On 1 March 2021, Te Tari Taiwhenua Department of Internal Affairs (DIA) publicly announced that it had issued a formal warning to Property Brokers Limited in respect of breaches of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act).
This is the first formal warning issued to a real estate agent since the AML/CFT Act was extended to the real estate sector in January 2019. The public nature of the warning and the fact that the DIA's action arose out of routine inspection activities (rather any external concerns) suggests a possible hardening of the DIA's attitude to enforcement. It also indicates that any grace period to achieve AML compliance for the real estate sector (and the legal and accountancy sectors that were captured by the AML regime in late 2018) is now over.
The AML/CFT breaches by Property Brokers
Property Brokers is a real estate agency, employing 700 staff and operating more than 80 branches nationwide.
The DIA found that Property Brokers had failed to meet a number of their obligations under AML/CFT Act. These included failures to establish, implement, and maintain an AML/CFT programme, including the hiring and training of compliance staff. Property Brokers also failed to have adequate policies, procedures and controls for monitoring compliance and failed to follow guidance from AML/CFT supervisors. The DIA's press release provides limited detail of the specific failures. Property Brokers has been instructed to take immediate action to rectify all areas of non-compliance, and will continue to be closely monitored by the DIA.
End to any grace period for real estate agents, lawyers and accountants
The real estate sector was brought within the AML/CFT regime three years ago. Real estate has often been referred to as a gatekeeper sector, as the purchase of real property can be a means to integrate the illicit proceeds of crime into the legal economy. When that real property is sold or rented, it can provide what appears to be a legitimate source of income.
The real estate sector was brought within the scope of the AML/CFT regime from 1 January 2019, shortly after the extension of the regime to lawyers, conveyancers and accountants in late 2018. The DIA initially took an educative approach to these new entrants to the AML regime, providing guidance in the lead up to these obligations coming into force. It is now clear that the DIA is expecting to see more mature policies, procedures and controls in place.
The DIA's response to Property Brokers signals an end to any grace period for AML non-compliance among these sectors. The public nature of the warning may also reflect a hardening of the DIA's usual enforcement settings. To date, private warnings have been the enforcement tool of choice for AML supervisors. There have been only 18 public formal warnings since the inception of the regime, as compared to over 60 private warnings.
Continued rapid growth in the New Zealand real estate market may see the sector being subject to close regulatory scrutiny. Across the Tasman, however, real estate agents continue to be outside the scope of Australia's AML/CFT regime, despite fierce criticism received from the Financial Action Task Force (FATF) and recognition in Australia's National Threat Assessment of the high money laundering risk posed by this sector.
Increased enforcement by AML supervisors
The DIA is one of three AML supervisors, alongside the Financial Markets Authority and the Reserve Bank of New Zealand. Its most recent formal warning is in line with a general trend of increased enforcement action from each of these supervisors over the past few years.
The DIA has been the most active in taking civil and criminal enforcement action for AML/CFT non-compliance. A number of cases pursued by the DIA have resulted in multi-million dollar civil penalties, as well as criminal convictions and fines. The FMA has also been increasingly active, indicating that remedial action is “more likely now to be accompanied by formal enforcement action, as [the FMA] expect[s] reporting entities to understand and meet their obligations." A full summary of AML enforcement action by the three AML supervisors is available in our Big Picture.
We are expecting the release of the FATF Mutual Evaluation report on New Zealand's AML/CFT practices in April 2021. The FATF Plenary, a 205 member delegation that met in late February 2021, concluded that New Zealand's AML/CFT regime is “delivering good results" but that New Zealand needs to focus more on improving the availability of beneficial ownership information, strengthening supervision and the implementation of targeted financial sanctions. We expect FATF's report may prompt change to the AML regulatory framework and the strategic priorities of AML supervisors in 2021.
What does this warning mean for New Zealand businesses?
This warning provides a clear illustration of the importance of understanding your AML/CFT obligations and taking active steps to ensure compliance with the Act.
If you have any questions about this latest warning, 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.