Anti-Money Laundering and
Countering the Financing of Terrorism

Submissions on the third discussion document (Supervisory Framework)

New Zealand Law Society

SUBMISSION ON THE FATF INTER - AGENCY WORKING GROUP'S THIRD DISCUSSION DOCUMENT - "ANTI MONEY LAUNDERING AND COUNTERING THE FINANCING OF TERRORISM: SUPERVISORY FRAMEWORK"

Introduction

1. The New Zealand Law Society (NZLS) presents this submission in response to the FATF Inter-Agency Working Group's Third Discussion Document - "Anti Money Laundering and Countering the Financing of Terrorism: Supervisory Framework" ("the Paper"). The submission adds to the comments raised by the NZLS in its previous submissions on the first and second discussion documents.

2. Broadly the NZLS supports the objectives outlined in the paper. In particular it supports the suggested two-staged implementation of a multi-supervisor model. First, existing government regulators would assume AML/CFT supervisory functions for the businesses within their sectors. In the second round, designated Self Regulatory Organisations (SROs) would assume responsibility for other non financial businesses and professions (DNFBPs). However, it is concerned that:

• the existing scope of legal professional privilege should not be eroded, should the Financial Intelligence Unit (FIU) be granted increased powers to require production of documents
• the production powers envisaged for the FIU be properly defined and appropriately limited to exclude the right of entry, which should be under warrant
• the MOJ officials continue to consult the NZLS on the scope and detail of the legislative framework, even though it is anticipated that lawyers (as DNFBPs) would not be brought into the proposed new regime until the second stage. This is particularly important as the regulatory framework established for the first stage will ultimately affect all target sectors
• the Self Regulating Organisations (SROs) should be represented on the AML/CFT Advisory Group as the reforms progress toward the second stage.

Consultation questions

Requirements to regulate and supervise

3. The NZLS agrees with the proposed approach to regulating financial institutions for the purposes of FATF Recommendation 23. It notes that lawyers, defined as financial institutions only when they perform specific functions, will not be subject to regulation by the Registrar of Companies because they will continue to be regulated by the NZLS, which would serve as a SRO. The NZLS is well placed to take responsibility for monitoring and ensuring lawyer compliance with AML/CFT requirements in tandem with implementation of the Lawyers & Conveyancers Act.

Supervisory functions and powers

4. The NZLS supports the suggested risk-based approach to supervision and notes that it already has the capacity to carry out the functions outlined, and that capability will be enhanced under the new Lawyers & Conveyancers Act regime. The Society looks forward to further consultation with the officials on the risk assessment methodology for use by supervisors across all sectors.

5. The NZLS supports the recommendations regarding supervisory powers, including (with limits, see paras 7-12 below) the authority to compel production of information and to impose adequate remedies. The practice rules which the Society is required to have under the Lawyers & Conveyancers Act will provide the ideal opportunity to articulate new AML/CFT obligations on lawyers and the Society will be consulting with MOJ officials during the drafting process.

Financial Intelligence Unit

6. The Society agrees with the proposed requirement for the FIU to provide formal feedback to reporting entities and believes that any such feedback will have educative value.

7. In principle, the Society agrees that it is important for authorities to have sufficiently robust information gathering powers to enforce compliance with the AML/CFT regulatory obligations. However, it is not persuaded by the analysis of the proposal in the paper that a power to require production of the sort proposed is necessary to achieve this objective.

8. The paper states "the purpose of the proposed production power is to ensure that the statutory requirements for filing of STRs 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). From this description and related analysis in the paper it appears that the proposed power is intended to operate in a similar way to the equivalent power currently held by the Director of the Serious Fraud Office.

9. The Society notes that pursuant to Section 44 of the Financial Transactions Reporting Act 1996 (FTRA) the District Court may already issue warrants to search any place or thing if there are reasonable grounds for believing they contain evidence of offences against the Act or associated regulations. Section 46 sets out the powers conferred by such warrants. Pursuant to Section 50, the procedures under Section 198A of the Summary Proceedings Act 1957 applicable to searches of lawyers' offices are applied to searches conducted under the FTRA.

10. The Society is not aware of any instances where the FIU or Police have sought to exercise the existing powers available under Section 44. From the analysis in the paper it is difficult to ascertain precisely why, in practice, the government considers the current powers available to the Police under the FTRA for investigating and prosecuting suspected offences under the Act inadequate.

11. However, the Society considers that a tightly focused production power by which the FIU may obtain records or documents directly relevant to its analysis of STRs filed by regulated entities may be justified. This could, for example, provide access to related trust account or financial records. However, it does not consider it appropriate that such a power be exercisable by way of on-site visits. The exercise of a power in this way could, in effect, be equivalent to a power of entry and search and should accordingly be subject to the usual processes associated with search warrants.

12. The Society makes the following points in respect of the proposed power:

• it should be tightly focused on specific records related to specific transactions that have been the subject of a STR. It should not operate as an investigative tool by which the FIU or Police investigate predicate offences such as drug dealing or money laundering. These should continue to be subject to normal search warrant procedures.
• the purpose for which the power may be exercised needs to be clearly stated in empowering legislation. It needs to be clear whether this is the investigation and enforcement of breaches of STR reporting requirements or the FIU's analysis of STRs.
• 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.
• the proposed power should not in any way operate to reduce the existing scope of legal professional privilege.

Supervisor Models and two staged implementation

13. The Society supports the multi-supervisor model as this would enable supervision to be tailored to each sector and therefore minimise compliance costs. The proposal to introduce the reforms in two stages is also supported, as the experience of the government regulators will aid the transition of the compliance regime to the SROs. The Society looks forward to receipt of further detail as to timing and notes that until the DNFBPs are brought fully into the supervisory framework the existing AML/CFT requirements will continue.

Supervisory framework - developing the legislation

14. The FIU's proposed role in developing the new legislation is understandable, given that it will have a significant oversight role in the new regulatory environment. However the NZLS believes that the SROs also have a significant contribution to make in this area and would see their role as being in the areas of consultation during the legislative process as well as being active in areas of regulation and rule making.

Composition and Role of AML/CFT Advisory Group

15. The NZLS notes that it is proposed that the group to be established will comprise the government regulators, the FIU and other government agencies. The Society suggests that the SRO group of regulators should be represented on this advisory body, given the stated intention to enhance the efficiency and effectiveness of the regime and to promote consistency of regulation and supervision across all sectors.

Rae Mazengarb
Deputy Executive Director
29.11.06