AML/CFT Supervisors Update Territorial Scope Guideline and Supervisory Framework
On Friday 22 November, the Department of Internal Affairs, Financial Markets Authority (FMA) and Reserve Bank of New Zealand (Reserve Bank) (AML/CFT Supervisors) together released updated versions of:
- their guideline (Territorial Scope Guideline) on the territorial scope of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act), and
- the supervisory framework (Supervisory Framework) of the anti-money laundering and countering financing of terrorism (AML/CFT) regime.
Who needs to read this? Why?
Many overseas entities carry out activities with varying degrees of connection to New Zealand. Some New Zealand entities only serve overseas customers. These entities, and their advisers, need to determine whether these entities are subject to New Zealand’s AML/CFT regime. They will find the Territorial Scope Guideline useful in assessing their obligations.
The Supervisory Framework may be of use for anyone seeking a general overview of the AML/CFT systems in New Zealand.
What do they cover?
Territorial Scope Guideline
The Territorial Scope Guideline replicates much of its previous version from December 2012 (2012 Guideline), but is updated to reflect the increased coverage following Phase II (that included designated non-financial businesses and professions, high-value dealers and the Racing Industry Transition Agency in the regime). The examples are also expanded.
The Territorial Scope Guideline states that:
- The activities covered by the AML/CFT regime must be ‘carried on in New Zealand in the ordinary course of business', which involves:
- a place of business in New Zealand from where it is directed, and likely includes New Zealand staff and/or infrastructure providing the means to carry it on; or
- an overseas entity actively and directly advertising to, or soliciting business from, persons in New Zealand to a sufficient extent for it to be carrying on business in New Zealand (which would then also require registration under the Companies Act 1993).
The Territorial Scope Guideline sets out examples of entities that do or do not fall within the territorial scope of the New Zealand AML/CFT regime.
- A person incorporated or formed in New Zealand that, in the ordinary course of business, carries on activities wholly outside New Zealand will not be captured by the New Zealand AML/CFT regime. It will instead be subject to the AML/CFT regime of the country where its activities are conducted.
- An overseas person that is carrying on business in New Zealand with a relevant activity will be subject to both the AML/CFT regime in their home country and, in respect of its New Zealand activities, the New Zealand AML/CFT regime.
- An overseas person that is not carrying on business in New Zealand is unlikely to be captured by the New Zealand AML/CFT regime. It will instead only be subject to its home country's AML/CFT regime.
The Territorial Scope Guideline includes a number of changes from the 2012 Guideline. These primarily reflect the expanded coverage of the AML/CFT regime under Phase II, with the remainder intended to add clarity to questions of territorial scope.
- The description of ‘reporting entities' has been expanded in line with this expanded coverage. The Territorial Scope Guideline does, however, specify that it is focusing on financial institutions and designated non-financial businesses or professions. In particular, it advises virtual asset service providers to ask their supervisor about territorial scope.
- It now confirms that a natural person in the same position as a corporate entity in terms of the application of the AML/CFT regime will also be covered.
- Further clarification is provided for the example of New Zealand persons carrying on activities wholly outside New Zealand. It is expressly extended to cover natural persons practising on their own account in sole practice. It also indicates that activities would not be considered to be carried on wholly outside New Zealand solely because the relevant services are provided to overseas persons (for instance, forming New Zealand companies or arranging nominees or trustees for New Zealand-based legal arrangements for those persons).
The Supervisory Framework similarly retains most of its 2012 version. Changes are made to reflect the expanded scope of the AML/CFT regime, as well as other updates in the wider AML/CFT sphere (such as the further releases by the Financial Action Task Force and the replacement of the Securities Commission by the FMA). The Supervisory Framework provides an overview of:
- the objectives of the AML/CFT Supervisors (derived from the purposes of the AML/CFT Act), being:
- to detect and deter money laundering and the financing of terrorism
- to contribute to public confidence in the financial system
- to facilitate co-operation amongst reporting entities, supervisors and various government agencies (in particular law enforcement and regulatory agencies), and
- to maintain and enhance New Zealand’s international reputation
- the wider framework of the New Zealand AML/CFT regime, including:
- the sources of regulation
- the relevant entities, being the AML/CFT Supervisors and other governmental bodies, and
- other elements of the regime, including Ministerial Exemptions, Codes of Practice and Guidelines
- the functions and powers of the AML/CFT Supervisors, and the guiding principles of their exercise, and
- the tools available to the AML/CFT Supervisors to encourage or enforce compliance, from education and guidance to criminal prosecutions.
The New Zealand AML/CFT regime imposes substantial obligations. With increasing amounts of economic activity occurring across borders, determining whether an entity is subject to the regime can be a key consideration in how, and possibly even whether, to set up its operations. The greater the clarity that can be provided around this, the more easily entities can know their obligations, and the more smoothly overseas entities can offer services into New Zealand and New Zealand entities can offer services overseas.
However, the Territorial Scope Guideline (like its predecessor) does not provide clarity. The coverage of the New Zealand AML/CFT regime remains unclear unless an entity happens to fall under one of the examples (such as having to register as an overseas company). Given the great variety in how operations are arranged and how they connect with New Zealand, and the significant consequences of being captured by the AML/CFT regime, this uncertainty is not conducive to either attracting overseas services to New Zealand or exporting New Zealand services to the world. Greater specificity in defining the territorial scope of the AML/CFT Act is necessary to improve this.
The Territorial Scope Guideline also takes a narrower view on the carrying on of activities in New Zealand than the Reserve Bank does under its recent guidance on the Reserve Bank of New Zealand Act 1989's restrictions on the carrying on of activities directly or indirectly in New Zealand by overseas banks. There, an activity can be carried on ‘directly or indirectly' and still be captured, with activities of intermediaries attributed back to the relevant entity.
The Supervisory Framework, while providing a general overview of the AML/CFT regime, does not really assist in the interpretation of substantive obligations.
If you have any questions on these reissued documents, or on the AML/CFT regime more generally, please contact one of our experts.