AML/CFT Act statutory review – Ministry of Justice calls for submissions
Today, the Ministry of Justice (Ministry) released the consultation document for its statutory review of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act). The Ministry has asked for submissions, or feedback through an online questionnaire, by 5pm on 3 December 2021.
This consultation is a keystone component of that statutory review, which commenced on 1 July this year as required under s 156A(1) of the AML/CFT Act. It had previously been held up by delays to the Financial Action Task Force (FATF)’s Mutual Evaluation Report of New Zealand’s anti-money laundering and countering financing of terrorism (AML/CFT) system, which was released at the end of April this year (and which we have previously discussed in detail).
The consultation document, as well as a summary document, the review’s terms of reference, and additional information, is on the Ministry’s website.
Who needs to read it? Why?
At least, the summary document should be read by:
- all existing reporting entities – because this is the opportunity to influence how the regime may be made more efficient and effective;
- all entities which have determined they currently fall outside the coverage of the AML/CFT Act – because the consultation includes proposals for boundary changes; and
- others with an interest in financial inclusion and/or innovation in the financial sector – because the AML/CFT regime has a significant impact on those concerns.
However, we recommend reading the consultation document as well as that is where most of the detail sits, and not all the issues make it into the summary.
It would be no exaggeration to say that this review represents potentially the most significant change to the AML/CFT Act since it was passed.
What does it cover?
The review’s terms of reference state that the purpose and intended outcome of the review is to have “New Zealand becom[e] the hardest place in the world for money laundering, terrorism financing, and financing the proliferation of weapons of mass destruction”.
Fundamentally, the statutory review is targeted at:
- how the AML/CFT Act has operated and performed since its commencement;
- whether any changes to the AML/CFT Act are necessary or desirable; and
- recommendations made by the FATF in its latest Mutual Evaluation.
This will involve looking at the AML/CFT Act itself as well as the range of instruments made under it. Supervisor guidance and individual exemptions are expressly not within its scope, although the role those play in the context of the wider regime is.
The consultation document is of substantial length and detail, and we will not step through each topic in depth. However, as a broad overview, the document is divided between:
- institutional arrangements and stewardship (looking at the foundations and purposes of the regime);
- the scope of the AML/CFT Act (looking at the coverage of the regime, both in terms of captured entities and imposed obligations);
- supervision, regulation, and enforcement (looking at the appropriateness of the supervisory framework, the sufficiency of regulation, and the proportionality and effectiveness of available sanctions);
- preventive measures (looking at whether the obligations are both sufficient to prevent money laundering and terrorism financing and able to be implemented efficiently and without disproportionate compliance burdens);
- other issues or topics (looking at a range of specific matters that fall outside the above topics); and
- minor changes for clarity.
The Ministry states that it may recommend changes that:
- address emerging areas of risk and support other government priorities;
- improve compliance with FATF standards following our latest Mutual Evaluation;
- ensure compliance costs are proportionate to risks for our economy;
- modernise the AML/CFT Act and our approach to reflect the digital economy; and/or
- avoid or mitigate unintended consequences.
A robust, effective, and modern AML/CFT regime is crucial for New Zealand, both in terms of domestic law enforcement and keeping in line with the march of international obligations. At the same time, the compliance obligations that entails do introduce frictions into the operation of the New Zealand economy. Ultimately, a balance must be struck between these pressures.
While we are encouraged by references throughout the consultation document to:
- “[not] compromising the ease of doing business or unduly impacting the lives of New Zealanders”;
- avoiding “unintended consequences” and “serious negative effects”; and
- “careful[ly] balancing…the need to address the harms of money laundering and terrorism financing while ensuring that businesses can operate efficiently and innovatively”,
the framing in many parts leans towards an expansion of the regime.
The need for balance in practice is clearly in the minds of the Ministry, but a strong showing in the submissions would reinforce the importance of considering the burden of compliance for legitimate activities, both for reporting entities and their would-be customers.
Some of the questions raised include:
- whether the purpose of the AML/CFT Act should shift from detecting and deterring money laundering and the financing of terrorism to actively preventing them – this would place greater responsibilities on reporting entities, and significantly reframe their position to include some elements of enforcement;
- what more could be done to mitigate the unintended consequences that the AML/CFT regime has on financial inclusion – this is a crucial concern, as those already vulnerable to financial exclusion can be hit hardest by more restrictive regulation, and excluded people may be pushed towards black-market financial services and counterproductively increase risk;
- whether the Financial Intelligence Unit should have expanded powers to request information or to freeze assets and transactions;
- whether there should be a registration and/or licensing regime (with associated fees) for reporting entities – this could add further complexity (and cost) to operating as a reporting entity;
- whether criminal defence lawyers should be subject to some AML/CFT obligations – this, as the consultation document recognises, gives rise to a range of difficult questions around proportionality of obligations and the balancing of broader financial intelligence against the sensitivities and necessary protections surrounding use of criminal defence lawyers;
- whether all types of virtual asset service providers should have AML/CFT obligations – this would clear up some current ambiguity in the regime;
- whether tax-exempt non-profits and non-resident tax charities should be included as a type of reporting entity – this, as the consultation document acknowledges, would impose significant compliance costs, and would need to be balanced against the risk of obstructing their ability to provide charitable services;
- whether there should be any protection or allowance for reporting entities that rely on an audit – this would allow entities greater comfort in relying on the results of their audits, as currently a supervisor may take a different view and still pursue an entity despite a clean audit record;
- whether the role played by AML/CFT consultants should be recognised in the AML/CFT Act;
- whether the range of potential penalties should be changed (primarily in terms of allowing for higher penalties in more serious cases);
- whether enforcement actions and penalties should be able to be applied to directors, senior managers, and/or AML/CFT compliance officers – this will naturally be of serious concern to these persons, especially given the possibility of fairly technical breaches of the AML/CFT Act; and
- whether there should be a change to the current address verification requirement of customer due diligence – this could clear up some existing difficulties in the application of the requirements.
We anticipate that many entities will need to form into common interest groups, to consolidate their efforts in making submissions and lend them greater weight. However, the short window for submissions limits the time available for coordination and negotiating a shared position.
The Ministry is required by s 156A(2) of the AML/CFT Act to provide its report to the Minister of Justice within a year of commencing the review (so, by 30 June 2022). The Minister must then, under s 156A(3), table that report in the House of Representatives as soon as is practicable.
The Ministry says the review is the start of a reform process and that the indicative timeframe is:
- 3 December 2021 – public consultation closes;
- February 2022 to April 2022 – further targeted consultation with the private sector and communities to form recommendations;
- March 2022 – advice provided to the Minister about what change can be made at an earlier stage using regulations or secondary legislation; and
- 30 June 2022 – the review concludes, and the report is provided to the Minister.
If entities need more time to provide feedback, we recommend that they reach out to the Ministry as soon as possible, as there may be some scope for accommodation.
On 20 October, we are sponsoring a Digital Identity NZ event on reliance and reuse of identity verification for AML/CFT purposes (see Digital Identity NZ’s website). Included on the panel will be Nick Kokay, the senior policy advisor at the Ministry responsible for leading the review of the AML/CFT Act.
If you have any questions in relation to the consultation document or the AML/CFT regime generally, or would like assistance with submissions, please contact one of our experts.