Who is a reporting entity for AML / CFT purposes?
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (hereafter referred to as the AML / CFT Act) came fully into force on 30 June 2013.
The AML / CFT Act contains a set of compliance obligations for “reporting entities”. Penalties for non-compliance with these obligations are massive and can be as high as $2m and/or up to 2 years in prison. The key to determine whether you have obligations under the AML / CFT Act is to understand the term reporting entity (RE). Once you establish you are a RE then you can start undertaking the necessary work to ensure you comply with the AML / CFT Act.
Who is a reporting entity?
In general, persons (individuals or entities) who may have obligations under the AML / CFT Act are known as REs. The definition for a RE in the AML / CFT Act is ‘inclusive’. RE means:
- A casino, or
- An entity or an individual carrying out in New Zealand, in the ordinary course of their business, certain financial activities listed under the definition of financial institution*, or
- Persons declared by regulations to be a RE. Examples include individuals who are AFAs, and businesses providing financial adviser services in respect of category 1 products.
*Section 5 of the AML / CFT Act explains the term financial institution. It is defined with reference to a list of financial activities. Advisers (or their businesses) carrying out any of these listed activities will have AML / CFT obligations. Some of the financial activities, described, are: Managing individual or collective portfolios; investing, administering, or managing funds or money on behalf of other persons, etc. Broadly, advisers who carry out transactions with clients’ funds, directly manage client assets are likely to be REs and have AML / CFT obligations under the AML / CFT Act.
Are you a reporting entity?
Here is some good news. Not all financial advisers (even if they are AFAs) are REs. This means not all advisers are likely to have AML / CFT obligations. Similarly, not all business entities may be REs. Keeping in mind, the general focus of AML / CFT is “involvement” with “money” and its “use”, the following may help you in determining whether you or your business are a RE under the AML / CFT Act or the Regulations:
Authorised financial advisers
If you are an AFA (in relation to either category 1 and 2 products, or only category 2), then you are likely to be a RE and have obligations under the AML / CFT Act if:
- You recommend clients buy financial products and also act as an intermediary for the purchase of these products from product providers, or
- You provide a broking service or a discretionary investment management service, or
- You arrange insurance policies* for clients through insurance companies, or
- You arrange home loans* (mortgage credit), or consumer credit (e.g. personal loans) for clients through lenders and/or finance companies.
*Issuing, or undertaking liability under, life insurance policies, and lending activities (e.g. mortgage credit, consumer credit, etc) are one of the 13 specified financial activities which make the entities undertaking these activities (e.g. insurer, and lenders) REs. If a person arranging these products is an AFA, then they are a RE, under the AML / CFT (Definitions) Regulations 2011.
If you are an AFA only recommending an appropriate financial solution (risk, investment, etc) to your clients but not acting as an intermediary, then you are not likely to be a RE and are unlikely to have obligations under the AML / CFT Act.
Registered financial advisers
If you are an RFA (providing advice on category 2 products, class service to retail clients, and financial adviser service to a wholesale client) then you are not likely to be a RE and unlikely to have obligations under the AML / CFT Act. RFAs may arrange insurance through insurance companies and mortgage credit (including personal loans) through lenders. However, RFAs are not REs because they are not included in the definition of a RE under regulation 16 of the AML / CFT (Definitions) Regulations 2011.
However, if you are an RFA operating via your NZ-registered company and you advise, and will continue to advise, on KiwiSaver, managed funds, shares, investment linked contracts of insurance, or Whole of Life or Endowment policies, then your company will be deemed to be a reporting entity. Hundreds of RFAs may be potentially caught by this.
If you are a broker (an individual acting as an intermediary for clients and generally handling money on behalf of clients), then you are likely to be a RE and have obligations under the AML / CFT Act.
Individuals who are fire and general insurance brokers may have obligations under the AML / CFT Act if they act as an intermediary for clients and handle clients’ money.
Individuals who do not handle client money but only provide advice on fire and general insurance products may not have obligations under the AML / CFT Act (on the basis they are not AFAs).
Note: Individuals referring to themselves as mortgage brokers or insurance brokers may be mortgage advisers or insurance advisers (and not brokers, if they are not handling client’s money). If these mortgage advisers and/or insurance advisers are not AFAs then they may not have obligations under the AML / CFT Act.
If you are an entity (including a QFE) providing financial adviser services in respect of category 1 products to retail and wholesale clients, then you are likely to be a RE and have obligations under the AML / CFT Act.
If you are an entity (including a QFE) carrying out activities listed under the definition of financial institution (e.g. managing individual or collective portfolios, investing, administering, or managing funds or money on behalf of other persons, etc) then you are likely to be a RE and have obligations under the AML / CFT Act.
How do you satisfy the requirements of the AML / CFT Act?
Under the AML / CFT Act, it is possible for your business to discharge your compliance obligations, relating to the development of an AML / CFT risk assessment and documented AML / CFT programme, for the services provided through it. This is because if you are a reporting entity by virtue of being an AFA, then it is likely the business you provide the advisory services through will also be a reporting entity.
If you are working as an AFA in a small advisory business then your business can develop the AML / CFT risk assessment and the AML / CFT programme. However, as an AFA, you should ensure that your business does develop those processes within the defined timeframe.
It is important to remember that, the individual adviser is still a RE and has to comply with their obligations under the AML / CFT Act. The benefit to advisers working in small advisory businesses is avoidance of duplication of the compliance work.
If not sure if you are a RE, then seek legal advice or contact us to discuss your situation.
Disclaimer: This article is general in nature. It is written to assist advisers who are AFAs and RFAs in small businesses to determine if they are likely to be a “reporting entity” and have obligations under the AML / CFT Act. This article is not legal advice, and should not be relied upon as such. This article is not a comprehensive guide covering all situations an individual or an entity may be engaged in to determine if they are a reporting entity. The directors and staff of Strategi Limited are not responsible for any error in or omission from this article.