AML - How to keep criminals at bay
New measures help businesses avoid money laundering - but many NZ companies not ready.
Scenario 1: A man walks into a jeweller and wants to buy a $15,000 necklace with cash. He is asked to produce his passport.
Scenario 2: An immigrant wants to send $1000 to family back home. The business remitting the funds has to advise the police of the transaction.
Scenario 3: A real estate agent is contacted by police after accepting a large payment from a property buyer whose criminal background they did not detect.
All scenarios can apply under recent amendments to the new Anti-Money Laundering and Countering Financing of Terrorism Act, the second phase of which comes into force in stages from July (except for scenario 2, which is already in force), and which contains far-reaching changes for many New Zealand companies.
The Justice Department estimates about $1.35 billion derived from drugs and fraud is laundered through legitimate New Zealand businesses every year – though few believe that is the full extent of the problem; merely that known about.
According to Tim Gacsal, Risk & Regulatory Director for accountancy and business advisory firm BDO New Zealand, many businesses – lawyers, accountants, real estate agencies, jewellers and other "high value" dealers like car and antique dealers – are simply not ready for the change.
The stakes are high. In Auckland's High Court just over a month ago, a money transfer company was fined over $5m for failing to comply with anti-money laundering legislation (financial institutions have been subject to the legislation for some time; the further changes are Phase 2 of the Act).
"That was just for non-compliance," says Gacsal of the fine. "The Department of Internal Affairs made it clear they were not alleging money laundering had taken place – just that the legislative requirements had not been observed."
Australia's Commonwealth Bank of Australia is currently facing court action from corporate and banking regulators which could expose it to billions of dollars in fines, while shareholders have filed a class-action lawsuit. In 2012, HSBC in the US were fined nearly US$2 billion after it was used to launder drugs money out of Mexico, as well as other banking lapses.
Gacsal says New Zealand's strengthened legislation came from a poor report by the OECD's inter-governmental money laundering body – leading to recommendations that businesses in New Zealand (not just financial institutions) had to know detailed background information on clients and the source of their funds.
"It means that all transactions of over $1000 remitted in or out of the country have to be notified to the police," he says. "It also means that anyone walking into a jeweller and paying cash for a product of $15,000 or more will have to produce his or her passport or other forms of ID such as a birth certificate and driver's licence."
Businesses like law firms, accountants, real estate agencies and others who deal in trust funds also had to be aware of, and comply with, far-reaching new provisions designed to prevent money laundering.
"What we are seeing is that, while lawyers and accountants are further down the track, there are few who are fully compliant; in the case of real estate agencies and high value dealers, it's a very low percentage, maybe even zero in the case of high value dealers."
Gacsal says one of the main requirements of businesses is to know who their clients are and where their funds have come from. It is not enough any more, as many have done, to park the funds in a trust account without inquiring about its origins.
"Now companies have to vet their clients; they have to at least have financial statements and background information to support that the clients are who they say they are. They have to monitor transactions and report suspicious ones; they have to do detailed checks and they have to know the history of their clients.
"Very few are equipped to do that kind of deep dive right now."
The problem feared by many New Zealand businesses is client "flight risk", says Gacsal – where companies worry the level of questioning to which they must now subject customers will cause them to move to a less inquisitive and demanding competitor.
He can also see the potential for some companies simply to close down high-risk activities, like money transfers or forming a company or being a registered office for another entity.
BDO have an 8-part strategy for complying with the new regulations:
- A risk-based assessment
- Vetting & training for staff – ensuring staff are not part of the problem, either as money launderers or with criminal contacts or simply not knowing procedures
- Know your client – a review of existing clients into categories ranging from low to high risk
- Record keeping
- Suspicious activity & reporting
- Prescribed transaction reporting – understanding and actioning reporting requirements
- Review & audit – to be done periodically
- Anonymous transactions – identifying and controlling such transactions for organisations that rely heavily on the online world, where anonymity poses a high risk of criminal activity.
As featured in the NZ Herald on 5 Dec 2017.