Anti-money Laundering: Next Steps after Phase 2

Phase 2 of the Anti-Money Laundering/Combating the Financing of Terrorism (AML/CFT) regime compliance begins taking affect from 1 July 2018.

Phase 2 extends the AML/CFT regime to lawyers, conveyancers, accountants, real estate agents, sports and race betting, and certain high value dealers. Sectors are affected in stages, with lawyers and conveyancers required to comply starting from 1 July 2018, followed by accountants in October 2018, with real estate agents and other sectors in 2019.

Phase 2 will help to make New Zealand less attractive to international criminal groups and corrupt officials who seek out weak regimes to circumvent global AML laws. Criminals will find it harder to misuse these sectors without detection. This legislation is a positive step towards preventing corruption internally and making New Zealand less vulnerable to external corruption.

The Financial Intelligence Unit in NZ Police recently highlighted in its National Risk Assessment the risk of these ‘gatekeepers’ to the financial system being misused by criminals. Phase 2 will assist in reducing this risk.

Next Steps for AML

Effective implementation of Phase 2 is critical to ensure that the regulations themselves become effective, and, to ensure a level playing field for affected businesses and professions.

Globally, adequate supervision using a risk-based approach has been demonstrated to be a key element to ensure that businesses implement the AML controls to deter and detect money laundering and other crimes.

In this regard, it is good news that additional resources are being provided to the Department of Internal Affairs (DIA) for supervision of Phase 2.

The DIA’s role is critical to support and monitor compliance through awareness raising, guidance, and surveillance. The DIA has already shown that it is a strong regulator when it needs to be. For example, the recent $5.3 million non-compliance fine to finance company Ping An is the largest fine to date under the AML/CFT regime.

The size of the fine puts Phase 1 and Phase 2 reporting entities on notice that while the DIA will offer a carrot, it also possesses a stick.

Transparency of beneficial ownership remains an issue. To prevent the misuse of New Zealand companies and trusts, we need greater visibility of the owners of entities and assets is required.

Phase 2 will help, but more to do…

The Government continues to make limited progress on its commitment to explore a beneficial ownership register for companies, a commitment made back in May 2016 at the London Anti-Corruption Summit.

New Zealand is falling behind like-minded countries, with the UK and the rest of the European Union already taking steps to implement beneficial ownership registries.

If done well, the benefits of a comprehensive register are clear. It provides a way for police investigations to trace corruption that has previously hidden behind a corporate veil. Financial institutions and others can use the register as a data source in their due diligence. This can reduce the duplication in the current process where information about the same beneficial owner may be collected by several financial organisations.

Administration of the register has its challenges. It is imperative that the data on the register be accurate and up to date for the system to work. This can be difficult as recent examples show.

New Zealand has an opportunity to learn from the efforts of other countries when implementing an effective beneficial ownership register. By moving quickly to set up a register of beneficial ownership, New Zealand could be a world leader in this anti-corruption effort.

Are AML Provisions Effective?

Just over a month before the Phase 2 AML provisions come into law, new studies by Dr Ron Pol have been publicised as concluding that anti-money laundering rules were “almost completely ineffective”.

Pol’s studies are available only behind pay walls. According to promotions of them, Pol found flaws in the effectiveness of anti-money laundering rules, affecting every country he surveyed in 2014. His results have credibility from being published in international peer-reviewed journals. The studies combined a methodology called “money laundering research” with “outcomes effectiveness analysis”.

The research claims to be a methodological breakthrough at the intersection of the policy (money laundering) and policy effectiveness disciplines. It applies an “outcomes effectiveness analysis” to examine the extent to which regulations achieve intended outcomes. This is the test of whether the AML policies are effective.

“If up to 99.9% of illicit funds in some countries stays in criminal hands each year, existing standards and current methods clearly don’t work as well as intended. For crime truly not to pay, beyond rhetoric, a step-change in vision and capability may be required”, says Pol.

This discussion about what “effective” looks like has a valuable contribution to make at a time when international organizations such as FATF, World Bank, IMF and UN along with national governments are working to develop more effective AML/DFT measures. It is important to acknowledge too that processes and policies have improved markedly since 2014. There is a much greater awareness of how vulnerable countries and businesses are to large flows of illicit funds. 

A short RNZ commentary ‘Anti-money laundering rules ineffective – study’ broadcast on 30 May, includes comments from both Pol and TINZ Chair, Suzanne Snively.