The Ministry of Justice (Ministry) has released a Cabinet Paper on four associated bills relating to reforms in the justice system, intended to “improve the effectiveness and efficiency of our regulatory systems”. Among these is the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Amendment Bill (Bill).
This is intended as the next step in the series of reforms that began with the Financial Action Task Force (FATF)’s last Mutual Evaluation of our AML/CFT regime and the Ministry’s subsequent Statutory Review of the same, and follows broad amendments to the regime’s regulations (Amendment Regulations) (each of which we have previously discussed).
A number of the Statutory Review's recommendations required changes to the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (Act) itself, and could not be carried out under regulation-making powers. The Bill is intended as a step in that direction.
Who needs to read it? Why?
This will be of interest to all reporting entities. While some of the proposed amendments are quite narrow and technical, a number apply to core obligations that they will want to be across.
What does it cover?
The Cabinet Paper proposes to make 25 changes to the Act (described from page 56), all of which are “minor and technical in nature” and taken from recommendations in the Statutory Review. The intention is to clarify existing obligations, provide regulatory relief, and make the regime more effective by closing loopholes, strengthening enforcement provisions, and ensuring New Zealand can increase its compliance with FATF Standards.
The most prominent AML/CFT proposal is to relax the current requirement for enhanced customer due diligence (CDD) on all trusts. The Bill proposes to “specify that a reporting entity is not required to verify information relating to the source of funds or source of wealth of a trust under enhanced customer due diligence requirements for low-risk trusts” by not requiring it “if the reporting entity is satisfied that doing so would not mitigate risks identified from conducting standard CDD”. The goal of this is to provide relief to reporting entities and allow a more risk-based approach to CDD reflecting “New Zealand’s unique trust environment”.
Another proposal which may provoke discussion is to amend the provision of the Act which states that it applies to reporting entities “only to the extent that [they undertake relevant activities for their category]” to remove that “only to the extent that” wording. The apparent concern is that this may allow reporting entities that carry out activities under multiple categories of reporting entity to escape requirements for some of them. The example given is a financial institution also carrying out designated non-financial business or profession (DNFBP) activities that may argue that the wording that the Act only applies to “a reporting entity that is a financial institution” to the extent that “the financial activities undertaken by that entity fall within the activities described in the definition of financial institution” means those DNFBP activities are not covered.
Other amendments proposed include:
Obligations
- Making clear that the prohibitions applying where CDD is “unable to be conducted” in fact apply where CDD is not conducted – i.e. that a reporting entity that is able to conduct CDD but chooses not will not avoid them.
- Expanding the prohibition on conducting international wire transfers that lack the required originator information to also prohibit those without the required beneficiary information.
- Making clear that reporting entities must take into account guidance materials and other factors when conducting their risk assessments, rather than merely “hav[ing] regard” to them.
- Setting clearer requirements on steps that must be taken to identify politically exposed persons.
- Clarifying the timeframe within which reporting entities must be able to comply with requests for AML/CFT records.
- Amending requirements to allow AML/CFT compliance officers to be, rather than just report to, senior managers, and to explicitly prohibit the appointment of non-natural persons.
- Removing the requirement to assess the effectiveness of the AML/CFT controls for counterparts in correspondent banking relationships.
- Amending requirements for border cash reports to limit them to unaccompanied cash but also to extend them to movements of stored value instruments, casino chips, and precious metals and stones and to better define when the movement is considered to occur and when the reports are required.
Definitions
- Bringing the Amendment Regulations’ changes to the definitions of “beneficial owner” (to limit its application to customers of customers) and the “trust and company service provider” category of DNFBPs (to avoid capture as both a financial institution and DNFBP where it is not intended) into the Act – seemingly to more embed them into the regime.
- Replacing the Act’s uses of the term “customer” in senses that do not align with its definition of that term.
- Including definitions for “money or value transfer service” and “life insurer”.
Supervisors and enforcement
- Changing the “formal warning” concept to a “censure”, to add weight to their issuing.
- Explicitly including certain additional compliance breaches as civil liability acts.
- Expanding the powers of the AML/CFT supervisors, such as to have pecuniary penalties be applied to covering their costs first or to conduct enquiries on behalf of overseas counterparts.
Our view
We support the approach of using this process to move more quickly and continue progressing reforms to the AML/CFT regime. The time it takes for more substantive Parliamentary action can be significant, and opportunities like this to keep things moving in the meantime should be grasped. Streamlining the regime will free up resources to focus on the high-risk areas that need it and preventing money laundering and financing of terrorism, rather than tick-box compliance.
Address: However, the absence of address verification relief is disappointing. Currently, reporting entities are required to obtain verification of address as part of standard CDD, which has emerged as a barrier to inclusion – particularly for those who do not have a fixed address or utilities in their name.
A draft form of the Amendment Regulations (which we discussed at the time) had included this, which followed a recommendation in the Statutory Review (from paragraph 672) and was widely supported. This was subsequently removed on the basis that it required changes to primary legislation instead (as explained on the Ministry’s website). It does not feature in the Cabinet Paper, which possibly indicates that it was not considered to fit the criteria (minor, technical, and non-controversial) for this reform vehicle. However, this is still something eagerly awaited by reporting entities and customers alike.
Trusts: On the other hand, we strongly support the trust CDD change, which will also be welcomed by reporting entities. This also reflects a change that had been included in the draft Amendment Regulations but was removed as requiring legislative change. At the time, that was a high-level and early-stage proposal, with only partial drafting and leaving open for consultation the question of how to define a “low-risk trust”, but it was well-received even then.
The blanket requirement for enhanced CDD, premised on the basis that all trusts are inherently high-risk, has been a point of contention from the outset of the regime. As the Statutory Review accepts (from paragraph 701), “[n]ot all trusts or other vehicles for holding personal assets are inherently high risk” and mandatory enhanced CDD for trusts is not required by the FATF Standards. In fact, it is inconsistent with the risk-based approach they promote – the Mutual Evaluation even suggested (at paragraph 118) that “New Zealand authorities may wish to consider whether there is a more nuanced approach to mitigating the risks posed by trusts”.
New Zealanders make widespread use of trusts, so they are a common customer type and the more intensive requirements are a noticeable burden on many reporting entities. The question of how exactly low-risk trusts may be defined, or the extent to which it may be left to reporting entities’ assessments, remains open.
Application: The proposed change to the Act’s application provision may have unintended consequences. This wording in the Act is what limits reporting entities’ obligations to relevant activities – i.e. what prevents their CDD obligations from extending to other non-relevant services that they also provide. Additionally, the 1 June 2024 Amendment Regulations included one making clear that a reporting entity of one category that carries out the activities of another category in the ordinary course of business is required to comply with the Act in respect of those other activities.
It is not clear how this proposed change to the Act would impact this position. It would be worth considering whether the policy goal here is sufficiently addressed by that regulation, or whether additional wording may be needed to avoid unintended capture of non-relevant activities.
What next?
The Minister and Associate Minister of Justice intend to introduce these bills to Parliament by December 2024. The Cabinet Paper notes (at paragraph 38) that, for any new compliance obligations introduced, the intention would be to provide for “adequate implementation time” in the drafting.
There will still remain recommendations from the Statutory Review that require changes to the Act. The process used here, so as to achieve a swifter legislative timeframe, has a more limited remit, covering only changes that are minor, technical, and broadly supported. It remains to be seen when more substantive reform may come before Parliament. However, we do hope that the address verification relief will find another place to be passed earlier than that.
If you have any questions about the Cabinet Paper’s proposed amendments, the wider AML/CFT reforms, or the regime more generally, please contact one of our experts.
This article was co-authored by Sam Short, a Senior Solicitor in our Financial Services team.
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