Legislative changes to the AML/CFT Act have been on the cards since the Ministry of Justice released its statutory report following its review of the Act in 2022, which included over 200 recommendations for reform.
Since the 2022 report, several of the Ministry's recommendations have been implemented through regulatory changes to the AML/CFT regime. These regulatory changes commence in three stages - the first two stages came into effect on 31 July 2023 and 1 June 2024 respectively, and the final stage is expected to come into effect on 1 June 2025. Our insight on those regulatory changes can be viewed here.
However, many of the Ministry's recommendations required changes to the primary legislation, so were unable to be effected by regulation.
On 20 August 2024, the Government released a cabinet paper setting out proposals to, among other things, introduce a proposed Anti-Money Laundering and Countering Financing of Terrorism Amendment Bill (AML/CFT Amendment Bill).
Key proposed changes
In total, the cabinet paper proposes that the AML/CFT Amendment Bill make 25 amendments to the AML/CFT Act. The cabinet paper stated that all 25 recommendations are drawn from the statutory report. The 25 amendments do not cover all the remaining recommendations from the statutory report – these will be tackled as part of a more substantive future update to the AML/CFT Act.
We have set out some of the most significant of these proposals below:
- Remove mandatory enhanced consumer due diligence (CDD) on certain low risk trusts: Currently, enhanced CDD is mandatory for all customers that are trusts or other vehicles for holding personal assets, even where the risk of money laundering or terrorism financing is low. The cabinet paper proposes that the AML/CFT Act be amended to remove the enhanced CDD requirement to verify the source of funds or source of wealth information of trusts, where the reporting entity is satisfied that verifying such information would not mitigate any risks identified when conducting standard CDD. This welcome change has potential to significantly reduce the compliance burden for reporting entities that regularly onboard trusts.
- Prohibit international wire transfers that lack required information: Currently, section 37 of the AML/CFT Act effectively prohibits wire transfers where CDD has not been conducted or there is missing information about the originator. However, it does not prohibit wire transfers that lack, for example, required beneficiary institution information. The cabinet paper proposes to explicitly prohibit the execution of international wire transfers that are not accompanied by required information.
- Remove the words “only to the extent that” from section 6(4): To avoid a potential regulatory gap, the cabinet paper proposes to remove the words "only to the extent that" from section 6(4) of the AML/CFT Act. We consider the proposed amendment requires more detailed consideration, as many reporting entities rely on section 6(4) to ensure that there is no application of the AML/CFT regime to activities that are not captured under the Act.
- Amend the definition of a “trust and company service provider”: The current definition of “trust and company service provider” results in certain reporting entities being captured as both a financial institution and a designated non-financial business or profession. While the 2023 regulatory changes sought to exclude certain entities from being trust and company service providers, the cabinet paper proposes that the definition in the AML/CFT Act is amended to remove any dual capture for businesses under the definition.
- Amend the “beneficial owner” definition to be consistent with the recent regulatory change: The AML/CFT Act requires reporting entities to conduct CDD on any beneficial owners of their customers. The definition of “beneficial owner” includes a person who has effective control of a customer or person on whose behalf a transaction is conducted (POWBATIC). A 2023 regulatory change sought to clarify that CDD should only be conducted on a POWBATIC to the extent the POWBATIC has ultimate ownership or control of a customer, meaning reporting entities would generally not be required to conduct CDD on customers’ customers. However, the 2023 regulatory change was limited in the way it could alter the AML/CFT Act definition. The proposal to amend the “beneficial owner” definition in the AML/CFT Act would now bring the definition in line with Parliament’s original intention and the subsequent regulatory change.
- Introduce specific record keeping timeframes: The AML/CFT Act currently requires that reporting entities keep AML/CFT records “readily accessible”. The cabinet paper proposes introducing specified timeframes to provide clarity on what is required. The Ministers propose that the timeframes comply with the Financial Action Task Force’s standard that records must be produced "swiftly". This is a welcome change – in at least one case it has been suggested that records need to be produced "immediately" – but much will depend on the actual timeframes introduced.
- Remove the obligation on correspondent banks to assess the effectiveness of a respondent bank’s AML/CFT controls under section 29: Currently, a correspondent bank must assess a respondent’s AML/CFT controls to ascertain that those controls are adequate and effective. The Ministers propose amending section 29 to remove the word “effective" on the basis that this will make it more practicable for reporting entities to carry out these assessments.
- Replace “is unable to” with “does not” in section 37: Section 37 of the AML/CFT Act currently requires reporting entities to (among other things) terminate an existing business relationship where it "is unable to" conduct CDD. To plug a perceived defect in section 37, the cabinet paper proposes to replace the words “is unable to” with “does not” to ensure the prohibitions in section 37 (including the obligation to terminate a business relationship) apply whenever a reporting entity fails to carry out CDD, not just when it is incapable of doing so.
The AML/CFT Amendment Bill, alongside the other three bills in the Regulatory Systems (Justice) Amendment Bill package, is intended to be introduced to Parliament by December 2024.
A summary of the full 25 proposed amendments to the AML/CFT Act can be found from page 56 of the Cabinet paper here.