On 7 November 2022, the Ministry of Justice (MoJ) published its final report and recommendations on the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act — its final suggestions are welcome news to us and the real estate profession.
There were concerns sweeping changes to the AML/CFT Act would see real estate professionals required to complete customer due diligence (CDD) on their client but also on the purchase — or any prospective purchaser.
When the consultation process opened with the MoJ, REINZ and our members strongly opposed this proposal, and we expressed this in our detailed submissions.
The final report and what it means for real estate
The MoJ’s original question in their consultation was: “Should we amend the existing regulations to require real estate agents to conduct client due diligence on both the purchaser and vendor?”
In the final published report, the MoJ has recommended a thorough risk assessment is completed to identify how real estate and the trade system are or could be, exploited before making any firm recommendation on amendments to the AML/CFT Act.
The MoJ’s willingness to listen to our profession and engage with us proactively before recommending far-reaching changes is very encouraging.
Read MOJ’s final report here.
MoJ recommends 215 changes — here’s what you need to know
MoJ remains concerned that despite the inclusion of law firms, conveyancers, and real estate agents in the regime since 2018, illicit capital is still entering the real estate market. They believe the AML/CFT Act ought to do more to identify where these gaps are being exploited and readdress these weaknesses.
The MoJ recommended 215 changes — we have highlighted some of these below:
Further assessment of risks to the real estate sector — recommendation 50
The Financial Intelligence Unity (FIU) and Department of Internal Affairs (DIA), to undertake further analysis to assess the risks in the real estate sector by identifying the ways illegal funds are entering the profession and analysing which sectors or businesses would have visibility of this.
Further legislation to inhibit illegal funds entering real estate — recommendation 51
Following the assessment in recommendation 50, the FIU and DIA should consider further legislative controls to prevent or deter this from happening. Ultimately, this may mean additional obligations for real estate agents and law firms.
Code of practice to set out clear guidelines on independent audits — recommendation 93
Code of practices should set out explicit provisions for an independent audit.
Civil sanctions should include those responsible when an agency fails to comply — recommendation 107
To extend civil sanctions to directors, senior managers, employees, and agents in appropriate circumstances, such as where they were responsible for making the decision that resulted in the agency not complying with their obligations.
Additional law protection required for compliance offers where appropriate —recommendation 108
Less responsibility should be placed on compliance officers who have acted in good faith, but the reporting entity has not complied with their AML/CFT obligations.
Extend time limit of prosecuting AML/CFT offences — recommendation 109
Extend the time limit for prosecuting AML/CFT offences from three to seven years.
New regulations required around gathering certain information — recommendation 121
New regulations are to be issued requiring reporting entities to obtain information about legal form and proof of existence, ownership, and control structure, and to verify this information according to the level of risk.
Reconsider any additional measures businesses should take — recommendation 122
Reassess whether businesses should be required to take further measures in addition to the current source of wealth or funds to manage and mitigate risk.
Regulations for businesses to implement any additional enhanced CDD measures — recommendation 124
To issue regulations requiring a business to implement any additional enhanced CDD measures at the start and for the duration of business relations to mitigate risk.
Reassess the need for mandatory CDD for all trust clients — recommendation 125
To review the need for mandatory CDD for all clients who are trusts, however, in the interim, to implement regulations to prescribe a process for conducting enhanced CDD on trusts and an exemption if the trust is low risk.
Regulations for businesses to assess AML/CFT risks when introducing new products or ways of working — recommendation 166
To issue regulations requiring businesses to assess AML/CFT risks associated with new products and new business practices. The risk must be conducted before the new technology is in use.
Look at ways to reduce any duplication of CDD — recommendation 175
Undertake a further analysis in which duplication of CDD across multiple reporting entities can be reduced.
Legislation changes on requirements to become a compliance officer — recommendation 182
A legislative change that requires compliance officers to either be a senior manager or report to a senior manager.
At a high level, the biggest issue remaining is that the AML/CFT Act is not taking a sufficiently risk-based approach. We agree with MoJ’s statement that some of the requirements under the current Act are overly prescriptive for real estate professionals, and a more flexible risk-based approach may be more appropriate at times.
There will be changes on the horizon, but these are likely to be well down the track and only after a full risk analysis has been completed.
We need to understand the magnitude of the problem for the profession, where the illicit funds are entering, and whether real estate professionals have visibility of this. Once this investigative work has been completed, there will be further opportunities for member engagement on these important issues.