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Do not be blown away by the AML CFT audit requirements

It’s possible that no other individual piece of New Zealand legislation has been responsible for the creation of more Three Letter Acronyms (‘TLA’s’) than the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the ‘Act’). So what is it all about, and what will it mean for you?

As a member of both the Financial Action Task Force (FATF) and the Asia Pacific Group on Money Laundering (APG) New Zealand’s regulatory framework around Anti-Money Laundering (AML) and Countering the Financing of Terrorism (CFT) changes on June 30 this year  to more closely align with our international obligations.

Prior to the release of the AML / CFT Act 2009, FATF, the ‘inter-governmental group established to promote the effective implementation of measures to combat money laundering, terrorist financing and other related threats to the integrity of the international financial system’, was largely unimpressed with New Zealand’s relatively unsophisticated approach to AML and CFT. The 2009 Act and other associated regulatory changes addresses these criticisms and brings New Zealand into line with international expectations on AML and CFT (as embodied in the FATF’s so called ’40 + 9 Recommendations’)

Fortunately, given the weight of regulation, these rules do not apply to everyone equally. In keeping with its risk focus, the requirements are initially only applicable to what the legislation defines as ‘Reporting Entities’, entities operating within selected, higher risk industries. The law makers have focussed on the usual suspects: banks, non-bank deposit takers and fund managers, but have also targeted industries that may not immediately spring to mind – casinos for example.

Now for the bad news – these rules will apply to almost everyone equally. That may sound contradictory, but most of us operate a bank account, or have a financial advisor that helps us manage our money. And as such, we are all likely to fall within the scope of the new requirements – albeit from the perspective of a customer.

So what will it mean? Essentially, the Act aims to mitigate the risk of New Zealand’s exposure to money laundering and the financing of terrorism by establishing the following three regulatory obligations: Know Your Client, Transaction or Account Monitoring and Suspicious Transaction Reporting.

KYC, or Know Your Client, requires Reporting Entities to ensure that at the start of the relationship with a potential customer that they confirm the identity of their customers and correctly assess the ML / FT risk of each customer to the organisation. The Act refers to this process as Customer Due Diligence (or CDD).

To further complicate matters, the Act requires that Reporting Entities perform either Standard, Simplified or Enhanced CDD, depending on the nature of the customer and the perceived risk to the organisation. To add to the proliferation of TLA’s, the CDD process also introduces the concept of a PEP, or Politically Exposed Person – essentially anyone who holds (or held) a position of power within a foreign government, or anyone related to someone who holds (or held) such a position. The theory being that a PEP, by virtue of their position and influence, represent a higher risk of involvement in ML / FT.

Once an entity knows who they are dealing with, the legislation requires that they monitor the activity of their clients to ensure that there are no significant inconsistencies between the expected transactions (based on the KYC procedures performed at the commencement of the relationship) and the actual transactions. The legislation refers to this process as On-going CDD and Account Monitoring – clearly the boffins weren’t able to come up with a TLA that works for this part of the legislation.

The final component is Suspicious Transaction Reporting (or STR for short). The legislation establishes an obligation for the entity to report any suspicious transactions identified through the on-going CDD process to the relevant authorities. This is the Financial Intelligence Unit (FIU) of the New Zealand Police (NZP). The Act provides protection from prosecution for those providing an STR, but also introduces significant penalties for those who do not provide an STR when it is appropriate, or when a person ‘blows the whistle’ (ie: informs the subject of an STR that an STR has been issued).

AML, CDD, STR, PEP, CFT, FIU, KYC – this alphabet soup of TLA’s established by the AML / CFT Act 2009 represents a quantum shift in the monitoring of financial transactions in New Zealand.

Financial institutions have and will continue to invest significant amounts in developing their response to this legislation and ensuring they remain compliant.

For the rest of us it is likely to mean providing more information about ourselves and our financial dealings than we are used to, but the end result will be to strengthen New Zealand’s position in the international community as a good place to do business.

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