Minister of Justice releases report on AML/CFT Act review

The Minister of Justice, Hon Kiritapu Allan, has released the Ministry of Justice's (MoJ) report on the review of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act).

The statutory review (required by section 156A(3)) assessed the performance of the AML/CFT Act and whether any amendments should be made. The review considered responses from industry consultation and the recommendations from the Financial Action Task Force's Mutual Evaluation Report 2021 of New Zealand's AML/CFT regime.

What are the important points?

Overall, the review found that the AML/CFT Act provides for a generally sound regulatory regime that is somewhat effective at detecting and deterring money laundering and terrorism financing. However, the report contains 215 recommendations for change.

Some of the highlights include:

1. amending the AML/CFT Act's purposes to explicitly reference the implementation of a risk-based approach (Recommendation 6);
2. issuing further regulatory exemptions for low-risk products, businesses and transactions, and greater use of simplified CDD (Recommendation 15);
3. creating a centralised source of AML/CFT information to consolidate all the information from the Government entities involved in the administration of the AML/CFT Act (Recommendation 17);
4. subject to further consultation, establishing a hybrid public/private funding model to partially support the AML/CFT regime (Recommendation 29);
5. considering amending the territorial scope of the AML/CFT Act, with the initially preferred approach being to clarify that offshore businesses that provide captured activities to or in New Zealand have the same obligations as businesses based in New Zealand (Recommendation 88);
6. subject to further engagement, establishing a licensing framework for high-risk sectors such as remitters, virtual asset service providers and trust and company service providers (Recommendation 92);
7. considering whether further regulation of auditors is required (Recommendation 94);
8. reviewing whether mandatory enhanced customer due diligence (CDD) remains necessary for all customers that are trusts or other vehicles for holding personal assets (Recommendation 125);
9. identifying further situations where simplified CDD is sufficient (Recommendation 131);
10. supporting the implementation of financial sanctions (Recommendation 158); and
11. analysing further circumstances in which duplication of CDD can be reduced (Recommendation 175).

The Minister has already announced several changes to the AML/CFT Act. These are:

1. relaxing the requirement on businesses to verify the address of most customers;
2. extending the timeframe for businesses to submit Prescribed Transactions Reports; and
3. exempting registered charities from AML/CFT obligations when they are providing small loans.

Implications for the funds management industry

The funds management industry was not the focus of the review. However, many of the report's recommendations, such as adopting a risk-based approach to the AML/CFT Act and the incoming relaxation of address verification requirements will be welcomed by many in the industry.

The report also recommended reviewing the exemption for certain workplace savings schemes contained in regulation 20A. Regulation 20A exempts workplace savings schemes under which member contributions are determined as a percentage of salary or wages, as provided for in the scheme's trust deed. The report stated:

“[MoJ's] preliminary analysis highlights that voluntary member contribution carry some money laundering risk given that some voluntary contributions are not locked in and members can request payments from their voluntary account at any time.”

The report noted that such review could result in regulation 20A being tightened if the risks associated with exempted workplace savings schemes are found to be higher than when the exemption was first issued.

In our experience, it is unusual for members to have early access to voluntary contributions. These are normally only payable when the member is entitled to a benefit from the scheme.

Our view

We support the underlying theme in the report about better reflecting the risk-based approach in the AML/CFT Act and its implementation. The report's acknowledgement of the balancing act between the risk-based approach, prescriptive guidance and the AML/CFT supervisor's interpretative approach will also be welcome. While the devil will be in the detail, and there will be a lot of work to come, we are hopeful that these aspects signal a move towards a more efficient and effective implementation of the AML/CFT Act. We also support the initial steps taken by the Minister to relax the AML/CFT obligations for some businesses and charities.

We welcome the MoJ's consultative approach to conducting its review, with many of the report's 215 recommendations requiring further engagement with industry before deciding on and implementing changes.

What's next?

In the short term, we expect draft regulations implementing the Minister's initial changes.

The Minister's press release stated that “further changes will address areas of known risk or vulnerabilities, improving efficiencies and reducing compliance costs, and improving compliance with international money laundering standards.” We expect these further changes to be consulted on and implemented over the longer term.

Please get in touch if you have any questions regarding the review or the AML/CFT regime more generally.