New Zealand’s non-financial business and professions are expected to spend $280 million per year on anti-money laundering compliance.
The Numbers
$280 million per year is spent on AML compliance New Zealand
$35 — $45 to onboard legal matter
$60 — $75 to onboard an accountancy client
$70 — $80 to onboard a motor dealer client
67% of business leaders are worried about staff pressures
80% firms surveyed indicate fraud is on the rise
Managing the cost of compliance can provide more than improvements to the bottom line.
Complying with Anti-Money Laundering (AML) / Counter Terrorism Financing (CTF) regulations has increased costs on firms, increased workload for employees and has impacted job satisfaction. Reducing the cost of compliance can have wide ranging benefits however before we focus on reducing the cost of compliance it is important to consider costs and their impacts.
Onboarding Cost
The Department of Justice engaged Deloitte's to assess the additional costs expected to be associated with AML compliance. Deloitte's assessed the expected impact on Designated Non-Financial Business and Profession (DNFBP’s). The cost to on-board a legal matter was estimated between $35 and $45 per matter where standard due diligence was required with higher costs associated for enhanced due diligence matters. Similarly, the costs to on-board a new accounting client was expected to range between $60 to $70 per client for standard due diligence.
No two firms are the same and costs vary depending on sector money laundering risk, firm size, the products or services offered and how those transactions are managed, the ability to utilise technology to scale and streamline workflows, and of course, the number of customers. Increasing regulation including amendments to the Privacy Act later this year, penalties for anti-money laundering breaches and sanctions violations are additional costs to consider.
New Zealand’s Designated Non-Financial Business and Profession (DNFBP’s), or Phase II entities, are expected to spend $280 million per year on anti-money laundering compliance.
The Human Cost
Firms rare still relying on manual processing to a large extent. The on-boarding process can be labour intensive with information still being captured via email and in person. Labour is the largest driver of compliance costs and represents a significant part of a firm’s compliance spend. In the most part, labour intensive anti-money laundering compliance is repetitive and manual, results in increased errors, increased operational and legal risk and tends to push AML compliance costs higher.
Labour intensive compliance also impacts staff. LexisNexis True Cost of Financial Crime Compliance Global Report found firms also worried about staff retention with 67% of firms concerned about job satisfaction as a result of increasing burden on staff. That is nothing to be complacent about.
Daniel Wager, Lexis Nexis Vice President of Global Financial Crime urges firms to invest in technology to relieve pressure on compliance staff. Affordable technology is available to manage key challenges and can simplify or remove some of the Know Your Customer (KYC) and Customer Due Diligence log-jams. Technology should remove laborious screening and provide compliance team insights and alter staff to possible risk. The human touch is valuable and should add value and analysis to the task rather than perform the task.
Aligning teams with technology can provide a ‘one customer’ view including identity verification, address verification, watchlist screening (politically exposed persons (PEP’s), known close associates, adverse media and sanctions), nature and purpose of relationship and transaction monitoring to inform decision making and assist with managing a firm’s risk. Strategi note one of the most common AML/CFT audit failings is the lack of PEP’s & sanctions screening. Without the right tools this can be cumbersome, time consuming, increase labour cost and can be fraught with risk in itself.
The Opportunity Cost
Managing the cost of compliance has immediate impacts on profitability, staff satisfaction and improved quality. The carrot and stick approach is clearly stacked in the favour of those seeking reward over punishment and punishment for non-compliance can result in fines exceeding the firms ability to pay.
Regulators have expressed their willingness to move from guidance for the first years of adaption to penalising firms for serious breaches of the law.
The Ministry of Justice has outlined the implications for firms not meeting their compliance obligations. “For New Zealand breaches individuals can be fined up to $200,000 and companies can be fined up to $2 million. Repeated failure to comply with AML/CFT obligations, providing false or misleading information and other criminal offences can result in fines up to $5 million for businesses, while individuals can be fined up to $300,000 or sentenced to up to 2 years in prison”.
Minter Ellison Rudd Watts reviewed a case in March this year where Her Honour Justice Walker handed down down the first criminal sanctions under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act).
Justice Walker observed:
“Money laundering is an activity which is highly detrimental to the New Zealand financial system and very difficult to detect. This is one reason why the AML/CFT regime must deal robustly with non-compliance which risks permitting laundering by third parties.”
In sentencing the defendants, Her Honour made several observations which are likely to have a more general impact, in particular:
- A fine should be set at a level to ensure defendants do not profit from their offending, but it should also exceed the profit in order to deter and punish the defendants.
- The AML/CFT Act was designed to deter by also punishing individuals responsible for the company’s conduct.
- Severe economic impact is an ordinary consequence of offending, and so Justice Walker rejected a submission from counsel that a significant monetary penalty would have a “crushing” effect such that it may have to liquidate.
- In accordance with the Sentencing Act 2002, Justice Walker was required to treat a fine as the presumptively appropriate sentence.
It appears from Justice Walker’s sentencing that future courts may also take a harder line in sentencing in the future.
Introducing technology to the firm’s risk management workflow improves staff satisfaction, build on firm wide efficiencies and can reduce the negative costs associated with compliance. The right technology can strengthen compliance teams, reduce labor costs and have a positive effect on profitability and risk externalities. It is not just about managing direct costs, but also indirect costs, direct risks and opportunity costs.