FIU National Risk Assessment and AML/CFT Prosecution Update

  • Legal update

    27 November 2019

FIU National Risk Assessment and AML/CFT Prosecution Update Desktop Image FIU National Risk Assessment and AML/CFT Prosecution Update Mobile Image

This week, the New Zealand Financial Intelligence Unit (FIU) of the New Zealand Police (Police) published the 2019 edition of its ‘National Risk Assessment of Money Laundering and Terrorism Financing Assessment'(National Risk Assessment). The Police’s media release and the National Risk Assessment can be found online.

On 22 November 2019, the judgment in the case of R v QF, FC and JFL (2019) NZHC 3058 (Jiaxin Finance Case) was delivered. This case was the first criminal prosecution since the anti-money laundering and countering financing of terrorism (AML/CFT) regime came into force in 2013. The judgment is not yet publicly available.

Who needs to read it? Why?

The National Risk Assessment is vital reading for all reporting entities and their advisers. It sets out the perceived risks faced by New Zealand and those within it. This may assist reporting entities in determining what they should be watching out for when setting up their own processes, as supervisors are likely to be particularly sensitive to risks identified in the National Risk Assessment.

The Jiaxin Finance Case is the first time the nature of the test around suspicious transactions has arisen in a criminal prosecution. This judgment would be useful to entities designing their compliance processes, as it provides further detail of what is expected around suspicious transaction reporting and record-keeping.

What does it cover?
National Risk Assessment

The National Risk Assessment describes the scale and nature of the criminality risks faced by New Zealand. It sits at the top of New Zealand’s three-tier AML/CFT risk assessment system, above sector risk assessments by the AML/CFT supervisors and assessments by individual businesses of their own operations.

Much has changed since the previous National Risk Assessment in 2010. The 2019 National Risk Assessment provides an overview of:

  • the nature of money laundering and financing of terrorism (ML/FT) threats, both domestic and offshore, faced by New Zealand;
  • the development of the New Zealand AML/CFT regime;
  • the most significant remaining ML/FT vulnerabilities faced by New Zealand, including:
    • international wire transfers – given the scale of money moving through those channels;
    • alternative payment methods and remittance systems – allowing the movement of value in a potentially less-regulated manner;
    • new technology – where the dynamic environment allows vulnerabilities to emerge quickly and alternative methods for moving value to develop;
    • gatekeeper professional services – that may conceal beneficial ownership, create further steps in the chain to frustrate detection and investigation, provide the impression of respectability or open channels for criminal transactions that would otherwise not be available;
    • the use of cash – given its anonymity, flexibility, independence from formal financial institutions and general lack of records or a transactional trail;
    • the use of businesses as fronts; and
    • high-value goods and real estate assets – given their ability to store wealth or move value;
  • the estimated volume of domestic criminal proceeds generated in New Zealand, being NZ$1.35 billion (consisting of NZ$750 million from drug offending, NZ$500 million from fraud and NZ$100 million from other offences, and excluding tax offending and overseas offences);
  • the interaction between the New Zealand and the global AML/CFT landscapes, and the attractiveness of New Zealand to those seeking to commit ML/FT;
  • the conclusions drawn by sector risk assessments;
  • the particular vulnerability of the financial sector in New Zealand;
  • risks and ongoing issues anticipated to emerge, including around:
    • correspondent relationships – creating a chain of relationships rather than direct transactions between the parties;
    • the displacement of transactions from more regulated sectors to less controlled sectors;
    • de-risking by deciding not to conduct business with entire classes of customer rather than managing the risks posed by individual customers, which does not align with the risk-based approach to combating ML/FT and may have wider social consequences; and
    • technological change in – particular, the generation of proceeds through cybercrime, the development of technology that increases anonymity, the increasing speed of transactions and the facilitation of international transactions.
Jiaxin Finance Case

In the Jiaxin Finance Case, a company and two individuals were charged with failing to:

conduct customer due diligence (specifically, in relation to wire transfers);
keep adequate records relating to a suspicious transaction; and
report a suspicious transaction.

One of the individuals was also charged with structuring a transaction to avoid one or more requirements of the AML/CFT regime.

These charges related to 311 transactions with a total value of around NZ$53 million and that were ultimately carried out on behalf of a wealthy overseas individual.

The judgment found these parties guilty on every charge. This was despite the fact that, for example, the individuals attempted to portray that third individual as not being a customer of the company itself, but instead of a customer of the company, as it was held that they were ‘in substance’ the company’s customer.

In particular, the High Court held that a failure to report or keep adequate records about suspicious transactions does not require knowing or reckless conduct, like the other criminal components of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 do. Instead, a defendant must, having considered all known circumstances, have had reasonable grounds to suspect that a transaction is, or may be, relevant to specified matters. This was held to be an objective test of limited mens rea (depending on what information a defendant had) rather than outright strict liability.

Convictions were not entered on the day of the judgment, and sentencing is due to occur on 18 February 2020.

Our view

The National Risk Assessment provides a useful overview of the risks that the New Zealand AML/CFT regime is seeking to combat. This may assist those subject to that regime to understand the reasons behind their obligations, which could allow them to more effectively fulfil them. Providing an indication of how much risk there is in certain activities or professions may also help relevant reporting entities be less likely to underestimate the risks that they face.

The Jiaxin Finance Case provides a stark warning to anyone attempting to structure their operations to artificially escape liability. The judgment makes clear that, for example, portraying a customer as being nominally the customer of one entity while in substance being another entity’s customer will not be accepted by the court. It further sets out that a subjective lack of suspicion will not in itself prevent prosecution under the suspicious transaction obligations, as the test is an objective one.

What next?

If you have any questions in relation to any of your obligations under the AML/CFT regime, or on the regime more generally, please contact one of our experts.