Industry balks at moves to impose levy on AML/CFT compliance

Neil Sands

Experts are concerned that a proposed industry levy to fund the revamped anti-money laundering/counter-terrorism financing (AML/CFT) regime will hike compliance costs and further complicate an already labyrinthine system.

Some lawyers contacted by LawNews strongly oppose the planned levy – which is the subject of a Ministry of Justice targeted consultation – questioning why industry should pay for a regulator to do its job.

“AML/CFT is not voluntary: it is mandatory.  And it is a sector that has clear organised-crime linkages, including international organised crime,” Nick Kearney, a director at Jim Thompson Law, said.

“The cost of investigating and enforcing crime is, and should be, borne by taxpayers as it is a core function of any government.”

Associate Justice Minister Nicole McKee announced plans for a levy last October as part of a raft of reforms that will include making the Department of Internal Affairs (DIA) New Zealand’s sole AML/CFT supervisor, a role previously split three ways between the DIA, the Reserve Bank and the Financial Markets Authority.

“I will ensure that this levy is designed in a way that distributes the costs in a risk appropriate and equitable way, so that it targets the highest risk sectors – such as large international banks – and does not place an undue burden on small businesses.” McKee told an AML conference in Auckland on Thursday.

Deeply concerned

While welcoming a single regulator, Business NZ economist Stephen Summers said small businesses were already struggling with AML regulations due to repetitive information requests, excessive procedures and inconsistent requirements.

Summers said this meant a high threshold must be met to justify the AML levy, urging the government to be transparent about how it was set up and what the funds were used for, in order to demonstrate it was providing a benefit.

“The prevalence of levies imposed on businesses risks shifting the cost burden of core public services onto the private sector, effectively making businesses co-funders of services that should be government-funded,” he said.  “Looking more broadly, BusinessNZ would be deeply concerned if part of the answer to various issues the government is addressing routinely includes levies.”

Jenine Colmore-Williams, founder of AML compliance specialist Dimension GRC, was sceptical about the benefits of a levy, saying none of the current regime’s three regulators had provided meaningful training or education material in recent years.

“I’m not a supporter of the levy personally, because I don’t see what value it’s actually going to bring to the table, over and above what the regulator should be doing as a regulator,” she said.

Stifling innovation?

Claudia Shan, co-founder of Avancier Legal and a member of The Law Association’s AML/CFT committee, said she could understand the need for a levy, given the costs previously shared by three regulators would be borne solely by DIA.

Shan compared the levy to the numerous charges imposed by the Companies Office on banks, non-bank deposit takers, insurers and financial advisors as the price of conducting business.

“My question is how are you going to work out fees so they’re proportionate?” she said. “Obviously with a bank, you can charge thousands of dollars for annual registration, whereas, if you’ve got a two-partner law firm or single lawyer practice, how are you going to charge them?

“Don’t say it’s going to be on turnover, because then you need to prove what the turnover is. Does it need to be audited? That’s going to cost money. You know how expensive it is to get a chartered accountant to audit your accounts.”

The Financial Services Federation (FSF) also pointed to the proliferation of existing fees, saying “regulated entities have endured considerable costs to meet layer upon layer of compliance obligations over the last few years”.

“It is crucial that we have a robust financial services sector with appropriate checks and balances to protect New Zealanders,” FSF executive director Lyn McMorran said. “But we have to be careful that compliance costs – which are not recoverable and which do not generate anything in terms of return on investment – are not overwhelming to the point where they stifle growth, innovation, an ability to do business, and ultimately competition and consumer choice.”

Fragmented landscape

The preferred levy design outlined in the consultation paper would set the charge based on two factors: a company’s financial scale – as measured by pre-tax earnings – and its transaction reporting activity.

The consultation says there would be no base charge for smaller entities and no cap on the levies paid by larger entities, such as banks.

The levy is part of a three-stage reform plan for the AML/CFT regime.

The first tranche involves amending legislation “to provide immediate regulatory relief” to business.

The second focuses on changes to the structure of the AML/CFT regime: moving to a sole regulator and creating a sustainable funding model (the levy) “which better aligns with cost-recovery principles [and] could deliver significant savings to the Crown”.

The final part will involve regulatory changes to implement international standards and deliver a more risk-based system. It contains of “changes to regulatory settings that provide benefits for tackling organised crime [and] provide regulatory relief”.

Colmore-Williams said recent years had seen wave after wave of regulatory change, with more to come, making it difficult even for experts to navigate the fragmented landscape, let alone those without specialist AML knowledge.

“Then you say ‘well, actually, now we’re going to apply a levy, and we’re going to make it a graded levy depending on the level of risk and complexity you have’.

“They [clients] are just like ‘oh my goodness, this is really complex!’ So, the communique that’s gone out to industry is leaving everyone thinking ‘okay, we’re already wearing the cost of compliance, we’re already covering all the costs of due diligence, the cost of audit, the cost of being regulated. But you want to go over and above and give us a levy that’s going to increase that cost – a cost we cannot pass on to clients. We wear it on our bottom line.  So what value am I getting out of that? What is the regulator going to give back to me that’s going to make my life easier, because I can’t see it’.”