Workplace savings schemes and fintechs might face tougher anti-money laundering (AML) provisions in the wake of a government review.
The broad-ranging Ministry of Justice probe into the existing AML regime in NZ notes the current exemption that allows certain workplace savings schemes to accept extra employee contributions up to 20 per cent of salary could be subject to stricter controls.
According to the just-published 256-page report, some submissions to the AML review called for unlimited workplace super employee contributions “to support the members’ ability to save for retirement”.
But the bid for greater employer super flexibility may have backfired as the report flags more scrutiny of the long-standing Regulation 20A exemptions that has allowed the sector to avoid some of the onerous AML compliance duties.
“… we recommend conducting further analysis of risks to ensure the settings of Regulation 20A are aligned with the risks of these retirement schemes. We note that this analysis could result in further tightening Regulation 20A if the risks associated with these schemes are found to be higher than when the exemption was first issued,” the report says. “In addition, any changes to increase the amount of voluntary contributions could only be progressed if the analysis demonstrates the change would carry low risks of money laundering and terrorism financing.”
Similarly, the AML review suggests certain fintech firms should be caught under the reporting regime that requires regulated businesses to provide “financial intelligence” to government agencies.
The report recommends further investigation of the benefits “in including fintech providers offering open banking solutions and commerce or marketplace operators as reporting entities”.
“This analysis should also include a comparison with other financial services related legislation to ensure consistency. Subject to the analysis, include them as a type of financial institution in the Act and implement appropriate AML/CFT obligations to align with their role in the financial system,” the AML review says.
However, the fintech and workplace savings tweaks represent a small component of the review that recommends wide-sweeping changes to the contentious AML regime.
“The biggest issue that we have identified is that the [AML] Act is not taking a sufficiently risk-based approach in that efforts by agencies and businesses are not always being prioritised towards areas of highest risk. Some requirements in the Act are overly prescriptive which prevents a flexible risk-based approach being taken,” the report says. “In addition, where a requirement is flexible, businesses generally do not have enough information or awareness about how to apply a risk-based approach. This is due to insufficient guidance or strategic intelligence being produced.”
AML has proven a painful and expensive compliance process, costing an estimated $260 million each year with the private sector picking up most of the tab ($246 million) and the remainder falling on government agencies.
“While this is a significant sum, we also estimate that the regime has significant monetary and non-monetary benefits, including disrupting NZD 1.7 billion worth of illegal drugs and fraud and NZD 5 billion of broader criminal activity over a ten-year period,” the report says. “We also note that not having an AML/CFT regime, or having a significantly weaker regime, would result in New Zealand being identified by the FATF as a high-risk jurisdiction. This would damage New Zealand’s international reputation and result in an estimated reduction of capital inflows of between 4.6 percent and 10.5 percent of GDP (between NZD 15 and 35 billion, or 58 to 134 times the estimated cost of the regime).”
Since the law was last amended in 2017 until the end of last reporting year the three regulators in charge of AML supervision have notched up over 700 remedial actions but with only a handful of criminal prosecutions and financial penalties among them.
The Department of Internal Affairs (DIA) has been the most active AML regulator, reporting over 500 remedial actions including five fines totaling $17.5 million and two criminal sanctions.
By contrast, both the Reserve Bank of NZ (RBNZ) and the Financial Markets Authority (FMA), which police smaller patches than the DIA, completed about 200 AML regulatory actions between them during the five-year period. Last year the RBNZ scored its first AML financial penalty, winning a record $3.5 million judgment against TSB Bank; the FMA also claimed an inaugural AML fine in 2021 after the Auckland High Court ordered derivatives trading firm, CLSAP, to pay $770,000 for breaches of the law.
Higher fines could be on the cards, though, as well as wider application of financial penalties if the government accepts the AML review recommendations.
“We also recommend increasing the available penalties in the Act to ensure they are able to be proportionate to serious misconduct irrespective of the size or nature of the business involved, as well as for civil penalties to be imposed against employees, directors, and senior managers in appropriate circumstances,” the review says. “However, we also recognise that penalties should be risk based and proportionate in their application and recommend amending the Act to prescribe a non-exhaustive list of AML/CFT-specific aggravating and mitigating factors that must be considered when penalties are applied.”
The FMA has traditionally favoured ‘private formal warnings’ as its AML weapon-of-choice, booking 36 private warnings over the five-year period under review. However, the regulator also issued four public AML breach notices over the 2017-2021 as well as a couple either side of the dates with the list including Circle Markets, Fullerton Markets, Tiger Brokers, Craigs Investment Partners, Sharesies and, most recently, InvestNow.
Justice Minister Kiri Allan said in a release that the government was “taking immediate action to improve the regime’s effectiveness” following the AML review.
“We’ve listened to businesses and agencies and heard what wasn’t working for them,” Allan said, citing AML rules changes such as:
- relaxing the requirement on businesses to verify the address of most customers;
- extending the timeframe for businesses to submit Prescribed Transactions Reports; and,
- exempting registered charities from AML/CFT obligations when they are providing small loans.
“Further changes will address areas of known risk or vulnerabilities, improving efficiencies and reducing compliance costs, and improving compliance with international money laundering standards,” the government statement says.