Commentary on the AML/CTF Bill  

Anti-Money Laundering and Countering Financing of Terrorism Bill

Gary Hughes of Wilson Harle and Alex Tan of PricewaterhouseCoopers recently presented a seminar on the AML/CFT Bill to LEANZ, entitled "The Law & Economics of Financial Crime". 

Click here for a copy of the presentation:  AML/CTF Bill Powerpoint

Gary Hughes was recently one of two AML experts interviewed by financial services publication Complinet. This article below first appeared on www.complinet.com:

New Zealand Update - AML/CFT Bill - The Big Changes

A New Zealand parliamentary committee has just released its proposed changes to the country's anti-money laundering bill, setting out a raft of reforms to bring the legislation closer to the risk-based models as espoused in other similar jurisdictions. The recommendations will come as a particular triumph for trans-Tasman reporting entities, which had complained vocally about the unnecessary differences between the Australian and New Zealand legislation.  

Lawyers and banking industry figures on both sides of the Tasman have emerged in overwhelming support for the select committee's findings. The major Australian-based banks said that the results were a triumph of pragmatism, while lawyers in Auckland said that they were evidence of the select committee process working as it was intended. 

Lloyd Kavanagh, a partner at Minter Ellison Rudd Watts, said that the select committee had taken on board the industry's concerns and saw the benefit of having a streamlined AML regime between New Zealand and Australia. He said that the committee's position would come as especially welcome news to reporting entities that have operations or do business in Australia.

"The select committee has explicitly acknowledged the benefit of harmonising with Australia as far as is practicable," Kavanagh told Complinet. "An important change proposed to the bill is to take a risk-based approach to customer due diligence more closely aligned to the Australian approach. This represents a major change from the more prescriptive approach originally proposed in New Zealand."

In its introduction to the proposals, the Foreign Affairs, Defence and Trade Committee said that it had attempted to craft a set of legislative changes that were "forward-looking (future-proofed), risk-based (to minimise compliance costs) and as far as practicable harmonised with Australian legislation."

"We formed the view that the bill as introduced did not give sufficient emphasis to a risk-based framework for countering money laundering and the financing of terrorism. Accordingly we recommend amendments to enhance the bill and to ensure that it is closely aligned with the Australian AML/CFT regime," the committee added.

The committee also made it clear that adopting a risk-based regime would ensure that the legislation did not impose excessive compliance burdens on reporting entities, especially in the area of customer due diligence.

"A risk-based approach would enable financial institutions to focus resources on areas of higher risk and thereby meet the objectives of AML/CFT activity efficiently and cost-effectively," the committee stated.

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Matter of timing

The Anti-Money Laundering and Countering Financing of Terrorism Bill does not set out any specific deadlines for compliance, preferring instead to leave these matters to the accompanying regulations. The committee said that it supported this approach and wanted to take a "flexible approach to implementation", giving the financial and casino sectors sufficient time to implement their AML/CFT regimes.

It has recommended that the relevant regulators and supervisors - whether that be four agencies or one - should issue a coordinated timetable for issuing their respective regulations and adopting codes of practice. It also said that the implementation of the AML/CFT regime should be staggered and allow "reasonable time" between the issuing of regulations and the commencement of obligations under the new AML/CFT regime. This is expected to be a two-year compliance period but, interestingly, the committee did not call for a transition period similar to the 15-month "policy principles" regime implemented in Australia.

Kavanagh said that although the committee had recognised the importance of giving reporting entities certainty, and a reasonable timeline to put in place the required processes, its final position offered little real certainty around timing. 

"They have proposed that the cross-border transportation of cash provisions should come into force in 12 months, and left it for regulations to specify when the other substantive AML/CFT provisions come into force. So there still remains real uncertainty as to timing," he observed.

Gary Hughes, a senior associate at Wilson Harle, said there had been some debate over whether the two-year implementation period should commence as soon as the Act is passed - for instance, from October 2009 - or only once the regulations and relevant codes of practice have been developed and published by the AML supervisors. 

"The issue is that quite a bit of the crucial detail for reporting entities is yet to come in those regulations, and it seems the select committee wants to emphasise the importance of adequate time being allowed to digest that level of detail. It has left it in the hands of the government agencies to consult on timelines and agree clear, coordinated programmes for intended implementation," Hughes noted.

He added that the parts of the legislation addressing the multi-regulator model will come into force immediately, with a brief to those agencies to quickly develop codes and regulations, and to liaise extensively with industry groups. "This is all very welcome, as there will be a big learning curve for both the firms affected and the regulators themselves. In practice we may see something like an informal 'honeymoon period' before any enforcement action is taken, even if not a formalised policy principles rule like in Australia," he predicted

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Risk and reward

While the committee has come out as a strong proponent of a risk-based regulatory model, in some respects it has failed to embrace this ethos fully, according to lawyers. Kavanagh noted that the select committee had failed to address the legislation's position that all trusts require enhanced customer due diligence, regardless of whether they present a higher level of risk. "Given the prevalence of trusts in New Zealand, ranging from Treaty of Waitangi settlement trusts, through trading trusts, to family trusts, this will impose a substantial burden," he said. 

In another curious development, New Zealand looks set to join all the other major jurisdictions in excluding domestic political figures and their associates from the definition of a "politically exposed person". Under the existing bill New Zealand had taken the unorthodox step of including domestic figures in the PEP regime, setting it in stark contrast to countries such as Canada, the United Kingdom, most of Europe and Australia. The committee has sided with the international "status quo", however, adding weight to claims that few politicians would be willing to define themselves as "PEPs" when passing legislation.

"We gave considerable thought to this question and recommend there be no definition of domestic PEPs in the bill or in guidelines. We consider that New Zealand-based PEPs are already required to conform to robust accounting, audit, company and trust legislation, practice, and procedures," the committee stated.

Interestingly, however, the committee's explanation for its decision makes little sense to anyone who understands the workings of client screening software and PEP databases.

"We were also told that banks subscribe to commercial lists of PEPs containing more than 55,000 names, including the names of all parliamentarians and other PEPs in New Zealand. Submitters also informed us on 'backroom', systems used to monitor transactions and to identify money laundering. Given the strength and robust nature of New Zealand's existing financial monitoring systems, we recommend against requiring the application of the FATF definition of PEPs to New Zealand nationals domiciled in New Zealand."

After applauding the fact that software and lists exist to very easily monitor domestic PEPs in addition to foreign ones, the committee proceeds to recommend that this need not be a legislative requirement - a non-sequitur if ever there was once. Logic aside, lawyers said that it made sense for New Zealand to fall into line with other major jurisdictions in their definition of a PEP. Hughes said that in his view this was a "sensible move" from the committee.

"To include domestic PEPs would have put us slightly out of step with most of our trading partners on this issue, especially Australia, and would have led to administrative difficulties for entities trying to comply," he noted

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Four become one

In one of the report's more controversial passages, it has also suggested that New Zealand should dispense with its multi-supervisor model and adopt a single regulator to match the Australian Transaction Reports and Analysis Centre. Lawyers said this was an unusual step for the select committee, as it had had gone well beyond the scope of the bill. The report noted that although the legislation does not specify any particular regulatory agencies this was something that the government should address as a related issue. It argued that the present arrangement was "administratively untidy" and failed to give reporting entities or overseas regulators a single point of contact in New Zealand.

The committee noted: "While this is beyond the scope of the bill, we note that Australia has a single supervisory agency, AUSTRAC. We think this arrangement is preferable to the situation applying in New Zealand where four entities - the Reserve Bank of New Zealand, the Securities Commission, the Department of Internal Affairs, and police - are all involved. Consideration should be given to consolidating supervision arrangements in one body which has a close relationship with AUSTRAC. 

Hughes said it was unusual that the committee would come out with "quite strong criticism" of a decision made some time ago. He said the multi-supervisor approach was originally taken in the belief that it would reduce costs by using existing bodies that already perform other regulatory functions for the various industry sectors. The Reserve Bank, Securities Commission and Department of Internal Affairs all have established expertise and relationships with entities in their relevant industry sectors. The Police would also inevitably be involved as they housed New Zealand's FIU.

He said it was uncertain, however, whether the present situation could be easily reversed at this late stage. "To go back and establish a single regulator now would be a major undertaking - and in all likelihood would delay the law reform altogether. I think at this point many parties aren't really in favour of further significant delay, but it may be something that's given attention in future," he noted.

Nathan Lynch, Complinet

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