Implementation of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 Consultation Paper on Proposed Regulations

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1 Implementation of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 Consultation Paper on Proposed Regulations (Tranche 2) 22 nd May 2018

2 Contents About this paper... 3 How to have your say Personal information and confidentiality... 3 Overview... 4 The Anti-Money Laundering and Countering Financing of Terrorism Act Current Regulations... 5 Proposals for the second tranche of regulations... 5 Timing... 6 Real estate... 7 Regulation proposal 1: Timing of customer due diligence... 7 Technical amendments (real estate)... 9 New Zealand Racing Board Regulation proposal 2: Occasional Transaction threshold for the New Zealand Racing Board Regulation proposal 3: Treatment of betting vouchers issued by the New Zealand Racing Board

3 About this paper The Ministry of Justice is seeking submissions on proposals for regulations under the Anti-Money Laundering and Countering Financing of Terrorism Act The regulations will outline how various anti-money laundering and countering financing of terrorism measures will work. There are specific questions where we are particularly interested in your feedback. We also welcome any other comments you may have. Your feedback will help ensure the most effective regulations are put in place. How to have your say. You can download or read this consultation document and either: - a submission to aml@justice.govt.nz - post a written submission to AML/CFT consultation team, Ministry of Justice, SX10088, Wellington, New Zealand Please ensure your submission reaches us by 5pm on Tuesday 12 th June Personal information and confidentiality We will hold your personal information in accordance with the Privacy Act We accept submissions made in confidence or anonymously. Please clearly indicate if you want your submission to be treated as confidential. We may be asked to release submissions in accordance with the Official Information Act 1982 and the Privacy Act These laws have provisions to protect sensitive information given in confidence, but we can t guarantee the information will be withheld. However, we won t release individuals contact details. 3

4 Overview The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act) aims to detect and deter money laundering and terrorism financing. It requires certain businesses to put anti-money laundering and countering financing of terrorism (AML/CFT) measures in place. These include assessing the money laundering and terrorism financing risks their business may face, establishing a compliance programme, confirming their customers identities, and reporting suspicious activities. Banks, casinos and a range of financial service providers ( Phase 1 reporting entities ) have been subject to the Act since Amendments to the Act in 2017 extended the AML/CFT regime to cover more businesses at risk of being used to launder money and finance terrorism (referred to here as Phase 2 reporting entities ). A staged approach is being taken to implementation of these businesses which include: lawyers, conveyancers and trust and company service providers must comply from 1 July 2018 accountants must comply from 1 October 2018 real estate agents must comply from 1 January 2019 the New Zealand Racing Board and certain businesses that deal in high value goods (such as cars, boats, jewellery, art) must comply from 1 August The 2017 amendments also made changes to the Act which apply to both Phase 1 and 2 reporting entities, for example, expanding reporting to Police from suspicious transactions to a broader class of suspicious activities. The Act can be found at: General information on the AML/CFT regime is available at: This includes Cabinet papers setting out policy decisions on the Amendment Act. The proposed regulations are discussed below. 4

5 Current Regulations A range of regulations have already been made under the Act which completed Phase 1 of the reforms, and the first part of the Phase 2 reforms. Additional regulations are required to implement further AML/CFT reforms. New regulations are being made in a series of different rounds called tranches. The first tranche of regulations was released in December This tranche was made in readiness for the first Phase 2 reporting entities (lawyers, conveyancers, and trust and company service providers) to comply on 1 July 2018, and providers of accountancy services to comply on 1 October In addition, regulations which affect all reporting entities, such as suspicious activity report requirements, were included. The second tranche of regulations will relate to the real estate sector and the New Zealand Racing Board. Alongside the work on regulations, the New Zealand Police s Financial Intelligence Unit (FIU) has provided a revised National Risk Assessment. The Department of Internal Affairs has provided a Phase 2 Sector Risk Assessment and sector guidelines to help businesses understand and meet their AML/CFT obligations. Development of additional guidelines is underway. Proposals for the second tranche of regulations The proposals for the second tranche of regulations include: Real estate: setting the timing of customer due diligence for real estate agents; and addressing three technical matters relating to the wider real estate sector. New Zealand Racing Board setting the occasional transaction threshold for the New Zealand Racing Board at $6,000 and above; and prescribing that New Zealand Racing Board betting vouchers are a Stored Value Instrument if they have a value of $6,000 and above. It is also proposed to prescribe a specific Annual Report form for the New Zealand Racing Board. This is consistent with requirements for other Phase 2 businesses. 5

6 Timing We expect the second tranche of regulations will be in place in July This will give affected businesses a reasonable lead-in time to set-up the required AML/CFT systems and processes before they must comply. 6

7 Real estate Regulation proposal 1: Timing of customer due diligence The Act provides for real estate agents to carry out standard, simplified and enhanced customer due diligence (CDD), at the times specified in regulations. CDD involves collecting and verifying identity information from customers and in some circumstances (such as if a customer is a trust), gathering information about where the money came from and other people involved. From 1 January 2019, real estate agents will be required to carry out CDD on their customer, in respect of the purchase or other acquisition of real estate. This will generally be a vendor but in some circumstances, when a real estate agent is acting as a buyer s agent and representing the buyer, it will be a purchaser. Proposal We propose, through regulation, to require real estate agents to carry out CDD when they enter into an agency agreement with their customer. Adopting this approach, CDD would be conducted early in the business relationship when the agency agreement to either sell a property, or act on behalf of a prospective purchaser (as a buyer s agent), is signed. Carrying out CDD when entering an agency agreement aligns with existing business practices and obligations. There are a range of other legal requirements to be met at that stage, so CDD would be easier to build into existing operating practices than later in the process. Conducting CDD early on customers helps reduce operational risks associated with having to slow or halt a sale to complete CDD late in the transaction. Customers are likely be more motivated to provide verification information at that time. In addition, this approach provides consistency across real estate agents and is easier to monitor. It is also consistent with other Phase 2 businesses, which are required to carry out CDD before providing any service covered by the Act. The proposed regulation is: For the purpose of sections 14(3), 18(3A), and 22(6) of the Act, a real estate agent must conduct customer due diligence before the real estate agent enters into an agency agreement (within the meaning of section 4(1) of the Real Estate Agents Act 2008) with a customer. 7

8 Questions 1. Is the time when real estate agents are entering into an agency agreement with their customer, the best time to carry out CDD on their customers? 2. Why/why not? 8

9 Technical amendments (real estate) We propose, through regulations, to make three technical amendments relating to the real estate sector. Proposed technical change 1. Amend AML/CFT (Definitions) Regulation 21A to remove the exclusion for licensed and registered auctioneers from 1 January 2019 Licensed and registered auctioneers are currently excluded from the Act via Definitions Regulations 21A. The proposed amendment will give effect to the policy intent of the Phase 2 AML/CFT reforms to specifically include auctioneers who sell any of the high value goods listed in section 5(1) of the AML/CFT Act, such as cars, boats, jewellery, art etc. by way of cash transactions, as high value dealers. High value dealers do not come into the regime until 1 August However, to ensure the Act is applied consistently between registered auctioneers and licensed real estate agents (both of whom can auction real estate), it is proposed that the amendment take effect on 1 January 2019, when real estate agents become part of the regime. Questions 3. Do you have any comments about the proposal to include licensed and registered auctioneers for the purposes of the Act, by 1 January 2019? Please explain. 9

10 Proposed technical change 2. Clarify the definition of customer for real estate agents The current policy setting is that real estate agents must conduct CDD on their customer but not the other party in the real estate transaction (who will be covered by their lawyer or conveyancer), unless they receive a deposit of $10,000 or more in cash. The current wording in the Act is ambiguous and may inadvertently capture all deposits (cash or electronic) received by a real estate agent. It may also capture the actions of an agent, representing a vendor, that assists a purchaser to complete a sale and purchase agreement, thereby triggering CDD. Therefore, it is proposed to clarify: That (subject to the point below) the other party or parties to a real estate transaction are not the agent s customer for the purposes of the Act; and That a real estate agent must carry out CDD on any person who makes a cash deposit of $10,000 or more. The proposed definition of customer is: For the purposes of paragraph (c) of the definition of customer in section 5(1) of the Act a customer, in relation to a real estate agent (as defined in section 4(1) of the Real Estate Agents Act 2008 (a) means a client (as defined in section 4(1) of the Real Estate Agents Act 2008) of that real estate agent; and (b) does not include any party to a real estate transaction on whose behalf the real estate agent is not carrying out real estate agency work; but (c) despite paragraph (b), includes a person who conducts an occasional transaction 1 with a real estate agent. 1 An occasional transaction is a cash transaction that occurs outside of a business relationship and is equal to or above the applicable threshold value, currently $10,000 (the transaction may be carried out in a single operation or several operations that appear to be linked). 10

11 Questions 4. Do you have any comments about the proposal to clarify the definition of customer for real estate agents? Please explain. 11

12 Proposed technical change 3. Exclude property management activities from the Act This proposal will give effect to the stated policy intent that property managers (and property management activities) would not be captured by the Act, even though they can be managing client funds. This exclusion will apply to property management activities carried out by real estate agents and property managers, i.e. professionals who carry out property management activities but are not also licensed real estate agents. It is proposed that the exclusion be reviewed and assessment of the money laundering and terrorism financing risks associated with property management activities be undertaken as part of the Statutory Review in By that stage there will be more data available on the real estate sector. This approach is consistent with the Financial Action Task Force. This is an inter-governmental body that sets international best practice standards for AML/CFT requirements and approaches adopted overseas. For example, in the United Kingdom and Canada property management agents and activities are not covered. One potential definition of property management activities is: (a) means (i) acting, or offering to act, for reward in respect of the negotiation, grant, approval or assignment of tenancies in relation to residential premises (within the meaning of section 2(1) of the Residential Tenancies Act 1986), irrespective of whether that activity is carried on by itself in conjunction with other businesses; and (ii) in relation to any real property (whether residential premises, commercial property or other real property) (A) collecting or offering to collect money payable for the use or repair or improvement of any property; and (B) holding or disbursing money received for the use or repair or improvement of any property; and (C) holding or disbursing money received for the advertising of or negotiating the use of any property: (b) includes advertising or negotiating, or any other act done directly or indirectly for the purpose of carrying out any activities referred to in paragraph (a); but (c) does not include (i) acting, or offering to act, for reward in respect of the negotiation, grant approval or assignment of a tenancy agreement for commercial premises (whether described as a lease, tenancy agreement or otherwise) in relation to commercial premises (within the meaning of section 2(1) of the Residential Tenancies Act 1986); or (ii) real estate agency work (within the meaning of section 4(1) of the Real Estate Agents Act

13 Questions 5. Does the potential definition of property management activities reasonably describe the scope of activities a professional providing property management services would carry out? 13

14 New Zealand Racing Board Regulation proposal 2: Occasional Transaction threshold for the New Zealand Racing Board Businesses covered by the Act are referred to as reporting entities. The Act requires a reporting entity to carry out customer due diligence (CDD) if a customer seeks to conduct an occasional transaction through that reporting entity. An occasional transaction is a cash transaction that occurs outside of a business relationship and is equal to or above the applicable threshold value. The transaction may be carried out in a single operation, or several operations that appear to be linked. The current occasional transaction threshold for most sectors is $10,000. This applies unless a different threshold is specified, for example: Casinos - $6,000 Travellers cheques - $5,000 Money orders, postal orders, wire transfers and currency exchange - $1,000 Stored Value Instruments - $1,000 if redeemable for cash or $5,000 if not redeemable for cash, $6,000 for casino chips. Proposal We propose, through regulation, to set the occasional transaction threshold for the New Zealand Racing Board at $6,000 and above. The gambling and betting sectors are rated medium/high risk by the Department of Internal Affairs in their respective sector risk assessments. In reviewing the New Zealand Racing Board risk profile there are various parallels with casinos. For example, both casinos and the New Zealand Racing Board offer services that allow for anonymous placement of cash, and subsequent potential anonymous pay-outs, making them attractive to money launderers. Given those similarities, it is proposed to align the occasional transaction threshold for the New Zealand Racing Board with that for casinos at $6,000 and above. This approach will ensure fair and consistent treatment and help reduce the risk of money laundering activity switching between the New Zealand Racing Board and casinos. 14

15 Questions 6. Is the threshold of $6,000 and above for an occasional transaction appropriate for the New Zealand Racing Board? 7. Should the New Zealand Racing Board and casino thresholds be aligned? 8. Are there other matters that should be considered in setting the threshold? 9. Why/why not? 15

16 Regulation proposal 3: Treatment of betting vouchers issued by the New Zealand Racing Board A customer can deposit money with the New Zealand Racing Board in return for a betting voucher. These vouchers can be used like cash to place bets or add money into an account. The value of a voucher can be added to and ultimately a voucher can be converted to cash. A common way to obtain a voucher is through a Self-Service Terminal. A Self- Service Terminal is a standalone self-service touch screen machine which can be located across the New Zealand Racing Board network. This may be within another business such as a hotel where no other betting services are available. A Self- Service Terminal can be used anonymously and does not require the customer to be an account holder to use all the functions. Vouchers present a high money laundering risk because they are easily moved around, able to be obtained anonymously from a Self-Service Terminal, and lack transparency. However, voucher is not currently defined in the Act, and as such, people using these betting vouchers are not subject to customer due diligence (CDD). Proposal We propose, through regulation, to include the New Zealand Racing Board betting vouchers within the definition of a Stored Value Instrument if it has a value of $6,000 or more. A Stored Value Instrument is defined in section 15 of the AML/CFT (Definitions) Regulations 2011 as a portable device including a gift facility 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. Like Stored Value Instruments, which trigger CDD if they meet the specified threshold, betting vouchers are portable and store a monetary value that is not physical currency. Including betting vouchers within the definition of a Stored Value Instrument will remove any inconsistency or ambiguity in the treatment of vouchers. Casino chips are similarly deemed a Stored Value Instrument with a threshold of $6,000 and above. The New Zealand Racing Board s betting vouchers have similar characteristics to casino chips. Both are anonymous, easily transferred to a third party, and readily exchangeable for cash. Given those similarities, we propose that the approach for the New Zealand Racing Board s betting vouchers be the same as that for casino chips. This approach will ensure consistent treatment and help reduce the risk of money laundering activity switching between the New Zealand Racing Board and casinos. 16

17 The definition of voucher is proposed to be: any document or other instrument issued by the New Zealand Racing Board to a person that has a monetary value and can be used to facilitate or carry out a transaction (for example to place a bet, or to top up an account) irrespective of whether (a) it can be redeemed for cash: (b) it can be split or consolidated for use in 2 or more transactions. Questions 10. Do you agree that a voucher with a value of $6,000 and above, issued by the New Zealand Racing Board, should be treated as a Stored Value Instrument for the purposes of the AML/CFT Act? 11. Do you agree with the proposed definition of voucher? 12. Why/why not? 17

18 Ministry of Justice Tāhū o te Ture justice.govt.nz info@justice.govt.nz 0800 COURTS National Office Justice Centre 19 Aitken St DX SX10088 Wellington New Zealand 22 May 2018