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Insights into the 2021 FATF Mutual Evaluation of New Zealand 

by Lloyd Kavanagh

Published: May, 2021

Submission: May, 2021

 



At the end of April, the Financial Action Task Force (FATF), in conjunction with the Asia-Pacific Group on Money Laundering (APG), released its long-awaited Mutual Evaluation Report of New Zealand’s anti-money laundering and countering financing of terrorism (AML/CFT) system (Mutual Evaluation).


Our initial views following the release can be found on our website. This news update provides more detailed insights, including our views on:


  • what will follow the Mutual Evaluation;
  • the key findings of the Mutual Evaluation; and
  • the background and process of the Mutual Evaluation.


The purpose of mutual evaluations like this is to provide an international peer review of the level of technical compliance that the subject country has with the 40 FATF Recommendations and the level of effectiveness of its AML/CFT system, and to recommend to the government of the subject country how that system could be strengthened.


Accordingly, while that would be primarily of interest to the AML/CFT supervisors and other governmental bodies in that regulatory sphere, identifying where the system itself could be strengthened, reporting entities regulated under it may find assistance in it for assessing where risk sits in their particular business models.


The Mutual Evaluation, as well as previous releases on New Zealand, can be found on the FATF’s website.


Following the Mutual Evaluation
With the Mutual Evaluation now released, that precondition for the upcoming statutory review of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) has been met. We expect that to formally commence in July 2021, and to result in a report to the Government in mid-2022.


Given the findings of the Mutual Evaluation, we expect this review to carefully examine a number of areas of the regime, and ultimately recommend strengthening the regime further to bring it into line with (or at least closer to) what the FATF has suggested. The significant detail and numerous recommendations provided by the Mutual Evaluation should assist in this respect.


We also expect that the private sector will use the statutory review as an opportunity to raise with the Government many of the issues and practical challenges being experienced under the AML/CFT Act. Some of these issues and challenges will pull in the opposite direction from the recommendations, especially where they would result in additional cost from a regime seen by some as disproportionate to the risk experienced in New Zealand.


Whether or not the Government acts on either the recommendations of the statutory review or private sector submissions remains to be seen. However, if there is a will to do so, there would potentially be time to make changes to the AML/CFT Act before the end of the current term of Parliament (expected to be in late 2023).


It should be borne in mind that the previous mutual evaluation in 2009 coincided with and is seen as the prompt for the enactment of the AML/CFT Act, and the 2013 follow-up report was ultimately the genesis of the Phase 2 reforms which expanded the regime to accountants, lawyers and real estate agents (amongst others). Accordingly, it is very possible that this Mutual Evaluation will likewise result in material changes.


The key findings of the Mutual Evaluation
As we raised in our initial views, the Mutual Evaluation’s findings landed about where they were expected to, being substantially positive with the New Zealand regime recognised as effective and technically compliant in many respects but still needing improvement on certain matters to bring them up to the high standards of the FATF.


In respect of the FATF’s 11 immediate outcomes, the New Zealand system’s effectiveness was found to be high in respect of 2, substantial in respect of 4, and moderate in respect of 5.


In respect of the 40 FATF Recommendations, New Zealand was said to be compliant with 8, largely compliant with 20, and partially compliant with 12.


This can be contrasted with the 2009 mutual evaluation, where New Zealand was said to be compliant with 8, largely compliant with 17, partially compliant with 6, and noncompliant with 18. While the number of Recommendations with which we are compliant has not changed, there has generally been upwards movement in the other categories.


The Mutual Evaluation is structured around seven substantive chapters, each with its own findings and recommended actions. We set out a summary of these below.


National AML/CFT policies and coordination
According to the FATF, New Zealand showed a robust understanding of its AML/CFT risks, with two iterations of a National Risk Assessment (NRA) and the supervisors’ Sector Risk Assessments (SRAs). The NRA was seen as comprehensive and methodologically sound, although the risk ratings of the SRAs were not directly comparable.


New Zealand was also found to have national AML/CFT policies and activities that largely address identified money laundering (ML) or terrorist financing (TF) risks, and in some cases (such as around high-value dealers and prescribed transaction reporting) extends further than the FATF standards. However, some identified risks (such as around beneficial ownership and unregistered money or value transfer services (MVTSs)) remained, yet to have reforms or policy decisions made.


The FATF commented on the New Zealand ministerial exemption regime, to note the absence of an express requirement for there to be proven low ML/TF risk before one is granted and to suggest that New Zealand review its existing exemptions (particularly historical and transitional ones) to ensure they do all relate to low ML/TF risk.


Also discussed positively was New Zealand’s approach to asset confiscation (both locally and abroad, and throughout a range of types of assets) as a key strategic means of disrupting criminal activity, with ambitious targets and impressive results. While insufficient priority had been placed on ML investigation and prosecution, it was recognised that actions had been taken to increase this focus.


Domestic coordination and cooperation were identified specifically as strengths of the New Zealand regime, with strong traditions of collaboration, and a very high degree of formal and informal cooperation, between the authorities.


The New Zealand authorities were also recognised for their substantial outreach to the private sector, to assist its participants in understanding the risks identified by the NRA and SRAs.


Recommended actions for New Zealand to take in this respect include:


  • continuing to ensure national policies and activities address the ML/TF risks from beneficial ownership of legal persons and arrangements and unregistered MVTS providers;
  • continuing work to understand ML/TF risks, including new and emerging ones, by completing the third NRA, which should allow for direct comparison between the different SRAs;
  • continuing to have authorities work through coordination measures, and fostering a shared understanding of TF elements of broader counter-terrorism efforts;
  • progressing work on coordination and development of policies to counter proliferation financing (another, less-known, target of the FATF); and
  • reviewing its exemption regime to ensure exemptions take place strictly on the basis of proven low ML/TF risk.


Legal system and operational issues
The FATF found that New Zealand authorities widely (and increasingly) used financial intelligence to support a spectrum of investigations. Law enforcement agencies generally had the necessary resources and skills to make use of this, although it had tended to be used more by specialised national police units than their local counterparts (at least in respect of starting investigations).


The Financial Intelligence Unit (FIU) put a significant part of its resources towards supporting the operational needs of law enforcement agencies. It also had a focus on known targets that corresponded with those operational needs, but more sophisticated tools would allow it to capitalise on the potential of financial intelligence to detect criminal activity by unknowns and contribute significantly towards the detection and investigation of ML.


Law enforcement agencies were seen as making use of the full range of investigative techniques, being skilled and excellently trained to conduct complex financial investigations. Communication and coordination among them, and other authorities, was found to be strong, both formally and informally.


While the growth in the number of ML cases investigated and charges laid was mainly in line with identified risks, the FATF commented that the pursuit of ML in respect of professional gatekeepers and tax offences did not reach what was expected based on the risk environment.


The FATF also identified an apparent reluctance on the part of some law enforcement officers (albeit not the specialist units that investigate ML) to expend resources pursuing ML prosecutions where convictions for the predicate offences or confiscation of proceeds were considered sufficiently dissuasive.


New Zealand authorities had shown the capability to successfully prosecute ML cases throughout the spectrum of complexity, as well as to successfully pursue complex multijurisdictional ML investigations. The penalties imposed were also seen as consistent with New Zealand’s ML risk profile (as well as its wider criminal justice system).


New Zealand was said to have made full and effective use of alternative measures, such as asset recovery and confiscation tools, as an important policy objective. However, despite these having demonstrated a significant dissuasive and disruptive effect, the FATF expressed the view that confiscation is not generally accepted as an alternative to prosecuting ML.


Recommended actions for New Zealand to take in this respect include:


  • the FIU implementing sophisticated tools for prioritisation, database integration and analysis of financial intelligence to enhance its ability to directly identify new targets and trends, and conduct outreach to encourage more use of proactive financial intelligence products;
  • the FIU continuing its guidance and outreach activities to ensure reporting entities understand their reporting obligations, are able to quickly and seamlessly report, and have access to typology and indicator information;
  • encouraging and providing guidance to law enforcement agencies to use FIU proactive financial intelligence products to launch financial investigations into new targets;
  • the FIU incorporating a tracking and feedback mechanism into its case management to track the use of its products and financial intelligence accessed by law enforcement agencies;
  • the FIU maintaining and leveraging its strong relationships with law enforcement agencies and the financial sector to maximise the support it provides;
  • sustaining the recent increase in ML investigation and prosecution, including maintaining and monitoring targets, articulating the role of ML in strategies to disrupt serious and organised crime, and collecting up-to-date and comprehensive statistics to monitor performance;
  • considering developing prosecution guidelines for ML, to promote a consistent and effective approach;
  • continuing the focus on the detection, seizure, and confiscation of cross-border criminal assets; and
  • ensuring effective, proportionate, and dissuasive sanctions are applied for non-declared transportation of cash.


Terrorist financing and financing of proliferation
While New Zealand was seen to have limited exposure to TF risk (primarily in the form of lone actors likely to be self-funded), its level of investigations and prosecutions (noting that no cases had reached the level of prosecution to date) of TF align with its risk profile. In the investigations it did pursue (particularly following the March 2019 Christchurch attacks), it had shown a strong and effective operational capacity, including effective coordination and information sharing mechanisms.


The New Zealand sanctions regime, operating through some automatic adoption of, and some domestic designations that follow, United Nations Security Council (UNSC) sanctions, was said to have made active and appropriate use of these domestic designations. However, it could be further strengthened by considering additional designations (given the greater difficulty of pursuing undesignated entities for TF) or increasing guidance and outreach (as there was significant variation in levels of knowledge and understanding of those obligations, as well as some inconsistency in which entities receive notifications of updates).


In the absence of a clear legal mandate to do so, the AML/CFT supervisors did not directly supervise sanctions implementation, and reporting entities held differing views as to which agency they should contact about sanctions issues.


In respect of proliferation financing, New Zealand did not have a consolidated list of sanctioned persons or entities, nor was there a process in place to notify reporting entities of changes to those sanctions. Counter-proliferation guidance and outreach to, and supervision of, reporting entities had been limited, although authorities had previously taken broader counter-proliferation measures.


Recommended actions for New Zealand to take in this respect include:


  • authorities continuing to work through appropriate mechanisms to respond to new and emerging TF risks, and to draw on the operational experiences of the Christchurch investigation;
  • authorities ensuring that prosecutors have the required tools to prosecute TF in all instances;
  • the Police continuing to develop understanding of financial intelligence relating to TF;
  • competent authorities working to ensure all reporting entities receive timely updates to counter-terrorism financing sanctions designations and counter-proliferation financing sanctions designations from an appropriate authority;
  • giving clear powers and mandate to an appropriate agency or agencies to supervise and enforce counter-terrorism financing sanctions obligations and counter-proliferation financing sanctions obligations;
  • continuing to build on the active use of UNSC sanctions designations and considering designating further terrorist entities in line with risks identified in the NRA;
  • addressing technical compliance shortcomings related to sanctions authorisations to mitigate the possibility of them being missed;
  • considering options to increase monitoring or supervision of charities identified under the NRA as having a moderate vulnerability to TF abuse;
  • completing planned work to assess proliferation financing risk, and using that to target enhanced outreach on sanctions obligations, the introduction of sanctions supervision, and to inform whole-of-government coordination on counter-proliferation financing sanctions;
  • ensuring outreach and guidance to reporting entities makes clear the respective roles of the different agencies with respect to counter-terrorism and counter-proliferation sanctions; and
  • considering developing proliferation financing investigation standard operating procedures.


Preventive measures
The broad trends identified by the FATF (with some variation around certain types of entity) were as one would expect, with reporting entities that were larger, had fallen within the AML/CFT regime for longer, or could draw on international compliance expertise and resources showing a greater understanding of ML/TF risks and AML/CFT obligations, while those that were smaller or newer to the regime were still developing that understanding.


In a similar vein, the implementation of policies and controls commensurate with the level of risks identified through individual risk assessments tended to be better amongst the larger reporting entities. Some smaller entities were observed having AML/CFT controls that were not clearly based on identified risks, or viewing the risk-based approach as subjective in nature. Some entities (notably banks), rather than implementing mitigating measures, were seen to de-risk by terminating relationships outright.


Customer due diligence (CDD) and record-keeping compliance followed a similar pattern, with adequate measures generally in place for the larger reporting entities but varying levels of compliance and sophistication of processes amongst smaller entities. Ongoing CDD updates for legacy customers were observed as a general challenge for reporting entities, especially in the banking sector.


Enhanced CDD compliance (such as around politically exposed persons, trusts or correspondent banks) also varied by entities’ size and international exposure. Entities that more recently became regulated tended to have less sophisticated measures. The lack of a trust register was identified as a particular obstacle in conducting enhanced CDD for those relationships.


Processes around reporting obligations (such as for suspicious activities and prescribed transactions) were seen to have practical and technical limitations due to the nature of the reporting system (for instance, with restrictions on uploading more than one transaction at a time), as well as being labour-intensive and time-consuming. Volumes of suspicious activity reporting were considered low relative to sectors’ risk.


Compliance culture and internal controls was also found to have varied by size and international engagement, with larger entities tending to have sufficient resources designated for compliance and more sophisticated and defined procedures.


Recommended actions for New Zealand to take in this respect include:


  • further developing the understanding of ML/TF risks by the newly supervised entities;
  • enhancing the understanding and implementation of smaller and newer entities of their obligations;
  • rectifying the technical compliance issues regarding preventive measures;
  • ensuring that MVTS network providers and agents are appropriately managed and monitored;
  • strengthening implementation of measures around identification and approval of politically exposed person relationships and designated persons under sanctions;
  • ensuring that all reporting entities are registered with the FIU, and resolving practical issues around this registration and reporting; and continuing efforts to improve suspicious activity reporting from under-reporting sectors.

Supervision
The FATF recognised that the New Zealand approach to registration was not through a comprehensive and dedicated reporting entity register, but rather relied on a disparate array of other regimes’ registration requirements, of varying scrutiny and completeness.


The three AML/CFT supervisors were found to have overall good understanding of the ML/TF risk profiles of their sectors and supervised reporting entities, despite some important gaps (such as their most recent SRAs only having assessed inherent risk, rather than considering controls or mitigation measures already in place).


All three were recognised as having reasonable risk-based supervisory frameworks, combining on-site inspections, desk-based reviews, and outreach activities. One particular concern that was raised was that the on-site inspection of registered banks (which was the primary tool for supervising their compliance) was of insufficient scope and depth relative to their complexity and risk. This was attributed to limited resourcing of the Reserve Bank of New Zealand (Reserve Bank). Further, the supervision of more recently regulated entities was also less developed and more limited.


The FATF commented that, while the supervisors were generally effective in their taking of remedial action, and demonstrated a willingness to impose civil sanctions, their ability to impose effective, proportionate and dissuasive sanctions needed improvement in some areas (for instance, the court process required is resource-intensive). The civil pecuniary penalties that had been imposed in previous cases were considered to be low compared to the seriousness of the breaches. Further, given the above nature of New Zealand's approach to licensing and registration, many reporting entities had no licence or registration for a supervisor to suspended, restrict or withdraw.


Reporting entities interviewed by the FATF indicated that they had a good working relationship, and good communication, with their respective supervisors. This was said to be affected positively by supervisor action. The exception to this, again, was the entities newer to the regime, where the impact of supervisor action could not yet be properly assessed.


The supervisors were also said to have released a wide range of guidance and conducted outreach activities, both together and individually. The interviewed reporting entities generally considered this useful, while noting that some guidance was outdated, there was a lack of some sector-specific guidance, and there was insufficient guidance on how to comply with prescribed transaction reporting obligations and on sanctions implementation.


Recommended actions for New Zealand to take in this respect include:


  • addressing shortcomings around licensing and registration of reporting entities (including considering an AML/CFT-specific registration regime);
  • enhancing sanctions available to AML/CFT supervisors to ensure there is a sufficient range that are proportionate and dissuasive;
  • ensuring the appropriate scope and depth of supervision for all the different categories of its supervisory population, taking into account sector-specific vulnerabilities (with a particular focus on the Reserve Bank);
  • continuing to deepen supervisor understanding of ML/TF risks within their supervised sectors and institutions (particularly around those newer to the regime) by extending the data sources used for SRAs; and
  • continuing to provide guidance and feedback to reporting entities (with particular mention of prescribed transaction reporting).


Legal persons and arrangements
The FATF commented on the lack of a central source of information of legal arrangements (most notably trusts), and how the absence of a domestic trusts register (and only sporadic registration by certain kinds of trusts) meant that the actual number of trusts in use was unknown.


New Zealand, and the supervisors in particular, were said to have a clear understanding of the risks of misuse of legal persons and arrangements, with limited liability companies, limited partnerships and trusts identified in the 2019 NRA as the most likely to bear AML/CFT abuse.


While measures to mitigate this potential for misuse had been implemented, there remained gaps (particularly around beneficial ownership information and nominee directors and shareholders). Reporting entities that were interviewed identified the lack of a central source of beneficial ownership information as being a burden and an obstacle to enhanced CDD processes. Similarly, the lack of a complete register of trust and company service providers could allow their provision of nominee services to be concealed from reporting entities.


Information requirements were found to be backed by a range of sanctions, but with some of those sanctions not having been exercised it wasn’t clear whether they were proportionate, dissuasive, and effective. While the ability to deregister companies was considered to have been an effective sanction, there was a lack of sanctions to bring to bear against individuals.


Recommended actions for New Zealand to take in this respect include:


  • introducing measures to improve the availability of accurate and up-to-date beneficial ownership information on legal persons and domestic express trusts (including considering a beneficial ownership register and a trust register);
  • implementing measures to mitigate the ML/TF risk of nominee shareholders and directors;
    ensuring trustees disclose their status to reporting entities when dealing with them;
  • ensuring that proportionate and dissuasive sanctions are available and enforced for breaches of basic and beneficial ownership information requirements; and
  • developing a complete trust and company service provider register.


International cooperation
New Zealand, while not a major financial centre, was recognised as an important regional remittance centre for the South Pacific, and as being exposed to transnational ML/TF risks by its open economy. It was seen as providing constructive and timely mutual legal assistance, with positive feedback from other jurisdictions. The same was said of extradition requests.


Other (informal) international cooperation was also considered a strength of New Zealand, being largely effective in exchanging information and supporting operational activity with foreign counterparts. The assistance and training provided to Pacific Island jurisdictions by law enforcement agencies and AML/CFT supervisors was also recognised.


Recommended actions for New Zealand to take in this respect include:


  • reviewing and strengthening the efficiency of its mutual legal assistance and extradition regime;
  • maintaining better statistics on mutual legal assistance, extradition and exchanging basic and beneficial ownership information of legal persons and arrangements, to facilitate effective case management and monitoring risk on an ongoing basis; and
  • continuing to improve the already-good cross-border supervisory cooperation (especially between the Reserve Bank and AUSTRAC in Australia, as the home regulator of New Zealand’s four major banks).


The background and process of the Mutual Evaluation
The assessment team for the Mutual Evaluation consisted of experts from the Russian Federation, Hong Kong, Australia, Bahrain, and India, with support from the FATF and APG Secretariats. It was then reviewed by experts from the Cook Islands, Malaysia, and the United States of America.


The report was based on information both provided by New Zealand (with documents submitted in September and November 2019) and obtained by the assessment team during its 26 February to 15 March 2020 on-site evaluation. The follow-up face-to-face meeting was then, due to the ongoing COVID-19 pandemic, conducted virtually in November 2020.


The Mutual Evaluation was then discussed and adopted at the FATF’s February 2021 Plenary meeting (its second Plenary under the current German Presidency). As a result again of the pandemic, the Plenary met virtually for the third time, following the June and October Plenaries last year.


The Mutual Evaluation was one of the FATF’s fourth round of mutual evaluations for its members. The typical timeline for this round of mutual evaluations has the process generally running around 6 months on either side of the on-site, with publication expected within 6 weeks of post-approval reviews. However, the almost year-long period between the 15 March 2020 end of the on-site and the late February 2021 Plenary discussion, and the 9 weeks between the 25 February 2021 end of the Plenary and the 29 April 2021 publication, reflect the disruption that the pandemic has brought.


Further questions
If you have any questions about the Mutual Evaluation, the FATF Recommendations or the AML/CFT sphere more generally, please contact one of our experts.



 



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