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PROPOSAL FOR NEW REGULATION FOR ANTI-MONEY LAUNDERING/COUNTERING THE FINANCING OF TERRORISM

Office of the Minister of Finance

The Chair

Cabinet Policy Committee

PROPOSAL

  1. This paper seeks the Committee’s agreement to the making of a new regulation under the Reserve Bank of New Zealand Act 1989 (the Act).

EXECUTIVE SUMMARY

  1. It is proposed that ‘systems, policies and procedures, to detect and deter money laundering and terrorist financing’ be added, through regulation, to the list of matters the Reserve Bank can consider in determining whether a registered bank or prospective registered bank is able to carry on its business or proposed business in a prudent manner. This would increase the Reserve Bank’s ability to supervise banks’ anti-money laundering and combating terrorist financing (AML/CFT) policies and procedures, and increase New Zealand’s compliance with relevant international standards.

BACKGROUND

  1. This proposal is a response to an invitation by the Minister of Finance and the Associate Minister of Justice, Clayton Cosgrove, to the Reserve Bank to consider recommending a regulation under the Act to make anti money laundering and countering the financing of terrorism (AML/CFT) part of the Reserve Bank’s bank registration and supervision arrangements.

  1. The proposed regulation is expected to come into force in advance of the new AML/CFT legislative regime that officials, led by the Ministry of Justice, have been working on to improve New Zealand’s compliance with the recommendations of the Financial Action Task Force (FATF). The FATF is an inter-governmental body established by the OECD to develop and promote national and international policies to combat money laundering and terrorist financing. It prescribes standards on AML/CFT matters, evaluates countries on their compliance with the standards (via a peer-review process entailing mutual evaluations), and takes action where countries are significantly non-compliant.

  1. New Zealand has been a member of the FATF since 1991. A condition of New Zealand’s membership is that it complies with the FATF Recommendations on AML/CFT. On 11 June 2003 POL (POL min (03) 13/2 ) agreed that New Zealand should vote at the Financial Action Task Force June 2003 plenary in favour of adopting a revised set of 40 FATF Recommendations, and that options for compliance should be explored by officials. If approved by Cabinet, the new framework for AML/CFT compliance is likely to be introduced in the first half of 2009.

  1. New Zealand will undergo a mutual evaluation of its compliance with the FATF Recommendations in April 2009. Because the new AML/CFT regime is not expected to be in place by that time, New Zealand is likely to be rated as non-compliant or partially compliant with some of the key FATF Recommendations.

  1. One of the FATF Recommendations requires that a designated competent authority has responsibility for supervising financial institutions’ compliance with requirements to combat money laundering and terrorist financing. While the proposed regulation will not result in New Zealand being compliant with this recommendation it may demonstrate to the FATF that New Zealand is making progress towards compliance with the FATF Recommendations.

COMMENT

  1. The proposal is for a new regulation under section 78 of the Act that will add policies, systems and procedures to detect and deter money laundering and the financing of terrorism to the list of matters which the Reserve Bank can consider under section 78. Section 78 of the Act sets out the matters to which the Reserve Bank can have regard when considering the ability of an applicant for registration as a registered bank or of an existing registered bank to carry on its business or proposed business in a prudent manner. The effect of adding a matter to this list is that the Reserve Bank can then explicitly take that matter into consideration when determining whether an applicant should become a registered bank and also as part of its ongoing supervision of registered banks.

  1. Section 78(1) (g) provides for additional matters to be prescribed in regulations and section 78(2) provides that such regulations are to be made by the Governor-General, by Order in Council, on the advice of the Minister, given in accordance with a recommendation of the Reserve Bank.

  1. Adding AML/CFT matters to the list of matters to which the Reserve Bank can have regard under section 78 is regarded as prudent because of the potential material reputational risks that can impact on the ability of a registered bank to conduct its business with correspondent banks and international counterparties if it does not have adequate systems to control the risk of money laundering and terrorist financing.

  1. The new regulation is consistent with the Basel Core Principles for Effective Banking Supervision, published by the Basel Committee on Banking Supervision. The Core Principles are an internationally recognised benchmark for assessing the quality of a country’s supervisory systems and for identifying future work to be done to achieve a baseline level of sound supervisory practices. The principles require that supervisors must be satisfied that banks have adequate policies and processes in place, including strict “know-your-customer” rules, that promote high ethical and professional standards in the financial sector and prevent banks from being used, intentionally or unintentionally, for criminal activities.

  1. The FATF Recommendations also require that regulatory and supervisory measures for banks that apply for prudential purposes and which are also relevant to money laundering, should be applied in a consistent manner for both purposes.

  1. The new regulation will give legislative backing to the Reserve Bank’s current expectations that applicants for registration as a bank and existing registered banks effectively mitigate the risks to their business posed by money laundering and the financing of terrorism. The Reserve Bank intends to update its Banking Supervision Handbook to reflect the new requirements. The Reserve Bank may also consider supervising registered banks’ compliance with existing statutory requirements under the Financial Transactions Reporting Act 1996 and the Terrorism Suppression Act 2002. Any additional cost to the registered banks as a result is expected to be minimal and relate primarily to reporting to the Reserve Bank, as the registered banks are already required to comply with those statutory requirements.

  1. The Reserve Bank does not intend to use the regulation to require the registered banks to become subject to a fully FATF-compliant comprehensive AML/CFT regime. Discussions with the Ministry of Justice indicate that the upcoming AML/CFT reforms will incorporate these obligations. It is inappropriate to expect banks to comply with a set of requirements which may change with the introduction of the wider AML/CFT regime. The regulation will be independent of any legislative changes that may result from these reforms.

CONSULTATION

  1. The following government departments and agencies were consulted about the proposals: The Treasury, the Ministry of Economic Development, the Ministry of Justice, the Department of Internal Affairs, the Ministry of Foreign Affairs & Trade, the New Zealand Police (Financial Intelligence Unit), the Securities Commission and Customs.

  1. The Department of Prime Minister & Cabinet and the Parliamentary Counsel Office were informed.

  1. The following organisations and entities were consulted: the New Zealand Bankers’ Association and the registered banks. In addition an opportunity was provided for the public to make submissions on the proposal.

  1. Most submitters supported the proposal. However one submitter considered that the proposed regulation would not compensate for New Zealand’s failure to generate legislation to give effect to FATF requirements and that it would be better to pursue a long term legislative solution rather than adopt a well intended but piecemeal initiative.

  1. The Reserve Bank will consult further with the registered banks before any consequential changes to the bank registration and supervision policy framework are finalised.

FINANCIAL IMPLICATIONS

  1. Any expense arising from the proposal will be met within the Reserve Bank’s funding agreement. However any additional expense is not expected to be material in the short term.

HUMAN RIGHTS IMPLICATIONS

  1. The proposal is not inconsistent with the New Zealand Bill of Rights Act and the Human Rights Act 1993.

LEGISLATIVE IMPLICATIONS

  1. The proposal in this paper will require the drafting of a regulation under the Reserve Bank of New Zealand Act.

REGULATORY IMPACT ANALYSIS

  1. The Reserve Bank confirms:

  • That the principles of the Code of Good Regulatory Practice and the regulatory impact analysis requirements, including the consultation Regulatory Impact Statement requirements, have been complied with.

  • A Regulatory Impact Statement has been prepared and is attached. The Reserve Bank considers the Regulatory Impact Statement to be adequate.

  • The Regulatory Impact Statement was circulated with the Cabinet paper for departmental consultation.

PUBLICITY

  1. The Reserve Bank will notify the registered banks when the regulation is made and will put a statement on the Reserve Bank’s website.

  1. No other publicity is planned.

RECOMMENDATIONS

  1. The Minister of Finance recommends that the Committee:

  1. note that section 78(1) of the Reserve Bank of New Zealand Act 1990 (the Act) sets out the matters which the Reserve Bank may consider in determining whether a registered bank or applicant for bank registration is able to carry on its business or proposed business in a prudent manner;

  1. note that section 78(1)(g) provides for additional matters to be prescribed in regulations and section 78 (2) provides that such regulations are to be made by the Governor General, by Order in Council, on the advice of the Minister, given in accordance with a recommendation of the Reserve Bank;

  1. agree that the Minister of Finance accepts the Reserve Bank’s recommendation that a regulation be made under section 78(2) of the Reserve Bank of New Zealand Act 1989 to add ‘policies, systems and procedures, or proposed policies, systems and procedures to detect and deter money laundering and the financing of terrorism’ to the list of matters that the Reserve Bank can consider when determining:

  1. whether an applicant for registration as a registered bank is or will be able to carry on its business or proposed business in a prudent manner; or
  2. whether a registered bank has not carried on its business in a prudent manner.

  1. invite the Minister of Finance to issue drafting instructions to Parliamentary Counsel Office to give effect to the decision above.

Hon Dr Michael Cullen

Minister of Finance


Date signed:

Regulatory Impact Statement

EXECUTIVE SUMMARY

It is proposed that ‘systems, policies and procedures to detect and deter money laundering and terrorist financing’ be added, through regulation, to the list of matters the Reserve Bank can consider in determining whether a registered bank or prospective registered bank is able to carry on its business or proposed business in a prudent manner. This would increase the Reserve Bank’s ability to supervise banks’ anti-money laundering and combating terrorist financing (AML/CFT) policies and procedures, and increase New Zealand’s compliance with relevant international standards.

ADEQUACY STATEMENT

This RIS was prepared by the Reserve Bank and circulated with the Cabinet paper for departmental consultation. The Reserve Bank considers this RIS statement is adequate.

STATUS QUO AND PROBLEM

Money laundering continues to be a serious international problem that is receiving increasing attention as nations attempt to deal with issues such as organised crime and terrorism. Financial institutions, in particular, are at risk of being used by criminal organisations to launder money and by terrorist groups to facilitate the financing of their activities. Effective policies and procedures are essential to reducing the risk that facilitating money laundering and terrorist financing activities poses to banks’ reputations and operations.

International standards for AML/CFT are set by the Financial Action Task Force (FATF) in the form of a number of ‘Recommendations’. FATF is an international organisation affiliated with the OECD. New Zealand is a member of FATF and is consequently obliged to work towards compliance with its Recommendations.

In addition, under the Basel Core Principles for Effective Banking Supervision (the international standards for banking supervision), supervisors are required to satisfy themselves that banks have adequate policies and processes in place that promote high ethical and professional standards in the financial sector and prevent banks from being used, intentionally or unintentionally, for criminal activities.

The current legal avenues the Reserve Bank has for ensuring registered banks have effective AML/CFT policies in place are relatively weak and do not comply with international standards.

OBJECTIVES

The objective is to improve New Zealand’s compliance with international requirements relating to anti money laundering and countering terrorist financing.

ALTERNATIVE OPTIONS

An alternative option is to amend the Reserve Bank of New Zealand Act 1989 (the Act) to include AML/CFT as one of the matters the Reserve Bank may consider in determining whether a bank or applicant bank is able to carry on its business or proposed business in a prudent manner. The reasons for not preferring this option are:

  • The time it would take to implement compared to the preferred option. The preferred option can be implemented ahead of New Zealand’s next mutual assessment against FAFT Recommendations (scheduled for April 2009). It is unlikely that a legislative change can be put in place prior to this assessment.
  • The AML/CFT legislative reforms currently in train (led by the Ministry of Justice) may necessitate consequential amendments to the Act, which are likely to be passed in the second half of 2009. It is preferable to consider all potential amendments relating to these reforms together. In this context it is noted that the proposed new regulation could be replaced with a legislative amendment in the future if that is considered appropriate at the time.

PREFERRED OPTION

The preferred option is to make a new regulation under the Act.

The Act identifies a number of matters that the Reserve Bank may consider in determining the ability of a registered bank or applicant for bank registration to ‘carry on its business or proposed business in a prudent manner’. Under the preferred option the following would be included as one such matter: ‘systems, policies and procedures to detect and deter money laundering and terrorist financing’ (the final wording would be drafted by the Parliamentary Counsel Office).

The benefits of this option are as follows:

  • Increases the Reserve Bank’s ability to supervise registered banks in respect of AML/CFT policies and procedures.
  • Appropriately pre-positions the Reserve Bank to implement relevant aspects of AML/CFT legislative reforms currently in train, but does not anticipate or close off any particular reform options.
  • Increases New Zealand’s level of compliance with international AML/CFT standards and obligations and with international standards for banking supervision (the ‘Basel Core Principles’).

Details of the costs of this option are:

  • Other than the administrative costs of proposing and putting in place the new regulation, there are no other immediate costs.
  • The proposal places a more explicit obligation on registered banks to comply with the Reserve Bank’s AML/CFT guidelines (and incur any costs associated with doing so over and above costs associated with the current ‘voluntary’ expectations of compliance with international best practices).

Any changes the Reserve Bank makes to its AML/CFT requirements for registered banks will be subject to industry consultation. The wider AML/CFT framework within which the Reserve Bank operates is expected to be defined in the course of the AML/CFT legislative reforms currently in train.

The proposed new regulation does not overlap with any existing rules, regulation or legislation and does not necessitate any alteration to existing rules, regulation or legislation.

IMPLEMENTATION AND REVIEW

Following consideration by POL, the planned implementation timetable is as follows:

  • Proposal considered by Cabinet Legislation Committee on 25 September 2008.
  • Proposal considered by Cabinet and Executive Council on 29 September 2008.
  • Advise registered banks of the new regulation once agreed.
  • Regulation takes effect 28 days after advising banks, approximately 31 October 2008.

CONSULTATION

A consultation paper was sent to all registered banks and has been publicly available on the Reserve Bank’s website. Most submissions were received from banks in support of the proposal. One bank was not in favour of the proposal because it considered the Reserve Bank already had an implicit mandate and authority to enquire into the AML/CFT arrangements of registered banks and that the proposed change would not compensate for New Zealand’s non-compliance against other FAFT Recommendations. The Reserve Bank has not altered the proposal in response to this submission because it is considered that the proposed new regulation does strengthen the Reserve Bank’s mandate and that it is worthwhile in terms of compliance with FAFT Recommendations.