Improving market governance of the New Zealand Emissions Trading Scheme

Closes 27 Feb 2023

Topic 4: Applying the AML/CFT Act framework

There are questions that can be answered within section four.

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Summary option

  • No further AML/CFT obligations will apply to the NZU market beyond what already applies.
  • This section describes how the AML/CFT Act currently operates and captures particular financial activity in the NZU market, and who might be regulated.
  • Alternative options to the status quo have not been considered. This topic serves as a reminder of AML/CFT obligations.

Summary of impact

  • The purpose is to detect and deter money laundering and terrorism financing within the NZU market.
  • Employing the status quo means highlighting how the AML/CFT already applies to the NZU market. There may be parties who did not know they are currently regulated.
  • Those who are regulated entities under the AML/CFT Act are regulated based on captured activities.

Objective

Our objective is to better communicate how the AML/CFT Act captures activities of interest within the NZU market to deter money laundering and financing of terrorism.

We propose to introduce no further AML/CFT obligations to the NZU market beyond what already applies at present.

What we have heard so far

Stakeholder feedback from the 2021 consultation* noted that adequate frameworks already exist in the FMC Act and AML/CFT, which are better suited to address misconduct.

Describing the AML/CFT Act

Supervisors

The AML/CFT Act and its associated regulations have a role in the activities surrounding any financial product market, by placing obligations on Aotearoa New Zealand’s financial institutions to detect and deter money laundering and terrorism financing.

The purpose of the AML/CFT Act is to:

  • detect and deter money laundering and the financing of terrorism
  • maintain and enhance Aotearoa New Zealand’s international reputation
  • contribute to public confidence in the financial system.

There are three supervisors responsible for monitoring and enforcing the Act: the FMA, the Reserve Bank and the Department of Internal Affairs.

These supervisors actively cooperate with each other, with the New Zealand Police’s Financial Intelligence Unit, and with the Ministry of Justice (which administers the AML/CFT Act). The Financial Intelligence Unit also publishes guidance information for reporting entities on their obligations to report suspicious activities and prescribed transactions, and how to meet those obligations.

Reporting entities under the AML/CFT Act

The AML/CFT Act applies to reporting entities as defined in the Act. These reporting entities include financial institutions that engage in one or more of a defined list of financial activities (described below), which will include some activities related to the NZU market.

An example of financial activity that may occur in the NZU market, which is captured in by the AML/CFT Act today:

  • when a client receives a service that is investing, administering or managing money on that client’s behalf.

An example of a financial activity that may occur in the NZU market, which is not captured by the AML/CFT Act today:

  • simply providing regulated financial advice (eg, a recommendation to acquire shares in Company X), where the adviser does not handle client money or cash (because the client will carry out the transaction through a third party).

Even though NZUs are not a listed financial product under the FMC Act, nor are they expressly mentioned in the AML/CFT Act, certain NZU market activities in the marketplace can be captured.

Scope

The AML/CFT Act already applies to activities related to the NZU market – in particular where persons handle or invest money on behalf of others, or carry out other types of financial activities. This is the current scope of the AML/CFT legislation as it applies to financial product markets generally.

At this time, it is not necessary to extend the scope beyond the way the AML/CFT Act already applies in the NZU market.

Form of regulation and oversight

AML/CFT legislation is a risk-based regime. It allows businesses to determine the level of risk they are exposed to, in the particular circumstances of their business, and tailor their compliance practices accordingly.

User guides and regular guidance is published to ensure that regulation is effective, and that entities understand their obligations.

Obligations under the AML/CFT Act

Below are some basic obligations for a reporting entity identified under the AML/CFT Act:**

  • Written risk assessment 
  • Compliance programme 
  • Customer due diligence (CDD) (customer identification and verification and ongoing CDD) 
  • Annual reporting obligations 
  • Independent audit obligations 
  • Prescribed transaction reporting obligations.

What this means in practice

Financial advice providers (and financial advice relating to NZUs)

In this discussion document, we have proposed that those who give financial advice relating to NZUs are regulated in the same manner as a financial advice provider. It is important to note that not all who give financial advice (and financial advice relating to NZUs) are captured by the AML/CFT Act.

Not all financial advice providers are captured by the AML/CFT Act

This is because the AML/CFT Act is primarily applicable to those who handle money, cash or valuable assets on behalf of other persons. Only some financial advice providers (eg, those who handle client money or purchase securities on behalf of clients) are subject to the AML/CFT Act in this context.

Example

If a person today in the ordinary course of business invests, administers or manages funds or money on behalf of another person (eg, in the process of buying or selling NZUs), they are identified as a financial institution and are subject to AML/CFT Act obligations.

Alternatively, a financial advice provider who only gives advice about acquiring or disposing of NZUs (and does not deal with a client’s money) is not captured under the AML/CFT Act.

It is important to note that individuals registered as financial adviser are not reporting entities under the AML/CFT Act, simply by being a financial adviser.

Licensed market operators

The status quo proposal will apply existing AML/CFT obligations to new actors – for example, persons who become licensed NZU market operators and who fall under the definition of a ‘financial institution’, which is detailed in the capture points below.

Capture points for AML/CFT framework within the NZU market

The AML/CFT Act specifies a list of financial activities that can help an NZU market user to determine what type of actions would mean they are captured.

The Act provides a list of activities which, if carried on in the ordinary course of business,* will mean a person is a ‘financial institution’ and therefore a reporting entity under the AML/CFT Act. Table 15 sets out the description of the activities, contained in section 5(1) of the AML/CFT Act [New Zealand Legislation website]. The Act also specifies the inclusion of a person or class of persons declared by regulations to be a financial institution for the purposes of the AML/CFT Act (and the exclusion of the inverse).

Table 15: Activities undertaken by an AML/CFT reporting entity

Activities of a financial institution (described by AML/CFT Act)

  • accepting deposits or other repayable funds from the public
  • lending to or for a customer, including consumer credit, mortgage credit, factoring (with or without recourse), and financing of commercial transactions (including forfeiting)
  • financial leasing (excluding financial leasing arrangements in relation to consumer products)
  • transferring money or value for, or on behalf of, a customer
  • issuing or managing the means of payment (eg, credit or debit cards, cheques, traveller’s cheques, money orders, bankers’ drafts, or electronic money)
  • undertaking financial guarantees and commitments
  • trading for, or on behalf of, a customer in any of the following, using the person’s account or the customer’s account:
    • money market instruments (eg, cheques, bills, or derivatives)
    • foreign exchange
    • exchange, interest rate or index instruments
    • transferable securities
    • commodity futures trading
  • participating in securities issues and the provision of financial services related to those issues
  • managing individual or collective portfolios
  • safe keeping or administering of cash or liquid securities on behalf of other persons
  • investing, administering, or managing funds or money on behalf of other persons
  • issuing, or undertaking liability under, life insurance policies as an insurer
  • money or currency changing

A designated non-financial business or profession may also be captured as a reporting entity. This would include:

  • a law firm
  • a conveyancing practitioner an incorporated conveyancing firm
  • a real estate agent
  • a trust and company service provider.

Certain obligations will apply to anyone who identifies that their organisation undertakes these activities. More information about how to fulfil these obligations can be found in the section on ‘Guidance – understanding AML/CFT obligations’.

OTC trades in the NZU market

OTC or bilateral trades in the NZU market would not be captured under the AML/CFT Act. Although the underlying transfer of funds with value (eg, through a bank) are captured, it is the bank which holds AML/CFT reporting obligations.

Examples of NZ ETS forestry interactions with the AML/CFT Act

  1. Family member A manages Family member B’s accounts on their behalf, and NZUs are traded in the NZU market. Are they captured under the AML/CFT framework?

The AML is only interested in people who do activities in the ordinary course of business. Family member A managing accounts on behalf of Family member B would therefore not be captured as a reporting entity.

  1. A land sale has NZUs included as part of the sale at a $0 value. While this is a zero-dollar trade, NZUs still have a price in the market – are they captured under the AML/CFT framework?

The sale and purchase of land (and any associated property, such as NZUs) is captured by the AML/CFT Act if there is a law firm or conveyancing practitioner processing the sale. While units are forming part of the sale price in some regard, there is no specific financial activity captured.

However, if two persons bought and sold NZUs between themselves, those persons would not be reporting entities under the AML/CFT Act, but the bank through which payment is processed would be subject to AML/CFT obligations as a reporting entity.

Obligations when captured

If captured, basic obligations imposed on reporting entities in the AML/CFT framework include: 

  • assessing the money laundering and financing of terrorism risk that they may reasonably expect to face in the course of their business
  • establishing, implementing and maintaining an AML/CFT programme (procedures, policies and controls) to detect, manage and mitigate the risk of money laundering and the financing of terrorism
  • CDD (identification and verification of identity)
  • ongoing CDD 
  • suspicious activity reporting
  • record-keeping.

Note that reporting entities have considerable flexibility, within the limits prescribed by the AML/CFT Act, in how they meet their obligations.

Guidance - understanding AML/CFT obligations

Guidelines are available and are designed to help develop and implement AML/CFT programmes.

The AML/CFT programme is based around the fact that no one understands a business better than its operator and, to that end, the supervisors of the programme have provided guidance.**

How other countries apply AML/CFT provisions to their carbon markets

Since 1990, the EU has modernised its regulatory framework to deter money laundering and financing of terrorism. The latest developments from 2019 to 2022 include the publication of multiple reports, an action plan, ambitious legislative packages, and user manuals. The European Commission has published information on how it is fighting against money laundering and the financing of terrorism.***

No alternative options are proposed, because they could not feasibly be included in the wider NZ ETS market governance proposal at this time

Under this topic, detailing the status quo is only intended to serve as a reminder of how the AML/CFT Act framework currently works in the NZU market. Additional obligations in this space have not been suggested, as they would likely have implications throughout the AML/CFT Act, which has recently undergone review.

40. How can we support you to better understand your AML/CFT obligations?
41. Are the current AML/CFT settings that apply to the NZU market appropriate to safeguard against risks of money laundering and the financing of terrorism?