7941703

New Zealand’s AML/CFT Regime:Impact on AFMA members

Presented by Lloyd Kavanagh

June 2013

Agenda

•Objective and timing of the new AML/CFT regime

•Key features of the new AML/CFT regime

•Similar in principle to Australia

•But significant differences in the detail

•Questions

Objective and timing of the new AML/CFT regime

• Purposes of the AML/CFT Act:

• To detect and deter money laundering and terrorism financing

• To maintain and enhance New Zealand’s international reputation by adopting FATF Recommendations

• To contribute to public confidence in the financial system

• Latest Regulation Changes 27 May 2013

Key difference: No assisted compliance period

Key features of the new AML/CFT regime -Supervisors• 3 Supervisors:

• Reserve Bank

• Financial Markets Authority

• Department of Internal Affairs

• Involvement by other entities including:

• Financial Intelligence Unit of Police

• AML/CFT National Co-ordination Committee

• Customs

• Ministry of Justice

Key difference: Split Supervision – No Austrac

Key features of the new AML/CFT regime -components

Regulations Codes of practice Guidance Material

AML / CFT Act

Key difference: Limited guidance so far.

Key features of the new AML/CFT regime –reporting entities• Casinos• Financial Institutions - person who in ordinary course of

business:

• Inclusions by regulation e.g. trust and company service providers, certain financial advisers

Key difference: Wider scope: Ambiguity

• accepts deposits from public• lends or finances• financial leases• transfers money for customer• issues means of payment• undertakes financial guarantees• trades financial instruments• participates in securities issues

• provides financial services related to securities issues

• manages individual or collective portfolios

• safe keeping cash or liquid securities• invests, administers or manages funds

or money for others• underwrites or places life or investment

related insurance• changes money or currency

Key features of the new AML/CFT regime –territorial scope• Guideline: Territorial scope of the Anti-Money Laundering and

Countering Financing of Terrorism Act 2009 issued by Supervisors:

• An entity formed in New Zealand which carries on financial activities wholly outside New Zealand and will not be a reporting entity under the AML/CFT Act

• An overseas entity will likely be a reporting entity if:

• Carrying on business in New Zealand; and

• Engaged in one or more of the activities listed in the financial institution definition in the AML/CFT Act in New Zealand

• Not carrying on business in New Zealand is unlikely to be a reporting entity under the AML/CFT Act

Key difference: No territoriality clause

Key features of AML/CFT regime - obligations

•Obligations – like Australia, the AML/CFT Act puts in place a number of active steps:

•AML/CFT Compliance Officer

•Risk assessments

•Ongoing Compliance Programme and Monitoring

•Customer Due Diligence

•Transaction monitoring and reporting of suspicious transactions

•Detailed Record Keeping Requirements

Key features of AML/CFT regime – obligations – Key differences from Australia.

•Hybrid Model:

•Mainly risk based - but

• Enhanced CDD for all trusts or vehicles holding personal assets, or companies with nominee shareholders or bearer shares.

• PEPs require senior management approval and source of wealth.

•Audits every two years but annual reporting

Key features of AML/CFT regime – obligations – Key differences from Australia•AML Compliance Officer – must be an employee of RE or DBG

•DBGs can include non-REs and be cross border

•No multi party facility holder exemption for CDD – must verify all facility holders

•Must CDD all “beneficial owners”

•effective controllers

•persons “on behalf”

•over 25% owners

Key features of the new AML/CFT regime –offences and enforcement

•Civil liability acts

•Failure to comply with requirements of obligations above, e.g. customer due diligence

•Extensive liability regime and penalties

•Could result in formal warnings, enforceable undertakings, compensation assessments, injunctions, pecuniary penalties

Key features of the new AML/CFT regime –offences and enforcement•Money laundering and terrorist financing offences – predicate offences contained in Crimes Act, Misuse of Drugs Act, Terrorism Suppression Act etc

•Offences under the AML/CFT Act where:

•Civil liability acts committed and reporting entity engaged in conduct knowingly or recklessly

•Other events occur, such as failure to report a suspicious transaction, providing misleading information etc

•Shell banks

•Immunities

Summary of Major Differences from Australia•The importance of harmonisation with Australia was a key submission point – however:

•Multiple Supervisors – no NZTRAC

•No assisted compliance period – short implementation period

•Greater prescription in some aspects

•Other differences in the detail – NZ decided to “start from scratch” rather than adopt Australian precedent

•No mutual recognition regime

•Cannot simply “drag and drop” Australia solutions because NZ law is not a copy of Australia – even though they are similar

AML/CFT – Questions and Answers

•Client Identification?

•Wholesale Markets?

•Mutual Recognition or Equivalence?

•Cross-border reporting

•Required?

•Permitted?

LEFT TO RIGHTLloyd Kavanagh Partner T +64 9 353 9976 M +64 21 786 172Aaron Lloyd Partner T +64 9 353 9971 M +64 21 532 000Jeremy Muir Partner T +64 9 353 9819 M +64 21 625 319

Team contacts

EMAIL firstname.lastname@minterellison.co.nz

Overview of guidelines issued by supervisors• Identity Verification Code• Risk Assessments• AML/CFT Risk Assessment Guideline• AML/CFT Programme Guideline• Interpreting “ordinary course of business” Guideline• Designated Business Group - Formation Guideline• Designated Business Group – Scope Guideline• Countries Assessment Guideline• Insurance Business Coverage Guideline

Overview of guidelines issued by supervisors

• Guideline: Issuers of securities and participants in issues

• Guide for small financial adviser businesses• Guideline for audits of risk assessments and

AML/CFT programmes• Guideline: Territorial scope of the Anti-

Money Laundering and Countering Financing of Terrorism Act 2009

Overview of guidelines issued by supervisors

• Beneficial Ownership Guideline • Beneficial Ownership Fact Sheets:

1. Customer Due Diligence - Clubs and Societies2. Customer Due Diligence – Companies3. Customer Due Diligence – Limited Partnerships4. Customer Due Diligence – Trusts5. Customer Due Diligence – Co-operatives6. Customer Due Diligence – Managing

Intermediaries

7941703

The Financial Markets Conduct Bill – A Roadmap

Presentation for AFMA18 June 2013

Agenda•Purpose

•Timetable

•What does it cover?

•Financial products

•Disclosure

•MIS and licensing

•Dealing/markets

•Enforcement

•Trans-Tasman issues

Purpose of the legislation

•Main purposes• Promoting confident and informed participation in financial

markets

• Promoting development of fair, efficient and transparent financial markets

•Additional purposes• Timely and accurate provision of information

• Appropriate governance arrangements

• Avoid unnecessary compliance costs

• Promote innovation and flexibility in financial markets

Timetable

•Enactment – Mid 2013?

•Draft regulations October 2013?

•New legislation effective (1 April 2014?)

•Transitional period • 2 years to transition existing schemes and funds

• New offers: have 12 months from commencement during which can elect either regime

• No allotments allowed under former enactments after 2 years

What does it cover?

Securities Act 1978

Securities Markets Act

1988

Securities Transfer Act

1991Unit Trusts Act

1960

Superannuation Schemes Act

1989Parts of the

KiwiSaver Act

Parts of the Securities

Amendment Act 2011

Variousregulations

FINANCIAL MARKETS CONDUCT

ACT

Overview of NZ’s securities law - now

Companies Act 1993[Other: LPs, unit trusts, super, KiwiSaver]

SecuritiesRegulations 2009

Investment Statement Prospectus

Takeovers Act 1993Takeovers Code 2000

Takeovers Panel

FINANCIAL MARKETS AUTHORITY

Securities Markets Act 1988

Insider Trading Market Manipulation

Securities Act 1978“Offer to the public”

Registrar of FSPs

NZX Listing Rules

Securities Transfer Act 1991

Continuous Disclosure

Financial Advisers Act 2008

Registrar of Companies

Securities Trustees and Statutory Supervisors Act 2011

Reserve Bank of NZ Act 1989

Financial Service Providers (Registration and Dispute Resolution) Act 2008

RBNZ

NZX

Auditor Regulation Act 2011

Overview of NZ’s securities law – future

Companies Act 1993[Other: LPs, KiwiSaver]

[Financial Markets Conduct Regulations]

Product Disclosure Statements (PDS)Online Register

Takeovers Act 1993Takeovers Code 2000

Takeovers Panel

FINANCIAL MARKETS AUTHORITY

[Financial Markets Conduct Act]-Regulated offers of financial products (equity/debt/MIS/derivatives-Insider trading-Market manipulation-Licensing

NZX Listing Rules

NZX

Registrar of Companies

Reserve Bank of NZ Act 1989

RBNZ

Securities Trustees and Statutory Supervisors Act 2011

Financial Service Providers (Registration and Dispute Resolution) Act 2008

Financial Advisers Act 2008

[Non-Bank Deposit Takers Act]

Auditor Regulation Act 2011

What does it cover?

•The Bill regulates “financial products”

•Definitions focus on substance not form (except equity securities!)

•FMA has power to designate products

•4 types of financial products

What is a financial product?

Equity Securities

Debt Securities

DerivativesManaged

investment products

Equity securities

•A share in a company

•A share in an industrial and provident society

•A share in a building society

•Not a debt security

Equity Securities

Debt securities

•A right to be repaid money or paid interest on money that is, or is to be, deposited with, lent to, or otherwise owing by, any person

•Includes debenture, bond, note, convertible note, redeemable share (except where only redeemable at entity’s option)

•Not a (transacting) share in a co-op company, a derivative, or a unit interest/membership in a registered scheme

Debt Securities

Derivatives

An agreement where the following apply:

•Future consideration to be provided

•Future time is not less than prescribed time

•Consideration or value of the agreement is determined by reference to value or amount of something else e.g. asset, rate (e.g. interest or exchange), index, commodity

Derivatives

Derivatives (continued - 1)

•Includes a transaction recurrently entered into in the financial markets and commonly referred to as: futures contract, forward, option (other than by issue, re another product), swap, CFD, margin contract, rolling spot contract, cap, collar, floor, spread

•Does not include agreement for future provision of services, debt security, equity security, managed investment product

Derivatives

Derivatives (continued - 2)

•Does not include an agreement:

•to buy/sell property (other than financial products or NZ or foreign currency) at a price and on a date in the future;

•which cannot be cash-settled, or by set-off, rather than by delivery of the property; and

•where neither usual market practice nor market rules permit closing out by matching offsetting obligations

Derivatives

Managed investment products

•Right to participate in, or receive financial benefits from, a managed investment scheme (MIS)

•Not an equity security or a debt security

•MIS requires contribution of money for rights to financial benefits produced by another; not day-to-day control for investors

•Not bare trust schemes; DIMS; or pure risk or (grandfathered) life insurance

Managed investment products

But …

FMA has power to designate investments into product classes

When is disclosure required?

•Will apply to “regulated offers”“An offer of financial products to 1 or more investors where the offer to at least 1 of those investors requires disclosure under Part 3 of the Bill”

•Disclosure is required unless an exemption in Schedule 1 applies

Exclusions from disclosure

All offers

Sophisticated persons

Bright-line safe harbours

Offers through licensees Small

offers

Other exemptions

Exclusions from disclosure (cont)

• Offers to wholesale investors:• Investment businesses;

• Persons who meet the “investment activity criteria”,

• Large persons (assets >$10m or turnover >$20m)

• Government agencies

• “Eligible investors” (self certified/AFA confirmed)

• $750K minimum subscription

• Offers through licensed intermediaries and DIMS licensees

Exclusions from disclosure (cont)• Small offers (max 20 investors and $2m over 12

months)

• Other exclusions:• Persons in close relationship (close business associates and relatives)

• Transfer of a controlling interest

• Small managed investment schemes (max 5 participants)

• Employee share purchase schemes

• Dividend reinvestment plans

• Offers for no consideration

• Offers of derivatives where derivatives issuer is not involved

• Offers of category 2 products or debt securities by registered banks

• Offers by Crown, local authorities etc

• Retirement villages, contributory mortgages

• Offers of renewals/variations

How to disclose•No prospectuses and investment statements. Instead disclosure will generally be comprised of:

• Product disclosure statement (PDS)

• Register entry

• Other documents - depending on the security (such as governing documents including trust deeds)

•The purpose of the PDS is to:“provide certain information that is likely to assist a prudent but non-expert person to decide whether or not to acquire the financial products”

Product Disclosure Statements

•The form and content of a PDS will be prescribed in separate regulations and will be customised for different situations

•2 parts – key information summary and prescribed information section

•To update a PDS, an issuer can lodge a supplementary document or a replacement PDS with the Registrar

Register entry

•Other material information relating to the regulated offer must be contained in a register entry for the offer

•When the PDS is lodged, the register entry must contain:

• all info and documents that regulations require; and

• all material information relating to the regulated offer that is not contained in the PDS. In summary, material info is info that a reasonable person would expect to, or to be likely to, influence persons who commonly invest in financial products when deciding whether to acquire the financial products

So basically disclosure is changing from

Disclosure for derivativesParty A Party B Example Consequence

licensed derivatives issuer

retail investor a bank and a customer

A makes disclosure; B

doesn’t

person in the business of entering into

derivatives

investor who is not energy company and a retail

investor

A must be licensed + disclose; B

doesn’t

licensed derivatives issuer

licensed derivatives issuer

two banks no disclosure required

wholesale investor wholesale investor two large energy companies

no disclosure required

investor not in the business of issuing

derivatives

investor not in the business of issuing

derivatives

[no example given – two retail

investors?]

no disclosure required

Managed investment schemes

•Managed investment schemes need to be registered (registered scheme) – requires them to meet key common governance and reporting requirements

•Manager of a registered scheme will now have to be licensed by the FMA and comply with general duties

•Supervisors of registered schemes will also have set functions and need to meet statutory duties

Managed investment schemes (cont)

•Related party transactions in relation to managed investment schemes are regulated and limits imposed for restricted managed investment schemes

•Custodianship of scheme property of a registered scheme needs to be independent from the Manager

Licensing of market services

•Licensing regime for certain market services – set out in Part 6

•The FMA will license:• Managers (of managed investment schemes)

• Providers of Discretionary Investment Management Services (DIMS)

• Derivatives issuers

• Independent trustees of restricted managed investment schemes

Licensing of market services (cont)

•Regulations will determine the specific license criteria and the types of conditions that apply

•The FMA is required to take account of whether entities seeking licenses are already QFEs or registered banks

•Supervisors of debt securities and managed investment schemes will continue to be licensed under Securities Trustees and Statutory Supervisors Act 2011

Dealing in Financial Products on Markets

Dealing in Financial Products on Markets

•Part 5 replaces various parts of the Securities Markets Act 1988 and the Securities Transfer Act 1991

• Insider trading and market manipulation

• Continuous disclosure by issuers

• SSH disclosure and disclosure by directors and senior managers

• Licensing and operation of exchanges (licensed markets)

• Unsolicited offers

Enforcement

•As a general principle, criminal penalties will be reserved for conduct which is “knowing or reckless”

•Introduces an infringement notice regime for minor “compliance” type contraventions. FMA will be able to issue “speeding tickets” in these situations

•Bill also includes other types of enforcement options: civil remedies, compensation orders, pecuniary penalty orders

Enforcement (cont)

•Significant increase in penalties (fines of up to NZ$1 million for individuals and NZ$5 million for companies)

•Maximum 10-year prison terms

Trans-Tasman issues

•Provides for mutual recognition regimes

•Territorial scope

•Fair dealing

•Disclosure

•Dealing on markets

•Licensing

Conclusion

•Bill represents a fundamental change to the regulation of NZ’s financial markets and securities offers

•It is important for the market to get up to speed with the requirements and to track the progress of the Bill

Questions