Trust and company service provider warned

19 December 2017
The Department of Internal Affairs has issued a formal warning to an Auckland-based reporting entity under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act).

ECS Limited, company number 6213668, provides trust and company services to overseas- based customers – a registered office, a business address and a correspondence address that they can use in New Zealand. A number of ECS customers are financial service providers who provide financial services outside New Zealand.

The Department is the supervisory agency that monitors trust and company service providers for compliance with their obligations under the AML/CFT Act. The formal warning to ECS Limited was issued on 29 November 2017 under section 80 of the AML/CFT Act.

The Department undertook an initial visit to ECS Limited on 8 June 2017, a subsequent desk-based review of its written AML/CFT procedures and then an on-site inspection on 23 August 2017. These supervisory engagements identified that ECS Limited had failed to establish, implement and maintain an adequate AML/CFT programme. In particular ECS Limited had failed to conduct customer due diligence as required, failed to adequately monitor accounts and transactions, and failed to keep adequate records in accordance with the AML/CFT Act.

The Department required ECS Limited to take immediate action to rectify all areas where it was non-compliant with its AML/CFT obligations. It will continue to monitor ECS Limited and consider further enforcement action if it engages in conduct that does not comply with the AML/CFT Act.

This is the third formal warning to be published as a summary. Since the AML/CFT Act came into force on 30 June 2013, the Department has issued 23 non-public formal warnings, either for failure to meet particular risk assessment or AML/CFT programme obligations or for failing to submit an annual AML/CFT report.

Ends

The Act seeks to detect and deter potential money laundering and terrorism financing. Enforcement of the Act contributes to public confidence in New Zealand’s financial system, and puts New Zealand in line with international anti-money laundering and countering financing of terrorism (AML/CFT) standards. The Act places obligations on New Zealand’s financial service providers, trust and company service providers and casinos, known as reporting entities, to detect and deter money laundering and terrorism financing (ML/FT).

What is a reporting entity required to do to comply with the Act?

A reporting entity is first required to assess the risk of ML/FT that it may reasonably expect to face in the course of its business. A reporting entity is then required to establish, implement and maintain an AML/CFT programme which includes adequate and effective procedures, policies and controls for managing and mitigating the ML/FT risk. The requirements of an AML/CFT programme include staff training and vetting, customer due diligence, account monitoring and suspicious transaction reporting, as well as obligations relating to record keeping, review, audit and submission of an annual report.

Who monitors reporting entities for compliance with their obligations under the Act?

The Act has three supervisory agencies in New Zealand, the Reserve Bank, the Financial Markets Authority (FMA) and the Department of Internal Affairs (DIA).

The Reserve Bank supervises registered banks, life insurers and non-bank deposit takers. The FMA supervises issuers of securities, licensed supervisors, fund managers, brokers and custodians, financial advisers, derivatives issuers, DIMS providers and peer to peer lending and equity crowd funding service providers. The DIA supervises casinos, non-deposit taking lenders, money changers, money remitters, payroll remitters, debt collectors, factors, financial leasors, safe deposit box vaults, non-bank credit card providers, stored value card providers and cash transporters, and any other financial institutions not supervised by the Reserve Bank or the FMA.

Taking effect during 2018-19, the AML/CFT Act is extended to include lawyers, conveyancers, accountants, real estate agents, the New Zealand Racing Board and some businesses that deal in expensive goods. The extension of the AML/CFT regime to these businesses is known as “Phase 2”. The DIA will be the supervisor of all Phase 2 reporting entities.

What is customer due diligence?

Customer due diligence (CDD) is a cornerstone of an AML/CFT programme. CDD is the process through which a reporting entity develops an understanding about its customers and the risks they pose to the business. CDD involves gathering and verifying information about a customer’s identity, beneficial owners or representatives, as well as other information, depending on the nature of the business relationship and the level of risk involved.

What is account monitoring?

Account monitoring involves reviewing a customer’s account activity and transaction behaviour. This requires a risk-based approach and consideration of the reporting entity’s knowledge about a customer, their business, transaction history and the type of CDD undertaken when the relationship was established. Account monitoring must allow a reporting entity to identify grounds for suspicious transaction reporting (to the New Zealand Police Financial Intelligence Unit).

What is record keeping?

The record-keeping obligations of the AML/CFT Act require a reporting entity to keep records relating to their customers and the transactions that they undertake. These records must enable all transactions to be fully reconstructed at any time. For complex, unusually large or patterned transactions, there are further requirements to examine them in detail and keep written findings.

What is a formal warning issued under section 80 of the Act?

Formal warnings can be issued when a supervisory agency has reasonable grounds to believe that a reporting entity has engaged in conduct that constitutes a civil liability act. These civil liability acts are specified in section 78 of the Act.

Why has a formal warning been issued to ECS Limited?

The formal warning has been issued on the basis that the Department has reasonable grounds to believe that ECS Limited has:

· Failed to conduct customer due diligence as required by subpart 1 of Part 2 of the Act (section 78(a) of the Act).
· Failed to adequately monitor accounts and transactions (section 78(b) of the Act).
· Entered into or continue a business relationship with a person who does not produce satisfactory evidence of the person’s identity (section 78(d) of the Act).
· Failed to report transactions in accordance with subpart 2 of Part 2 of the Act.
· Failed to keep records in accordance with the requirements of subpart 3 of Part 2 of the Act (section 78(e) of the Act).
· Failed to establish, implement, or maintain an AML/CFT programme (section 78(f) of the Act).

How many formal warnings has DIA issued under section 80 of the Act?

Since the Act came into force on 30 June 2013, DIA has issued 23 non-public formal warnings. These have been issued either for failure to meet particular risk assessment or AML/CFT programme obligations or for failing to submit an annual AML/CFT report.

This formal warning is the third for which DIA has published a summary.

Why has DIA published a summary of the formal warning to ECS Limited?

The civil liability acts in which ECS Limited has engaged are serious and extensive. It is therefore appropriate to publish a summary of this formal warning.

What other action can be taken if a reporting entity does not comply with the requirements of the Act?

Where reporting entities engage in conduct that does not comply with the requirements of the Act, supervisory agencies have various enforcement actions available to them. This includes civil or criminal action, which could result in (but is not limited to) the imposition of:

· Civil penalties of up to $200,000 in the case of an individual, and $2 million, in the case of a body corporate; and
· Criminal penalties of imprisonment for up to two years or a fine of up to $300,000, in the case of an individual, and $5 million in the case of a body corporate.

On 28 September 2017, the first judgment was issued in the Auckland High Court for conduct by a reporting entity constituting civil liability acts under the AML/CFT Act. The Court made orders requiring Ping An Finance (Group) New Zealand Company Limited to pay a total of $5.29 million in pecuniary penalties. It also granted injunctions restraining the company and its sole director, Mr Xiaolan Xiao, from providing financial services that would cause either of them to be a reporting entity under the AML/CFT Act. A copy of the judgment is available (here).

Ends