FATF evaluation of NZ’s AML system – “fine so far, but not all rosy”

New Zealand has now scored a sound pass from the global AML body, unlike last time when, from 2009-2013, we were sent to “the naughty corner” for lagging behind international standards. News reports about the report’s release trumpeted the Criminal Proceeds (Recovery) Act asset restraints system, which is undoubtedly a roaring success, but that does not mean everything is rosy.

This article explores what the Financial Action Task Force (FATF) Mutual Evaluation Report 2021 means, why we should care, and what is likely to happen next.

It also discusses the impending Statutory Review of our AML legislation, due to commence in July.  Gary is an invited member of the Ministry of Justice Industry Advisory expert group for this Review, and is available to assist reporting entities in making submissions. 

A global ‘name and shame’ system is proving effective

The FATF is an inter-governmental body (like the OECD, for example) instigated by the G-7 nations in 1989 to focus on combatting financial crime, particularly drug trafficking at the time.  It sets global standards for legal, regulatory and operational measures, then carries out periodic Mutual Evaluations of how effectively individual nations are implementing the FATF standards.

New Zealand has been a member and supporter since 1991 and, like many small countries, takes these international peer review (‘name and shame’) exercises very seriously. To the point where staff were seconded into this project full-time and even carried out a full ‘mock-evaluation’ rehearsal many months before FATF visited in February 2020.

The FATF system, including more recent priorities around terrorism financing (TF) and weapons proliferation, can prove effective to pressure countries into improving their law or regulatory regimes. But this has its limitations:

• The Mutual Evaluation analyses the level of compliance with 40 technical recommendations and 11 measures of effectiveness of New Zealand’s AML/CFT system. It provides recommendations on how the system could be strengthened in those aspects. But it does not address issues such as the compliance cost and vagueness/complexity in the law, of more concern to the commercial community.
• A visiting international team from Russia, Hong Kong, Australia, Bahrain and India was expected to get to grips with NZ’s legal regime in great detail, during the global pandemic. Inevitably they have had to rely heavily on material put forward by the Ministry of Justice and other agencies, and a limited selection pool of local interviews conducted.

NZ gets a big tick compared to where we were in 2009

The report praises New Zealand for a good understanding of where local money laundering (ML) risks lie, and how we use financial intelligence to deploy world-leading asset stripping operations against criminals.

The international community likes our comprehensive multi-tiered risk assessments, giving meaning to the FATF “risk-based approach”, and enabling us to investigate and prosecute financial crime effectively.  And New Zealand is seen to play nicely with others – we score well for co-operation with international partners on trans-border criminal cases.

Essentially, what we have is a complex system of rules wrapped into a compliance framework, which is designed to generate better, more frequent and systematic reporting of financial intelligence data to the New Zealand Police. It does that quite successfully, giving Police the evidential material to freeze and seize the proceeds of crime. But it also requires a costly, big-stick approach, with regulatory machinery to punish those entities that fail to meet the elevated standards of the compliance framework.

In 2009 we barely scraped a pass mark. The Anti-Money Laundering & Countering Financing of Terrorism Act was passed into law in a choreographed move in the very same week as the FATF 2009 report came out.

Since then, New Zealand’s addition of Designated Non-Financial Businesses & Professions (DNFBP) in 2017 Amendments carried us a long way towards meeting more of the FATF technical recommendations. Australia still has not done that, and can expect a telling-off from the FATF when their (currently deferred) report-card arrives.

But financial complexity, criminal devices, and international expectations march right along with time. What was considered best practice, or at least ‘good enough’, back then may not suffice in modern global terms.  So there are a number of further deficiencies and priority actions set out by FATF for the attention of the New Zealand government.

Why we should care – problem areas remain

The report highlights key risks for ML and TF within New Zealand’s social and economic situation:

• Laundering threats come from proceeds of crime generated both domestically (gangs, meth) and transiting from overseas – particularly through financial, legal, property and cash-intensive sectors.
• As a high integrity jurisdiction with comparatively low crime rates, and a very open economy, New Zealand regularly wins those ‘Ease of Doing Business’ surveys. But that exact same feature affords easy access to legal persons and arrangements, companies and limited partnerships, being mechanisms that are vulnerable to abuse for ML/TF purposes.
• Nominees can still provide resident director or trustee services for overseas customers, abuse of New Zealand shell companies continues, and there are comparatively few measures enabling law enforcement to detect the abuse of trusts.
• Although the Christchurch mosque attack was a wake-up call, the greatest TF risk remains in relation to overseas-based groups, within an overall low TF risk. However, the potential consequences of small-scale domestic TF can be enormous, since funds may be used within, or sent to, New Zealand to finance terrorism activity by lone actors or small cell groups.

On a sector basis, the top risk industries are seen to be banking, money transfer, real estate markets and professional services. No real surprise there.

Phase 1 entities have had many years to get to grips with the complex compliance framework.  But some lawyers and accountants (newer entrants to the AML regime) may be struggling.  The FATF concluded:

As law firms are relatively new to the AML/CFT Act, the level of understanding of ML/TF risks and AML/CFT obligations varies across the sector. Larger law firms with international offices or networks have developed a good understanding. They have developed internal company surveys and have used the NRA, SRA and guidance to inform their risk assessment. They treat the risk assessment as a living document with ongoing review and updates. Smaller and medium sized law firms are still in the process of developing their understanding. … with AML/CFT programmes not specific to the reporting entities’ business.

Small/medium-sized accounting firms also have less understanding of ML/TF risks and AML/CFT obligations:

This could be compounded by the lack of understanding by these reporting entities of the specific category of activities that trigger obligations under the AML/CFT Act. Similar to law firms, some parts of the sector do not agree with its risk rating assigned in the SRA, cases of ML ascribed to a few bad apples rather than a sector wide vulnerability.

As for real estate:

Some real estate agents have a basic understanding of the risks, but are struggling to formulate a clear understanding of the risk assessment requirements. They have relied on off-the-shelf templates bought from external providers.

Deficiencies – signposts of where NZ law may be going next

The FATF Report contains numerous tea leaves that can be read, to see what law changes will soon be under consideration. Contemplating the “key deficiencies” section of the report, there are clues that the Ministry of Justice might be looking at:

• rewriting the Terrorism Suppression Act and TF regime – often thought barely fit for modern purpose;
• implementing a proper Financial Sanctions law and enforcement function (finally) – no fewer than 17 of FATF’s findings relate to TF and Sanctions;
• reconsidering the Police FIU’s use of IT, and the goAML platform as a primary communications tool – the FIU has quickly announced some response steps, including new data analytics and case tracking software;
• greater scrutiny of risks in non-profit organisations and charities;
• tightening up the criteria and process for Ministerial Exemptions;
• whether to require more explicit enquiries by reporting entities into legal persons and arrangements, and ultimate beneficial owners;
• widening Politically Exposed Person (PEP) categories, and including NZ domestic PEPs – ironically enough, that was in our original 2009 draft Bill and the New Zealand politicians then exposed to it threw it out;
• licensing/registration processes for money transfer firms, and virtual asset providers;
• whether CDD rules for real estate agents and precious metal/jewels dealers are too soft;
• insufficient data publicly available about limited partnerships;
• mechanisms to force trustees to hold and update information about trust affairs;
• requiring compliance officers to sit at management level, and requiring financial entity group-wide programmes for all branches/subsidiaries;
• more sector guidance for trust/corporate secretariat firms, casinos, and probably DNFBPs.

Our Supervisory system involving 3 regulators each handling different sectors – the DIA, FMA and RBNZ (plus Police FIU) – is leading to a growing number of inconsistencies. The FATF singled out the Reserve Bank for inadequate supervision of the banking sector, noting it had just 5 full-time AML supervision staff and, unlike its counterpart AUSTRAC in Australia, had not yet taken any significant enforcement action against big banks.

We will see a continued push for a comprehensive register of ultimate beneficial owners of assets. Overseas, the trend is moving this way, even in the UK and its tax haven dependencies. After a tentative stab by MBIE at discussing it in 2018, which avoided grappling with domestic trusts, this topic has remained stalled on the policy drawing board ever since.

On enforcement, FATF said that New Zealand needs to boost its actions against non-compliant reporting entities. The DIA and FMA were already keen to do that, so watch this space.

Imminent Statutory Review process – get onboard

An important Statutory Review process is about to kick off, led by Ministry of Justice officials.  That is partly designed to show a speedy response to the deficiencies now identified by FATF, and also a statutory requirement that was baked into the Act in 2017 when lawyers, real estate agents, accountants and high-value dealers were added to the AML/CFT catchment net.

Lawyers and businesses are strongly encouraged to participate in the consultation process. Leaving it simply to the Law Society, or a trade association, to handle will usually dilute the message. And grumbling in private without proposing any constructive ideas is unlikely to lead to positive changes.

This is a once-in-a decade opportunity to improve the law. The regulators reportedly have a wish-list of about 200 changes they would like to see made – so the regulated community may wish to pay attention!  I am starting work with reporting entities looking to craft persuasive, reasoned submissions for this Statutory Review. Please get in touch if you would like assistance to engage with the law reform process.

To me, some key points deserving close attention in reforming a complex system like this might include:

1. Ways to reduce complexity in the law, and discretionary interpretations by the regulators, and hence compliance costs;
2. Better use of intermediaries and chains of reliance – the cost and variability in the system is a barrier to many small firms, unlike the large banks;
3. Greater consistency of regulatory outcomes – including whether we need so many various agencies in the AML/CFT ring;
4. Privacy and information sharing problems – how to control vast rivers of reportable data, and reduce duplication of CDD effort;
5. Proper cost-benefit analysis to be applied before more reforms are loaded on top of existing obligations;
6. Improved mechanisms for handling risks around beneficial ownership and opaque structures, including trusts and trustee arrangements;
7. Ways to fine-tune the enforcement powers, including checks and balances if more tools are to be provided to the regulators.

Gary Hughes

Barrister at Akarana Chambers

21 May 2021