Anti-Money Laundering and
Countering the Financing of Terrorism

Submissions on the third discussion document (Supervisory Framework)

New Zealand Institute of Chartered Accountants

30 November 2006

Cindy O'Brien
FATF Inter-Agency Working Group
c/o Ministry of Justice
P O Box 180
WELLINGTON

Fatf.iwg@justice.govt.nz

Dear Cindy

ANTI-MONEY LAUNDERING AND COUNTERING THE FINANCING OF TERRORISM: SUPERVISORY FRAMEWORK

Thank you for the opportunity to comment on the Ministry of Justice discussion document "Anti-Money Laundering and Countering the Financing of Terrorism: Supervisory Framework".

The New Zealand Institute of Chartered Accountants (the Institute) continues to hold strong reservations with respect to New Zealand's proposed compliance with the latest Financial Action Task Force (FATF) recommendations. These concerns relate in particular to the high cost of the existing and proposed anti money laundering and counter terrorism financing measures, and the absence of any evidence that those measures are in any way effective. These concerns are outlined in some detail in the Institute's two earlier submissions to the Ministry of Justice.

Within this broader context, the Institute considers the third discussion document to be a good paper, and is pleased at the relatively pragmatic approach taken to the proposed supervisory framework. The Institute has limited its comments to two areas: the "Supervisory Framework"; and "Proposed AML/CFT Supervisor Framework: Legislation".

Supervisory Framework

There is some ambiguity and tension in the supervisory framework outlined on pages 9 and 10. The Institute notes the statement (page 9):

"The challenge is to design a framework that meets the ultimate objective of detecting and deterring money laundering and terrorist financing in line with international standards, and in a manner that is best fit for New Zealand, while at the same time imposing the least amount of cost on society."

There are two key tensions within this sentence:

1. Between the benefits (detecting and deterring money laundering/terrorist financing) and the associated costs on society; and

2. Between the proposed measures being consistent with international standards, yet in a manner that is best fit for New Zealand.

What the discussion document does not do is provide an explicit "touchstone" or hierarchy of priorities to resolve those tensions. This is easily done by amending the fist line of the objectives statement to read "The challenge is to design a framework that meets the ultimate objective of promoting the public interest by putting in place measures that detect and deter money laundering and terrorist financing..."

This minor amendment would make it explicit that measures would be put in place only if they were expected to generate greater benefits than costs. Further, it would be clear that the FATF recommendations would be implemented, except where to do so is not in the public interest.

Similarly, while pleased to see design principle 5, which is a substantive improvement on the way FATF is portrayed elsewhere , it remains unacceptably vague. In particular, it is unclear what "to the greatest extent possible" or "unless there are good reasons" mean. Consequently, the Institute recommends it be reworded to:

"International legal compliance: the overall framework should meet our international obligations unless to do so is inconsistent with meeting the framework objectives at this time."

Finally, as worded, design principle 1 fails to provide useful guidance and should be clarified to read:

"Consistency: AML/CFT regulation and supervision must be consistent across all sectors, financial and non-financial, while at the same time recognising sector differences where to do so is consistent with meeting the framework objectives."

Proposed AML/CFT Supervisory Framework: Legislation

On page 27 the discussion document poses the question "(ii) What role do you think the supervisors should have in relation to developing legislation?"

A well recognised regulatory design principle is that the regulatory/enforcement function should be separate from the policy making function. The regulator is conflicted by, in particular, the political motivation to minimise the risk of adverse publicity from poor outcomes over which the regulator has responsibility. This creates a bias to over regulate by underestimating and ignoring important costs while overemphasising the benefits. This can be reinforced by an "empire building" approach which promotes the interests of the regulatory body, but not necessarily the efficient functioning of the market being regulated.

For these reasons it is very important that the supervisors not be the lead agency responsible for reviewing and developing policy. That said, it is important that the supervisors, together with other interested parties, ensure the lead agency is aware of their views as they will have perspectives and expertise relevant to developing an effective regime.

Again, the Institute appreciates the opportunity to provide comment on the third FATF discussion document, and would be pleased to discuss any aspect of this submission with officials at their convenience.

Yours sincerely

David Pickens
Director - Government Relations and Strategic Projects