Anti-Money Laundering explained

AMLHUB's quick guide to anti-money laundering in New Zealand

“Money laundering” – it calls to mind laundromats and giant bags of cash, or maybe the Netflix series Ozark. For most people it’s a vague concept that’s ‘bad’, with no understanding of what it is and how it actually happens. But it’s a big problem: in New Zealand alone, around $1 billion is laundered every year, while globally the figure is estimated to be $4 trillion.

Laundered money is a result of the most appalling crimes, such as drug smuggling, human trafficking, bribery, blackmail…. etc., and New Zealand is united with countries around the world to detect and deter money laundering.

In this article I’ll give you the run-down on what money laundering is, how it happens, and what New Zealand is doing to combat it with anti-money laundering laws.

What is money laundering?

Money laundering is the way in which criminals take “dirty” money obtained through illegal activities, and “clean” it by running it through several different transactions to obscure its origins.

As mentioned above, this money is usually a result of some seriously illegal activity, so criminals have a lot of motivation to hide its origins so they can spend it without being caught.

There are many sophisticated ways to layer the funds through multiple channels. For example, putting $1 million cash into your bank account is easily detected. Using different financial products and assets can disguise the origin of the money. 

How is money laundered?

*please note, this is not a how-to guide...

There are a variety of ways money can be laundered, ranging from the simple (such as business fronts) to the very complex (multi-country money transfers via shell corporations). The methods of money laundering are seemingly limited only by criminal imagination.

There are three typical stages to the money laundering process: placement, layering, and integration.

1. Placement: this is when dirty money is entered into the financial system, either locally or abroad. For example, buying foreign money through a currency exchange, or purchasing a large asset like property.
2. Layering: at this stage, the money is “washed” through several transactions to obscure the trail further and create the impression that it’s legitimate, typically across country lines. This could be in the form of wire transfers or making payments between shell companies. The point at this stage is to keep the money moving, take advantage of bureaucratic delays and legal loopholes, and create a difficult trail to follow.
3. Integration: the now “cleaned” money is returned to the criminals and can be accessed and spent on whatever they like. Since it appears to have come from a legitimate source, there is no suspicion.
   
   

Innocent businesses are helping money launderers

Money launderers don’t work in isolation. They frequently make use of professional service providers to move money around, such as lawyers, accountants, real estate agents, and fund managers.

The reason professional services are targeted is because they have the authority to handle large sums of money without suspicion, or they can set up the systems by which money can be transferred or obscured. They also own qualifications that add a veneer of legitimacy and are members of a body that is trusted by society. Perfect for money launderers.

6 examples of how professional services are used to launder money

1. Purchase of a house: Criminals use real estate agencies to buy a house using a legitimate deposit. They then take out a mortgage for remainder and pay it back using illicit funds. Once the mortgage is paid off, criminals sell the house and pocket the clean money. Mortgage repayments are made below the reporting threshold, so no alarm bells are set off.
2. Manipulating property prices: a quick way to squeeze clean money out of real estate dealings is to undervalue what the property is worth and pay the difference to the seller in cash. Similarly, criminals can offer to buy the house at far more than it’s worth in order to get a bigger mortgage, so that more “dirty” money can be repaid to the bank over time.
3. Setting up companies: lawyers and accountants frequently help with setting up businesses, and money launderers take advantage of this by having them create “shell” companies (businesses that exist on paper with no substance behind them). The professionals provide their registered business address or register the company on behalf of the client, which gives the money launderer anonymity and distance, making it difficult for authorities to track them down.

4. Setting up and managing trusts: lawyers and accountants have authority to manage trust funds on behalf of people, including the sale, purchase, and hold of real estate. Transferring and holding money in their accounts helps obscure its origins and hide it—and the money launderer—from the authorities. 

5. Acting as directors or shareholders: lawyers may be asked to sit as a director for a company that is registered to the NZ Companies Office, which gives false legitimacy. The company is then used as a channel through which money can be transferred.

6. Managing funds: financial service providers (such as the people who manage your pension) oversee the movement of large sums around the stock market on behalf of their clients. Money launderers use illicit funds to buy into the investment and sell up later to collect the now “clean” money.
   
   

How New Zealand is fighting money laundering

All of the above spells out how big a problem money laundering is for New Zealand and the world, but we’re not sitting idly by and just letting it happen.

In 2009, New Zealand passed the Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) Act, which is a set of obligations for businesses captured under the Act to help detect and deter money laundering happening as part of their every-day service offerings. Such businesses range from casinos to banks, law firms to real estate agents, and more. The enforcement of the Act is overseen by three Supervisors: the Department of Internal Affairs, Reserve Bank of NZ, and Financial Markets Authority.

Like our Health and Safety laws, the AML/CFT Act is risk-based legislation. This means the company must identify and then mitigate their risks. Your company is captured under the Act by the products and services you provide. For example, if you offer a captured service you must comply with the rules and obligations set out in the Act.^[1]

What are the obligations of the AML/CFT Act?

If you’re captured under the Act, you have certain AML obligations you must undertake to protect your business (and reputation!) from money laundering:

1. Appoint a Compliance Officer who manages your business compliance activities and reports.
2. Perform a Risk Assessment on where in your business you are most exposed.
3. Create a Compliance Programme for how you’re going to manage your risk.

You must also:

• Perform Customer Due Diligence (CDD) and sign-off on each case
• Conduct ongoing CDD and account monitoring
• Conduct staff vetting
• Conduct staff training
• Report suspicious activities
• Submit prescribed transaction reports
• File an annual report with the Supervisors
• Get an independent audit every three years
• Reassess and update your Compliance Programme regularly
• Keep all records for at least five years
• Demonstrate you’ve done all the above through record-keeping and updates

It’s important to note that under the Act, businesses cannot outsource their liability.^[2] For example, if they use a third-party to manage CDD, the business still must review the outsourced work and sign it off. 

What happens if I don’t meet all the obligations?

The AML/CFT Act comes with both criminal and civil penalties which is meant to enforce the legislation, and businesses need to be rigorous in complying with its obligations. Businesses and individuals that do not meet their AML obligations could be faced with the following:

• Private warning
  The Supervisors will conduct reviews and where the business is non-compliant, may issue a warning to the Board of Directors. The Supervisor will then follow up to check if you’ve implemented required changes or remedial activities.
• Public warning
  The Supervisors issue a public statement highlighting where the business is non-compliant. Public warnings generate much media interest and cause significant damage to brand reputation (see an example of a DIA formal warning here).
  
• Fines and prosecution
  Under the Civil Liability Act, individuals can face fines of up to $200,00 while body corporate or partnerships can face up to $2 million.^[3]
  
  Under sections 91 to 97 of the Act, individuals can be hit with fines of up to $300,000 and up to two years’ imprisonment. Body corporates or partnerships can receive fines of up to $5 million.^[4]
  
  

Conclusion

Businesses and professionals are key to disrupting money laundering activities, as they are a major channel through which money is legitimized and returned to criminals. With over $1 billion being laundered in New Zealand every year, businesses and professionals have a responsibility to get to grips with money laundering: what it is, how it happens, and what their obligations are under the Act. By understanding and meeting their AML requirements, businesses and professionals can help fight the profiteering of human trafficking, drug smuggling, corruption and bribery.

About AMLHUB

AMLHUB is New Zealand’s leading Anti-Money Laundering Software, helping you manage all your AML/CFT obligations from one digital platform. We support and empower your business to own and manage its AML obligations, so you can meet all the requirements of the Act in the easiest way and with total transparency.

Find out more about how AMLHUB can help your business.

[1] https://www.dia.govt.nz/AML-CFT-information-for-accountants

[2] https://www.dia.govt.nz/aml-cft-outsourcing-customer-due-diligence

[3] https://www.legislation.govt.nz/act/public/2009/0035/latest/DLM2140968.html

[4] https://www.legislation.govt.nz/act/public/2009/0035/latest/DLM2140981.html