On 29 April 2021, the Financial Action Task Force (FATF) released its Mutual Evaluation report on the effectiveness of New Zealand's anti-money laundering and countering financing of terrorism (AML/CFT) regime.
The FATF report, which totals 260 pages, was long awaited by New Zealand government agencies and reporting entities – our controls were last reviewed in 2013, only a few months after the AML/CFT Act had come into force. Overall, New Zealand received a solid report card, the FATF finding our system to be “effective in many respects" and observing its strengths in confiscating proceeds of crime, and investigating and prosecuting money laundering. As we anticipated in our Big Picture last year, the FATF found room for improvement, in areas such as corporate transparency, supervision and financial sanctions.
We expect the New Zealand Police, three AML supervisors, and Government to take careful note of the FATF's recommendations, which arrive in time for the imminent statutory review of the AML/CFT Act.
In this publication, we highlight the key AML/CFT risks facing New Zealand, the FATF's evaluation of compliance by reporting entities, and three priority actions for New Zealand that may prompt regulatory change in 2021.
New Zealand understands its AML/CFT risks but threats remain
The FATF describes New Zealand's understanding of its AML/CFT risks as “robust", reflecting comprehensive risk assessments by New Zealand Police and strong co-ordination and cooperation between domestic agencies responsible for AML supervision.
New Zealand is a “high integrity jurisdiction", as reflected in its regular first placing on the Transparency International Corruption Perceptions Index. However, New Zealand faces money laundering threats from criminal proceeds generated domestically (typically from drugs, tax and fraud offending) and internationally from transnational organised crime groups. In particular, New Zealand's open economy, and ease and low cost of creating legal structures, attract the movement of funds to and through New Zealand. The FATF highlights the vulnerability of New Zealand's banking, money transfer, real estate and professional services sectors to money laundering in light of their role and size in the overall financial system.
Further, while the risk of terrorist financing remains low, authorities are alert to the possibility that funds may be raised, moved or used for terrorist purposes following the Christchurch attacks.
Compliance by AML/CFT reporting entities is mixed across sectors
The compliance of reporting entities attracted a “mixed" assessment from the FATF, which observed that the sophistication of AML/CFT controls largely reflected the size and length of time that the entity had been subject to the AML/CFT Act. While banks and larger financial institutions had implemented AML/CFT controls to “a good standard", the controls of the money transfer sector were “variable" and those of professional services firms (the more recently captured Phase 2 reporting entities) “still developing".
The FATF observed the following areas in which reporting entities could uplift their understanding and compliance with AML/CFT obligations:
The conduct of comprehensive risk assessments, tailored to the particular services, scale and customer base of the business,
The screening of customers as part of due diligence processes, to ensure politically exposed persons (PEPs) and designated individuals under sanctions lists were identified,
The education of employees regarding the making of suspicious activity reports (SARs), which continue to be underreported from Phase 2 reporting entities, and
The completion of registration with the New Zealand Police Financial Intelligence Unit (notwithstanding identified technical issues with that reporting system).
The beneficial ownership of our companies, partnerships and trusts remains obscure
In a country with over a million legal persons (such as companies, limited liability partnerships, and trusts), the FATF reports that there are “substantial gaps" in the available information about the individuals who ultimately own and control these legal entities. While modest measures have been implemented in recent years, including a register of foreign trusts and company director residency requirements, it remains difficult to collect beneficial ownership information or to determine whether shareholders or directors are acting in a nominee capacity.
Among other reforms, the FATF has invited New Zealand to consider a beneficial ownership register, which would provide information as to who owned, or effectively controlled, legal entities. Proposals for such a register in New Zealand are not new. In 2018, MBIE issued a discussion document asking the public what requirements there should be on companies and limited liability partnerships to hold and disclose information about their beneficial owners. MBIE's preferred option was to introduce a publicly accessible beneficial ownership register. Although the previous Minister of Commerce and Consumer Affairs described it as a “priority", it has not gained any traction. In the United Kingdom, where a register of “People with Significant Control" has been in place for companies since 2016, the register is well used but lacks verification, casting its reliability into doubt.
We expect the FATF report to return the Government's focus to MBIE's proposals for a beneficial ownership register. Any such proposals are likely to be met by understandable concerns about the additional cost and compliance burden of such a register. As a result, any change may not be fast-moving.
AML supervisors have an inadequate range of sanctions
The FATF found that the depth of supervision by the three AML supervisors was broadly proportionate to the relative AML/CFT risks of their respective sectors (with the exception of the higher risk banking sector, which demanded more intensive supervision). However, the FATF found that the supervisors lacked a sufficient range of deterrent sanctions with which to penalise non-compliant reporting entities. Generally, the FATF observed, supervisors used public or private formal warnings in most non-compliance cases, with enforceable undertakings and injunctions rarely used. (See our Big Picture for further details of these trends).
The FATF recommended the supervisors be given a greater range of pecuniary penalties and the ability to impose administrative penalties. Pecuniary penalties are already available for a range of breaches of the AML/CFT Act. However, administrative penalties (i.e. penalties imposed directly by regulators without the involvement of the courts) are a relatively foreign concept to New Zealand financial regulation. Their introduction would represent a significant change to the enforcement landscape. Pending any further legislative or regulatory change, we expect that all supervisors (including the newly-established Enforcement team at the Reserve Bank of New Zealand) will be reflecting on their use of sanctions for non-compliance. As a result, we may see more severe enforcement outcomes for compliance breaches in the months to come.
No authority has a clear mandate to supervise and enforce sanctions compliance
New Zealand's sanctions regime adopts the sanctions imposed by the United Nations Security Council through the promulgation of domestic regulations. A failure to comply with those sanctions regulations is a criminal offence.
The FATF report highlights that none of the Reserve Bank, Financial Markets Authority or Department of Internal Affairs has any mandate to supervise reporting entities for the implementation of sanctions as part of their compliance controls. There is, therefore, no check on whether New Zealand entities are doing business – illegally – with designated persons or countries under our sanctions regulations. There have been very few prosecutions in New Zealand for sanctions breaches.
The FATF has recommended that New Zealand gives clear powers to one or more appropriate agencies to supervise sanctions compliance, including educational outreach about sanctions obligations. Given the significant variation in corporate understanding of sanctions obligations, we see that recommendation as positive development. It reflects similar steps taken in other jurisdictions to ensure sanctions are properly understood and implemented (e.g. the creation of the Office of Financial Sanctions Implementation in the United Kingdom).
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Overall, the FATF Mutual Evaluation report comprises a largely positive endorsement of New Zealand's commitment to AML/CFT controls, which nonetheless (and as expected) gives AML supervisors and reporting entities areas for improvement. We expect that some of the FATF's findings will be reflected in legislative priorities for the upcoming statutory review of the AML/CFT Act.
If you have any questions about this report, or would like assistance with your AML/CFT obligations or compliance programme, please get in touch with the contacts listed or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.