Anti-Money Laundering and
Countering the Financing of Terrorism

Submissions on the third discussion document (Supervisory Framework)

Financial Services Federation (INC)

December 2006

Introduction

1 The FSF represents the interests of over forty financial institutions a listing of which is available from www.fsf.org.nz. These organisations provide a range of financial services including the provision of commercial, farm and consumer finance. Many, but not all members are deposit takers. Collectively, members have assets exceeding $18 billion and represent the major New Zealand grouping of non-bank financial intermediaries.

2 Responses to the two preceding discussion papers issued by the FATF IWG have been made by the FSF. Although the submissions of other parties provide an insight into their thinking on these papers there has been no detailed feedback from officials. For us this means that significant aspects of the proposals continue to lack detail and clarity. The implications and costs of future requirements are yet to be determined. It is against this background and with this limitation that we make this submission on a supervisory framework.

Response to Consultation Questions

We have numbered these in the sequence in which they are asked in the discussion document.

1 Do you agree with the proposed approach to regulating financial institutions for the purposes of FATF Recommendation 23? Why/why not?

The FSF agrees with the general approach to regulation of financial institutions outlined in the paper and its companion papers released by the Ministry of Economic Development as part of the Review of Financial Products and Providers (RFPP). We note that the MED paper proposes that financial institutions be registered with the Companies Office and part of this process will involve negative assurance checks on directors and senior management. This will be fully inclusive of designated financial institutions. It is further proposed that qualitative checks would be conducted by the appropriate regulator. For NBDT this could be either the Reserve Bank or the Securities Commission. This is not fully inclusive of some financial institutions we represent.

The category known as Non-Bank Deposit-Takers (NBDT's) are described in RFPP papers as those institutions that are "in the business of borrowing money from the public to lend to others" including finance companies, credit unions and building societies. This does not cover institutions that are in the business of lending but who either borrow the money they lend from local or overseas wholesale sources and/or from overseas parent companies NOT from the public. These organisations are not regulated by either the Reserve Bank or the Securities Commission nor is there any other present reason for them to be. As a consequence there is no obvious party to perform qualitative assessment. If such assessment is not absolutely required by FATF Recommendation 23 there is no problem as far as regulation is concerned and if this is the case, the FSF believes that these organisations should not be subject to any supervision.

This does leave unanswered the question "who would supervise them?" (if this is required by FATF Recommendation 23) as they again have no natural connection with either of the supervisors of deposit taking businesses.

The companies within the FSF membership in this category are or are owned by major multinationals with home country jurisdictional responsibilities.

The Working Group's paper on AML/CFT regulatory and supervisory arrangements proposes that the Reserve Bank act as AML supervisor for "authorised deposit takers" and the Securities Commission act as supervisor for other deposit takers. The paper has does not acknowledge the distinction between lending institutions that are deposit takers and those that are not. As a consequence it is unclear from the paper which of the AML/CFT supervisors identified would be responsible for supervising non-deposit taking lending institutions. This is an issue that needs to be addressed.

2 Do you agree with the Working Group's recommendations regarding supervisors' functions? Why/why not?

3 Do you agree with the Working Group's recommendations regarding supervisors' powers? Why/why not?

The FSF agrees with the Working Group's recommendations regarding supervisors functions and powers.

4 Do you agree that the FIU should be required to provide formal feedback to reporting entities in relation to suspicious transaction reports? Why/why not?

The FSF agrees that it is highly desirable that the FIU provide formal feedback to reporting entities in relation to STRs. This would assist them to develop and maintain more effective and targeted AML/CFT practices and procedures.

5 Do you agree that the FIU or Police on behalf of the FIU should have express production powers to enforce statutory requirements for the filing of STR's and to ensure such requirements are being complied with? Why/why not?

The paper states that "the purpose of the proposed production power is to ensure that the statutory requirements for filing of STR's are being complied with and to enforce those requirements" (emphasis added). It proposes that the powers would be exercisable either by way of written notice or on-site visits to entities (subject to legal safeguards).

The paper lacks detail about how the proposed power would operate in practice, and in particular what specific legal safeguards would attach to it.

The FSF is aware of the existence of the power held by the Director of the Serious Fraud Office under which the Director can require the production of information in the course of an SFO investigation. The FSF assumes that the proposed power is intended to be similar to this SFO power in effect. Furthermore, the FSF is also aware of legislation that the government intends introducing shortly relating to the confiscation of criminal assets. It understands that this legislation proposes similar information gathering powers for an asset recovery agency. It is not readily apparent from the paper how the proposed AML-related power would operate in comparison to the equivalent SFO power or investigative powers proposed in relation to upcoming criminal asset confiscation legislation.

The FSF makes the following points in respect of the proposed power:

• The police (FIU) have an existing search/inspection power under the Financial Transactions Reporting Act (FTRA) for investigating suspected breaches of FTRA requirements by financial institutions. Whether this power has been exercised is relevant in assessing the need for the proposed production power.
• It should be tightly focused on specific transactions that are of interest to the FIU for reasons related to suspected breaches of STR reporting requirements. It should not operate as an investigative tool by which the FIU or Police investigate predicate offences such as drug dealing or money-laundering. Investigations into this type of criminal activity should continue to be subject to the usual procedures for search-warrants.
• The purpose for which the power may be exercised needs to be clearly stated in empowering legislation. Based on the description in the paper this is the investigation and enforcement of breaches of STR reporting requirements.
• There should be some requirement that the FIU, or Police acting on its behalf, have some evidential basis for believing that the exercise of the power is justifiable. A requirement that the FIU/Police have reasonable grounds for believing that the circumstances justifying the exercise of the power exist before exercising it will ensure an appropriate level of accountability for the manner in which the power is used.
• The Police and FIU should be required to report to an appropriate authority, on an annual basis the number of times any such power is exercised and related outcomes (i.e. warnings, prosecutions for STR-related offences or related predicate offences).
• There should be clearly defined limits on the use to which information gathered under the proposed power can be put. For example, whether the Police/FIU exercising this power would be able to use information collected for unrelated prosecutions or refer it on for use by other government agencies (e.g. the Inland Revenue Department, Customs, Serious Fraud Office).
• The paper is silent on what "legal safeguards" the government expects the power would be subject to. More specific detail on what these are would assist a more detailed assessment of the implications of the proposed power.

In principle, the FSF agrees with the need for an information gathering power proposed in the paper. The FSF membership support investigations into suspected criminal activity and recognise the importance of co-operating fully in such matters in accordance with their legal obligations under the Privacy Act and other relevant legislation. The FSF fully expects this approach to continue.

Supervisory models - Options

6 Do you support the multi-supervisor model? Why/why not?

7 If you prefer an alternative model, please explain your preference.

The FSF agrees that it is logical to utilise existing industry knowledge and expertise held by government agencies that exercise oversight functions for specific sectors. Subject to clarification about the body that will be responsible supervising non-deposit taking lending institutions the FSF agrees with the proposed structure described in the table on page 21 of the paper.

Two-staged implementation of supervisory reforms

8 Do you support the two-staged approach to implementation of the supervisory framework?

9 If you prefer an alternative approach, please explain your preference.

The FSF's main concern is that its members are provided with sufficient time to implement the new requirements. In previous discussion documents officials indicated that the government expected that its package of legislation might be introduced in 2007 and be passed before the next FATF Evaluation scheduled to occur in 2008. In the second discussion document a lead-in period for implementation of 18 months was intimated.

The FSF considers that an 18 month implementation period is the minimum required for its members to implement the new AML requirements.

Proposed AML/CFT Supervisory Framework

10 Do you agree with the role proposed for the FIU in relation to developing legislation? Why/Why not?

11 What role do you think the supervisors should have in relation to developing legislation?

The FSF agrees that as the primary government agency responsible for receiving, analysing and disseminating STRs it is important for the FIU to be consulted and have input into the areas identified in the paper.

It agrees that the FIU should retain oversight of STRs

Regulators and Supervisors

12 Please indicate whether or not you agree with the composition and role of the AML/CFT Advisory Group and why.

The FSF agrees with the proposed establishment and functions of an AML/CFT Advisory Group. Such a group brings together the major agencies with an involvement of this subject and can operate to moderate sectional views and achieve consistency of approach.