Dirty Money Law Gets Thumbs Up but Compliance Comes at a Cost
Organisations and occupations affected by new legislation designed to combat money laundering in New Zealand largely welcome the long overdue measure but have voiced reservations about some aspects of it.
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 came into effect on June 30th and is designed to wipe out a $1.5 billion a year business in “dirty money” that has tarnished our financial reputation.
The Act, which will bring this country into line with many other jurisdictions, applies to so-called “reporting entities” that include banks, life insurers, finance companies, building societies, credit unions, issuers of securities, trustee companies, futures dealers, brokers, certain financial advisors, casinos, money service businesses, those involved in financial leasing and safe deposit businesses.
Lawyers, incorporated law firms, accountants, conveyancing practitioners and real estate agents will be captured by the new legislation next year. However, experts point out that these entities are currently subject to various laws already in force, and urge consideration of the new legislation’s
effect sooner rather than later (see Law News Issue 19, 28 June 2013).
All will be obliged to comply with a raft of measures, such as providing a written risk assessment of money laundering that could be expected in their business; procedures to detect, deter, manage and mitigate laundering; a compliance officer to administer the programme; customer due diligence processes; and suspicious transaction reporting systems.
Michal Amzallag, a KPMG Advisory Risk Consulting Senior Manager, sees a pressing need for the legislation.
“While being a little late out of the blocks, New Zealand has a history of producing robust legislation and actually implementing it rather than other jurisdictions which have brought in AML/CFT legislation and widely ignored it. New Zealand has a reputation for integrity and transparency and rushed, or poor, legislation will only damage that reputation.
“What has to be remembered is that this is not merely a regulatory and compliance issue but a crime issue – attacking the financial base of crime and making New Zealand an environment hostile to ML/FT means a safer and more honest New Zealand.”
Ms Amzallag’s views are echoed by Kirk Hope, CEO of the New Zealand Bankers Association, who believes the timeframe for the introduction of the new measures is “appropriate given the task.”
“We support the aims of the legislation – enhanced monitoring under the new regime will provide enforcement agencies with better information in cases where there are suspicions of money laundering and terrorism financing.”
However, Mr Hope says the compliance costs for banks have been considerable.
“Implementing the legislation has been time-consuming and costly for banks in particular because it required developing and establishing large-scale new technology solutions.
“It has cost banks a lot to become compliant, around $90 million, and there will be significant ongoing monitoring, reporting and system maintenance costs. Supervisors need to work actively with banks to ensure that ongoing compliance does not impose any unnecessary costs. Similarly, the government needs to avoid any unnecessary changes to the regime which may impose further costs on banks.”
Mr Hope says ongoing costs of maintaining the new systems and the dedicated teams required to run them are estimated to be $9 million a year, which raises an important question:
To what extent will compliance costs be passed on to customers and clients of the multitude of reporting entities?
Kirk Hope says the costs “won’t be directly passed on to customers” but Michal Amzallag takes a different view.
“Any compliance cost will ultimately be passed on to the customer one way or another. It is up to the reporting entities how they will do this. If they adopt an overly cautious approach this may result in large costs and an overly burdensome AML/CFT regime. Alternatively, if the reporting entity buries its head in the sand, then large fines and huge reputational damage may be incurred.
“It is all about proportionality and this is based on the entity having a reliable and valid risk assessment – AML/CFT risk factors are dynamic in nature and compliance costs will be an ongoing process.”
Ms Amzallag says it would have been better to “incorporate all aspects of the Act in one go to reduce regulatory inconvenience and cost.”
“However, the two stage approach mirrors the Australian model and provides opportunity to revisit the legislation.”
It therefore seems likely that consumers will be hit in the pocket, but in the overall scheme of things this could be a small price to pay given that New Zealand has adopted the international Financial Action Task Force (FATF) standards for anti-money laundering.
Rob Edwards, the Reserve Bank Anti-Money Laundering manager, says this country cannot afford to be seen as a weak link in the chain of international efforts to tackle money laundering and the financing of terrorism.
“If FATF were to give New Zealand a poor AML rating at its next review (most probably in 2016), the consequences could be severe,” he says.
For the moment lawyers are generally exempt from the new legislation, although they are still bound by the Financial Transactions Reporting Act 1996 which obliges them to carry out due diligence and report suspicious transactions.
But they will come under its provisions sometime next year when the second phase of the Act comes into effect.
Russell McVeagh partner Deemple Budhia says one or two aspects of the legislation give her cause for concern.
“The Act’s definition of financial institutions is cast very widely and this means there is a risk that it captures activities/entities with very little risk of money laundering.
“While the broad definition of financial institutions is consistent with the Financial Action Task Force 40 recommendations, it could result in many entities incurring unnecessary compliance costs where there is little real risk of money laundering. The Ministerial exemption regime will play a key role regulating the impact on such entities.”
Ms Budhia’s concerns are shared by Auckland firm Anti-Money Laundering Solutions which recently told The New Zealand Herald that the legislation could affect the ability of migrant workers to send money home to poor family members.
According to the Department of Internal Affairs there are about 820 identified agents offering money remittance services outside of registered banks. The estimated total value of both inbound and outbound transactions a year is somewhere between $150 to $200 million.
AML Solutions says some remitters could come under closer scrutiny and be left unable to access banking services. It believes a blanket crackdown could put them out of business and prevent money reaching poor people in Asian or Pacific countries.
But on balance all those spoken to by Law News were confident that the new measures will be very effective in combating money laundering and the financing of terrorism in this part of the world.
Michal Amzallag believes they “represent a new AML/CFT environment which will have real teeth compared to the previous Financial Transactions Reporting Act” while Kirk Hope says “the new regime is fit for purpose and in line with international best practice.”