AML Phase 2 races ahead – Select Committee reports back with few significant changes
Proposals to extend AML/CFT legislation, which would at least triple the number of reporting entities currently captured, have been moving at breakneck pace in New Zealand.
The Law and Order Select Committee reported back to Parliament on 13 July 2017, two weeks ahead of deadline. That appears consistent with the government’s stated intention to rush through the legislation before Parliament must rise (in mid-August) for the upcoming election. The Select Committee recommends the Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill now be passed, with a number of amendments, but with little serious change from the original draft.
Designated Non-Financial Business and Profession sectors to be covered include lawyers, conveyancers, accountants, real estate agents, the Racing Board (TAB), and selected dealers in high-value assets (such as cars, boats, jewellery, precious metals and stones, artefacts and art).
Originally announced as a reaction to the Panama Papers and the 2016 Shewan Report, the law has moved from the drawing board to fully-fledged prototype at tremendous speed. The Bill was only introduced in March 2017, after a truncated preliminary consultation period, and now seems highly likely to go through, with only final readings required.
This article summarises key points from the Select Committee Report, with commentary based upon the experience of other reporting entities since they were captured in 2009.
No change to implementation dates
Despite submissions to the contrary, including by ADLS, the staged implementation periods remain:
- lawyers, conveyancers, and any trust and company service providers not already captured – 1 July 2018;
- accountants – 1 October 2018;
- real estate agents – 1 January 2019; and
- New Zealand Racing Board and high-value dealers – 1 August 2019.
While acknowledging concerns about the amount of work that will be required in a short time frame, there seems little sympathy from the Select Committee. Its members rest a view that the implementation timeframe is satisfactory on the basis that Regulations and Guidance material would be available at least six months before each new sector comes in.
There are several problems with this. First, it does not appear as a legislative requirement – more a wish-list – with no sanction if the Guidance arrives late. And it puts huge pressure on the Supervisor/ Ministry to rush out appropriate materials without consultation, and also on affected firms to then respond in the six months’ time remaining.
This ignores the fact that banks and other Phase 1 entities had almost four years to get their compliance systems up and running, before the Act took effect at the end of June 2013. Even then, vast numbers of entities limped across the line non-compliant for some time afterward. History seems likely to repeat itself in 2018-19.
Although I am a supporter of the extensions to sectors recently targeted by money launderers, because they remain outside the regulatory regime, racing ahead with unrealistic timeframes will do nothing to help the new law bed down efficiently. It risks poor law-making, with courts then called in much later to try to patch up the legislative gaps.
Plenty of time exists before New Zealand’s next Mutual Evaluation (by the international body, the Financial Action Task Force) in 2019-20, for all entities to be brought in at one time, say early or mid-2019, once the Supervisor is ready and all parts of the legal framework are properly developed. There would be little risk of criticism from the FATF. Back in 2009, the new AML law was rushed through in the very same week that our Mutual Evaluation report was released. That was a somewhat unedifying, orchestrated attempt to show the international community that New Zealand was doing something, but served the purpose, and the Evaluation outcome was fine.
No change to core coverage, only clarification of definitions
Heeding submissions that many aspects of the detailed definitions in section 5, especially for law firms, were inapt or imprecise, several changes are proposed. An important new concept of “legal arrangement” is introduced, to cover a trust, partnership, charity, and any other type of “arrangement” to be prescribed in Regulations.
The definition of “law firm” will turn upon the two branches of professional lawyer, barrister and solicitor and barrister sole, rather than partnership or firm.
The confusing notion of when a professional was “engaging in or giving instructions” is clarified, but not in any way that limits coverage. It will apply to any instructions given on behalf of a customer/ client to another person, such that any third party actions or referral will be caught, if relating to a defined type of activity. Coverage of real estate agency work now uses more precise definitions of “transaction” already in the Real Estate Agents Act 2008, and “conveyancing” is also aligned.
Coverage of transactions in relation to land, leases, licences etc. is therefore itemised in a more fulsome and precise way.
Perhaps the most useful changes are to reinforce that customer due diligence must be conducted only when needing to undertake the specified covered activities listed for each profession, although that is now clarified and extended to occasional, one-off activities.
What else is good?
A replacement definition of wire transfer is welcome, given the notoriously technical and difficult existing definition. With prescribed transaction reporting of all wire transfers over NZ$1,000 becoming a reality in November 2017, more clarity on this topic is sensible.
The Select Committee has for the most part rejected an unnecessarily broad set of information-sharing provisions scattered through the Bill. It takes on board the Privacy Commissioner’s concern about the potential for wholesale information-sharing between agencies, without Ministerial approval or much scrutiny being required. The Bill now focuses on defined “law enforcement purposes” to ensure that the agencies have sufficient ability to share information to prevent harm and take action against the very offences (laundering and terrorist financing) the regime targets. It removes the more nebulous idea of sharing for “regulatory purposes”, and removes proposals to allow reporting entities themselves to share personal data in a fairly uncontrolled way.
There is a log-jam of outstanding Exemption applications before the Ministry of Justice, which it was suggested may be fixed by allowing Ministry officials to make the decisions, rather than the Minister. That was rejected. As the Select Committee says, “the Secretary for Justice is not the appropriate person to hold this authority considering the breadth and nature of the exemption power”. The real solution to this embarrassing process delay is to properly resource and prioritise the process to ensure exemptions can be fast-tracked and not stuck on the Minister’s desk, perhaps by stating a firm deadline for processing.
What else is disappointing?
The Select Committee has decided to make Regulation 5A (a late insertion in 2011) part of the primary Act as a new section 22A. This ill-considered requirement to conduct enhanced due diligence whenever an entity lodges a suspicious activity report was never subject to proper consultation, and causes real practical problems for reporting entities when making a report to the Police FIU. It would have been better to consider throwing out this requirement altogether, not elevating it into the primary legislation.
The obligations for high-value asset dealers are at such a low threshold as to remain nigh-on useless. While it is laudable that the Select Committee has concern around compliance costs (notably absent when applied to the professions?), the obligations as they currently stand involve a voluntary ability (not requirement) to report suspicious activity when dealing in cash over the intended threshold of NZ$15,000. Having it as a voluntary rather than mandatory obligation is a nonsense. In practice, very few car dealers or similar entities are likely to choose to make a voluntary report – which, in any event, if serious enough under the current regime, could be arranged with the FIU anyway.
Only minor changes were suggested to the reliance on other parties’ provisions in section 33. In my view, the existing changes proposed do not go far enough. There has been a marked reluctance of many financial reporting entities to agree to rely on each other, or attempt to meet the conditions for doing so. Against a background of rampant de-risking behaviour in the last few years, there is such distrust in the market and disinterest in reaching reasonable agreements to pass on CDD information that it is hard to see these amendments having much positive effect.
For lawyers, legal professional privilege definitions have been tinkered with, but not in a way that aids certainty. The concept of a belief “on reasonable grounds” is introduced, as to whether or not information is privileged. Although designed to allow more flexibility, that phrase is a time-honoured way of introducing vagueness and uncertainty into legislation. It will increase difficulty trying to assess quickly and reliably whether information is truly privileged and, as the Bill anticipates, likely to lead people in some cases to have to apply to a District Court Judge for a ruling.
The Select Committee took a passing interest in submissions suggesting that work should be done on a beneficial ownership register, but then simply put in the “too-hard basket”, noting that MBIE is undertaking preliminary work on a register – but only in relation to companies. This was a missed opportunity to make progress in clarifying the difficult and murky relationship of trusts law with the AML law.
Speaking of missed opportunities, the early decision made behind closed doors at Ministry level, not to take the talented staff at each of the existing three Supervisors and roll them into one properly-funded single agency, has never been fully explained, let alone revisited. Most leading AML experts were in favour of it, but all we can do is lament the mistakes of 2009 repeating.
This summary/commentary has been prepared by Gary Hughes, Barrister (www.law-strategy.nz). He specialises in regulatory investigations and cases, including competition, financial, and AML regulators.