Neil Sands
“Inefficient”, “inconsistent”, “economic dead weight”, “ad hoc” – ask the experts and there’s not much love around for the current anti-money laundering/counter-terrorism financing (AML/CFT) regime.
Not only is there dissatisfaction with the administrative burden placed on reporting entities, but there is also disquiet that an inadvertent breach of the complex rules may be a potential “firm terminator” for the offending party.
Associate Justice Minister Nicole McKee has pledged to revamp the regime, which came into force in 2013, outlining a program of regulatory and legislative reforms she says will make the system more agile.
This includes making the Department of Internal Affairs (DIA) New Zealand’s sole AML/CFT supervisor, a role previously split three ways between the DIA, Reserve Bank and the Financial Markets Authority.
“The changes will deliver a critical government priority to reform key sectors where the cost of regulation is overly burdensome for businesses and improve the efficiency and effectiveness of the AML/CFT system to meet international standards,” McKee said in a statement. The minister declined to be interviewed by LawNews.
We asked a number of experts to outline what they see as the main issues with the AML/CFT regime and their priorities for reform.
Rewrite, don’t revise
Philip Hardiman, practice manager at Pidgeon Judd and a member of The Law Association’s AML/CFT committee, said reform should focus on reducing the economic deadweight borne by reporting entities, and ultimately their clients.
He said the relevant legislation, which originally focused on financial institutions, must be rewritten to better reflect the professions it now covers, including lawyers.
“[It] was designed for banking institutions and is not fit for purpose as it relates to professionals,” he said. “The subsequent amendments since 2017 have only made for a more complex and confused set of legislation.”
Hardiman also wants the AML/CFT to adopt a risk-based approach, rather than the catch-all strategy reflected in current regulations.
“The existing AML regulations and CDD (customer due diligence) process captures all entities and individuals, all of which need to be verified,” he said. “This unnecessarily increases compliance costs. Low-risk clients/transactions should not need to be AML- verified.”
Claudia Shan, co-founder of Avancier Legal and convenor of The Law Association’s AML/CFT committee, agrees that a wholesale overhaul of the regime is a better solution than the succession of tweaks currently underway.
“Bottom line, I think it’s easier to start from scratch, particularly for lawyers and real estate agents and accountants – for the non-financial services businesses,” she said.
“[That’s] because you can actually look at legislation being drafted in other countries and see what they’re doing. I think Australia is in the middle of theirs… also, you can take into account some of the issues that lawyers face, like privilege.
“When I have to file a suspicious activity report, I have to be very careful about what information I say about the client, what advice I’ve given.”
Shan said AML meant lawyers needed to both represent, protect and uphold client interests, while also monitoring and potentially reporting those clients for suspicious activity – a balance not reflected in the current regime.
AML portal ‘the ultimate dream’
High on the wish lists of those LawNews contacted was a central AML/CML hub capable of incorporating various records collected by government agencies while also addressing privacy concerns.
“The ultimate dream is a central repository which all the reporting entities can plug into,” said Katrina Wood, a partner at Christchurch firm Saunders Robinson Brown, who is also on The Law Association’s AML/CFT committee.
“The cost on clients… they’re having to provide the same information to multiple service providers all the time. Something central where that’s not needed any more would be nice, but I’d be very happy if that was in my lifetime and I’m still young.”
Business NZ economist Steve Summers said a centralised data system and better use of digital tools would help streamline the AML administration.
“The absence of a central system for managing and validating AML information leads to inefficiencies and excessive paperwork for small businesses,” he said.
Shan said much of the information needed for AML identity verification purposes was already held by the government.
“The government collects so much data – land ownership, tax, driver’s licence, birth, deaths and marriages, etc. If you could have an AML hub that somehow coordinated all that, and you could plug into that,” she said.
“If I could see a screenshot of your passport that comes from a government department, I don’t have to ask for it from you, because I could rely on that. I don’t need to ask you to go to your local lawyer or your justice of the peace with a copy and send that to me.”
Guidance gap
Another common theme was the need for more consistent, clear guidance from AML regulators.
Hardiman said there was a gap between the catch-all regulation codes supplied by supervisory authorities and the AML legislation itself.
“This creates disparities between AML practise and the AML legislation, which detract from overall cohesiveness and ultimately reduces the supervisor’s ability to enforce its own regulations on non-compliant reporting entities,” he said.
Summers said small businesses often found the guidance provided by different agencies was conflicting and unclear.
“Develop clear, accessible guidance and support for small businesses to navigate AML requirements. This includes providing consistent information and addressing discrepancies in standards,” he said.
The committee said in a submission to the government last year that some terminology used in the legislation, such as “customer” and “business relationship” was not suited to the legal profession, warning any changes should not make existing problems worse.
“The committee considers it critical to ensure any regulatory amendments do not compound or exacerbate existing difficulties and that wherever possible, they simplify and clarify obligations and the application of the legislation,” it said.
“To this end, the specific wording used needs careful attention.”
Wood said the entire profession faced difficulties in complying with the AML regime.
“There are two aspects to it, in terms of being a firm terminator,” she said.
“If you screw up, the potential consequences are massive, but the part that really drives me nuts is the fact that it can be a firm terminator from the perspective of how much it actually costs to implement the systems and processes you need to comply.”
She said compliance was so labour-intensive that some firms hesitated to take one-off jobs because AML compliance soaked up the bulk of any payment received.
“And from a client perspective, they’re thinking ‘do I have to go through this onboarding rigmarole again?’, so it creates a barrier to people changing legacy legal providers.
“What most people want is just for it to be easier and more logical. Hopefully if people are talking about it and a bit of pressure builds, we’ll see if anyone listens.”
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