ANTI MONEY LAUNDERING AND COUNTERING FINANCING OF TERRORISM BILL RELEASED IN JUNE 2009

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1 1 3 AUG 2009 FORE[GN AFFAIRS, DEFENCE AND TRADE COMMITTEE Australian Finance Conference Level 7, 34 Hunter Street, Sydney, GPO Box 1595, Sydney 2001 ABN Telephone: (02) _7J. Facsimile: (02) e mail: afc@afe.asn.au ET :D \ SED1 RELEASE'q 2089~ ~ RE 13 August N i 2 4 AUG 2 4 AUG 2089 FO~a,~,,l A~? * 7fij FOREIGN AFFANS l Clerk of the Committee Foreign Affairs, Defence and Trade Parliamentary Select Committee New Zealand Parliament NEW ZEALAND By e mail to: Select.Committees@.parliament.qov.nz Dear Sir/Madam, ANTI MONEY LAUNDERING AND COUNTERING FINANCING OF TERRORISM BILL RELEASED IN JUNE 2009 Thank you for the opportunity to provide comments to the Select Committee on the Anti Money Laundering and Countering Financing of Terrorism Bill. A submission on behalf of the Australian Finance Conference (AFC) and its affiliated bodies the Australian Equipment Lessors Association (AELA) and the Institute for Factors and Discounters (IFD) is attached. The AFC and AELA represent more than 120 financier organisations. The IFD represents 20 organisations involved in providing debt factoring and invoice discounting services. The AFC made a submission to the Ministry of Justice in October 2008 in relation to the Consultation Draft of the Bill. The attached submission reflects many of the issues raised in our earlier submission. If you have any questions on any aspect of our comments, please do not hesitate to contact me by to ron@afc.asn.au or our Corporate Lawyer Catherine Shand by to catherine@ afc.asn.au. Kind Regards, Yours truly, Ron Hardaker Executive Director Incorporated in NS W as Australian Finance Conference Limited ACN

2 S Australian Finance Conference Level 7, 34 Hunter Street, Sydney, GPO Box 1595, Sydney 2001 ABN Telephone: (02) Facsimile: (02) e mail: afc@afc.asn,au 13 August 2009 ANTI MONEY LAUNDERING AND COUNTERING FINANCING OF TERRORISM BILL RELEASED IN JUNE EXECUTIVE SUMMARY This submission is made in respect of the Anti Money Laundering and Countering Financing of Terrorism Bill (the Bill) which was introduced to the New Zealand Parliament in June The Australian Finance Conference (AFC) made a submission in October 2008 in respect of the consultation draft of the Bill. This submission reflects that earlier submission and covers additional areas of concern for our Members arising out of the Bill. The AFC, AELA and the IFD support the purpose of the Bill, being to enhance New Zealand's anti money laundering and counter terrorism financing framework and to assure the robustness of the New Zealand financial system. However we are concerned to ensure that the obligations imposed on financiers under the Bill do not exceed New Zealand's international obligations or exceed what is necessary to allow financial institutions to manage the money laundering and terrorism financing risks of their customers and services. We welcome the risk based approach which is accommodated in Part 2 in relation to customer due diligence and account monitoring. However we submit that guidance should be provided to assist financiers to determine the level of the money laundering and terrorism financing risk of their customers and services. As noted in our earlier submission, the New Zealand finance industry operates ina competitive environment which is already subject to substantial regulation. The industry uses a variety of methods to identify and to carry out ongoing due diligence of its customers, as required under current laws and as appropriate to manage credit and operational risks. We are of the view that any tightening of the anti money laundering and counter terrorism financing laws should: be appropriate to the New Zealand market; take account of the sound commercial practices already in place; support real time electronic verification of customer information such as names, addresses and dates of birth through access to Government data bases; provide certainty and flexibility; Incorporated in NSW as Australian Finance Conference Limited ACN

3 take account of current laws and practices in comparable jurisdictions such as Australia, the United Kingdom and the United States; be consistent with, but not exceed, New Zealand's obligations under the FATF Recommendations; and be risk based to avoid imposing a regulatory burden which is disproportionate to the money laundering and terrorism financing risks presented by particular financial services and customers. 2. BACKGROUND TO THIS SUBMISSION The Australian Finance Conference is an Australian based finance industry association, established in 1958 with a diverse membership along financier functional rather than institutional lines. Membership includes traditional finance companies, banks, building societies, leasing companies and general financiers. Our associate members include receivables management companies and credit reporting agencies. This submission is made on behalf of Members of the AFC and its affiliated bodies the Australian Equipment Lessors Association (AELA) and the Institute for Factors and Discounters (IFD). The AFC and AELA represent more than 120 financier organisations. The IFD represents 20 organisations involved in providing debt factoring and invoice discounting services. Appendix A sets out a broad description of the main financial services offered by our Members. Not all of these services are provided by all Members in New Zealand, but those who carry on business in New Zealand are likely to be "financial institutions" under the Bill. Some of our Members provide services which are currently subject to the requirements of the Financial Transactions Reporting Act (FTRA), while others may be newly regulated under the proposed laws. The new laws will therefore have a wide ranging impact on our Members' operations in New Zealand. Some of our Members are also members of the New Zealand Financial Services Federation, which we understand is making a submission in relation to the Bill; our comments are consistent with the NZFSF submission. 3. CLAUSE 2 COMMENCEMENT The Bill does not refer to a proposed start date for the new regime. Some of the financial activities carries on by our Members may not be covered by the FTRA. All of our Members, irrespective of whether they are currently subject to the FTRA requirements, will need to review their existing systems, procedures and documents, implement the necessary changes and carry out staff training. Irt addition, some Members use the services of third parties such as brokers, dealers and suppliers to source business and administer finance products. Some of these third parties may require training or may need to be formally appointed to carry out customer identification procedures or to provide other services covered by the Bill. For these reasons, we are of the view that a transition period of two years should be allowed.

4 It is also submitted that draft Regulations and Guidelines should be circulated for consultation as soon as practicable to allow financiers an appropriate time to prepare for implementation of the necessary changes needed to achieve compliance with the new requirements. 4. CLAUSE 4 DEFINITION OF "FACILITY" AND THRESHOLDS Other than in respect of some transactions involving cash and wire transfers, the Bill appears to apply to a financial activity irrespective of the value of the transaction or the money laundering/terrorism financing risk involved. Many financiers regularly provide services with a comparatively low monetary value and which are likely to present a low money laundering or terrorism financing risk. Examples include small business and consumer loans which finance the purchase of used vehicles, personal computers and whitegoods. These loans are likely to be advanced in a single drawdown, require payment by direct debit from a bank account and to have no facility for re draws or payments by cash. It is submitted that the Bill should include a monetary threshold below which a service will be exempt from at least some of the new requirements, such as initial customer identification. Such an exemption could include safeguards against a customer avoiding the application of the laws by entering into a number of transactions which are just below the specified threshold. It would also not apply to the obligation to report suspicious matters under Subpart 2 of Part CLAUSE 4 DEFINITION OF "FINANCIAL INSTITUTION" The definition of "financial institution" reflects the Financial Action Task Force definition. In relation to financial leasing and the exclusion of financial leasing arrangements for consumer products, the equivalent Australian provisions have caused some uncertainty in the Australian equipment and motor vehicle financing industries. It is submitted that to ensure certainty of interpretation, the Bill should include definitions of the terms "financial leasing", "financial leasing arrangements" and "consumer products". 6. CLAUSE 11 VERIFICATION OF INFORMATION We support a regime that is "technology neutral" and that allows financiers the option of using either face to face, non face to face, third party or electronic verification procedures. Many of our Members have little or no direct contact with customers and deal with them on a non face to face basis and/or through third parties throughout the life of a service. The extent of customer identification undertaken depends on commercial factors such as the degree to which a financier needs to know its customer, fraud prevention, legal requirements (such as whether a service is covered by the FTRA) and the accessibility of independent data sources. Clause 11 provides for verification to be based on documents, data or information from a reliable and independent source. In some cases, the accuracy of customer identification procedures may be impeded by restrictions on access to Government databases which are the primary records of information such as passport and driver licence numbers, dates of birth and address details which can be used to verify

5 customer identification information. We submit that in order to facilitate the verification of customer information and subject to appropriate constraints, Government databases should be accessible to reporting entities and to approved third parties, such as information brokers. 7. CLAUSES 147, 148, 151 AND 153 EXEMPTIONS We welcome the provisions which allow for exemptions by way of Regulation or by the Minister. Based on our experience with the Australian Anti Money Laundering and Counter Terrorism Financing Act, some financial services present a very low money laundering/terrorism financing risk compared to the cost for financiers and their customers of implementing and maintaining AML/CTF compliance programs. The process of obtaining exemptions by way of Regulation or through the Minister may be somewhat inflexible. We submit that it would be in the interests of efficient administration of the Act for the relevant AML/CFT supervisor to have the power to grant exemptions. The Australian experience is that, during the transitional period of the AML/CTF laws, the need for some exemptions has been identified while financial institutions are implementing their AML/CTF programs. The Australian regulator AUSTRAC has the power to grant many types of exemptions and has administered this process by reference to the aim.s of the Australian Act and in consultation with industry. This has been particularly useful for fairly narrow product based or entity based exemptions. An example of an area where AUSTRAC has worked with the finance industry is in relation to insurance premium loans. Neither the Recommendations of the Financial Action Task Force nor the Bill refer to general insurance products, but a loan provided to finance the cost of general insurance premiums appear to be a financial activity covered by the Bill. Most insurance premium loans are made in a single advance to finance annual policy premiums. Loan proceeds are generally paid directly to the insurer or through an intermediary (such as an insurance broker) and cannot be accessed by the borrower/insured. In the unusual event of a policy being cancelled before the end of the loan and a refund being due to the customer/borrower, the insurer pays any refunded balance of premium to the financier or intermediary to apply towards the outstanding loan amount and other costs. Any balance due to the borrower would be comparatively small, making this an unlikely and inefficient way to launder money. We note the proposals for exemptions outlined in the Background Information Document issued by the Ministry of Justice in July At the appropriate time, we would like to discuss exemptions for low risk financial services such as insurance premium funding, equipment finance and low value consumer loans. = CLAUSES RELATED ENTITIES AND DESIGNATED BUSINESS GROUPS Many of our Members are part of corporate groups. We welcome provisions that allow designated business groups to rely on customer due diligence carried out by other members of the group. It is submitted that these provisions should extend to other obligations, including compliance reporting to the relevant AML/CTF supervisor, record keeping and suspicious transaction reporting. Clause 29 (1)(a)

6 refers to a member of a designated business group adopting parts of an AML/CFT program of another member of the group that relates to record keeping, account monitoring, ongoing customer due diligence and annual reporting, subject to any conditions prescribed by regulations. It is not clear whether this allows one member of a designated business group to actually carry out these activities on the other's behalf: It is submitted that the Bill should make allowance for designated services provided by a company to its related group entities. This would avoid the need for related companies to carry out customer identification procedures in respect of each other and to monitor each other's transactions. It is also submitted that the prohibition against disciosure of suspicious transaction reports should recognise that within corporate groups, it may be necessary to involve entities and individuals other than the reporting entity and its employees when investigating and reporting suspicious matters. 9. CLAUSES REGULATORS Clause 127 establishes three different regulators depending on the activities of the reporting entity. These are as follows: (a) for banks, life insurers and non bank deposit takers, the Reserve Bank of New Zealand; (b) for issuers of securities, trustee companies, futures dealers, collective investment schemes, brokers and financial advisers, the Securities Commission; and (c) for casinos, non deposit taking lenders (which might include credit card providers), money changers and other reporting entities not covered by paragraph (a) or (b), the Department of Internal Affairs. Clause 127 provides that if the products or services provided by a reporting entity are covered by more than one AML/CFT supervisor, the AML/CFT supervisors may agree on the AML/CFT supervisor for that reporting entity. If the supervisors cannot agree, then an AML/CFT co ordination committee must appoint the supervisor for that entity. Some of our Members may provide services covered by more than one supervisor. This may cause uncertainty about interpretation of the requirements imposed by the various supervisors for different categories of entity and difficulty in achieving consistent interpretation of many of the detailed requirements of the legislation. We submit that a single regulator/supervisor should be established for the financial services industry. The need for this may be reduced if the AML/CTF co ordination committee referred to in section 144 has an active role in interpreting and administering the Act. 10. CLAUSE 23 POLITICALLY EXPOSED PERSONS We are concerned about the potentially far reaching implications of the provisions regarding politically exposed persons, in particular because the definition includes family members of office holders and joint owners of property. This is of concern

7 due to the requirement to carry out enhanced due diligence in respect of such persons. It is submitted that the Government should provide the facility for financiers to find out which individuals are covered by these provisions. 11. CLAUSES RECORD KEEPING The record keeping obligations in Part 2 are not risk based. This could result in retention of substantial volumes of paper or electronic records, which will have no value in determining whether a money laundering or terrorism financing offence has or may take place. We submit that the record keeping provisions should allow reporting entities to take a risk based approach to the retention of records, documents and information. It is also submitted that the law should permit electronic retention of records. 12. CONCLUSION We look forward to participating in continued consultation in relation to the Anti Money Laundering and Countering Financing of Terrorism Bill.

8 APPENDIX A EXAMPLES OF PRODUCTS OFFERED BY MEMBERS OF THE AUSTRALIAN FINANCE CONFERENCE, THE AUSTRALIAN EQUIPMENT LESSORS ASSOCIATION AND THE INSTITUTE FOR FACTORS AND DISCOUNTERS A. INVESTMENT PRODUCTS 1. Debentures and other money market products 2. Term and at call deposit accounts 3. Cheque accounts 4. Cash management trust accounts B. CONSUMER CREDIT PRODUCTS 1. Credit cards 2. Loans and lines of credit secured by consumer mortgages over real property 3. Consumer equipment mortgages and chattel mortgages 4. Consumer leases 5. Personal loans COMMERCIAL CREDIT PRODUCTS Commercial equipment mortgages and chattel mortgages Commercial loan and overdraft facilities Credit cards Commercial equipment leases Commercial hire purchase Novated leases Fleet leasing Floor plan and bailment arrangements Insurance premium financing Debt factoring and invoice discounting * Note: Not all of these products may be currently offered by all Members in New Zealand