Customer Due Diligence (CDD): it can be a bit challenging at times. Back and forth with customers to get documents; questions on the need for information and privacy concerns. However, it is all part and parcel of an ever-growing compliance world, and critical to ensuring you meet your AML obligations.
An understanding of your specific sector’s due diligence obligations is important, as every sector is different in its own way. For one, those who conduct business in high-frequency cash sectors, such as casinos or betting platforms have customers with different characteristics to those working in larger scale asset sectors, such as real estate. Therefore, understanding who your customers are in regards to your sector is important to ensure your business is safe and, importantly, compliant.
There are many ways to go about this, but the most important foundations that everyone should know centre around proactivity, risk identification, and compliance. These pillars of AML/CFT due diligence are critical in helping prevent criminal activity.
Due diligence and proactivity - Why is it important?
In New Zealand each year $1.5 billion of laundered funds is reported, to fund criminal activity and finance terrorist activities. While there has certainly been a crackdown by police, regulators, and supervisors to identify those laundering these funds, we must all continue to play our part and create a strong front-line approach to deterring criminal activity by identifying AML risk and suspicious activity, early.
As the AML/CFT Act ramps up in its integration, examples of failure to participate in this front-line approach are becoming more frequent and highlight the potential for illegally obtained funds to be filtered through the system. This of course does not mean an entity itself is engaged in criminal activity – rather that the steps taken to assess and mitigate potential risk posed by its customers may not have been implemented correctly, or implemented at all. Proactiveness, then, is a crucial first step.
'Proactivity' is the name of the game!
Sharesies – one of New Zealand’s largest investment platforms – is one well-known example of a lack of proactivity in determining customer details. In August 2021, Sharesies Limited and Sharesies Nominee Limited were formally warned by the Financial Markets Authority (FMA) for failure to sufficiently implement anti-money laundering procedures, policies, and controls. In this formal warning, the FMA shared its view that Sharesies had failed to obtain sufficient information about the nature and purpose of the proposed business relationship from most customers, determine whether certain customers should be subject to Enhanced Due Diligence (EDD), and complete the verification of up to 7,815 customers who have an account balance of more than $1000.
The result of this warning was a need for a proactive increase in understanding by Sharesies of who their customers are and the nature of their relationship with Sharesies outside of simply joining the shares market, especially for those with a high level of wealth.
While it is important to state that Sharesies were not directly linked to any form of criminal activity by their customers, they did not do enough proactive work to mitigate the risk of the platform being used for criminal purposes. In theory, countless funds could have been ‘cleaned’ through the platform and no one would have been able to identify this. Following the warning, Sharesies have implemented an improved compliance programme to ensure a more proactive approach is taken when onboarding customers.
Why is active due diligence so important?
While it is certain that different sectors pose different types of risk, each is just as impactful on New Zealand’s free flowing and liquid economy as the next.
As Sharesies exemplified, the share market poses significant risk in terms of manipulation that affects the transparency and effectiveness of the market, as well as the vast sums of money travelling internationally. As FMA Head of Enforcement, Margot Gatland, states, with reference to reporting entities compliance:
“…the importance of these laws in maintaining the integrity of New Zealand’s financial markets; non-compliance is a serious matter … A failure to keep records, as required by the AML/CFT Act, severely hampers the FMA’s ability to monitor compliance and ensure the regime is effective.”
Understanding who your customers are, why they are engaging in business with you, and, in some instances, how the returns of investment will be used or stored is extremely important. This process includes identity checks, corporate structure evaluation, and analysis of holding vessels such as trusts. All of these are proactive due diligence checks that are used to identify would-be launderers looking to ‘clean’ money derived from criminal activities such as drugs, extortion, theft, and fraud.
Of course, these larger scale, high volume money transfers are not the sole functioning sectors of our economy. There are many more, smaller scale businesses which importantly contribute to the economy’s capital too. So, it is crucial these companies also understand their obligations to ensure that New Zealand is as safe and reliable as the world perceives it to be.
Due diligence and risk: Why you need to know
It would be reasonable for anyone to assume that due diligence is a process levied primarily against those who deal with high-frequency money transactions as these provide the most quickly accessible funds for would-be launderers. However, the Act captures a large range of sectors, and for good reason.
Real estate is a prime example as it provides an opportunity for criminals to funnel illegally obtained funds into the financial system by purchasing and selling houses, essentially ‘cleaning’ the money in the process. This is commonly referred to as layering and integrating laundered funds. The large sums of money from these transactions also means that a one-off transaction is all that is needed to fund numerous criminal activities for months, even years.
As we are all aware the demand for property in New Zealand’s volatile market sees people buying and selling property for numerous different reasons. Due diligence is an important step in understanding who your client is, and the reasons they are selling a property helps build a picture of the potential risks.
Reporting entity compliance is crucial
The DIA, FMA, Reserve Bank, and FIU are very prescriptive on the process of conducting due diligence on potential customers, and importantly, ensuring that you have a process in place so that your staff and agents can identify potential risk.
A recent formal warning issued by the DIA exemplifies this neatly. In June 2023, Arizto Real Estate was given a formal warning for failure to conduct proper due diligence, and just as importantly, failing to establish, implement, or maintain an AML/CFT programme. It is crucial to state that Arizto was not alleged to have been involved in any money laundering or financing of terrorism as this was simply a formal warning with monitoring in place as a result. However, the failure to implement an AML/CFT programme demonstrated a lack of proactivity which the AML Act expects its captured sectors to undertake.
In terms of AML/CFT obligations then, this in itself represents frontline negligence with potentially harmful results – something that New Zealand’s proactive approach aims to mitigate. So, as the Head Hunters case proves, an understanding of how clients obtain funds and having documentation to support this, especially if held in asset vehicles such as trusts, becomes ever so important.
Why is due diligence an all-encompassing priority?
As you can see from the previous examples, due diligence is an important process to:
- Protect your businesses reputation and identify risk;
- Understand who your customers are; and
- Ensure staff and agents are properly trained to proactively engage in a frontline approach.
As the AML/CFT world is still in its relative infancy, there is of course more which can be improved upon both process and clarity wise for reporting entities and customers alike. The recent AML/CFT amendments demonstrate this as they outline further changes coming into effect over the next few years to strengthen our AML system. Understanding how your sector can be exploited by a would-be money launderer is crucial to help New Zealand stay as reputable as possible.
Landmark AML/CFT prosecution
In 2021, Chinese-Canadian businessman Edward Gong was forced to forfeit more than $70 million in assets to the New Zealand Police following a 2017 investigation into a multi-national pyramid scheme. Gong, who’s scheme revolved around the sale of health-care products and shares in drug and television companies, forfeited New Zealand’s largest haul of assets under the Criminal Proceeds (Recovery) Act 2009 in what police called a ‘message to criminals around the world’.
Following the 2017 investigation and freeze of Gong’s assets, Te Tari Taiwhenua Department of Internal Affairs (DIA) charged remittance provider Jiaxin Finance, its sole Director Qiang Fu, and his mother Fuqin Che, in 2018 for failing to report and keep record of suspicious transactions undertaken by Gong to the total of $53 million. The result of the court case was a $4 million fine, a failed appeal process, and most importantly, a landmark judgement for New Zealand.
This was New Zealand’s first ever criminal prosecution under the AML/CFT Act and highlighted the importance and need for customer due diligence, as well as an understanding of the potential money laundering risk your sector is privy to.
Sector compliance and failure to proactively identify risk
As the AML/CFT Act outlines, the purpose of the act is to detect and deter money laundering and the financing of terrorism to maintain New Zealand’s international reputation and contribute to public confidence in our financial system. In order to do this, co-operation between reporting entities, law enforcement, and regulators is critical. Yet, having an understanding of sector deficiencies that provide opportunity for exploitation is just as crucial.
Jiaxin Finance highlights this, as their minimal understanding about their customer, lack of proactivity in identifying risk, and a failure to keep records of transactions made through their business had serious consequences which affected their reputation as a company. Of course, every sector has different trigger points which are considered ‘captured’ activities (meaning activities which the Supervisors and the Act consider are applicable). For the money remittance industry, for example, risk is posed by the anonymity of both the sender and receiver of funds.
However, no matter the sector, the principle remains the same: know your customer and protect your business, and by extension, protect New Zealand. Therefore, monitoring of transactions and completing due diligence checks on clients is crucial so that red flags can be identified and monitored if necessary.
Due diligence - not a hassle, but a need
Overall, the implementation of the AML/CFT process across New Zealand and the world is still a work in progress. Of course, maintaining and adhering to privacy regulations is critical, but some people feel the AML/CFT obligations are a breach of privacy. However, knowing your customer is about building a picture, one which can be rationalised logically and backed by relevant information to ensure that potential risk identification is conducted fairly, but diligently. Depending on your sector, this could involve different processes, but the general principles of proactivity, risk identification, and compliance are still there.
As the examples above have proven, knowing who your customer is, and the reason for them entering a business relationship with you, is crucial to building this picture. Due diligence then is not a process which should be considered burdensome and a hassle, but rather it should be considered as a process which will allow for a better understanding of your customers.
If you need some help with customer due diligence or with ensuring your AML compliance is meeting AML requirements, call us on 09 369 6867 or email info@ticcompany.com
Jerome Cookson | Chief Operating Officer | tic company 
tic company 
Fiona Hall 
