Date posted: 16/01/2019 5 min read

AML Phase II has Arrived. What does it mean for practicing accountants?

New Zealand has a commendable reputation as a safe place to do business, however, it is important to continue to build upon that reputation.

Phase two: Why now and what does it mean for accountants?

New Zealand has a commendable reputation as a safe place to do business, however, it is important to continue to build upon that reputation.

When it was first implemented in 2013, the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act dealt with organisations in the business of transactions - such as banks, casinos and a range of financial service providers.

Now with the introduction of the 2017 amendment, the NZ government has extended the AML regime to include designated non-financial businesses and professions (DNFBPs). And accountants feature prominently in this group.

From the first of October 2018, if you are an accounting practice providing certain kinds of services to your clients such as, but not limited to, providing a registered office (unless its ancillary other non-captured activities), managing client funds, accounts, or securities, or acting as a formation agent you are required to be compliant with the Act.

There are multiple reasons why the introduction of phase two is important.

These include;

  • Failure to comply can be costly. Already this year the New Zealand Government has issued warnings to five AML reporting entities.
  • According to MP Ian McKelvie, speaking to Parliament, each year more than $1.3 billion of revenue generated by fraud and drugs is laundered through New Zealand businesses. He said Phase two is expected to disrupt $1.7 billion in criminal activity directly over the next 10 years and prevent up to $5 billion in broader criminal activity.
  • According to research by Deloitte, the cost impact on the approximately 2,200 accounting businesses, which will need to be compliant under Phase 2, is between $22M and $75M annually. To ensure the most efficient compliance processes are in place, accountants need to equip themselves and their practices with the skills and tools needed to support AML.
  • And finally, AML should not only be viewed as a compliance issue. It is also an opportunity for accountants who wish to provide higher levels of services to their clients.

In a recent webcast as part of the CA Catalyst programme, we discussed key issues around AML. You can listen to that webcast below.

How can RegTech companies help?

According to Anthony Quinn of Arctic Intelligence, "The challenges faced by accountants in managing financial crime risk exposures are the same the world over. The vulnerabilities of these businesses varies based on their nature, size and complexity, as well as their risk profile from a customer, channel, product/service and geographic perspective."

Also, as the AML requirements are driven globally by the Financial Action Task Force (FATF), the core requirements of risk assessment, customer due diligence, transaction monitoring, regulatory reporting and independent audit requirements are the same, says Quinn. "And there are vendors that have been providing RegTech solutions for a long time prior to these local regulatory changes and have mature solutions that can help the accounting profession to manage their risk exposures."

While AML creates an additional compliance overhead for many companies, there is good news on two fronts.

Firstly, for many accounting practices, especially at the middle to larger end of the market, there is already internal AML capability due to work they have done, or at least studied in regards to the phase one rules.

"As AML laws have been in place for many sectors and markets for over five years the expansion of AML laws to new sectors is not a challenge for many RegTech solution providers, the challenge for solution providers is to understand the specific nuances to each regulated sector and tailor their solutions accordingly," says Quinn.

But the other big change in the market since phase one was first introduced is the emergence internationally and locally of a vibrant RegTech ecosystem. The RegTech ecosystem includes government, regulators, regulated entities, professional service providers and founder-led RegTech companies. Universities, research houses, media and industry groups are all participating in the discussion and developing approaches around RegTech," says Deborah Young the Australian-based, founding CEO of The RegTech Association.

Deborah Young

Deborah Young, CEO of The RegTech Association.

Her organisation represents 63 international and local organisations who are committed to providing solutions to help businesses become AML compliant and supporting the Australia Pacific region as a global centre for RegTech excellence.

A recent FinTech event in Singapore, for instance, identified more than 4,500 companies operating in the area of which as many as 20 per cent had an AML focus or component.

According to Martyn Soloman CA, Associate Partner, Audit & Assurance at Crowe Horwath, who attended the event, "Most are working in the 'Know Your Client' (KYC) space (also called customer due diligence) and are solving these issues."

Many of these solutions are often focused on solving problems for larger organisations but those may not necessarily be appropriate for smaller practices. Crowe Horwath has significant scale with over 25 offices, and the business is well progressed in terms of creating AML compliant systems and processes.

The assessment Martyn shared during the CA ANZ AML webcast is that many of these solutions are still maturing.

"Instead, his advice is to look for solutions that meet their wider organisational needs of which AML is just one, rather than focusing on AML standalone solutions."
Martyn Soloman CA, Crowe Horwath

Instead, his advice is to look for solutions that meet the wider organisational needs, of which AML is just one, rather than focusing on AML standalone solutions.

"We are more interested in the complete entity and admin solutions where AML is part of the solution rather than a standalone product which can lead to data duplication issues as you are moving data from system to system."

Those sentiments are echoed by Neil Jeans, a financial crime compliance and risk consultant from Initialism and an advisor to Arctic Intelligence, "I think there is a relatively low level of maturity at the moment."

In the AML webinar he said, "There's a lot of organisations offering systems and solutions and we are starting to see these appear in NZ. But remember AML is an international issue and the problems organisations have in NZ are replicated in other jurisdictions."

The rapid growth of the FinTech and RegTech ecosystem - and their success in attracting funding - means there are now a lot of companies getting into space. Jeans says the challenge for any business is to identify what they need and to match that to the solutions that are available.

"Most of the challenges are around knowing who the customer is and managing your customer's data around the organisation."

Like Martyn, he advises that the better approach is to look for solutions that help and support the business rather than just AML-centric ones that mean you are just adding more complexity into your business.

And he says it's prudent to be cautious when dealing with new providers. "There is a lot of vapourware out there."

He stressed the importance of testing the vendor's claims and asking for recommendations, checking to ensure the vendor can offer verifiable testimonials and ensuring that the solution is really the best fit.

"You don't want to be the guinea pig where they are still designing solutions."

This is not just an issue for new and emerging companies. You also need to be cautious with bigger more established vendors. "There are a lot of solutions being built across many industries but they may not fit the requirements of the accountancy business."

Jeans also says the market is starting to see the emergence of concierge-style services that let businesses outsource some of their compliance work to third parties.

"That's quite a new area and it is happening in response to the need to provide expert support as it is needed rather than having to have permanent AML CTF professionals."

Tools and guides*

There are a variety of resources and guides online from CA ANZ, the New Zealand Government and various industry groups. We have compiled a small resource guide here to help get you started.

AML go-to guides

Regtech Resources That May Help*

The RegTech industry is small but growing quickly. While RegTech solutions have scope to make AML compliance more straightforward, the barriers to implementation and adoption need to be thoroughly analysed. It is important to do your due diligence and to look at you wider business processes alongside your AML compliance requirements. There are service bureaus emerging that could help you to outsource some of your requirements.

* Disclaimer

Chartered Accountants Australia and New Zealand (CA ANZ) does not endorse or recommend any of the third-party tools, solutions or websites that are referred to in this publication.

This publication is provided for general guidance only and must not be relied on as a substitute for legal or professional advice. CA ANZ does not warrant the accuracy, currency, completeness or reliability of the information contained in this publication (including any content related to third party products and services) or its suitability for you. You are responsible for assessing the accuracy, reliability and/or suitability of the material provided in this publication. If you have any queries about your legal obligations, you should seek independent professional advice.