New Zealand Lacks Governance Framework To Combat Transnational Crime

With 20+ years’ experience in preventing financial crime and anti-money laundering, I feel obligated to inform other financial crime experts of New Zealand's weaknesses to detect and prevent transnational crime. This includes money laundering and terrorism financing.

Failing International Standards to Prevent Money Laundering

On 1 July 2013, New Zealand’s registered banks became subject to the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the AML/CFT Act).

Prior to that date, New Zealand had no regulatory framework to enforce laws for anti-money laundering and prevention of terrorism financing.

Though NZ had in place the Financial Transactions Reporting Act 1996 (FTR Act), the FTR Act was not administered or regulated across New Zealand. Most businesses that were captured by the FTR Act, did not even know of its existence.

Though NZ’s registered banks were aware of the FTR Act, there were no standards set for banks to adequately identify their customers.

When a country operates without the framework to detect, report and monitor threats arising from money laundering and/or financing of terrorism, one can assume the country will be a haven for facilitating such crimes.

When New Zealand’s AML/CFT Act came into force on 1 July 2013, it had a significant flaw. The flaw resulted as a consequence of New Zealand’s banks successfully lobbying Parliament to change the conditions that trigger when a bank should verify the identity of their "existing customers".

To explain this further, the AML/CFT Bill required banks to verify the identity of their existing customers when either one of the below events were triggered:

1. The bank gained knowledge that the client identity records on file were unreliable or non-existent; OR
2. There was a material change in the nature and purpose of the client’s business relationship.

However by the time the AML/CFT Act was implemented, the word “OR” had been removed and replaced with the word “AND”.

This therefore meant that even if the bank held knowledge that the account had insufficient identity verification records, there was no need to update identity verification until there was a ‘material change in the nature and purpose’ of the business account.

The AML/CFT Act essentially enables a bank account that was facilitating money laundering or financing of terrorism, as at 1 July 2013, to continue.

Identity verification for these accounts only needed to occur when the client materially changed their business or account activity.

This of course is a material failure for the AML/CFT Act which sets out its purpose as:

• to detect and deter money laundering and terrorism financing;
• 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.

Increased Exposure to Facilitating the Financing of Terrorism

Transnational crime is closely linked to serious fraud, money laundering, financing of terrorism, corruption and bribery.

In an attempt to curtail these threats to society, the United Nations Security Council (UNSC) obligates its Member Countries to unite and take action for the purpose of maintaining international peace and security.

One of the powers held by UNSC is the issue of UN Sanctions. Known as economic and trade sanctions, UN Sanctions are issued against individuals, groups and countries that fail to comply with international standards of peace and security.

New Zealand as a Member Country of the United Nations is obligated to enforce UN Sanctions. However, NZ continues to have no sanctions monitoring framework in place or regulators that enforce UN Sanctions.

Even the AML/CFT Act fails to ensure businesses are informed of their obligations under UN Sanctions.

These weaknesses expose New Zealand as a country that can facilitate terrorism financing whilst simultaneously, failing to regulate UN Sanctions.

Illustration of New Zealand’s facilitation of Terrorism Financing

A good illustration of how New Zealand’s weaknesses can harm international security occurred in 2009.

At that time a NZ incorporated company SP Trading Ltd was used to hire a former Soviet Air Force transport plane. The said plane was later intercepted by Thailand police when it landed at Bangkok airport for fuelling.

Thailand’s investigators found the plane was transporting 35 tonnes of weapons from North Korea and was heading to Iran. The weapons included explosives, rocket-propelled grenades and components for surface-to-air missiles. Both countries, North Korea and Iran were subject to UN Sanctions (both countries still are).

The above is one example of the threats that NZ presents to all other countries arising from its weaknesses to combat transnational crime, money laundering, terrorism financing, serious fraud and corruption.

This is 1 of 3 articles discussing New Zealand’s weaknesses in managing threats arising from transnational crime.

Opinion: Kerry Grass, Asia Pacific AML

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