Risk-based principles for anti-money laundering supervision

New Zealand hosts annual anti-money laundering conference

In 2019, from 8 October to 9, the New Zealand Police Financial Intelligence Unit, FIU, and the Association of Certified Anti-Money Laundering Specialists, ACAMS, jointly hosted the annual Anti-Money Laundering and Countering Financing of Terrorism conference.

The day before, the three financial supervisors—the Reserve Bank of New Zealand (RBNZ), Financial Markets Authority (FMA) and Department of Internal Affairs (DIA)—each held related workshops.

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The year 2019 marked the tenth anniversary of New Zealand's Anti-Money Laundering and Countering Financing of Terrorism Act, referred to here as the AML Act. At the conference, industry experts from around the world examined and discussed numerous international cases from the decade,

covering banking sector transformation and innovation in a stricter anti-money laundering environment; an introduction to Financial Action Task Force (FATF) mutual evaluations; the evolution of supervisory approaches; how compliance officers can become their organisations' moral compass; anti-money laundering controls for virtual assets and cryptocurrencies; digital identity systems and customer due diligence in blockchain; how the FBI uses suspicious transaction and activity reports; and sanctions lists and managing terrorism financing risks.

All reporting entities should pay close attention to the conference's analysis of global anti-money laundering trends and discussion of developments in New Zealand, particularly supervisors' principles and approaches.

To date, judgments have been delivered in four anti-money laundering cases in New Zealand:

Ping An Finance (PINGAN FINANCE (GROUP) NEW ZEALAND COMPANY LIMITED) was fined NZ$5,290,000;

Qian Duo Duo Limited (QIAN DUO DUO LIMITED) was fined NZ$356,000;

Jin Yuan Finance (JIN YUAN FINANCE LIMITED) was fined NZ$4,007,750;

Jia Xin Finance Limited (JIA XIN FINANCE LIMITED) was fined NZ$2,550,000, and the company's owners were also ordered to pay personal fines.

In addition, Fang Yuan Finance (OTT TRADING GROUP LIMITED) is facing proceedings brought by DIA. It is apparent that all four companies mentioned above are Chinese-owned financial businesses.

Does this mean that our Chinese culture, transaction habits and business practices make us more likely to be targeted for investigation and enforcement?

Let us look at how anti-money laundering supervisors generally decide whom to warn and whom to take to court.

A shift in the global anti-money laundering focus

In recent years, the global anti-money laundering focus has shifted from a compliance-based approach to a risk-based approach. New Zealand follows the risk-based principle. For reporting entities, this means first assessing their own exposure to money laundering risks, including:

• The nature of the industry, the company's size and the complexity of its business;

• Vulnerabilities inherent in the types of products or services offered;

• Whether the way products and services are delivered could be exploited for money laundering;

• Which customers are more likely to launder money;

• Which countries or regions with which they do business

carry a higher money laundering risk;

• Which other organisations connected to, or transacting with, the entity present money laundering risks.

Overall, this requires reporting entities to assess their own risks and the potential harm, then flexibly select and implement anti-money laundering measures proportionate to those risks.

For supervisors, a risk-based approach requires an understanding of reporting entities' business activities and a comprehensive view of the money laundering threats they face, the measures they have adopted and how effective those measures are. Supervisors then assess each entity's risk level to determine where and in what proportions to allocate anti-money laundering resources and apply differentiated measures. Entities assessed as higher risk receive priority when supervisory resources are allocated, improving the effectiveness of efforts to prevent and combat money laundering.

Differentiated supervision improves enforcement effectiveness

At the conference, supervisors explained in detail how they assess reporting entities differently under risk-based supervisory principles. They divide reporting entities into five categories and allocate resources according to risk. Rather than applying absolute standards, supervisors follow the principle of selecting appropriate measures based on risk, allowing reporting entities to adopt measures and procedures suited to their risk levels. Supervisors also use money laundering risk and the effectiveness of risk controls as their starting points, ensuring that limited resources are directed first to high-risk entities and business areas, with proportionate, differentiated supervision based on risk.

First category: reporting entities willing to do the right thing

These entities take a broad view of anti-money laundering legislation and regulations, recognise the benefits of compliance, stay informed and actively pursue compliance. They aim beyond the minimum requirements and adopt best-practice standards.

Their internal anti-money laundering programmes generally need no further improvement, and supervisors' on-site inspections confirm this. Supervisors place their trust in these entities.

Second category: reporting entities with no previous interaction

with their supervisor. As implementation of the AML Act entered its second phase, more reporting entities came under supervisory oversight. Limited staffing and resources mean supervisors have not yet been able to conduct desk-based reviews or on-site inspections of every entity. However, these entities may be reviewed at any time.

Third category: reporting entities that try to comply but do not always

succeed. These entities have an insufficient understanding of the AML Act's requirements, and their compliance controls are disorganised or lack a systematic approach. Although they actively seek to comply, they focus only on meeting minimum requirements and need substantial support from supervisors.

Desk-based reviews and on-site inspections of these entities usually find partial compliance requiring remedial action. Supervisors will review them again within a specified period.

Fourth category: reporting entities reluctant to comply

These entities resist compliance and are unwilling to act, often considering it only when a supervisor begins a review. Compliance is not a sustained, long-term practice for them. Failing to submit annual reports on time, having no compliance track record, or failing to implement a supervisor's remediation plan may lead to enforcement action. Depending on the seriousness of the circumstances, supervisors may take any of the following measures:

• A formal warning: the supervisor issues a written warning to the non-compliant entity;

• An enforceable undertaking: the non-compliant entity fulfils commitments under a remediation plan;

• A public warning: the supervisor issues a written warning to the non-compliant entity and publishes it online and through the media;

• Civil proceedings and injunctions: the supervisor brings civil proceedings and seeks injunctions against the non-compliant company, potentially extending to its responsible officers and compliance officer.

These enforcement measures are not sequential. Supervisors may choose any of them based on their assessment.

Fifth category: reporting entities that resist compliance

These entities may be involved in criminal activity and deliberately disregard compliance requirements, treating non-compliance as a competitive advantage. Supervisors will take the following measures against them:

• Civil proceedings, together with an application for an enforceable undertaking order;

• Civil proceedings, together with an application for a mandatory enforcement order;

• Civil proceedings, together with an application for a pecuniary penalty;

• Criminal proceedings;

A supervisor's representative offered a memorable conclusion at the conference: 'Think compliance is too expensive? Try non-compliance!' The financial penalties cost far more!

 

About the author

Christina Wang

LLM, CAMS-Audit, CCRP

Chief Compliance Officer, Collinson & Co

Christina Wang has worked in compliance in New Zealand's financial sector since 2012. She is a Certified Anti-Money Laundering Specialist, a Certified Anti-Money Laundering Audit Specialist and a GRC Institute-certified compliance and risk professional (CCRP).

Her white paper, 'How New Zealand Small and Medium-sized Businesses Can Balance Anti-Money Laundering Compliance with Business Objectives', was published by the Association of Certified Anti-Money Laundering Specialists (ACAMS).

She holds a Master of Laws from the University of Auckland and is qualified to practise law in both New Zealand and China.