All entities that are captured under the AML/CFT Act 2009 (“the Act”) are required to complete a Risk Assessment of the risks posed to the business as it relates to people using them for money laundering or terrorist financing purposes. Once this is established an AML/CFT Programme needs to be established that considers the risks identified in the risk assessment document along with prescribed requirements set out in section 57 of the Act including:
- Vetting of staff
- Training of staff
- Customer due diligence (“CDD”) requirements including on going account monitoring
- Reporting suspicious activities
- Record Keeping
- Requirements as to how the entity will manage and mitigate the risks of money laundering and the financing of terrorism
- Examining and keeping written findings on suspicious activities
- Monitoring, examining and keeping written findings when dealing with countries that have insufficient money laundering and countering financing of terrorism systems
- Preventing the use of money laundering and financing of terrorism via products that may favour anonymity
- Determining when enhanced due diligence is required
- Procedures for any third parties carrying out the CDD required on behalf of the entity
- Training of all relevant staff
During the first round of AML/CFT auditing, as required under section 59 of the Act, it became apparent that many entities were doing a relatively good job of setting up their risk assessment and programme documentation based on the stated requirements. However, a major part of deterring and stopping the entity from being used for money laundering and financing of terrorism is the on going monitoring of transactions and identifying any Red Flag activities that may be being presented to the entity.
The problem with this is unless you know what is a potential unusual activity (Red Flag), how are you going to identify it! This all stems back to the initial CDD process, you should not just stop at the identification stage of CDD you should also be asking the potential client what their expected transaction activity will be and with whom. i.e. any third parties. The entity should also have a very good understanding of the client’s financial situation so when any payments or new funds come in they match up with what would be expected or not expected of that person. If the entity is dealing with individuals that may only require standard CDD, questions should still be asked around how any funds are to be introduced and what the expectations are over the following year, which could be from:
a) expected additional funding for an investment portfolio
b) expected lump sum payment on a loan
c) expected assets to be transferred in from a third party or a trust
The opposite of the above is that these activities occur but were not expected, hence a requirement to investigate further to determine if a suspicious transaction report may need to be submitted.
To illustrate this further the following is an extract from the FMA’s AML/CFT Monitoring Report 01 July 2013 to 30 June 2014.
“Transaction monitoring and suspicious transaction reporting
Ongoing customer transaction monitoring is one of the most important areas of the AML/CFT programme. There is evidence that some Reporting Entities (RE) have not yet properly developed a transaction monitoring system, or are relying on third parties to carry this out on their behalf, with no agreement in place as to responsibilities for the various related activities. When asked, some of these entities cannot explain to us what criteria they use to identify a transaction as unusual. This leads to a lack of procedure or process for investigation and documenting suspicious or unusual transactions. It is of concern that a lack of procedure and process has led to a low number of suspicious transaction reports (STR) being led with the Police Financial Intelligence Unit.”
The following are possible RED FLAG activities that relate to on going monitoring of clients for financial advisers and trust managers:
- Inexplicable or unusual withdrawals or activity contrary to the client’s stated investment objectives
- Requests to process transactions in a manner that would circumvent the adviser’s ordinary documentation requirements
- Lack of concern regarding performance returns or investment risk
- Frequent additions to or withdrawals from accounts
- Funds drawn on, or wire transfers from, accounts of third parties with no relation to the client
- Transfers of funds to the adviser for management followed by transfers to accounts at other institutions
- Trust relevant party evades attempts by the trust company to establish personal contact
- Trust structure or transactions indicate some illicit purpose or are inconsistent with the trust company’s knowledge of the trust relevant party, its business and risk profile and where appropriate, the source of funds
- For example, substantial increase in the amount or frequency of, asset injections from or asset distributions to a trust relevant party or any other person, which is not aligned with the trust company’s knowledge of, the source of wealth of the settlor, and the purpose and intended nature of the establishment of business contact
- Trust assets are withdrawn immediately after being settled into the trust account, unless there is a plausible reason for such immediate withdrawal
- Previously inactive trust account is now used intensively, unless there is a plausible reason for such use
- Transactions relating to the trust account are conducted with countries or entities that are reported to be associated with terrorist activities or with persons that have been designated as terrorists
- Trust structure or transactions relating to the trust account utilise complex and opaque legal entities and arrangements, foreign private foundations that operate in jurisdictions with secrecy laws, wherein the trust company is unable to fully understand the purpose or activities of their usage
- Transactions that are suspected to be in violation of another country’s foreign exchange laws and regulations
- Frequent changes to the address or authorised signatories
Does money laundering and financing of terrorism really happen in NZ?
The following is an extract from the Police FIU’s Quarterly Typology Report Third quarter (Q3) 2015/2016
OBSERVATIONS – CENTRAL ASSET RECOVERY UNIT
Criminal Proceeds Recovery Act (CPRA) is now seven years old and all Asset Recovery Units in New Zealand are seeing increased referrals with notable increases from government agencies outside of Police. For example, the ARUs have been able to forfeit illegal funds and assets from people involved in offending such as education fraud, fisheries exploitation, MSD fraud, people smuggling, and organised criminal entities involved in drug offending.
A common theme is ‘co-mingling’ of funds, where illicit earnings are integrated with legal income, particularly from cash- intensive businesses that are used to disguise the source of such funds. This typology has been evident in several investigations, including one involving the commercial cultivation and sale of cannabis, people smuggling, and farming.
We are now seeing the frequent use of value cards (e.g., travel cards, ‘Prezzy cards’), which are easily purchased with cash, easily transferrable, simple to use, and can be ‘topped up’. The variety of cards on the market is a challenge, and staff are becoming more vigilant and aware of how these cards can be easily used for illegitimate purposes.
False identities and laundering funds through those identities is a familiar, but popular, typology. Also, with the AML/CFT legislation, we have seen greater compliance within the financial sector, resulting in criminals finding it more difficult to introduce illicit funds. As criminals become more conversant with the legislation, we are noticing some interesting trends occurring in order to launder illicit funds gained from criminal enterprises. It is evident that ‘cash is still king’. Criminals often try to hide their assets in “third party” names or nominees. Lastly, we are seeing an emergence of high-value, portable commodities, in particular bullion and jewellery.