New Zealand's banking sector remains vulnerable to potential money laundering and terrorism financing risks, says the Reserve Bank in its latest assessment.
"The banking sector continues to have a relatively high potential risk, because money launderers and terrorist financiers are more likely to target financial institutions in that sector, rather than targeting in other sectors," the central bank said in its Sector Risk Assessment, published Friday. Non-bank deposit takers and life insurers face lower risks, it said.
The RBNZ underscored the assessment didn't take into account the adequacy or effectiveness of any money laundering or terrorism financing controls that have been put in place. The study is "an assessment of potential inherent risk across each subsector and the sector as a whole," it said. The assessment is the second the central bank has carried out, the first being in 2011. It now expects the institutions supervised by the Reserve Bank to update their own written risk assessments.
Toby Fiennes, head of prudential supervision, said the bank sector risk rating hasn't changed since the Reserve Bank's last assessment, but more detail has been added to the different risks. Regarding non-bank deposit takers, he noted more attention has been given to the money laundering and terrorist financing risks potentially experienced by New Zealand's credit unions, which have a strong domestic customer focus.
Regarding the scope of the problem, the central bank cites data from the New Zealand Police Financial Intelligence Unit that estimates that $1.35 billion of domestic criminal proceeds are laundered in New Zealand on an annual basis and the "social harm caused by the laundering and its associated offending is estimated at many times this figure." The estimate relates principally to drug and fraud offending and the value of money laundering associated with tax evasion has not been established "but is thought to be significant."
While the terrorism threat that New Zealand itself faces is rated as 'low' by the international community, the FIU notes it is still exposed to threats relating to terrorism financing overseas, including the potential for financiers of overseas groups within New Zealand, and overseas-based groups which may seek to use the country as a conduit for funds.
"Given the global nature of TF and the constantly changing nature of international tensions and conflicts, the risks associated with TF are highly dynamic. As such, reporting entities need to ensure that their CFT measures are current, regularly reviewed and effective," the RBNZ report said.
According to the RBNZ, the high potential risk in the banking sector is due to its relative size, the large number of customers and the high number and value of transactions compared to other areas. Combined with the wide availability and easy accessibility of products and services and access to international financial systems the banking subsector presents a much greater risk of ML/TF than the other subsectors, it said. "The value, volume and velocity of banking transactions provide an environment which conceals, disguises or obfuscates the proceeds of crime," it said.
Within the sector, retail banking and business/commercial banking are rated high risk while wholesale/institutional banking is rated medium.
The non-bank deposit takers are rated medium, reflecting the "relatively smaller size and complexity of this subsector compared to the banking subsector even though it has some similar products and services to the retail banks." It did note, however, the sector is vulnerable to a number of ML/TF factors and may present an attractive avenue for ML/TF.
The overall 'Low' risk rating for the insurance industry remains unchanged and reflects the smaller size and relatively simple life insurance products and services.
The assessment identified 12 key potential vulnerabilities that cut across all three subsectors including trusts and shell companies, as New Zealand's open business environment and common use of trusts is highly vulnerable to ML/TF abuse, it said. "All shell companies and trusts, including family trusts, should be considered highly vulnerable to ML/TF activity," according to the RBNZ.
Other potential weaknesses include new payment technology as it may create vulnerabilities that emerge faster than ML/TF controls can respond. "ML/TF via internet and online banking presents a quick and easy anonymous, cross-border channel which moves funds faster than enforcement can keep up with. This vulnerability also includes Alternative Banking Platforms and ecurrencies," it said.
The RBNZ currently supervises 110 reporting entities including 24 registered banks, 14 life insurance providers, 27 NBDTs and 45 reporting entities who are the members of a designated business group