Implementation of the Anti-Money Laundering and Countering Financing of Terrorism Act Regulations CONSULTATION DOCUMENT JULY 2012

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1 Implementation of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 Regulations CONSULTATION DOCUMENT JULY 2012

2 Table of Contents Information Section One: Introduction 4 Glossary 5 Overview 6 Regulations 8 Scope of the proposals Section Two: Application of the AML/CFT Act 9 Administrative matters 9 Annual reporting form 9 Suspicious transaction report requirements 11 Technical amendments 11 Beneficial ownership threshold 11 Wire transfer threshold 11 Exemptions for customer due diligence 11 Consumer credit exemption for non-finance businesses 11 Inclusion of trust and company service providers 12 Casino record keeping exemption 13 New policy matters 13 Simplified customer due diligence 14 Beneficial ownership obligations and custodial accounts 15 Circumstances in which customer due diligence should be carried out 16 Details of beneficiaries of international wire transfers Ordering institutions Beneficiary institutions 18 Stored value instruments 22 Transitional exemption for auctioneers, internet auction providers and other retail sector businesses 23 Appendix One: Annual reporting form 34 Appendix Two: Suspicious transaction report requirements 2

3 Information This document contains proposals to be included in regulations under the Anti-Money Laundering and Countering Financing of Terrorism Act Submissions are invited on these proposals. Recommendations to Ministers on proposals are intended in September Comments on this consultation document should be provided to the Ministry of Justice by 5pm Friday 17 th August 2012, and should be sent to: Post: Attention: International Criminal Law team Ministry of Justice Tahu o te Ture SX10088 Wellington 6012 Publication of submissions, the Official Information Act and the Privacy Act The Ministry of Justice does not intend to publish comment that it receives on this document. However any comment will be subject to the Official Information Act 1982 ( OIA ) and may, therefore, be released in part or full. The Privacy Act 1993 also applies. If you do provide comment on the document, please state if you have any objections to the release of any information contained in your submission. If so, please identify which parts of your submission you would prefer to be withheld and the grounds for doing so under the OIA (eg, that it would be likely to unfairly prejudice the commercial position of the person providing the information). Any grounds for withholding information under the OIA must be related to the information within a document, not to the document itself. Disclaimer This document contains proposals for consultation and does not reflect government policy. Readers are advised to seek specific advice from an appropriately qualified professional before undertaking any action in reliance on the contents of this document. The Crown does not accept any responsibility whether in contract, tort, equity or otherwise, for any action taken, or reliance placed on, any part, or all, of the information in this document, or for any error or omission in this document. Acknowledgment The Ministry would like to thank officials from the Ministry of Economic Development, Ministry of Foreign Affairs and Trade, New Zealand Police, Reserve Bank of New Zealand, Department of Internal Affairs, Financial Markets Authority, Inland Revenue Department, and New Zealand Customs Service that have contributed to the development of this document. 3

4 Glossary Acronym AML/CFT AML/CFT Act AML/CFT Regulations Explanation Anti-Money Laundering and Countering Financing of Terrorism. Anti-Money Laundering and Countering Financing of Terrorism Act Anti-Money Laundering and Countering Financing of Terrorism Regulations CCCFA Credit Contracts and Consumer Finance Act CDD FATF FIU Customer Due Diligence or knowing your customer a set of obligations designed to elicit accurate information about customers to ensure reporting entities know their customers and can make appropriate assessment of money laundering and terrorist financing risk. Financial Action Task Force the body responsible for developing international best practice standards for anti-money laundering and countering financing of terrorism. Financial Intelligence Unit an intelligence unit within the New Zealand Police. FTRA Financial Transactions Reporting Act ML/TF NCC STR SVI Money Laundering/Terrorist Financing. National Coordination Committee a body set up under the AML/CFT Act to ensure consistency in the application of the regime. Suspicious Transaction Report a report made in relation to a transaction that is suspected of being related to money laundering, terrorism financing or any other serious crime. These reports should be submitted to the Financial Intelligence Unit. Stored Value Instrument. 4

5 Overview 1. The FATF is an inter-governmental body set up by the G7 group of Ministers in 1989 to develop and promote policies and legislation to combat money laundering associated with organised crime, terrorist financing and more recently the proliferation of weapons of mass destruction. 2. The FATF issues Recommendations to guide governments in their implementation of measures to combat money laundering and terrorism financing. Countries are routinely assessed for compliance with those Recommendations. The FATF have recently reviewed and updated these international standards, now called the Forty Recommendations The Anti-Money Laundering and Countering the Financing of Terrorism Act 2009 (the AML/CFT Act) is New Zealand s primary response to comply with the FATF Recommendations. The AML/CFT Act received Royal assent on 16 October On 30 June 2011 the AML/CFT Commencement Order was promulgated providing for obligations in the Act to come into full force on 30 June The Act places obligations on financial institutions and casinos (reporting entities). Through compliance with the AML/CFT Act reporting entities help to detect and deter money laundering and terrorism financing. The AML/CFT Act builds on the existing obligations on financial institutions to carry out AML/CFT activity under the Financial Transactions Reporting Act 1996 (FTRA). 5. Under the AML/CFT Act reporting entities will have a range of responsibilities including: 5.1. developing and maintaining a risk assessment and a risk-based AML/CFT programme 5.2. customer identification and identity verification 5.3. ongoing customer due diligence, including account monitoring 5.4. suspicious transaction reporting (STR) 5.5. record keeping 5.6. meeting audit requirements and annual reporting. 6. The AML/CFT Act establishes three statutory supervisors of reporting entities: 6.1. for banks, life insurers, and non-bank deposit takers, the Reserve Bank of New Zealand is the relevant AML/CFT supervisor 6.2. for issuers of securities, trustee companies, futures dealers, collective investment schemes, brokers, and financial advisers, the Financial Markets Authority is the relevant AML/CFT supervisor 1 5

6 6.3. for casinos, non-deposit taking lenders, money changers, and other remaining entities the Department of Internal Affairs is the relevant AML/CFT supervisor. Regulations 7. The AML/CFT Act contains a range of regulation-making powers that allow for further prescription of requirements in a number of areas, to alter the scope of definitions in the Act and to provide for the exemption of entities, services and transactions. The proposals in this document are intended for regulation. 8. The primary set of regulations under the AML/CFT Act 2009 was promulgated on 30 June Those regulations: 1.1. brought two further classes of entities under the Act; certain financial advisers and certain trust and company service providers 1.2. excluded some sectors or entities, notably lawyers, accountants, conveyancing practitioners and real estate agents, government departments, pawnbrokers, and the Reserve Bank of New Zealand 1.3. established transaction thresholds, which define the scope of transactions outside of business relationships to which obligations will apply 1.4. contained full and partial exemptions for certain services and transactions for reasons of low money laundering and terrorism financing risk, impracticality, to prevent competitive distortions or to remove capture of specific groups of entities who undertake certain transactions or services (such as retailers) 1.5. prescribed some specific requirements in relation to simplified due diligence, anonymous accounts, beneficiaries of trusts, and annual reporting. Other key elements of the regime Codes of Practice 9. The AML/CFT Act also provides for codes of practice which are non-mandatory instruments that describe a method of complying with AML/CFT obligations. If reporting entities opt out of the code of practice however, they must notify their supervisor and comply with the Act by equally effective means. The AML/CFT supervisors (the Reserve Bank, the Department of Internal Affairs and the Financial Markets Authority) are responsible for developing codes of practice relevant to their respective sectors. No code of practice has legal effect until approved by the responsible Minister. 10. On 1 September 2011 the Identity Verification Code of Practice 2011 was gazetted. This code of practice will help reporting entities to ensure they are in compliance with AML/CFT Act verification obligations for name and date of birth of customers (that are natural persons) that reporting entities have assessed as low to medium risk. 6

7 Guidelines 11. Guidelines have already been published on a number of topics and can be accessed online through the websites of AML/CFT supervisors: AML/CFT Risk Assessment Guideline AML/CFT Programme Guideline In the Ordinary Course of Business Guideline Insurance Business Coverage Guideline (which explains the exemptions under the AML/CFT Regulations for certain types of insurance from AML/CFT Act obligations) Guide for Small Financial Adviser Businesses. 12. Guidelines can be either universal or sector-specific where appropriate. Guidelines will continue to be developed and released by AML/CFT supervisors and the FIU (in consultation with the AML/CFT National Coordination Committee (NCC) 3 to ensure consistency). National and sector risk assessments 13. National and sector risk assessments have been published and are available on the Ministry of Justice website 4 and websites of the AML/CFT supervisors. 14. The national risk assessment focuses on money laundering typologies at a high level. Sector risk assessments provide more sector-relevant detail. 15. National and sector risk assessments will continue to evolve over time as supervisors and the FIU access better quality intelligence about ML/TF risks from reporting entities. The AML/CFT regime is designed to facilitate gathering better quality intelligence. 2 Department of Internal Affairs Financial Markets Authority Reserve Bank of New Zealand 3 The National Coordination Committee is established under section 150 of the AML/CFT Act to ensure the consistent, effective and efficient operation of the AML/CFT regulatory system. Membership consists of the Ministry of Justice; the New Zealand Customs Service; every AML/CFT supervisor; the FIU; and such other persons as are invited from time to time by the Chair (which is a delegate of the Secretary of Justice)

8 Scope of proposals for this set of regulations 16. A further set of AML/CFT regulations is now required to complete the first phase of reform by resolving some outstanding administrative matters, specifically: prescription of an annual reporting form information that must be contained in a Suspicious Transaction Report (STR). 17. A number of minor and technical amendments are also required to clarify or address oversights in the set of regulations promulgated in June Finally, officials have identified some further policy matters which will further enhance management of money laundering and terrorism financing (ML/TF) risks, and increase New Zealand s compliance with the revised FATF recommendations. Those are: explicitly require customer due diligence (CDD) to be carried out where there is a suspicion of ML/TF explicitly require ordering institutions to obtain (but not verify) information on the beneficiaries of international wire transfers, and beneficiary institutions to carry out CDD in accordance with the Act (including verification) on customers that receive international wire transfers a minor clarification in the definition of stored value instrument, some adjustments to the exemption and making increasing value on a stored value instrument an occasional transaction, to better manage residual risks of ML/TF. 19. We do not anticipate that these additional proposals will result in substantial compliance costs for reporting entities. However, we invite specific feedback from reporting entities on the compliance costs involved with the proposals. We invite submissions on all information contained in this document. 20. It is anticipated that final decisions on regulations will be made and communicated in October. Regulations should be in place by January

9 Administrative matters Annual reporting form 21. A reporting entity is required to prepare an annual report on its risk assessment and AML/CFT programme. Under section 60 of the Act the annual report must: be in the prescribed form take into account the results and implications of the audit required by section 59(2), and contain any information prescribed by regulations. 22. The AML/CFT (Requirements and Compliance) Regulations 2011 prescribed categories of information that reporting entities must provide to their supervisor as part of the annual report. Proposal 23. It is proposed to revoke the current Annual Reporting Regulation and prescribe an annual reporting form. The form is attached at Appendix One (page 23). 24. The annual reporting form is more specific and it is clearer for reporting entities what information is required to fulfil annual reporting obligations. We think this approach is much more user-friendly than the current regulation. We invite comment on whether reporting entities prefer this approach. 25. It is proposed that reporting entities be able to submit the annual reporting form either electronically (encouraged) or in writing. The AML/CFT supervisors also intend to provide information for reporting entities on how to fill out the annual reporting form, including information on how Designated Business Groups may fill out the form. Suspicious transaction report requirements 26. Section 41(1) 5 of the AML/CFT Act requires that suspicious transactions reports (STRs) must: be in the prescribed form (if any) contain the details prescribed by regulations contain a statement of the grounds on which the reporting entity holds the suspicions referred to in section 40(1)(b) be signed by a person authorised by the reporting entity to sign STRs (unless the report is forwarded by or another similar means of communication) 5 Section 41(1) is subject to section 42(2) which means that suspicious transaction reporting obligations do not apply to privileged communications between two lawyers in their professional capacities or a lawyer and his or her client in a professional capacity. 9

10 Proposal be forwarded, in writing, to the Commissioner: by way of secure electronic transmission by a means specified or provided by the Commissioner for this purpose; or by another means (including, without limitation, by way of transmission by fax or ) that may be agreed from time to time between the Commissioner and the reporting entity concerned. 27. The proposed STR details are set out at Appendix Two (page 34). We invite comment on the proposed requirements. The requirements were developed using the STR form in the Financial Transactions Reporting Act 1996 (FTRA), 7 with the following modifications: Comment additional elements to make the form consistent with AML/CFT Act requirements inserting if applicable where information is sought but is not specifically required for certain reporting entities who, for example, may be subject to exemptions from certain requirements inserting if available where more information must be provided if it is known to reporting entities, but its collection is not mandatory under the AML/CFT Act. 28. The proposed information set out at Appendix Two is information that must be included in an STR, subject to being applicable or available as indicated. The FIU are developing the STR form which will be used by reporting entities when submitting STRs. The form is not required to be prescribed in regulations. 29. The FTRA requirements will continue to be in force until 30 June 2013, when phase one of the AML/CFT regime begins. In addition, the FTRA requirements will continue to apply for entities that intend to be covered by the phase two of the AML/CFT regime (for example jewellers, lawyers, accountants and real estate agents) until phase two is in force. Consistency as far as possible between the two regimes is desirable to facilitate a smooth transition. 6 If the urgency of the situation requires, a suspicious transaction report may be made orally to any Police employee authorised for the purpose by the Commissioner, but in any such case the reporting entity must, as soon as practicable, but no later than 3 working days, forward to the Commissioner a suspicious transaction report that complies with the requirements in subsection (1) of section Schedule to the Financial Transactions Reporting Act

11 Technical amendments 30. A number of minor and technical amendments are proposed in response to feedback from industry and agencies following the set of regulations promulgated in June 2011, in order to: Clarify that the beneficial ownership threshold is intended to apply (consistent with the Australian regime) to individuals that own more than 25% of the customer or person on whose behalf a transaction is conducted. Currently the threshold is simply described as 25%, which means it would include 25%. This was not intended Revoke the exemption for wire transfers of $1000 or less in favour of prescribing a $1000 threshold under section 27 (which has the same effect, obligations will only apply to wire transfers above $1000) Amend some provision references in all exemptions that relate to CDD to ensure they include requirements relating to Politically Exposed Persons (section 26) and the circumstances in which CDD must be carried out (sections 14(a)-(c) and 22(1)(a), (b)). This ensures full effect is given to the CDD exemption as intended Amend Regulation 17(2)(c) of the AML/CFT (Definitions) Regulations 2011 to clarify the scope of the regulation. At present the wording of the regulation potentially captures building owners that provide rental or lease accommodation for businesses. This is not intended. The intention of this regulation was to include trust and company service providers under the AML/CFT Act. Therefore, it is proposed to remove the words or accommodation. 31. If reporting entities are aware of or have identified other minor or technical amendments that may be required to reduce ambiguity or ensure regulations can be properly implemented, we encourage you to submit those comments to us. Consumer credit exemption for non-finance businesses 32. In the AML/CFT (Exemptions) Regulations there is an exemption for non-finance businesses from obligations in respect of certain types of consumer credit. This exemption was designed to scope out short term self-funded consumer credit where it was provided by the retail institution who was supplying goods and services to consumers. It was anticipated this would exclude most of the retail sector, excepting those that provide substantial finance services or undertake quasi-banking activities Subsequent feedback from industry is that in the absence of a regulated definition of consumer, there is uncertainty about the scope of this exemption. Proposal 34. It is proposed to remove the reference to consumer in this exemption. 8 For competitive reasons, those entities should be treated equivalently to other financial institutions. 11

12 Comment 35. In the absence of a regulated definition, the definition of consumer is likely to be read in accordance with the Consumer Credit Contracts and Consumer Finance Act This definition may be problematic. It may require retailers to make a judgement about the purpose of the goods or services before credit is supplied. This creates uncertainty about a retailer s status as a reporting entity and is not desirable. 36. The exemption is already limited to non-finance businesses, where the credit is not provided under a credit contract or the provision of credit is under a credit contract that is incidental to the supply of goods or services. 37. We do not anticipate that the removal of the reference to consumer will have the effect of expanding this exemption to include other financial institutions that are clearly intended to be captured by the Act (such as independent finance companies providing consumer credit services). Record keeping exemptions in casinos 38. In the AML/CFT exemptions regulations, casinos are exempt from record keeping requirements in respect of five categories of transactions: Proposal the purchase of chips at the cashier of a casino below $6, the redemption of chips at the cashier of a casino below $6, the exchange of coins and purchase of tokens at the cashier of a casino below $6, the exchange of coins and redemption of tokens at the cashier of a casino below $6, the exchange of notes for notes at the cashier of a casino below $6, It is proposed to: Comment include a further category in the casino record keeping exemption, the purchase of chips at a gaming table clarify the language exchange of coins and exchange of notes for notes to ensure that it is explicit that these exemptions do not apply to foreign currency exchange transactions. 40. The exemption outlined in paragraph 38 above was justified on the basis that it was considered impractical to record the large volume of transactions that occur in casinos, including those that are undertaken during game-play. It was considered that compliance cost associated with the retention of these particular transaction records may outweigh the benefits. 12

13 41. One category of transaction, the purchase of chips at a gaming table, was unintentionally omitted from regulations. The rationale for exemption of this category of transactions is consistent with the current exemptions. 42. Additionally, the record keeping exemptions were never intended to apply to foreign currency exchange 9 or wire transfer services carried out by casinos. That would mean requirements associated with these activities in casinos were different to other types of reporting entities that provide the same services, which is not desirable. New policy matters Simplified CDD 43. The AML/CFT Act lists customers that reduced CDD measures can be taken in respect of (eg, publicly listed companies and government departments). Other types of customers can be included on this list through regulation. Proposal 44. It is proposed to include two additional types of customers in respect of which simplified CDD measures can be taken: Comment foreign publicly listed companies that are listed on a recognised overseas stock exchange that has sufficient disclosure requirements and that are listed in a country with sufficient anti-money laundering and countering financing of terrorism systems and measures in place reporting entities that are supervised or regulated under the New Zealand AML/CFT Act and that are licensed or regulated in accordance with the Insurance (Prudential Supervision) Act 2010, the Reserve Bank of New Zealand Act 1989 or the Non-bank Deposit Takers Bill. 45. Reduced CDD obligations lower compliance cost because less information is required about a customer (eg, address and beneficial ownership information is not required). 46. Foreign publicly listed companies are subject to disclosure requirements when they are listed on a stock exchange. Information about listed companies is transparent and publicly available. 47. Entities that have obligations under the AML/CFT Act will be subject to regulation and supervision for AML/CFT purposes, for example vetting procedures in respect of senior management. Simplified CDD measures will be permitted where reporting entities are also regulated in accordance with statute that holds entities to a sufficient fit and proper standard including the Insurance (Prudential Supervision) Act 2010, Reserve Bank of New Zealand Act 1989 and the Nonbank Deposit Takers Bill). 9 Foreign currency exchange; which is the exchange of one type of currency (e.g. New Zealand currency) for another type (e.g. Australian currency) 13

14 48. We invite comment from industry on the proposals to expand the application of simplified CDD. Exemption from beneficial ownership obligations for custodial account holders 49. The exemption from beneficial ownership obligations in Regulation 24 of the AML/CFT (Exemptions) Regulations 2011 was intended to ensure that where a customer that is a reporting entity or a person subject to the Financial Transactions Reporting Act 1996 (entity B) has a holding-type bank account through which multiple client funds flow frequently, the reporting entity (entity A) will not be required to collect and hold information about all of the clients of the customer. An example of this type of customer is a law firm that holds a trust account with a bank to manage funds belonging to the firm s clients. 50. Under Regulation 24, entity A would be able to rely on a written agreement with entity B that on request, beneficial ownership information will be provided. Proposal 51. The simplified CDD proposal for certain New Zealand reporting entities (outlined on page 13 of this document) may address some of the issues with meeting beneficial ownership obligations. This is because simplified CDD is proposed for certain domestic reporting entities (ie, entity B) so for those reporting entities, beneficial ownership obligations may no longer apply. 52. Another option is to extend the exemption under Regulation 24 of the AML/CFT (Exemptions) Regulations 2011 so that it applies to custodial accounts instead of trust accounts. Comment 53. If an account provided by entity A is held by entity B who is a person that is subject to the AML/CFT Act or the Financial Transactions Reporting Act 1996, then money laundering and terrorist financing risks should already be managed to some extent by entity B. 54. Industry has highlighted circumstances where there are issues with obtaining beneficial ownership information due to impracticality, disproportionate compliance cost and commercial sensitivity. Some circumstances do not appear to fall within the scope of the exemption under Regulation 24. This appears to be due to the reference to trust accounts. 55. We invite industry to indicate the preferred approach. If broadening the scope of the exemption in Regulation 24 as well as extending the application of simplified CDD is preferred, please provide us with specific examples that support exemption. 14

15 Circumstances in which CDD should be carried out 56. FATF Forty Recommendations state 10 that when a financial institution suspects that transactions relate to money laundering or terrorist financing (ML/TF), the institution should: seek to identify and verify the identity of the customer and the beneficial owner irrespective of any exemption or any designated threshold that might otherwise apply, and make a suspicious transaction report (STR). 57. Currently in the AML/CFT Act and regulations there is no explicit trigger for CDD to be carried out where there is a suspicion of ML/TF. However, the AML/CFT Act does contain regulation making powers which allow prescription of further circumstances where CDD must be carried out. 11 Proposal 58. It is proposed to regulate for CDD to be conducted where there is a suspicion of ML/TF, regardless of exemptions or thresholds that are referred to elsewhere in the AML/CFT Act and Regulations. 59. A reporting entity would not be required to conduct CDD if it believes that to do so would disclose, or is reasonably likely to disclose, the existence of an STR. This clarifies that there is no potential conflict with prohibition against tipping off customers to the existence of an STR under the Act. 12 This approach is also adopted in Canadian law This obligation will not affect entities that are excluded from the definition of reporting entity via Regulation 18 of the AML/CFT (Definitions) Regulations 2011 (which provides that an entity whose every relevant service is exempt from the Act is not a reporting entity). 61. In addition, reporting entities will not be required to obtain or verify any documents, data or information that has been previously obtained and verified for the purposes of carrying out CDD in accordance with the Act. Section 11(4) of the AML/CFT Act is clear in this respect. Comment 62. Under the AML/CFT Act a reporting entity must submit STRs where there are reasonable grounds to suspect a transaction is relevant to ML/TF. The benefit of the obligation to conduct CDD based on suspicion of ML/TF is that better quality CDD information would be provided in STRs to the Financial Intelligence Unit, New Zealand Police. This obligation would help to align the New Zealand AML/CFT regime with the international standards set out by the FATF. 10 Interpretive note to recommendation 10 of the revised FATF 40 recommendations 11 Sections 14(d) and 22(1)(e) AML/CFT Act. 12 Section 46(1)(c) AML/CFT Act. 13 See clause 53.1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, SOR/ (Canada). 15

16 63. There will be a relatively small amount of transactions in respect of which this obligation will arise. In respect of business relationships and occasional transactions, CDD will generally have already been conducted. 64. This proposal may however result in reporting entities taking additional steps where suspicion has arisen in relation to: pre-aml/cft commencement customers (in some situations) customers on whom CDD has never been conducted because of an exemption from CDD for a particular service transactions which are not occasional transactions (i.e. are below relevant transaction thresholds). 65. Australia, the United Kingdom and Canada have all included circumstances where suspicion arises as an explicit trigger for conducting CDD. 14 This requirement is not envisaged by the FATF as discretionary. The FATF, in Mutual Evaluations, has indicated that exemptions from CDD should not supersede this requirement. 66. In Canada, exemptions do supersede this requirement. However, they appear to be currently exploring extending the requirement to override any exemptions from general customer identification, record-keeping and reporting requirements. 15 Details of beneficiaries of international wire transfers 67. Under the AML/CFT Act, a reporting entity that is an ordering institution is not required to obtain information on the beneficiaries of international wire transfers. The revised FATF Recommendations have clarified that ordering institutions are expected to collect this information Additionally, the revisions clarify that reporting entities that are beneficiary institutions are required to identify and verify beneficiaries of international wire transfers. Proposal 69. It is proposed to include a requirement in regulations under section 27 for ordering institutions that conduct international wire transfers to collect (but not verify): the name of the beneficiary the beneficiary account number or unique transaction reference number. 14 Refer clause 15.9(2) of the Anti-Money Laundering and Counter-Terrorism Financing Rules Instrument 2007 (No. 1) incorporating amendments up to the Anti-Money Laundering and Counter- Terrorism Financing Rules Amendment Instrument 2011 (No. 7) (Australia), clause 7(1)(c) of The Money Laundering Regulations 2007 (UK), clause 53.1 of the Proceeds of Crime (Money Laundering) and Terrorist Financing Regulations, SOR/ (Canada) Refer to Recommendation 16 of the FATF Forty Recommendations. 16

17 70. It is further proposed to include into the definition of occasional transaction the receipt by a beneficiary institution of an international wire transfer over $1000. This will ensure that customer due diligence in accordance with the Act (including identity verification) is carried out on beneficiaries of wire transfers before funds are released. Comment 71. Wire transfers are classified as high ML/TF risk in the National Risk Assessment and in the top three typologies currently assessed as impacting the most on New Zealand Including requirements in regulations for beneficiary institutions to obtain information on the payee of an international wire transfer supports the provision of more detailed, useful information to the Financial Intelligence Unit, New Zealand Police. Including the obligations increases New Zealand s compliance with FATF standards. 73. We do not anticipate that either of these proposals will result in additional compliance costs for reporting entities. We expect that these requirements are generally consistent with current business practice. 74. We do however think it is important to codify these requirements to meet FATF s expectation that these requirements are held in legislation or are otherwise enforceable, and compliance is monitored accordingly. 75. We are aware that this creates different identification procedures for ordering and beneficiary transactions. While this is not ideal, it is unavoidable because of the way the Act is structured and where the regulation making power is located. We think in practice a common identification procedure can be implemented. To provide reporting entities with as much flexibility as possible to manage this, we intend that the current exemption in AML/CFT regulations for verification of address in respect of occasional transactions continues to apply here also National Risk Assessment 2010, New Zealand Police, page 15, Regulation 6 AML/CFT (Exemptions) Regulations

18 Stored value instruments Definition 76. The definition of stored value instruments is currently: Proposal a portable device that is capable of storing monetary value in a form that is not physical currency, regardless of whether the device is reloadable or able to be redeemed for cash; and includes any portable device whose value, or associated value, is transferable to a third party or able to be remitted; and any account or other arrangement associated with the value stored on the device; but does not include a credit card or debit card or other device in respect of which a person is required to conduct customer due diligence in accordance with the Act. 77. It is proposed to delete the words or other device in respect of which a person is required to conduct customer due diligence in accordance with the Act and more clearly exclude from the definition situations that are analogous to credit and debit facilities; where the device provides access to an account or arrangement where funds or value is held, and that is managed by a financial institution on behalf of the customer. Comment 78. The words in paragraph 75.2 above 19 were designed to distinguish between over the counter type products that may be purchased from a range of entities (including retailers, such as gift cards or vouchers sold by supermarkets) and instruments that are associated with an established business relationship with a financial institution or reporting entity. 79. A business relationship is defined in the AML/CFT Act as a business, professional, or commercial relationship between a reporting entity and a customer that has an element of duration or that is expected by the reporting entity, at the time when contact is established, to have an element of duration. 80. The FATF recommendations are clear that business relationships with financial institutions should be subject to the full range of AML/CFT requirements. 81. Low value instruments that were intended to be exempt from the Act include those commonly referred to as e-purse or e-money for example; reloadable stored value cards used on public transport services. 19 Clause 3(c) of Regulation 15 AML/CFT (Exemption) Regulations

19 82. However, customers can sometimes register these types of cards online and receive balance and transaction history details. Similarly, a card that is reloadable may require a customer to return to the same institution on multiple occasions to top up their instrument. It is unclear at what point these scenarios may indicate the existence of a business relationship which consequently casts ambiguity about the parameters of this exemption. 83. We propose that a more useful distinction may be between: stored value instruments where value is stored on the device, including any account or other arrangement associated with the value stored on the device (clearly captured by the definition) instruments that, like credit and debit cards, provide access to an account or arrangement where funds are held, and the account or arrangement is managed by a financial institution. 84. We invite feedback on the current definition and this proposal, particularly from reporting entities that are involved in these types of payment services. We would like to know whether there are any other types of instruments, devices, cards, programs, services or products that do not strictly fall within the current definition of stored value instrument, but are not debit or credit cards or other such cards that provide access to an account where funds are held. 85. We seek feedback on whether a definition of debit card would be useful and if so whether the Australian definition could be adopted: 20 (a) an article intended for use by a person in obtaining access to an account that is held by the person for the purpose of withdrawing or depositing cash or obtaining goods or services; or (b) an article that may be used as an article referred to in paragraph (a). 86. A definition of credit card is not proposed. The characteristics of a credit card for use in obtaining goods or services on credit are quite distinct from characteristics of a stored value instrument. Exemption from the AML/CFT Act 87. The AML/CFT Regulations set out an exemption for relevant services provided in respect of certain stored value instruments (SVIs). 21 As described above, the scope of the exemption is in part defined by relevant thresholds. To be exempt, the maximum possible value of a SVI at any one time must be less than: $1,000 if the SVI is redeemable for cash $5,000 if the SVI is not redeemable for cash. 88. SVIs with thresholds that exceed these amounts are currently captured by the AML/CFT Act by virtue of either: 20 Section 5 of the Australian Anti-Money Laundering and Countering Financing of Terrorism Act Regulation 15 AML/CFT (Exemption) Regulations

20 88.1. their issuance within the context of a business relationship regulation 15 of the AML/CFT (Definitions) Regulations which includes the issuing or provision of stored value instruments that have a maximum potential value at any one time of $1,000 (cash redeemable) or $5,000 (not cash redeemable) or above, within the definition of occasional transaction. 89. The Ministry of Justice has continued to consult with other relevant AML/CFT agencies and monitor international guidance on emerging risks associated with stored value instruments. A number of adjustments are now proposed. Proposal 90. It is proposed to retain these exemptions at current thresholds, but to introduce two additional measures to mitigate risks. These include narrowing the exemptions to: exclude instruments which have international remittance capability, in order to prevent unmonitored transfer of funds across borders via these instruments introduce further limits on the ability to reload or withdraw cash through: restricting the ability to reload an instrument so that a top-up or upload from an account or arrangement managed by a financial institution based outside of New Zealand is not permitted, and restricting cash withdrawal to a maximum of $500 per week; and/or restricting the total maximum value the instrument can be reloaded with, to $10, The restriction proposed in paragraph could be either time restricted (the aggregated value of reloads in any consecutive 12 month period) or it could affect the validity of an instrument (the instrument expires or becomes invalid after it has been reloaded to an aggregate value of $10,000). Feedback is sought from industry about the preferred approach. 92. Further, it is proposed to require reporting entities to carry out CDD where they increase value (reload) stored value instruments over $1000. This is consistent with Australian requirements and has the practical effect of deterring customers from structuring transactions to avoid identification thresholds, which is an indentified money laundering typology. Comment 93. The FATF has published a number of typology reports on the potential misuse of new payment methods including stored value instruments. In the National Risk 20

21 Assessment, the New Zealand Police noted the use of prepaid cards as a developing typology with high ML/TF risk International guidance on managing risks associated with stored value instruments continues to develop in response to the evolving capabilities of the instruments. Following publication of the AML/CFT regulations in June 2011, the Wolfsberg Group of International Financial Institutions published further guidance for financial institutions on managing risks. 23 Two key risk characteristics identified by the Wolfsberg guidance are devices that facilitate international remittance and access to the global ATM network. The proposals above are designed to mitigate these risks. 95. Stored value instruments can have similar capabilities as other services such as wire transfers. While permissive of a low value threshold under which obligations may not apply, FATF recommendations are clear that wire transfers should be subject to the full range of AML/CFT measures when thresholds are exceeded; whether via a single operation or through a series of transactions that appear to be linked. FATF recommendations are also clear that when a credit, debit or pre paid card is used as a payment system to effect person to person transfers the transaction should be subject to AML/CFT measures. 96. The proposal to exclude SVIs with international remittance capabilities from the SVI exemptions below the applicable thresholds is not intended to affect in any way the exemption in Regulation 10 of the AML/CFT (Exemptions) Regulations 2011 for certain remittance card facilities. Exemption from the Financial Transactions Reporting Act The existing provisions in the Financial Transactions Reporting Act 1996 require CDD and record keeping obligations that will not apply to low value stored value instruments upon commencement of the AML/CFT Act due to the exemption in the AML/CFT Regulations promulgated in June The Ministry of Justice is interested in feedback on the benefits for industry of an exemption for stored value instruments from Financial Transactions Reporting Act 1996 obligations, that is fundamentally equivalent to the exemption under the AML/CFT Regulations promulgated in June This would effectively bring the AML/CFT exemption for low value stored value instruments forward several months. 22 National Risk Assessment 2010, New Zealand Police, page Wolfsberg Guidance on Prepaid and Stored Value Cards. 21

22 Exemption for auctioneers, internet auction providers and other retail sector businesses 99. In the regulations promulgated in June 2011, pawnbrokers were exempted from phase one of the AML/CFT regime. Due to the close connection of pawn-broking to the retail sector, and potential overlap in regulation of CDD and reporting requirements under the Secondhand Dealers and Pawnbrokers Act 2004, it was preferred to consider coverage in the second phase of reform. Proposal 100. Due to the close connection to the retail sector and potential overlap in regulation of CDD in other statute, it is proposed to exempt entities that carry out auctions within the meaning of clause 65 of the Consumer Law Reform Bill; a process in which property of any kind (including goods, services, and interests in land) is offered for sale by an auctioneer on behalf of a vendor, and bids for the property are placed with the auctioneer in real time, whether in person, by telephone, via the Internet, or by any other means; and the property is sold when the auctioneer so indicates It is also proposed to exempt internet auction providers that carry out internet based auctions. This includes internet auctions that provide that any contract of sale resulting from the process is a contract directly between the winner of the bidding and the seller of the property These activities will be considered in the second phase of reform. Comment 103. Auctioneers are currently regulated under the Auctioneers Act The Consumer Law Reform Bill which received its first reading in February 2012 intends to (amongst other things) replace the Auctioneers Act. The Consumer Law Reform Bill requires auctioneers to identify their customers Internet auction providers are regulated under the Second-hand Dealers and Pawnbrokers Act Internet auction providers are required to keep records including identification information about their customers Further consideration is currently being given as to whether other entities that carry out retail activities that involve transferring money or value on behalf of a customer (such as selling goods on behalf of others) should be covered by the AML/CFT Act at this time We invite comment from industry on the proposed exemption. We also invite comment from other entities that are closely connected to the retail sector and transfer money or value for, or on behalf of, a customer. 22

23 Appendix One Annual reporting form Contact details 1 Reporting entity name : FSPR Number : Company Name : Company Number/Charity Number/etc. : Trading Name(s) (if different from Company Name) Physical address Street Name and Number; Suburb/Town: City: Postcode: Postal address (if different from physical address) Street Name and Number/ PO Box: Suburb/Town: City: Postcode: AML/CFT Compliance Officer (full name): AML/CFT Contact Telephone Number (if available): AML/CFT address (if available): Entity Website (if available): Organisation Structure 2 Is your reporting entity a member of a Designated Business Group (DBG)? Yes No 3 3a Is your reporting entity a branch or subsidiary of an offshore parent? No Yes, Branch Yes, Subsidiary 3b In what country is your reporting entity s largest owner based? (or location of parent s head office, if applicable) Country: 23

24 3c 3d 3e 3f Do you have branches in New Zealand? (If yes, state the number of physical branch locations (exclude agent s office locations), or nil). Do you have New Zealand incorporated subsidiaries? (If yes, state the number of subsidiaries, or nil). Do you have branches located or incorporated outside New Zealand? (If yes, state the number of physical branch locations, or nil). Do you have subsidiaries located or incorporated outside New Zealand? If yes, state the number of subsidiaries, or nil). Number: Number: Number: Number: Products and Services 4 What products and services does your reporting entity offer? (For each product/service (below) that you offer, state the average monthly number and NZD value of transactions settled over your most recent full financial year. Enter nil or number). Domestic Average monthly number of transactions Domestic Account and Deposit Taking Services $ Domestic Lending (other than residential mortgages and car finance) $ Residential Mortgage lending $ Motor vehicle finance $ Debt Instrument/Bonds $ Finance & Leasing $ Government and Specialist Finance & leasing $ Domestic Wire Transfer/Electronic Funds Transfer Services $ International International Wire Transfer/Electronic Funds Transfer Services $ Average monthly NZD value of transactions 24

25 International mobile telephone transfer services Forex trading, multi-currency and foreign currency accounts $ Currency/Money Exchange Services $ Issuing Traveller s Cheques $ Cashing Traveller s Cheques $ International correspondent banking $ Trade Finance and related bonds/guarantees, forfeiting, export/import finance $ Casinos Conducting money transfers $ Foreign currency exchange $ Foreign holding account $ Credit accounts/markers $ Stored value services $ Debit card cashing facilities $ Cheque cashing $ Safety deposit boxes $ Trust and company service providers (TCSPs) Company formation $ Trust formation $ Provider of office services (including registered address, virtual office, serviced offices, phone/mail forwarding) Nominee director/company secretary services $ Nominee shareholder services $ $ 25