Proposed framework to prevent money laundering and terrorism financing

The Financial Action Task Force Action Group has released its third and final discussion paper concerning the proposal to prevent money laundering and terrorist financing by setting up a supervisory framework.

The three discussion documents (first released August 2005) have outlined regulatory changes in order for New Zealand to meet its Financial Action Task Force (FATF) obligations. 

What is FATF?

The FATF is an inter-governmental body set up to combat money laundering and terrorist financing.  The ultimate objective is to formulate a supervisory framework in line with international standards that will detect and deter money laundering and terrorist financing.

There are two main reasons for the establishment of such a framework:

1. New Zealand's stable financial market makes us an attractive target for international criminals to deposit their funds here.  New Zealand wishes to protect the integrity of our financial system by not being seen as a weak link; and
   
   
2. Money laundering occurs on a domestic level, primarily by drug dealers.  As a result, such measures are important to keep our communities safer.

The discussion documents

The earlier two discussion documents related to the FATF compliance requirements and outlined where there were gaps with compliance, recommending ways to improve this. 

The third discussion document seeks comment on the proposed framework for monitoring and enforcing business compliance with these requirements, as well as the most effective way to minimise compliance costs by using existing regulatory frameworks.

Justice Minister Clayton Cosgrove has stated that the Government is "proposing the most cost-effective, business-friendly option".

Recommendations

With regulation, supervision and enforcement in mind, the document proposes a supervisory framework model that will monitor reporting entities through a variety of means including inspections and reporting, and oversight of suspicious transaction reporting. 

The discussion document also recommends:

• utilising existing regulators and supervisors to undertake anti-money laundering and to counter financing of terrorist activity rather than establishing a stand-alone agency which would add another layer of regulation and additional costs.  For example, the Reserve Bank, the Securities Commission and the Department of Internal Affairs can supervise the businesses they already regulate for other purposes; and
  
  
• implementing the regime in a two stage process. Financial institutions and casinos will be the first group of businesses covered by the new requirements. Others, including lawyers, accountants and real estate agents, will not be covered until the second stage. However, they will remain subject to the existing legal obligations to prevent money laundering and terrorist financing.

Risky businesses

FATF's risk assessments on international money laundering and terrorist financing shows banks, casinos and finance companies are at the highest risk of money laundering. However, proceeds of crime can also be accepted unknowingly by lawyers, accountants and real estate agents and introduced into the financial system where they become untraceable.

Ultimately the supervisory framework hopes to achieve the following outcomes:

• detecting and deterring money laundering and terrorist financing;
  
  
• maintaining and enhancing New Zealand's international reputation as not being a safe haven for criminals and terrorists to exploit; and
  
  
• contributing to public confidence in the financial system. This will be achieved most effectively by meeting the first two objectives.

The Government intends to introduce the legislation this year, in time for New Zealand's next scheduled evaluation by FATF late next year.

Enquiries and information

For more information on any of the cases, articles and features in Financial Services Quarterly, please email Rachel Gowing or call on 64 9 916 8825.