The Dirt on AML - August Newsletter
You’ve probably already heard that $1.35 billion is estimated by the New Zealand Police to be laundered through New Zealand businesses by criminals – mostly drug dealers, fraudsters and tax evaders. It’s been in the keep our money clean campaign been run by the government for some time now. Less is known about the additional threat facing financial institutions and professional services about the financing of terrorism.
Generally terrorism financing and money laundering comes to light at the point of the terrorist attack or being found out by law enforcement. Both rely on the movement of money covertly through the financial sector or cash economy. Although they may share many techniques they have different overall aims. Terrorism financing takes any funds (including legitimate funds) and moves them towards an intended crime, the results of which can be significant. Money laundering takes proceeds of crime and attempts to transform these into clean (legitimate) funds, this is by far the more prevalent in New Zealand.
Money Laundering also has a significant effect, although not as transparent perhaps, and has implications both within and outside New Zealand. Laundering touches all levels of society; the selling of drugs on our poorest streets, laundering cash through local and offshore businesses and corrupt politicians and officials laundering funds through shell companies and trusts via tax havens and multi-jurisdictional structures e.g. the Panama Papers scandal. There are the financial effects of distorting the economy, eroding the tax base and depressing growth, the reputation effects of been seen as a safe and trustworthy place to do business and the emotional/physical effects on those caught in the drug net, the frustration of seeing offshore criminals sequester funds into our artificially inflated housing market whilst being unable to escape the rent trap or seeing people in our own neighbourhoods enjoying luxury assets we can only dream about.
Money laundering has three overlapping phases.
The placement stage such as cash from illegal drug sales being co-mingled with legitimate business takings or is traded for assets, an illegitimate tax refund being used to buy shares in a company or a fraudulently obtained loan being split up and moved through several bank accounts or loaded into a number of credit cards.
The layering stage involves making a series of transactions, conversions or movements of the illicit funds to confuse the audit trail, obstruct any investigation and put some distance between the launderer and the original crime. Examples of these include; the engagement of professional services to move funds through trust accounts and the concealment of beneficial owners such as setting up trading companies with nominee directors or shareholders; trade based fraud such as disguising fund transfers as legitimate payments using fake supporting documentation.
The integration stage is the ultimate goal. The use of clean funds to enjoy luxury assets or real estate, investing funds back into criminal activities or investing in legitimate businesses. Again professional services can be instrumental in supporting this integration into real estate, businesses and other assets especially where property titles are placed in third party names or in the names of trusts or companies to maintain some distance from the actual beneficial owner.
Like money laundering terrorism financing also has three phases.
Raising funds; these can involve criminal activities but could equally be from donations or other forms of legitimate earnings. The use of charitable trusts is a vehicle often utilised.
Transferring of funds; this generally means the movement of funds or value across borders – physical transportation of cash, wire transfers or the use of hawala networks (an very-old informal transaction system that is difficult to monitor).
Use of funds; this involves the terrorist groups funding their operations from living expenses through to a terrorist act.
The express statutory purpose of the Anti-Money Laundering and Countering Financing Terrorism Act (AML/CFT Act) is to detect and deter both of these actions, to maintain and enhance New Zealand’s international reputation by adopting, where appropriate in the New Zealand context, recommendations issued by the Financial Action Task Force (FATF) and to contribute to public confidence in the financial system.
It would be fair to say the implementation of the Act has had a significant, and perhaps disproportionate, impact on individual businesses. It has placed requirements on reporting entities that are both costly and time consuming to implement. Appointment of compliance officers, onboarding time and cost of customer due diligent measures, training of staff, ongoing monitoring and two yearly audits all adds up.
Some businesses have also spent an amount of time on ensuring they do not become captured under the Act, resulting in possible lost earnings and inconvenience to clients, but in some cases a good ole’ shake up chance to refocus.
However, there are some benefits from being compliant:
The exercise of writing the risk-assessment and compliance programme is valuable in gaining insights into your business’s operations and governance. It can improve systems and efficiencies and combining with existing business processes will be mutually reinforcing.
A well designed programme deters criminals by putting scrutiny and the threat of reporting to Police in their way and builds a greater barrier to being exploited or risking reputational and financial damage.
Staff will have greater situational awareness and become aware of criminal influences both in and outside the business, such as fraud.
Public confidence in the system and individual businesses aids investment and take-up of services.
And having an understanding of the wider benefits of maintaining safer communities, being regarded as good global citizens and having a trusted financial system, along with better policy making due to more accurate economic information and a larger tax take to fund social spending may go some way in making the burden easier to carry, or at least provide greater understanding of why the Act is necessary.
So do the benefits outweigh the costs? That’s possibly more an ethical/social conscious question than a quantitative one for many businesses captured by the act and one that will inevitably bring a range of answers. What is clear is that the Act is here to stay – how we reconcile that to our individual situation is up to you.
That’s all for this month…..