This week the Ministry of Justice released for consultation its "AML/CFT Early Regulatory Package", which includes an exposure draft of proposed regulations. The draft regulations are intended to implement a number of the recommendations which were made in the Ministry's 2022 report on its review of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009.
That the changes are proposed to be made by way of regulation, rather than amendment to the AML/CFT Act, belies the scale of the proposed changes. They include major changes to the way New Zealand's AML/CFT regime operates, both in terms of its scope (who is required to comply) and obligations (what reporting entities are required to do). Collectively, these proposals represent the biggest changes to the regime since the Phase 2 reforms in 2018/2019, and the biggest changes for Phase 1 entities since the AML/CFT Act came into force in 2013.
Submissions close on Friday 14 April 2023.
Background
In November last year the Ministry's statutory review report on the AML/CFT Act was released. The report contained 215 recommendations in total, many of which were flagged as being appropriate for immediate implementation through an "early regulatory package". These are the subject of the draft regulations being consulted on now. The remainder of the recommendations either require further consultation and policy work before being progressed or will need to be implemented through legislative change (amendments to the AML/CFT Act itself).
What's changing?
As foreshadowed by the Justice Minister in a press release last year, the draft regulations include:
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a complete exemption from the address verification requirement for all reporting entities, except for when enhanced customer due diligence applies. Reporting entities will, however, need to verify that an address provided by a customer is a genuine address;
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an extension of the timeframe for submitting Prescribed Transaction Reports from 10 to 20 working days, but only where there is an issue related to the use of an automated system; and
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an exemption for charitable entities providing loans of less than $6,000.
But the draft regulations go much further than this and propose significant changes across a wide range of areas. We have summarised some of the key proposals below and recommend that you review the full regulatory package in detail to assess any potential impacts on your business.
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"Beneficial owner" definition: The much-maligned definition of "beneficial owner" will be clarified via regulation to specifically include a person with ultimate ownership or control of the customer, whether directly or indirectly, and will only apply to a "person on whose behalf a transaction is conducted" ("POWBATIC") that meets this threshold.
This proposed clarification has led to the proposed removal of the existing exemption in respect of trust accounts or client funds accounts. The Ministry is also seeking submissions on whether the proposed regulations necessitate any changes to the existing class exemptions for managing intermediaries. The trust account and managing intermediary exemptions are critical features of the existing AML/CFT regime so extreme care will need to be taken to ensure there are no unintended consequences in the proposed changes.
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Definition of "customer": The draft regulations include provisions seeking to clarify who is a reporting entity's "customer" in certain situations (eg for trusts, companies in liquidation, and real estate transactions).
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Risk-rating requirement: Reporting entities will be specifically required to risk-rate new customers when conducting CDD, and to consider and update risk ratings as part of ongoing customer due diligence and account monitoring.
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Relaxation of enhanced CDD on trusts: When conducting enhanced CDD in relation to a trust, a reporting entity will not always be required to verify (but will still need to obtain) information relating to the source of funds or source of wealth of the trust. The precise circumstances in which this relaxation will apply are yet to be defined.
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Additional enhanced CDD requirements: Reporting entities will need to implement enhanced CDD measures when establishing, and during, a business relationship as required to mitigate the risks of money laundering and the financing of terrorism. The Draft Regulations contain a list of potential additional measures that reporting entities may apply.
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CDD required where grounds for suspicion: Reporting entities will need to carry out CDD outside of a business relationship and where there is no occasional transaction, where there may be grounds to report a suspicious activity.
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Additional obligations for relying on another person to conduct CDD: Reporting entities relying on another reporting entity, or person in another country, to conduct CDD under s 33 of the AML/CFT Act will need to take steps to satisfy itself that the entity being relied on has adequate record keeping measures in place and will make verification information available within the required timeframe.
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Senior manager delegation: A senior manager of a customer whose identity has been obtained and verified in accordance with the AML/CFT Act may delegate their authority to employees to act on behalf of the customer by electronic means, subject to any conditions or requirements necessary to manage risks of money laundering and the financing of terrorism.
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Stored value instruments: The definition of stored value instruments will be amended to ensure that the existing exemption is technology neutral and capture electronic or digital forms of stored value. The exemption will also be amended to ensure that bulk sales of stored value instruments are not inadvertently captured by the AML/CFT Act where each instrument appears to be for a different recipient.
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Virtual assets: The AML/CFT Act is currently technology neutral and does not contain a definition of virtual assets, or virtual asset service providers. Regulations are proposed that would introduce definitions of both virtual assets and virtual asset service providers, and to capture occasional transactions involving virtual assets. Virtual asset transfers will also be deemed to be international wire transfers unless the reporting entity is satisfied otherwise, and virtual asset transactions at or above $1,000 will be deemed occasional transactions.
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Money or value transfer services: Regulations will prescribe that an agent of an operator of a money or value transfer service that is carrying out training, monitoring, or other assurance activities in relation to a sub-agent of the operation will not be providing a relevant service. Operators of money or value transfer services will need to comply with all requirements relating to wire transfers.
This list is not comprehensive – in total 71 changes are proposed, some of which relate specifically to (for example) pawnbrokers, real estate agents, lawyers and non-court appointed liquidators.
Timing for implementation
Consultation on the Draft Regulations is open until 14 April 2023.
The majority of the amendments are expected to come into force on 31 July 2023 and the rest of the amendments are expected to come into force on 1 June 2024.
All existing reporting entities (and entities which rely on current exemptions from the AML/CFT Act) should carefully review the draft regulations and consider the potential impact on their business – all reporting entities will be affected in some way.
If you would like to discuss any aspect of the draft regulations or its impact in further detail, please get in touch with one of our experts.