AML/CFT: CDD guideline for trusts and liquidator guidance published

  • Legal update

    13 May 2024

AML/CFT: CDD guideline for trusts and liquidator guidance published Desktop Image AML/CFT: CDD guideline for trusts and liquidator guidance published Mobile Image

On Friday, 10 May, the three Supervisors together published an updated guideline on customer due diligence (CDD) on trusts (Trusts Guideline) under the anti-money laundering and countering financing of terrorism (AML/CFT) regime. The Trusts Guideline can be found on each of their websites here: Department of Internal Affairs (DIA), Financial Markets Authority, and Reserve Bank of New Zealand.

The Trusts Guideline is targeted at the next stage of regulation changes that are coming into effect on 1 June 2024, as well as the previous stage that commenced on 31 July 2023.

Additionally, on Wednesday, 8 May 2024 the DIA also released guidance for liquidators on the 31 July 2023 regulation changes that impacted them (Liquidator Guidance).

Who needs to read it? Why?

New Zealand is known for its high prevalence of trusts, and nearly all reporting entities will encounter them as customers on a regular basis. Those reporting entities need to be across the Trusts Guideline to ensure their core CDD obligations are being complied with and to help understand the Supervisors’ expectations around the new requirements.

Liquidators occupy an unusual position under the AML/CFT regime, often carrying out relevant activities but with quite a different dynamic with their “customers” than a typical reporting entity. The Liquidator Guidance looks to explain how they are affected by the suite of exemptions updated or introduced on 31 July 2023, and should be considered by liquidators and those who advise them, as well as reporting entities that deal with liquidators.

These two additional pieces of guidance follow the new and updated CDD guidelines (including for customers that are companies or limited partnerships) published by the Supervisors on 29 April, which we have previously discussed. AML/CFT compliance programmes should be updated to take account of all the new guidance immediately.

What does it cover?
Trusts Guideline

The Trusts Guideline has been substantially rewritten and expanded from its previous version. It states that it should be read alongside the beneficial ownership and enhanced CDD guidelines, which were among the guidelines updated on 29 April 2024 that we have previously discussed.

The most substantial trust-related change in the upcoming 1 June 2024 regulations is the obligation to, as part of standard CDD, obtain information relating to:

  • the trust’s legal form and proof of existence;
  • the trust’s ownership and control structure;
  • any powers that bind and regulate the trust; and
  • the settlor(s) and protector(s) of the trust.

As with the company and limited partnership CDD guidelines, these are considered to be “formalis[ing] the information you are required to obtain and verify as part of standard CDD”, “can be read in combination with each other”, and “can (and should) be aligned with your existing procedures, policies and controls…in place to identify and verify the identity of the beneficial owner(s) of a customer that is a trust” and meet source of funds or wealth requirements.

The Supervisors state that the “information relating to…the settlor(s) and protector(s) of the trust” means their names, while they “do not consider it necessary to obtain the date of birth of a settlor or protector that is not a beneficial owner”.

The first three of those categories of information will have to be verified on the basis of documents, data, or information issued by a reliable (and not necessarily independent) source – for instance, the trust deed. The fourth category, on the other hand, will have to be verified on the basis of documents, data, or information issued by a reliable and independent source – for instance, a natural person’s identity document evidencing their name and date of birth.

However, the Supervisors have continued the approach taken in the 29 April 2024 guidelines, to recognise that there may not always be an independent source available to verify some information – in such case, a reliable source would be acceptable. It even states that “[i]n circumstances where it is not reasonable (or even possible) to verify some identity information relating to the trust and this is for a valid reason, you are not required to do so. Instead, you should record on the file your reasons for not being able to verify the required information”.

Similarly, the Trusts Guideline accepts that a non-beneficial owner settlor or protector could have so little an impact on the trust’s level of risk that the required verification steps are significantly reduced, and states that the Supervisors “consider that this includes a situation where a settlor and/or a protector is deceased”.

Where a reporting entity provides a facility to a trust, their “customer” for the purposes of the AML/CFT regime is (since 31 July 2023) defined by regulation to be the trust itself and not its trustees. While this differs from the way trusts are treated elsewhere in the law (as they are not incorporated entities with their own legal personality, but rather are relationships between people), this does reflect the interpretation that the Supervisors have taken in guidance since 2013. That said, trusts are expressly classed as “legal arrangements”, and not “legal persons”, under the regime.

Beyond a trust itself as customer, CDD must also be carried through to its beneficial owners – essentially, those with sufficient (direct or indirect) ownership of or control over it. The Trusts Guideline suggests that, “[f]irst and foremost, the trust deed should be analysed”, to identify such ownership or control – be it held by a trustee, settlor, protector, appointor, beneficiary, or anyone else. (Despite the similar terminology, it also notes that beneficiaries are not necessarily beneficial owners.) Control in this sense is defined broadly, including over trust property or distributions, the variation or termination of the trust, or the list of persons who are trustees or beneficiaries.

A key topic the Trusts Guideline addresses is who are to be regarded as the settlors of trusts under the new requirement in the regulations. It states that:

  • Settlors are “natural or legal persons who transfer ownership of their assets to trustees by means of a trust deed or similar arrangement”, and that this “requires an element of bounty (i.e., the settlor must intend to provide some form of benefit rather than being an independent third party transferring something to the trust for full consideration)”. A person is also a settlor if they “have provided (or undertaken to provide) property or funds for the trust”.
  • “A settlor is generally understood as the person (or persons) establishing a trust” but “may or may not be named in the trust deed”. It also identifies that some settlors named in trust deeds are merely nominee settlors, with the actual property of the trust coming from a real economic settlor – in which case, “additional consideration may be needed as to how to identify the economic settlor”.
  • Settlors may, on the facts, also be beneficial owners if they “have effective control” over the trusts – but “a settlor may not always be a beneficial owner of the trust”.
Liquidator Guidance

The 31 July 2023 regulations did two things for liquidators: they specified who their “customers” will be, and set out the exemptions from AML/CFT requirements that apply to them. The DIA also states that, even when liquidators are personally appointed, it views the (for instance) accounting practice that they are employed by, or a partner of, as being the relevant reporting entity.

Under the regulations, a liquidator’s customer (to which its CDD and other obligations attach) is the company or limited partnership over which they are appointed. There are typically not direct AML/CFT obligations in relation to the party or parties responsible for seeking their appointment – although the Liquidator Guidance does identify that suspicious activity reporting obligations can extend to them, as those are not restricted to customer activities.

Additionally, the unusual nature of liquidators within the AML/CFT regime, and the unique nature of the risks they encounter, were considered to warrant a number of exemptions. Court-appointed liquidators already had their exemptions (with some additional tweaks made), while the regulations extended some (but not all) of these to non-court-appointed liquidators. We will not step through these in detail, but they broadly reflect the fact that liquidators are in control of the entity being liquidated, and should not be able to be impeded by persons opposed to the liquidation refusing to cooperate in the CDD process.

Despite these exemptions, the regulations also prescribed specific requirements:

  • for CDD when disbursing funds to beneficial owners (likely including any person due, or who ultimately stands to benefit from, over 25% of the realisable assets from the company or limited partnership being liquidated); and
  • to submit prescribed transaction reports for international wire transfers of $1,000 or more from a liquidator’s trust account as part of the liquidation.
Our view

As with the previous guidelines, there is only a narrow window left before the next regulations are in force (now, less than three weeks). This does not leave much opportunity for reporting entities to adjust their processes and documents to reflect the supervisory interpretations and expectations from the Trusts Guideline. That is regrettable.

We support the Supervisors continuing to take a pragmatic and risk-based approach to interpret obligations in a practical and proportionate manner that reflects the New Zealand context, and would encourage them to continue that into the future.

The new additional detail in the Trusts Guideline is likely to be of some assistance to reporting entities in approaching their existing and upcoming obligations. Returning to the matters we suggested, in our discussion of the 29 April 2024 guidelines, should be addressed in the Trusts Guideline update, the Supervisors here have:

  • agreed that settlors are not inherently beneficial owners, but rather it will depend on how they feature in the terms of their trusts and whether those reserve or grant to them effective control (or they otherwise exercise substantial influence over their trusts) – this differs from the Financial Action Task Force’s sweeping position that settlors will be beneficial owners, but is more reflective of what settlors really are under New Zealand’s established and developed concept of a trust;
  • essentially drawn the distinction between (for instance) settlors that are beneficial owners (requiring full CDD) and settlors that are not beneficial owners (requiring the new information, and being relevant for source of funds/wealth, but not needing full CDD);
  • confirmed the focus is on the settlors who establish a trust (or on whose behalf it is established) both nominal and economic – rather than on subsequent donors to a trust who could be included in a technical trust law definition of “settlor”;
  • identified what the new information requirements around settlors and protectors are, and not set that at a level that would be particularly onerous; and
  • continued the practical approach of accepting non-independent sources for verification where independent sources are not available.

However, with the benefit of hindsight, it would have been better if these aspects were expressly addressed in the regulations at the time, not only to give greater precision but also more time to prepare ahead of the 1 June deadline.

Left unresolved by the regulations and guidance is that all trusts require enhanced CDD, regardless of their actual level of risk, under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. This was initially intended to feature in the amendment regulations but was removed (as we discussed at the time) because regulations could not override an express statutory requirement. We expect this will likely be revisited in future revisions of the legislation and our National Risk Assessment.

The Liquidator Guidance provides a useful summary and convenient point of reference for the liquidator provisions of the 31 July 2023 regulations, as the drafting of those provisions is heavy on cross-references and not very descriptive.

What next?

As described in more detail in our discussion of the previous guidelines, the next set of regulations will be coming into force on 1 June 2024, followed by the 1 June 2025 tranche and expected additional changes to legislation, regulations, and guidance (including updates to the CDD guidelines on co-operatives and sole traders and partnerships, which remain pending).

If you have any questions about the Trusts Guideline or Liquidator Guidance, the upcoming amendment regulations, the wider AML/CFT reforms, or the regime more generally, please do not hesitate to contact one of our experts.


This article was co-authored by Sam Short, a Senior Solicitor in our Banking and Financial Services team.