Proposed framework to prevent money laundering and terrorism financing

Associate Justice Minister Clayton Cosgrove today released the third and final discussion document on proposals to prevent money laundering and terrorist financing.

The discussion documents, all released since August last year, outline proposed regulatory changes to enable New Zealand to meet its Financial Action Task Force (FATF) obligations.

FATF is an inter-governmental body that sets international standards for combating money laundering and terrorist financing. Its 33 members include New Zealand, the United States, Great Britain, Canada and Australia.

Mr Cosgrove said upgrading the security measures to prevent money laundering in this country was important domestically, as well as internationally.

"New Zealand's stable financial system makes it attractive for international criminals to deposit funds here and then move the money to other jurisdictions, so we must not be a weak target," he said. "Money laundering also occurs here, primarily by drug dealers, so these measures are important for making our communities safer."

Mr Cosgrove said the earlier discussion rounds sought feedback on the FATF compliance requirements, and the third seeks comment on the proposed framework for monitoring and enforcing businesses' compliance with those requirements.

In response to submissions raising concerns about compliance costs, the proposed framework outlined in the third discussion document minimises compliance costs by using existing regulatory frameworks where possible, he said.

Mr Cosgrove said the Government is therefore proposing the most cost-effective, business-friendly option.

"Our aim is to minimise costs by using existing regulatory arrangements rather than creating a new agency to carry out this vital work," he said. "For example, it is proposed that the Reserve Bank, the Securities Commission and the Department of Internal Affairs supervise the businesses they already regulate for other purposes."

The Government plans to introduce the proposed framework in two stages to allow more time to consult with industry over the supervisory requirements.

Financial institutions and casinos will be the first group of businesses covered by the new requirements. Other businesses, including lawyers, accountants, and real estate agents, will be not be covered until the second stage, although they will remain subject to their existing legal obligations to prevent money laundering and terrorist financing.

“These groups have strong industry associations that may be capable of assuming the new supervisory functions,” said Mr Cosgrove. “We want to work with those industry associations to determine how to utilise their industry expertise in the new framework to stop duplication, and prevent any wasting of time and money."

Mr Cosgrove said the approach is also broadly consistent with the Australian reform process currently underway across the Tasman.

The document Anti-Money Laundering And Countering The Financing Of Terrorism: Supervisory Framework is available on the Ministry of Justice's website at www.justice.govt.nz and submissions close on 30 November 2006.

Background Information

Why are regulatory changes necessary?
New Zealand must meet its 'anti-money laundering and countering the financing of terrorism' obligations as a member of the Financial Action Task Force (FATF). Most of New Zealand's legislative requirements are contained in the Financial Transactions Reporting Act 1996. This Act pre-dates the current FATF standards and is deficient in some areas. These proposals seek to redress that situation.

What will these reforms achieve?
Firstly, the reforms will help reduce crime domestically by ensuring that money launderers (who are primarily drug dealers in New Zealand) are detected and deterred in their activities. This fits squarely within the Government’s drive to help make communities safer and dovetails with other measures such as the Criminal Proceeds (Recovery) Bill that proposes a system to take the profits of crime away from individuals or groups without the need to secure a conviction. It also fits within new amendments to the Terrorism Suppression Act 2002 recently approved by the Government.
Secondly, the reforms will help protect the global financial system against exploitation by international criminal gangs (such as human traffickers, drug dealers and terrorists). New Zealand has a very stable financial system by world standards, which makes it an attractive target for money launderers offshore who want to deposit funds here and then move the money to other jurisdictions. New Zealand does not want to be the weak link in global efforts to reduce crime.

How does this discussion document relate to the earlier discussion documents?
The first two discussion documents sought feedback on proposed requirements related to customer identification and verification, record keeping, reporting and internal anti-money laundering and counter terrorist financing procedures. Comment was also sought on extending coverage of the FATF requirements beyond the financial sector to other professions where money laundering could occur, such as through lawyers, accountants, real estate agents, jewellers and casinos.
In response to submissions raising concerns about compliance costs, the proposed framework outlined in the third discussion document minimises compliance costs by using existing regulatory frameworks where possible. This proposal is the most cost-efficient option.

What is a supervisory framework?
The supervisory framework will consist of three components – regulation, supervision and enforcement. It will monitor reporting entities through a variety of means, including inspections and reporting, and oversight of suspicious transactions reporting.
Australia, Canada, the United States and the United Kingdom, for instance, already have such a framework in place.

Why is a supervisory framework necessary?
A key FATF requirement is that countries have a supervisory framework that regulates financial institutions and other businesses and monitors and enforces their compliance with anti-money laundering and counter terrorist financing requirements. In a 2003 joint evaluation by the International Monetary Fund and the Asia/Pacific Group on Money Laundering for compliance with these FATF requirements, it was identified that New Zealand needed to improve its performance in this area.

How will the proposed supervisory framework minimise business compliance costs and burdens?
The government is trying to minimise costs on business by using existing regulatory arrangements rather than creating a new supervisory agency. For example, banks currently have reporting obligations to the Reserve Bank. Under the proposed model, they would also report to the Reserve Bank for anti-money laundering and counter terrorist financing purposes.
The same approach is recommended for lawyers, accountants and real estate agents in the second stage of implementation. It is likely that their industry associations may be able to assume anti-money laundering and counter terrorist financing supervisory functions. The Government expects to have ongoing discussions with these groups on this issue during the first stage.

Who is responsible for ensuring supervisors act consistently across sectors?
A committee comprising relevant Government agencies will oversee the process to ensure that supervisors have a consistent approach. However the responsibility for ensuring business compliance will lie with each anti-money laundering supervisor. For example, it will be the Reserve Bank's responsibility to ensure that banks comply.

Why are certain professions and occupations considered to be at higher risk of money laundering?
The FATF bases its risk assessments on international research into money laundering and terrorist financing trends. This research shows that deposit-taking institutions such as banks, casinos and finance companies are at high risk of money laundering. Proceeds of crime can also be accepted unknowingly by lawyers, accountants and real estate agents, and introduced into the financial system where they become untraceable. That is why these groups are sometimes referred to as gatekeepers to the financial system.

When will the legislation be introduced?
The Government intends to introduce legislation in 2007, in time for New Zealand's next scheduled evaluation by FATF in late 2008.

Money laundering in New Zealand
The Police state that most crime in New Zealand is financially motivated and estimate that more than $500 million a year is generated from illegal activity. Crimes include drug manufacturing, distribution and smuggling, as well as illegal prostitution, robbery, and intimidation.
All of these activities generate illegal proceeds, including money and stolen goods. In one way or another those funds or goods must be re-used to purchase "legitimate" goods or sold to generate other proceeds of crime. Once that occurs, money laundering offences have been committed, adding more crime on top of others.