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Dirty Money in NZ: the new anti-money laundering/countering financing of terrorism regime

Phase one of New Zealand’s anti-money laundering reform has now been implemented.  The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (Act) came into force on 30 June 2013.  It is likely that phase two of the reform will take effect in 2014.  The phase two reforms will cover accountants, lawyers, real estate agents and other professionals.  New Zealand law-makers are passing the laws in response to increasing international pressure on New Zealand to pull its weight in the global fight against money laundering and the financing of terrorism.

What is money laundering?

Money laundering is a description for the process by which criminals take money obtained from criminal activities and use the financial system to attempt to hide its origin.

The Financial Action Task Force (FATF) is an international body tasked with protecting the integrity of its member’s financial systems.  A report published by FATF in 2009 identified that 75% of money laundering in New Zealand relates to fraud (in particular internet banking), with drug related money laundering in second place at 10%.

What is the financing of terrorism?

Under the Act, “financing of terrorism” essentially means using funds to carry out terrorist acts or finance terrorist organisations.

The 2009 FATF report notes that New Zealand authorities consider there is a low risk of terrorist financing occurring in New Zealand.

The legal framework/supervisors

The Act is the main source of anti-money laundering/countering financing of terrorism (AML/CFT) law.  There are also AML/CFT regulations, which expand on certain aspects of the Act.  The Act also allows supervisors to issues codes of practice.  It is not compulsory for organisations to follow these, but if they do it provides a defence to allegations of non-compliance.  Supervisors can also issue guidelines and fact sheets.  These documents help organisations to understand what their supervisor’s compliance expectations are.

The Act appoints three supervisors.  The Reserve Bank supervises banks, non-bank deposit takers and life insurers.  The Financial Markets Authority supervises issuers of securities, trustee companies, futures dealers, collective investment schemes, brokers and financial advisors.  The Department of Internal Affairs supervises casinos, non-deposit taking lenders, money changers and any other organisation that is not subject to supervision by the Reserve Bank or the Financial Markets Authority.

Who has to comply with the Act?

An organisation that is subject to the Act is called a “reporting entity”.  Some of the organisations that the Act applies to include:

  • casinos
  • banks
  • finance companies
  • financial advisors
  • life insurers
  • fund managers
  • share brokers
  • debt collectors

Please note that there are also other organisations that the Act applies to. Organisations can apply for an exemption from the Act if they fit certain criteria. Helpfully two of the three supervisors have published lists of organisations they believe are subject to the Act.  You can check to see whether you or any of your clients are subject to the Act by visiting these websites:

http://www.dia.govt.nz/diawebsite.nsf/wpg_url/services-anti-money-laundering-list-of-reporting-entities

http://www.fma.govt.nz/laws-we-enforce/registers/list-of-aml-reporting-entities/

How does the Act work?

Broadly speaking, the requirements on a reporting entity under the Act can be broken down into two parts: a risk assessment and a compliance programme.

A risk assessment involves a reporting entity identifying AML/CFT risks in their organisation and then rating the likelihood that these risks may eventuate.

After a reporting entity has finalised its risk assessment, it then needs to prepare its compliance programme to address the risks it has identified in its risk assessment.  The compliance programme also implements policies, procedures and controls for:

  • vetting and training staff involved in AML/CFT duties
  • complying with customer due diligence requirements
  • reporting suspicious transactions to supervisors
  • monitoring, record keeping and ensuring compliance with the programme

Identifying and verifying the identity of customers is the central focus of the Act.  There are 3 levels of customer due diligence that must be carried out under the Act:

  • simplified (government departments, publicly listed companies)
  • standard (the majority of due diligence will fall under this heading)
  • enhanced (trusts, politically exposed persons, high risk customers and transactions)

Penalties

The penalties for non-compliance with the Act are severe.  In the case of an individual they can be imprisoned for up to 2 years and fined up to $300,000.  In the case of a body corporate, they can be fined up to $5 million.