FMA announces formal warnings for audit failings

Thursday 16 May 2019

Authors: Blair Keown and Timothy Shiels

​​​​​On 13 May 2019, the Financial Markets Authority (FMA) publicly announced it had issued 10 formal warnings to reporting entities, and issued a compliance letter to an additional reporting entity, for apparent breaches of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the AML/CFT Act).

Each of the 10 formal warnings related to a failure by a small business or individual to have their risk assessment and/or anti-money laundering and countering financing of terrorism programme (AML/CFT programme) audited on time, or at all. The FMA stated that naming the persons involved would be a disproportionate penalty given the nature of the issues involved.

The relatively low level nature of the breaches and the corresponding enforcement response is unlikely to capture the attention of many reporting entities that are supervised by the FMA for AML/CFT purposes. More attention is likely to be focused on transitioning towards the new financial advice regime to be brought in by the Financial Services Legislation Amendment Act 2019 and/or responding to the Ministry of Business, Innovation and Employment's recent Conduct of Financial Institutions Options Paper. However, in an environment of increasing regulation, the FMA's press release provides a timely reminder that compliance with the AML/CFT Act should not be overlooked. It remains an enforcement priority for the FMA. The independent audit reports that reporting entities are required to obtain under the AML/CFT Act will be closely scrutinised in that context.

The significance of an AML/CFT audit

The AML/CFT Act requires every reporting entity to undertake an assessment of the money laundering and terrorist financing risk that it reasonably expects to face in the course of its business (the risk assessment). On the basis of the risk assessment, the reporting entity is required to establish, implement and maintain an AML/CFT programme that detects and manages the risks of money laundering and the financing of terrorism. The risk assessment and the AML/CFT programme must be independently audited every two years.

Independent audit reports have been a focus of the FMA's recent monitoring activity. A failure to have an audit conducted on time, or at all, is a relatively straightforward breach to establish. Such reports provide a consolidated source of information on how a reporting entity has tried to meet its other obligations under the AML/CFT Act. That information can be helpful in investigating and establishing other breaches of the AML/CFT Act. In its AML/CFT Monitoring Report released in April 2019, the FMA stated that its future monitoring activities will involve an increased focus on reviewing independent audit reports, which will result in more in-depth reviews of areas such as client on-boarding and account monitoring processes.

The importance of AML/CFT compliance

To date, the FMA's principal tool for enforcing compliance with the AML/CFT Act has been a non-public warning. In the period 1 July 2016 to 30 June 2018, 18 formal warnings (of which one was public1), were issued for breaches of the AML/CFT Act. The FMA's recent announcement of 10 formal warnings is consistent with that picture.

However, that does not necessarily mean that compliance with the AML/CFT Act and management of AML/CFT risk should be moved down the compliance risk register. The FMA has stated that it will give more consideration to making formal warnings public. In 2020, the Financial Action Task Force (FATF) will review New Zealand's compliance with FATF's international standards on combating money laundering and the financing of terrorism. That review will consider the supervisory and enforcement activities of the FMA (as one of three AML/CFT supervisors). This impending scrutiny might prompt even closer FMA attention to the AML/CFT Act.

Irrespective of the threat of enforcement activity, the risk of money laundering and terrorist financing remains. In 2017/18, 128 suspicious activity reports were submitted by reporting entities supervised by the FMA. That represented a 128% increase in the number of reports submitted in the previous year. Certain sectors supervised by the FMA face an increased risk of money-laundering and terrorism financing. Derivatives issuers, brokers and custodians have been identified as presenting particularly high levels of risk. Those risk levels have increased from previous periods.

If you would like to discuss any of the matters raised in this article or your AML/CFT obligations more generally, please contact the authors or your usual Bell Gully advisor.


1 Financial Markets Authority "FMA issues formal AML/CFT warning to Fullerton Markets" (media release 24 November 2017).


Disclaimer

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.

For more information
  • David Craig

    Partner Wellington
  • Blair Keown

    Senior Associate Auckland
Related areas of expertise
  • Financial sector regulation
  • Regulatory investigations & prosecutions
  • Derivatives