Yesterday, the Ministry of Justice (Ministry) released a draft set of regulations (Draft Regulations) under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) for public consultation. The Ministry is seeking submissions by 5pm on 14 April 2023.
The Draft Regulations and the explanatory consultation document (Consultation Document) can be found on the Ministry’s website. We have previously discussed both the Statutory Review Report and the Mutual Evaluation Report in detail.
Who needs to read it? Why?
Collectively, the proposals amount to the most significant suite of changes since the introduction of Phase 2. While some are designed to reduce the administrative burden, many others are designed to plug perceived gaps and strengthen the regime.
These proposals follow last November’s release of the report for the statutory review of the anti-money laundering and countering financing of terrorism (AML/CFT) regime carried out between July 2021 and June 2022 (Statutory Review Report). That in turn followed from the Financial Action Task Force (FATF)’s Mutual Evaluation Report of New Zealand’s AML/CFT regime.
Accordingly, the Draft Regulations and Consultation Document should be carefully read by:
- all existing reporting entities under the AML/CFT Act, to understand how their treatment by the regime may change;
- all entities which have determined they currently fall outside the coverage of the AML/CFT Act, to understand whether they may be brought within the regime; and
- other persons with an interest in financial inclusion and/or innovation in the financial sector more generally, as the application of the AML/CFT regime has significant implications there.
What does it cover?
The stated purpose of the Draft Regulations is to respond to a number of issues identified in the Statutory Review Report more quickly than would be possible with (for instance) legislative changes. In this case, the devil really does lie in the detail, and there is no substitute for considering carefully how your business may be affected.
Among the particular issues they are intended to respond to are:
- gaps around known high-risk areas of cash, virtual assets, high-risk countries, and high-risk customers;
- restrictions on sharing AML/CFT information;
- outdated, unclear, or non-fit-for-purpose definitions and terminology; and
- unnecessary costs to business from obligations set to a standard of risk higher than actual risk.
The proposed amendments cover most of the existing sets of AML/CFT regulations, with around 80 proposed additions, replacements, or revocations. While we will not step through them in detail here, we have identified a number of key proposals.
Among the changes proposed are those identified by the Minister of Justice in her announcement of upcoming regulatory changes on the release of the Statutory Review Report, namely:
- relaxing the requirement on businesses to verify the address of most customers (reg 32; new reg 24AJ);
- extending the timeframe for businesses to submit prescribed transaction reports (reg 38; new reg 35); and
- exempting registered charities from AML/CFT obligations when they are providing small loans (reg 32; new reg 24AH).
Other changes that will be of significance include:
- defining virtual assets and virtual asset service providers (VASPs), setting a threshold for virtual asset transactions to be occasional transactions, and explicitly bringing VASPs that provide safekeeping or administration of virtual assets into the regime (regs 14, 16 and 38; new regs 15A, 16A, and 36);
- expressly describing the prescribed transaction reporting obligations of designated non-financial businesses or professions making or receiving international wire transfers from or to their trust accounts through another reporting entity (reg 40; new reg 8);
- removing the “portable” wording from the definition of “stored value instrument”, to more readily include purely digital/non-tangible types (regs 13 and 27; amended regs 15 and 15);
- providing a specific exemption for certain transactions with online marketplaces (reg 25; new reg 9A);
- changing the default obligation to conduct enhanced customer due diligence on trusts (reg 37; new reg 12C) – including a particular question for consultation as to how precisely to define a low-risk trust for this purpose;
- additional requirements where a reporting entity is relying on another person to conduct customer due diligence procedures (reg 38; new regs 16 and 17); and
- clarifying the definition of a ‘beneficial owner” (reg 7; new reg 5AA).
This package of regulations has been approved by the Government, so the focus is more on clarity of drafting and purpose, and identifying unintended consequences, than shifting the underlying policy decisions.
We welcome the Ministry’s consultation on the Draft Regulations. However, the 6-week period allowed will be very challenging for those who have not been actively following the Statutory Review process closely.
Consulting with the industry is vitally important. It provides greater visibility to the Ministry of how the regime operates in practice, and what the practical consequences of proposed changes may be. This is particularly important for a regime like the New Zealand AML/CFT Act, which is heavily principles-based and intended to reflect a risk-based approach. As a result, the calibration of obligations under it is of central importance.
Many of the proposed changes or additions cover areas that have previously been unhelpfully ambiguous or have caused issues in practice. In particular, we applaud the focus on marrying up risk mitigation and proportionate operating costs, and on helping the regime more meaningfully account for changing technology.
However, others will require reporting entities to make significant changes to their AML/CFT Compliance Programmes. In other cases, entities who have relied on exemptions to date may now find themselves inside the regime.
The Ministry has asked for any submissions to be provided by 5pm on 14 April 2023, in email or written posted form. Details on how to submit an be found on the Ministry’s website.
As drafted, some of the Draft Regulations would come into force on 31 July 2023, while others would instead come into force on 1 June 2024.
If you have any questions in relation to the implications of the Draft Regulations and Consultation Document, or would like assistance in making a submission, 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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