The triple-regulated NZ anti-money laundering (AML) regime has added costs but very little else over its 10-year plus operation with a makeover long overdue, according to Dynamique director, Guy Dobson.
Global law enforcement agencies had a huge win, recently, by breaking into a drug cartel, seizing assets, and locking up many ‘crims’ thus potentially protecting numerous misguided drug users from causing even more harm to themselves.
The bust, engineered via an ingenious online trap, has seen laundering of drug money and recycling of illegal proceeds into legal assets by placement, stopped in its tracks across many jurisdictions including New Zealand: albeit, probably only temporarily.
At the same time, the Paris based Financial Action Task Force (better known by its acronym FATF) has praised New Zealand measures to combat money-laundering and terrorist financing, although, noting there is still room for further improvements in the availability of beneficial ownership information, strengthening supervision and implementation of targeted financial sanctions.
Clearly, the police need to be empowered to keep fighting organised crime and preventing the very behaviour that triggers money-laundering transactions.
Under the current system, the New Zealand Police Financial Intelligence Unit (FIU) receives all Suspicious Transaction Reports (STRs), reviewing such activity and undertaking investigations where there is a real possibility of some form of illegal activity.
Sometimes the police can cope, other times their efforts become swamped by a tsunami of STRs from concerned gatekeepers, trying to protect themselves from the risk of prosecution rather than a desire to help catch criminals.
But many New Zealand businesses are, in effect, forced into acting as unpaid law enforcement officers under onerous anti-money laundering (AML) duties that demand an officious response such as generating STRs for any number of minor breaches.
Despite having been around since 1930s in the US – and 2009 in New Zealand with the passing of the Anti-Money Laundering and Countering Financing of Terrorism Act – AML practices have added a huge cost to business with little return either in preventing crime or reducing operational risks.
Indeed, the cost of such operations imposed by regulators on all institutions captured under AML legislation only leads to more expensive financial products and services. No business is prepared to absorb the cost of an activity most regard as being the responsibility of the police.
According to an article published in The Economist magazine by Ronald Pol, a financial crime expert, the global AML system could be “the world’s least effective policy experiment”.
In fact, Pol says that the cost of compliance for banks and other businesses could be more than 100-times higher than the amount of laundered money seized.
New Zealand boasts three AML regulators: Reserve Bank of New Zealand (RBNZ); Department of Internal Affairs (DIA); and, Financial Markets Authority (FMA).
The country only has a population of 5 million, so having three regulators, albeit each covering specialist sectors, does seem an expensive overkill. Surely one agency – say, ‘AML New Zealand’ – under the wing of the Ministry of Justice would be a more cost-effective and efficient alternative.
It is the role of these regulators to publish guidelines to help their industry sectors comply with the AML rules. Guidance should be written in plain English, not legal English, and must not add another layer of rules over that stated in the AML CFT statute signed off by Parliament in 2009.
New Zealand is a multi-racial society with many people speaking English as their second language, which increases the need for simplicity and clarity in all aspects of guidance. It is often the English as a secondary language sector, which appear to be caught out the most by NZ AML compliance breaches.
Not all regulation is good regulation, especially where it over-burdens industry with excessive costs disproportionate to the benefit to society as a whole. AML has created a whole industry of advisers, consultants, specialist lawyers and accountants with ‘their noses in the AML trough’.
Indeed, many new platforms offer seamless AML client due diligence services with linked validation to government databases for specific client information. These platforms are not cheap. They often create a so-called ‘safe-harbour’ whereby lesser-informed AML-impacted businesses get persuaded to sign up for many services that they could, with a small adjustment to their current operating processes, do quite easily themselves – and for a minimal cost.
A New Zealand AML platform recently raised NZ$8 million from a private equity firm to provide services both here and in Australia. Private equity firms typically expect a high return on their investments, putting pressure on acquired companies to maximise profits. Assuming private equity investors in the NZ AML firm are looking to at least double their initial $8 million outlay that would suggest underlying compliance costs of $16 million would have to be extracted from client firms over time.
This was not the intention of the Minister when drafting New Zealand’s AML laws, which were scripted to have the minimal cost impact on businesses caught by the legislation.
For now, we are currently stuck with this ‘mother of all industry costs’: but what can we do?
To mitigate the risk of regulatory breaches, it is a vital requirement for all people administering AML compliance programmes to be professionally trained in all aspects of relevant law both globally – given the trans-national nature of the problem and cross-border reach of FATF – and locally, as market rules vary between jurisdictions.
When people are not trained in local laws, but their job brief entitles them to oversee and enforce the rules, firms being supervised by such bodies may find themselves being unfairly penalised. For example, companies could be pulled up for not following a US AML ruling that does not apply in New Zealand; or worse, the training does not include additional statutory AML customer due diligence (CDD) requirements which must be carried out on new and incumbent clients.
How many local AML training firms actually cover the AML legal idiosyncrasies of the NZ market?
Naturally, setting yourself up as providing the gold standard of AML training can be a dangerous claim if you promote yourself in such terms but fail to address and train people up in local market laws.
Evidence provided by such users of the gold standard attest to it not relating to the New Zealand market.
So, one has to question where is the value of such training to local market practitioners?
As markets come of age, so tertiary institutions have come to the party forming joint ventures with private enterprise as the latter group has more specific market expertise in auditing, consulting, and training in their own respective industry sectors.
This coming of age has happened in New Zealand much to the delight and relief of many industry practitioners.
For many smaller practitioners there is an air of bemusement as larger banks continually fall foul of their duties to exercise robust AML procedures in their firms.
Such firms are invariably fined large amounts and given a ‘slap with a wet fish’ warning to not do it again.
Meanwhile, convicted firms pay a fine but deny any responsibility for their actions. In the UK, for instance, the rebranded RBS, now called NatWest, was dragged before the courts in London as it failed to properly scrutinise a gold-dealing client that deposited £362 million ($502 million) with the bank – with £264 million being in cash.
In New Zealand, regulators have shut down smaller businesses for misdemeanours, which were more a misunderstanding of the rules rather than genuine and willful breaches of AML compliance.
Indeed, such hits on these smaller entities often revolved around quality of identification documents, where the Act and regulatory guidance vary.
The New Zealand Business Alliance notes: “… we need the MBIE, DIA, FMA, RBNZ to take a long hard look at current AML rules and regulations as there is evidence that inter-country legitimate transactions and deals are being hampered by incorrectly applied AML rules.
“Banks should not use AML rules to close bank accounts or deny firms accounts to support legitimate business. The digital society and the decline of cash makes it impossible for a business entity and indeed individuals to survive without a bank account. Human rights may be impacted here leaving banks open to legal action by aggrieved and unfairly treated customers.
“We would ask for root and branch review of the chaotic AML rules in New Zealand, the calibre and understanding of the supervisory authorities and their teams in overseeing and enforcing the rules and a detailed cost benefit analysis of AML in benefiting New Zealanders. There is a need to rein in the explosive growth AML industry driven by badly written rules, and misdirected enforcement. Fines and censure for AML offences should be put at the door of the police not industry.”
The NZ Business Alliance assessment suggests current rules and modus operandi of AML regulation in New Zealand is not fully applicable or sustainable.
Laws by their very nature must be fair, proportionate, easily enforced and generally accepted by the people they impact.
If the laws become disproportionate, unfair, expensive to enforce and generally not-accepted by those caught under the legislation, then they will fail – and the society which they purport to serve will the worse for it.
AML in New Zealand needs to change. Guidance published by regulators (preferably one NZ authority) must not add more rules that are not explicit in the legislation.
Businesses usually seek an appropriate amount of information about any counterparty before entering into a deal – it’s just commonsense. Perhaps the government needs to exercise some commonsense, too, and tidy up the AML mess before it overwhelms us all.
Guy Dobson is a director of financial education firm, Dynamique. Dynamique has a 50 per cent equity holding in Maxima, a NZ capital markets and best practice compliance CPD platform that includes AML as part of a know-your-client service.