has put the likely one off start-up costs for financial institutions at $111.8 million, with ongoing costs of $42.7 million per year. This is substantially lower than expectations of the industry, with banks alone estimating that start-up costs will be in the region of $137.5 million. A large percentage of the start-up costs is attributed to the need to update IT systems whilst ongoing costs will mainly relate to account and transaction monitoring and AML Programme management.
WHERE TO NOW?
The Bill is expected to be introduced to Parliament in April 2009. We expect bipartisan party support and international pressure will mean the Bill will have a speedy passage through the House.
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