A new report details how New Zealand's markets watchdog has escalated its enforcement approach to non-compliance with anti-money laundering and countering financing of terrorism (AML/CTF) laws.
The Financial Markets Authority (FMA) - Te Mana Tātai Hokohoko - has today released its AML/CFT monitoring insights report for the past three years to June.
It notes the regulator issued three public warnings, brought its first High Court proceedings under the AML/CFT Act and 27 formal, private warnings were issued.
The court case saw a Kiwi derivatives trading firm and subsidiary of a Hong Kong company, CLSA Premium New Zealand Limited, fined $770,000 earlier this month for breaching AML laws over nearly $50 million of suspicious transactions.
The FMA's previous monitoring report, July 2016 to June 2018, said the government agency issued one public warning and 17 formal, private warnings.
In the three-year period, the FMA conducted 60 monitoring reviews on firms, identifying 363 issues requiring remedial action. The most common areas of concern were inadequate and outdated AML/CFT programmes and entity self-risk assessments, as well as insufficient customer due diligence by entities, the report said.
FMA director of supervision, James Greig, said the AML/CFT regime has been in place for eight years and businesses have had plenty of time to comply with the regulations.
"We have now less tolerance for companies not meeting their obligations, which is reflected in an increased number of enforcement actions," he said in a statement today.
"Disappointingly, we found numerous instances of businesses not meeting basic requirements, particularly around having a robust AML/CFT programme."
Greig said the FMA has also spent considerable time educating the industry on what's expected, including targeted training for compliance officers on how to monitor accounts and transactions, and file suspicious activity reports.
"This appears to have had an impact, with large increases in volumes of suspicious activity reports being filed by firms."
Suspicious activity reports submitted by FMA-reporting entities to the Police Financial Intelligence Unit (FIU) have risen significantly during the past three years – from 170 in 2018-19 to 257 in 2019-20 and 493 in 2020-21. However, this is only a proportion of the total FIU reports for all reporting entities.
The AML/CFT Act requires reporting entities to have self-risk assessments and compliance programmes audited every three years or at any other time at the request of their AML/CFT supervisor.
The FMA is one of three supervisors under the AML/CFT Act, alongside the Reserve Bank of New Zealand, which took action against TSB Bank and resulted in $3.5m in civil penalties this year. The third supervisor, the Department of Internal Affairs, has taken several entities to court, including the prosecution of an Auckland finance firm and its owners that failed to report $53.4m of suspicious transactions involving controversial Chinese-Canadian businessman Xiao Hua (Edward) Gong, who was accused of running a $200m pyramid scheme.
The FMA supervises about 750 reporting entities under the legislation, two-thirds of which define themselves as financial advice providers.
"We have noted several instances where firms failed to have their AML/CFT audits completed, or they were late," Greig said.
"There were also failures to remediate audit findings, which could indicate a lack of priority or willingness to comply. In some instances, senior management failed to monitor the progress of remediation work."
The FMA's monitoring activities through 2020-21 were impacted by Covid-19, with on-site monitoring paused through alert levels 3 and 4, however, the FMA said it remained vigilant to any issues raised by firms.
During 2019-20, an assessment by the Financial Action Task Force of the effectiveness of New Zealand's AML/CFT measures found Aotearoa was doing well but abuse of shell companies and trusts pose one of the top threats.
With an eye on the future, the FMA said it intends to continue monitoring firms' processes, with more in-depth assessments of how new customers are added, monitoring accounts and transactions, and reporting suspicious activity to the FIU.
The regulator will also assess how much entities relied on guidance issued in response to Covid-19 limiting abilities to onboard new customers and perform account monitoring.
The FMA said it will test if entities applied the guidance correctly.
It will also be monitoring the financial advice sector and risk level after the implementation of the financial advice regime in March, which means some financial advisers will become FMA-reporting entities.