Financial services education and compliance firm, Strategi, has produced a new guide for NZ entities caught under anti-money laundering (AML) regulations.
Authored by Strategi head of risk and compliance, Selvan Naidoo, the paper argues for a widespread adoption of automated ‘customer due diligence’ (CDD) processes.
Naidoo said many AML reporting entities still rely on manual CDD checks that are time-consuming, prone to error and possibly non-compliant.
“Most of the entities we have audited for AML compliance do CDD manually,” he said. “And that means collecting, verifying and storing a large of amount of information from clients.”
According to Naidoo, switching to a digital CDD process would ease the “pain point” for all AML reporting entities while also introducing business efficiencies and decreasing compliance risks – albeit with some upfront costs.
“The single largest non-conformity issue we find when conducting AML audits relates to incorrectly conducting CDD,” the Strategi paper says. “Selecting the right software provider can almost immediately remove this compliance issue and reduce the risk of non-compliance penalties.”
However, Naidoo said AML reporting firms should take care when choosing from the dozen or more digital CDD providers currently operating in NZ, all with different features, business models and price schedules.
Most importantly, he said businesses should ensure that any prospective electronic CDD service complies with the Identify Verification Code of Practice (IVCOP), which sets the standards for the industry.
For example, CDD services should offer a politically exposed person (PEP) check against official global databases, Naidoo said.
“You can’t just do a PEP check by googling the person,” he said. “Many don’t realise, too, that a proper PEP check will identify any politically exposed individuals associated with the person.”
Aside from making sure any provider meets basic standards, Naidoo said AML reporting firms should look for CDD software that fits their particular business needs.
“Some are tailored for certain industries, such as real estate, as part of larger AML solution. Others deal mainly with individuals while some mostly have companies or trusts as clients,” he said. “Look for one that matches your business needs. If you just want a system that does CDD with PEP checks, for example, many vendors offer a cost-effective solution.”
But while price and lack of knowledge about CDD solutions may have put off many AML reporting entities from going digital, Naidoo said the benefits significantly outweigh costs.
“Automated CDD processes make it easier for the client and saves firms time and money – it’s much more efficient,” he said. “It’s also easier for the auditor – we hate going through piles of paper identity documents. Having electronic CDD records makes the audit process much quicker, and more cost-effective.”
AML legislation (officially the AML/Countering Financing of Terrorism Act) for NZ was first introduced in 2013 following a global push by the US to clamp down on payments to potential terrorists.
Under the phase one AML implementation most financial services firms were handed onerous new compliance duties while other businesses such as real estate agents, lawyers and accountants moved into the regime in 2018.
Almost since inception the AML rules proved problematic with a number of high-profile firms, and other lesser-known entities, pinged by the regulator over the years. And last week the Financial Markets Authority (FMA) added another scalp to the list after citing CLSAP NZ, formerly known as KVB Kunlun New Zealand, for a raft of AML breaches due to be heard in Auckland High Court civil proceedings.
“The FMA claims CLSAP NZ failed on numerous occasions to conduct sufficient customer due diligence and enhanced customer due diligence, to terminate business relationships, to report suspicious transactions and to keep records in accordancewith the AML/CFT Act,” the regulator said in a release.
Broking house CLSAP NZ, a subsidiary of a Hong Kong based company, breached AML compliance duties over more than three years involving transactions of almost $50 million, the regulator alleged.
Neil Kynoch, FMA general counsel, said in a statement: “The regime has been in place since 2013 and CLSAP’s alleged breaches are serious so it is appropriate for the FMA to take a strong regulatory response. CLSAP NZ needs to be held to account and our approach sends an important message of deterrence to the industry.”
CLSAP could face fines of up to $2 million, the FMA said.