AML Phase 2 races ahead: Select Committee reports back with few significant changes

Proposals to extend Anti-Money Laundering 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 today reported back to Parliament, 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 Committee recommends the AML-CFT Amendment Bill now be passed, with a number of amendments, but with little serious change from the 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 Shewan Report commissioned during 2016, 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. It now seems highly likely that reforms are about to go through, with only final readings/debates required.

This article summarises key points from the Committee report, and please note they are quick first review reactions.

No change to implementation dates

Despite submissions to the contrary, the original staged implementation periods remain:

  • Lawyers, conveyancers, and any trust & company service providers not already captured -1st July 2018.
  • Accountants – 1st October 2018.
  • Real estate agents – 1st January 2019.
  • New Zealand Racing Board and high-value dealers – 1st August 2019.

While acknowledging concerns about the amount of work that will be required in a short time frame, there seems little sympathy. The Committee rests its view that the implementation timeframe is satisfactory on it being calculated on the basis that Regulations and Guidance material would be available at least 6 months before each new sector comes in. There are several problems with this. First, it doesn’t 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 with limited consultation, and also on affected firms to then respond in the 6 months  remaining.

This conveniently ignores the fact that banks and other Phase 1 entities had almost 4 years to get their compliance systems up and running, before the Act took effect at the end of June 2013. Even then, expert advisors saw a vast numbers of entities limp across the line non-compliant for some time afterward. We seem destined to have history repeat itself in 2018-19.

Although I am a firm supporter of the extensions to new sectors, bashing ahead with unrealistic timeframes will do nothing to help the new law bed down efficiently. It risks poor law-making, and lacunae, with Courts then called in much later to help interpret the legislative linguini served up.

New Zealand might now be held up as an example to berate Australian law reformers into action, and perhaps deservedly. However, speeding through a complex piece of legislation (without fixing problems left over from Phase 1) holds risks too.

Plenty of time exists (before New Zealand’s next mutual evaluation by the FATF 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, without any 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 NZ 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, especially for law firms, were inapt or imprecise, several definitional 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 the profession, barristers and fused barrister/solicitor, rather than partnership or firm.

The confusing notion of when a professional was “engaging in or giving instructions” is clarified, but  in a way that confirms an expansive coverage. It will apply to any instructions given on behalf of a customer/client to another person, intended such that any third party actions or referrals about the defined type of activity will be caught.

Real estate agent coverage 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 wire transfers over NZ$1,000 becoming a reality in November 2017, more clarity on this topic is sensible.

The 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 degree to which this may lead to wholesale information-sharing between agencies, without Ministerial approval or much scrutiny being required. The Bill 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. But it rejects the more nebulous idea of “regulatory purposes”, or allowing reporting entities themselves to share personal data in a fairly uncontrolled way.

And proposals to somehow fix the log-jam of outstanding Exemption applications, by allowing Ministry officials to make the decisions, rather than the Minister, were rejected. As the 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 Committee has decided to make Regulation 5A, a late insertion in 2011, part of the primary Act as a new s 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 for officials 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 laudable that the 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 take it seriously, let alone 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 provisions in section 33. By and large the existing changes proposed do not go far enough, in my view. There has been a marked reluctance of many reporting entities to agree to rely on each other, or attempt to meet the conditions for doing so, even with the vaunted but flawed Managing Intermediaries Class Exemptions coming on stream. Against a background of rampant de-risking behaviour in the last few years, there is such a degree of distrust in the market and disinterest in reaching reasonable agreements to pass on CDD information that it is hard to see these amendments having widespread 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, may lead people to have to go off and spend money applying to a District Court Judge for a ruling.

The Committee took a passing interest in submissions suggesting that more work should be done on a beneficial ownership register, but then put it 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 the murky and massive area of trusts for NZ, beyond the existing Shewan tax reforms put through to ensure disclosure of foreign trusts – but only to the IRD.

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 Supervisors and roll them into one properly funded single supervisor, has never been fully explained, let alone revisited. Most leading experts in this field were in favour of it, but all we can do is lament the mistakes of 2009 repeating.

For the legal profession, you can find a webinar presentation and paper recently delivered, with the ADLS, available here as an introductory resource:
Anti-Money Laundering for Lawyers: Time to Get Ready
AML Phase 2 races ahead: Select Committee reports back with few significant changes