New Zealand central bank has failed on AML/CFT supervision, says FATF

The international anti-money laundering standard setter has criticised the Reserve Bank of New Zealand (RBNZ) for failing to supervise the banking sector adequately, despite an overwhelmingly positive national review. The Financial Action Task Force’s (FATF) latest mutual evaluation report revealed the central bank has just five full-time staff dedicated to financial crime compliance supervision. 

The RBNZ had failed to take any significant action against any of the country’s largest banks. This is despite extensive evidence of misconduct involving three of the New Zealand banks’ parent companies in Australia, the report said. The RBNZ’s failure as a banking supervisor was one of only a handful of serious deficiencies identified in the Pacific island nation’s critical fourth-round mutual evaluation report.

On the whole, FATF gave New Zealand an impressive scorecard — noting there were significant improvements since the third-round review. Notably, New Zealand has moved to regulate lawyers, accountants and real estate agents since the 2009 review. It has also closed many of the vulnerabilities in its foreign trusts regime, as identified in the Panama Papers.

The report found New Zealand was at least partially compliant with all 40 of FATF’s recommendations. in 2009 found the jurisdiction was lagging badly and was non-compliant with 18 recommendations, the report said. Since then, New Zealand has moved resolutely and its latest results place the country ahead of Australia in terms of technical compliance.

With regards to effectiveness, New Zealand was found to be either “highly”, “substantially”, or “moderately” effective in all of the 11 areas FATF assesses.

The standard setter singled out New Zealand for its effectiveness in targeting the proceeds of crime. The New Zealand Police, which houses the country’s financial intelligence unit, has a strong focus on asset seizures. This is supported with a top-level target for the volume of criminal assets to be restrained (NZ$500 million by 2021). The dedicated Asset Recovery Unit also works in cooperation with law enforcement agencies to run parallel restraint and forfeiture proceedings, alongside any civil or criminal matters.


Room for improvement 

Despite the overwhelmingly positive report, FATF singled out a number of areas for improvement. New Zealand needed to improve the transparency around the ultimate beneficial owners of companies, such as shell companies and trusts, that are commonly used to launder illicit funds, it said.

FATF also urged New Zealand to improve supervision in the areas of banking and designated non-financial businesses and professions (DNFBPs). The country has also been urged to improve its counter-terrorist financing measures, particularly with the supervision of targeted financial sanctions.

On the supervision front, the review noted the good supervisory work being carried out by the Department of Internal Affairs (DIA) and the Financial Markets Authority (FMA), particularly following the expansion of the regime in July 2018.

The results may put pressure on New Zealand to reconsider its “tripartite” model of AML/CFT supervision, given the mixed scorecard and potential for inconsistent oversight.

When New Zealand’s AML/CFT laws were passed, the government took the view that the cost of establishing a dedicated regulator and financial intelligence unit, such as that established in Australia, could not be justified.

FATF’s report had highlighted some of the strengths and weaknesses with New Zealand’s tripartite supervisory model, said Gary Hughes, a leading financial crime barrister with Akarana Chambers in Auckland.

“Out of our three AML supervisors, RBNZ is the one that faces the biggest challenges. It was never set up to be an independent and focused regulator compared with, say, the Financial Markets Authority,” Hughes said.

“RBNZ has too many conflicting institutional roles requiring it to be aloof — around prudential supervision, monetary policy and stability of the banking system — to be able to prioritise tough AML enforcement.”

The report said the scope and depth of RBNZ’s inspections “does not adequately reflect the risk and complexity of the banks inspected”.

“There is scope to improve the range of sanction powers available to the supervisors, and for the supervisors to impose sanctions that are more effective, proportionate and dissuasive,” FATF said.


Reluctant regulators 

Central banks and prudential regulators are often reluctant to take on enforcement cases due to their conflicting mandates. The priority of financial stability and confidence tends to trump the need to be perceived as a strong and committed enforcement agency. In Australia, for instance, the central bank has described itself as a “reluctant regulator” of the payments sector.

The challenges with the RBNZ’s supervisory approach run far deeper, however, than the obvious staffing and resourcing issues.

“It’s not just a case of lack of funding or people resources. It is unfortunately not the right agency for the job [the] government has thrown to it,” he said.


Land of the long, white laundromat 

The mutual evaluation of New Zealand took place in February and March 2020, just before the country was placed in lockdown due to COVID-19. The assessors highlighted the success of New Zealand’s efforts to deprive criminals of their ill-gotten gains.

Financial investigations are increasingly being used to support prosecutions on money laundering charges, the report said. The number of prosecutions into money laundering have increased since 2018.

“Our criminal proceeds recovery regime is one of the most active and aggressive areas of modern policing. Nearly everybody apart from drug dealers would agree it has made highly visible and successful inroads in confiscating organised crime gang assets,” Hughes said.

“Almost every single police operation under that regime will have been assisted by suspicious reporting or prescribed transaction reporting from firms caught within the AML/CFT regulatory net.”


Room for improvement 

FATF found banks and other large financial institutions have good systems and controls in place to manage financial crime risks but common areas for improvement include PEPs and sanctions screening, CDD on existing customers, and group-wide risk management.

“There are moderate shortcomings in the AML/CFT Act, particularly in relation to political exposed persons (PEPs), MVTS, wire transfers, internal controls, higher-risk countries, AML/CFT obligations for dealers in precious metals and stones (DPMS), the definition of trust and company service providers (TCSP), and real estate customer due diligence (CDD) obligations, which impact New Zealand’s overall compliance and effectiveness,” FATF said.

The report has highlighted the need to improve New Zealand’s opaque system of company and trust registration, which has been an ongoing challenge.

“There are longstanding issues with shell companies, the ease of setting up a limited partnership or layers of corporations. These are well-known problems,” Hughes said.

Despite the reforms following the Shewan Report into foreign trust disclosure rules, New Zealand’s “addiction to trust structures” has not disappeared, he said.

“There are up to half a million trusts of different types, according to some estimates, but only the Inland Revenue Department really knows,” Hughes said. “Inland Revenue doesn’t make that information available, except to other law enforcement bodies.”


Beneficial reforms 

Looking ahead, it is likely that New Zealand will eventually need to set up a comprehensive register of the ultimate beneficial owners who own assets.

“Overseas, the trend is moving toward beneficial ownership registers in different ways. Here, after a tentative stab at discussing that in 2018, it has remained stalled on the [Ministry of Business, Innovation and Employment] policy-drawing table ever since,” he said.

On enforcement, FATF said New Zealand needs to boost its actions against non-compliant reporting entities. It criticised the low range of financial penalties available and the lack of administrative penalties.

“The sanctions that have been applied in practice do not appear to have been fully effective, proportionate and dissuasive,” FATF said.


By Nathan Lynch, May 20, 2021, published on Thomson Reuters

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