AML/CFT regulations amended
On 8 June 2021, four sets of amendment regulations for the anti-money laundering and countering financing of terrorism (AML/CFT) regime were made (together, the Amendments). These will all come into force on 9 July 2021.
The key changes coming under the Amendments will be:
- an expansion of customer due diligence (CDD) obligations where nominee directors, nominee shareholders or nominee general partners are involved, including to require enhanced CDD (EDD);
- a general lengthening of the time periods for audits of risk assessments and AML/CFT Compliance Programmes;
- a widening of the capture of wire transfers as occasional transactions;
- a modification of the stored value instrument (SVI) provisions to reduce the ability to structure around them; and
- an expansion of the exemption for providing services to related entities to include non-body corporate entities.
These follow a process of development and targeted consultation dating back to 2019, prompted by the fact that some of the underlying regulations had upcoming expirations. The opportunity was taken to update and further expand the AML/CFT regulations, to address these and other issues. The Ministry of Justice’s Regulatory Impact Statement can be found on its website.
Who needs to read it? Why?
While many of the changes to be made by the Amendments are technical in nature and narrow in scope, as we identify below there are some that have more sweeping coverage. All reporting entities should consider whether the Amendments will impact their business.
In particular, reporting entities that have customers that are companies, limited partnerships or overseas limited partnerships will likely need to update their policies, practices, risk assessments and AML/CFT Compliance Programmes to reflect the new requirements around nominee directors, nominee shareholders and nominee general partners.
What does it cover?
The Amendments take the form of the Anti-Money Laundering and Countering Financing of Terrorism:
- (Requirements and Compliance) Amendment Regulations 2021 (Requirements and Compliance Amendment);
- (Definitions) Amendment Regulations 2021 (Definitions Amendment);
- (Exemptions) Amendment Regulations 2021 (Exemptions Amendment); and
- (Cross-border Transportation of Cash) Amendment Regulations 2021 (CBTC Amendment).
The Amendments will carry out some tidying and consolidation within the regulations, as well as removing a number of now-redundant provisions. However, of more interest are the various substantive changes which we summarise below.
The Requirements and Compliance Amendment
The Requirements and Compliance Amendment will make what we consider the most substantial change of the Amendments, in relation to nominee directors, nominee shareholders and nominee general partners, and associated CDD.
Following this change, the information that must be collected and verified for CDD will include:
- for a company, whether it has any nominee directors or nominee shareholders and, if so, their names; and
- for a limited partnership or overseas limited partnership, whether it has a nominee general partner and, if so, its name.
Where a reporting entity establishes a business relationship with a customer that is either a company with one or more nominee directors or a nominee general partner of a limited partnership or overseas limited partnership, it will be required to carry out EDD.
The introduced definitions of nominee director, nominee shareholder and nominee general partner are broad, essentially covering any situation where they are required to carry out, or accustomed to carrying out, that role in accordance with the directions or instructions of another person who is not a director, shareholder or general partner (as appropriate).
On its face, this would cover some very common situations, such as where a holding company or other shareholder is entitled to appoint directors to a company’s board where (as is often the case) those directors are obliged to, or tend to, follow the instructions of their appointer.
Also in the Requirements and Compliance Amendment is a change in the time period required for audits of risk assessments and AML/CFT Compliance Programmes for reporting entities that are not high-value dealers. Rather than the current 2-year period, this will set the period at 3 years generally and 4 years where a reporting entity’s AML/CFT supervisor notifies it that such applies.
The Definitions Amendment
The Definitions Amendment, in addition to removing their 27 July 2021 expiry date, will make a number of technical changes to their underlying regulations, including:
- clarifying that a liquidator’s customer for AML/CFT purposes is the company in liquidation, and that the customer for the provision of relevant services to an executor or administrator of an estate is the executor or administrator in question;
- prescribing related limited partnerships as being eligible to be members of a designated business group;
- expanding the capture of wire transfers of sufficient size outside business relationships as occasional transactions to include not just their receipt but also their carrying out;
- amending the capture of issuing or providing SVIs outside business relationships as occasional transactions so that the value thresholds apply to the total maximum of apparently linked operations, and so that non-finance businesses issuing SVIs do not fall under the debit card carve-out;
- removing the exclusion from being a reporting entity for persons providing relevant services in the ordinary course of their business as an executor, administrator or trustee;
- including greater specificity in the exclusion of persons carrying out property management activities from being reporting entities; and
- amending the CDD timeframe for real estate agents carrying out real estate agency work in relation to commercial lease transactions.
The Exemptions Amendment
The most significant change from the Exemptions Amendment will be, in our view, the expansion of the related entities exemption, not only to be a more self-contained provision (rather than simply referring to the Financial Markets Conduct Act 2013) but also to capture entities that are not bodies corporate. Under the current exemption, being related is primarily tied to voting products, so entities that do not have those generally cannot come within it. As amended, broader notions of control will suffice to make entities related.
The other changes made by the Exemptions Amendment will include:
- aligning with the Definitions Amendment’s expansion of the capture of wire transfers as occasional transactions;
- clarifying that the exemption for insurance policies that are closed to new customers and premiums only applies to life insurers;
- amending the exemption for certain SVIs so that the value thresholds apply to the total maximum of apparently linked operations, and so that non-finance businesses issuing SVIs do not fall under the debit card carve-out; and
- adding further exemptions for relevant services provided in respect of court-appointed liquidators or certain third-party transactions, to an executor or administrator of an estate or the subject of an order or production order from the Commissioner of Police, or by a reporting entity acting as an executor or administrator.
The 30 June 2020 expiry date for their underlying regulations had already been removed through a separate amendment.
The CBTC Amendment
The CBTC Amendment will make the most limited change, replacing the current prescribed form for cross-border transportation of cash reports with an updated list of information they must contain.
On the whole, we support the Amendments and the general principle of refining the AML/CFT regime to reflect both its increasing maturity and its development as further issues and trends arise.
As described above, the significance of the changes around nominee directors, nominee shareholders and nominee general partners stands out above the rest. Given how widespread it is in practice for people (such as shareholders) to have powers to appoint directors who may be required to carry out, or accustomed to carrying out, the directions or instructions of those appointers, we anticipate the frequency with which reporting entities need to carry out EDD to increase materially.
These changes are in response to the Financial Action Task Force’s recommendations that all jurisdictions have measures in place to prevent the misuse of nominee arrangements, as those arrangements give rise to a higher level of risk from an AML/CFT perspective.
A significant consequence of this is that reporting entities that deal with customers that may trigger these provisions will need to update their risk assessments and AML/CFT Compliance Programmes before the Amendments come into force on 9 July 2021, which is only just over three weeks from the date of this alert.
Some further changes we consider warrant specific comment are as follows.
- The capture of wire transfers of sufficient size outside business relationships as occasional transactions appears to cover all wire transfers, not just international wire transfers like the prescribed transaction reporting regime. Further, there may be overlapping obligations as the entities at each end of the transfer could trigger this requirement.
- While the CDD timeframe for real estate agents carrying out real estate agency work in relation to commercial lease transactions will be amended, the existing requirement for other real estate transactions will remain to conduct CDD before entering into an agency agreement. Our concern around this remains that it may be impracticable in many circumstances and, in any case, it is out of line with the general timeframe required for reporting entities.
- It is not clear when exactly the 4-year audit period is anticipated to apply. Guidance on when the AML/CFT supervisors would consider exercising this power would be useful for reporting entities to get some sense of when it would be realistic to inquire after that.
Vital to the AML/CFT regime is the balancing of compliance obligations and risks, to ensure they remain proportionate so innovation and business activity are not constrained and/or pushed overseas to more welcoming jurisdictions.
As mentioned above, the Amendments have been promulgated but only come into force on 9 July 2021. The timing of the next step in the regulations amendment, being to consolidate the various AML/CFT regulations into a single regulatory instrument, has not yet been announced.
If you have any questions in relation to the Amendments and how they may impact your business, or the AML/CFT regime more generally, please contact one of our experts.