Initial Briefing on Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill April 2017.

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1 Initial Briefing on Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill April Information requested by the Law and Order Select Committee The Committee requested that the advisers provide the following further information, either in follow-up advice or the departmental report: 1. the cost-benefit analysis conducted by the government on compliance costs, including information on the respective costs to different sectors, particularly real estate agents and lawyers; 2. a summary of the consultation workshops held by the government during preparation of the bill, and who participated in them; and 3. details of the changes made between the exposure draft released in December 2016, and the Bill as introduced to the House. The information below provides responses to the requests made by the Committee.

2 Overview of AML/CFT workshops by location, audience and numbers Date Location Audience Number 14 December 2016 Hamilton Designated business group/reliance group including: 19 6 lawyers 5 accountants 5 real estate agents 3 conveyancers 15 December Auckland Real estate transactional group including: real estate agents 6 lawyers 19 December Dunedin Real estate transactional group including: lawyers 4 real estate agents. 24 January 2017 Auckland High value dealer group including: 4 car dealers 8 2 boat dealers 1 auctioneer 1 jeweller 25 January 2017 Wellington High value dealer group including: 3 car dealers 6 3 jewellers Provided by Litmus

3 Details of the changes made between the exposure draft released in December 2016, and the Bill, as it was introduced to the House. A number of changes were made to the exposure draft Bill in response to submissions from the public. The table below outlines these changes and why they have been made. Topic Implementation period for Phase II sectors Supervision Model Changes to the exposure draft in the current Bill Changes were made to the commencement dates, which will be set by Order in Council: The lead-in period for lawyers and conveyancers has been extended to no later than 12 months. The lead-in period for accountants has been extended to no later than 15 months. The implementation time-frame for the NZ Racing Board has been extended from 18 to 24 months. Changes were made that would enable supervision of Phase II sectors to be transferred to another agency by regulation. The change would maintain the position of having a multi-agency model and establish the Department of Internal Affairs as the supervisor for all Phase II sectors. This will allow a flexible approach to transferring supervisory functions to another agency should this be considered appropriate. Coverage of lawyers and conveyancers Legal professional privilege Minor technical changes were made to the definition of Designated Non-Financial Business or Profession 1 to provide more clarity on the types of businesses that have AML/CFT obligations. One example of this was changing the definition to include a law firm that participates in specific financial activities, rather than a lawyer that does the same. This was intended to clarify for the legal sector that the firm, rather than the individual, is responsible for meeting their AML/CFT obligations. Changes were made the legal professional privilege provisions to make it consistent with the scope of privilege as set out in the Evidence Act and Search and Surveillance Act. The changes clarify that privilege will not apply if there is a prima facie case that the information is being used for a dishonest purpose or to enable or aid the commission of an offence. The intention of this change is to remove the ability for lawyers to claim privilege in every situation where they should be making reports of suspicious activity. 1 Designated Non-Financial Business or Profession means: a law firm, a conveyancing practitioner, an incorporated conveyancing firm, an accounting practice, a real estate agent, or a trust and company service provider who, in the ordinary course of business, participates in any of the activities listed within the definition.

4 Topic Coverage of accountants Coverage of real estate agents Coverage of gambling service providers Information sharing Simplified due diligence Changes to the exposure draft in the current Bill Minor technical changes were made to the definition of Designated Non-Financial Business or Profession to provide more clarity on who has AML/CFT obligations. One example of this was changing the definition to include an accounting practise that participates in specific financial activities, rather than an accountant that does the same. This was intended to clarify for the sector that the accounting practice is responsible for meeting their AML/CFT obligations, rather than the individual. Changes were made to specify that agents must conduct customer due diligence, 2 and that the timing of this will be set in regulations. The intention is to allow more time for the Government to work with the sector, in order to identify the most effective point in the real estate transaction process to conduct customer due diligence. For other sectors, this is normally done at the beginning of a customer relationship. However, the real estate transaction process is unique and very complex (e.g. The beneficial owner of the purchaser or name on a lease may change just before settlement. If CDD is conducted too early, it may need to be done again later in the process to meet the standards set in the Act). Minor changes were made to exclude class 4 gambling. This will ensure the New Zealand Racing Board only has obligations with respect to its accounts, betting vouchers and large cash deposits. The intention of this is to cover the higher-risk activities and to clarify that the legislation would not be covering other gambling activities such as operating pokies machines. Changes were made to this section that sets out the situations where information can be shared between Police, Customs and an AML/CFT supervisor. Changes have been made so that informationsharing under this provision can only be conducted for law enforcement or regulatory purposes, rather than for the effective administration of the AML/CFT regime. Furthermore, the disclosing agency needs to be satisfied that the other agency/regulator has a proper interest in receiving the information. This approach provides more certainty on when information can be shared. Minor technical changes were made to the circumstances in which simplified customer due diligence applies. 3 This will result in lower compliance costs when dealing with these entities that have a demonstrably low risk profile. This is consistent with international recommendations made by the Financial Action Task Force. 4 2 Customer Due Diligence includes requesting identification, verifying identification, and carrying out other checks on a customer in proportion to the risk the customer poses. 3 Simplified customer due diligence involves a reduced amount of checks on a customer, because the customer is identified by the legislation as lower-risk than other reporting entities. 4 FATF is an inter-governmental forum of technical experts on AML/CFT.

5 Additional Information for Select Committee The following provides a summary to accompany the cost/benefit analysis report which is attached. At the end of this note is a summary timeline of when each piece of analysis was undertaken. Compliance Cost Analysis Compliance cost analysis looks at the cost each Phase 2 sector is likely to face in implementing and complying on an annual basis. It is a financial/accounting based methodology that considers set-up and annual on-going costs as if they were all borne by business at the same time. In reality this would not happen. A short outline of the approach and the results are set out below. Cost Benefit Analysis Cost/benefit analysis looks at the broader economic effects of the proposed changes to the AML/CFT regime. It estimates impacts across society and the economy as a whole to see what the overall scale of the costs and benefits are, and who benefits from change and who has to bear the cost of that change. It considers all monetised costs and benefits over time (eg 10 years) and discounts all figures back to the same dollar value (that is it removes the impact of inflation). A summary of the approach and results are below. Summary of compliance cost analysis 1. In order to calculate the cost to business of Phase 2, the Ministry engaged the services of an external and independent adviser that has experience in estimating the business compliance cost for Phase 1, advising their own clients on AML, and having to meet their own obligations under the current Act. 2. They sent out a survey, through national bodies to each of their members, and conducted follow up interviews with a number of those who responded to the survey. 3. By combining the survey data, interviews, and their own professional experience with Phase 1, they were able to estimate the aggregate compliance cost for Phase 2 businesses. In estimating these costs they had to make a number of informed assumptions about: the number of businesses in each sector; the proportion of small, medium and large businesses in those sectors; the sector risk profile; etc. 4. They advised that it was not reasonable to estimate what it would cost an individual business to comply. This is because this is influenced by a number of factors including: the individual businesses risk profile (influenced by the services they provide, the kinds of clients they have and the nature of the business relationship with those clients); the size of the business; a commercial decision about how much they are willing to pay for external advice; and the level of comfort the business wants around complying with the Act. 5. The business compliance cost report is publically available. However, since the original report was published, there has been a number of decisions made (eg coverage of high value dealers and their obligations, understand how businesses would use provisions

6 such as those relating to DBG s to manage their costs) that have resulted in the figures being revised. These revised figures are those used in this report to Select Committee and are set out below. In all the analysis the high end figure was used. Establishment cost Ongoing costs (Year 1) (each year) low high low high Lawyers and Conveyancers $13,836,578 $69,535,899 $12,289,631 $51,350,407 Accountants $21,000,990 $84,138,199 $18,768,601 $62,400,191 Real Estate $10,840,954 $28,521,827 $9,618,290 $18,855,091 High value dealers $760,263 $682,652 Total $45,678,522 $182,956,189 $40,676,522 $133,288, The figures in the compliance cost analysis were used to inform the cost/benefit analysis (as referred to above, to be included in the cost/benefit analysis the compliance cost figures had to be phased over time to reflect implementation dates and were discounted to remove the impact of inflation). Summary of the cost/benefit analysis 7. We estimated that for every dollar spent New Zealand would get a return of $1.1 to $1.14. This was calculated using Treasury s cost/benefit methodology (CBAx), and was based on the sector coverage contained in the Amendment Bill. 8. In summary the cost/benefit is made up of the following. To business of refer note below complying To government Costs (over 10 years NPV) $1.1 billion Crime prevented by expansion of AML regime $0.30 billion Benefits (over 10 years NPV) $1.13 billion Note consultation and modelling indicated that the cost to business could be in the order of $0.8 to $1.1 billion. The top end estimate was used for the purpose of the CBAx calculation. This approach is consistent with the conservative approach taken to modelling throughout. 9. Some additional (strategic) benefits were estimated but not included in the above cost/benefit figure. These are as follows: Strategic Benefit Crime deterred Drug harm prevented International reputation Value (over 10 years NPV) $2.9 billion $0.8 billion low Process for estimating

7 10. A separate company was engaged to estimate the benefits of Phase 2, and combine those with the estimated compliance and Crown financial costs to produce a benefit to cost ratio. 11. There are a range of benefits from extending the AML regime. These include: a. Increased financial intelligence for criminal investigations b. Increased ability to restrain assets c. Reduced criminal incentives d. Reduced economic and market distortions e. Increased tax collection f. Decreased re-investment in crime g. Improved international reputation 12. It is acknowledged internationally that a number of these benefits are hard to cost. Those that we have a good degree of confidence in were costed and included in the benefit/cost ration. Those where we felt comfortable estimating the scale of impact we costed but did not include in the benefit/cost ratio (refer above tables). Others we did not seek to estimate as we had a lower level of confidence in being able to do so. 13. To support the benefit analysis we look to international empirical analysis as well as New Zealand experience and evidence. This analysis was compared to international results where appropriate to cross-check the estimates. 14. A summary of the CBAx is publically available, and is attached for your information. 15. Two runs of the CBAx were undertaken and signed off by Treasury. The first was undertaken as a result of the first round of consultation and the second after the second round of consultation. The second run is presented above. IN both runs a conservative approach was taken to avoid under estimating costs and over estimating benefits. Additional Advice 16. Further advice was also provided by the firm who undertook the cost/benefit analysis in relation to: Whether cost/benefit analysis could reasonably be done at a sector by sector level. What economic theory and practice tells us about the scope and impact of the proposed extension of AML to lawyers, accountants, conveyancers, real estate, NZRB and some high value dealers. 17. On the first, the advice concludes that, given the network nature of money laundering and that money laundering generally occurs across multiple channels and sectors, any sector by sector analysis using a cost/benefit model would require significantly more research than has been undertaken in any country, including New Zealand, and the results would be highly questionable. The above cost/benefit analysis was recommended as an achievable and robust approach.

8 18. On the second, the advice concludes that the risk-based approach taken appears to have resulted in proposed regulatory settings that strike a reasonable balance between: the effectiveness of the regulation; capturing a broad enough portion of the economy to capture and deter illegal activity; avoiding significant economic arbitrage between regulated sectors; covering a broad enough portion of the economy where illegal activity occurs to disrupt some money-laundering networks; and avoiding significant dilution of the regulatory impact by over regulating (crying wolf). Summary of timeline 19. The figures contained in this note are those re-estimated between January and March 2017, based on feedback on the exposure draft.