Money laundering is rife in New Zealand, with an estimated $1.35 billion being laundered each year. 

Legislation was put in place in 2009 to try to identify, and prevent, money laundering and financing of terrorism in New Zealand, in the form of the Anti-Money Laundering and Countering Financing of Terrorism Act.

The first phase of the legislation applied to banks, casinos and financial service providers.  They have been subject to the legislation since 2013.

Phase two of the legislation is currently being rolled out, which includes real estate agents, lawyers and accountants.  The AML requirements will apply to Registered Real Estate Agencies from 1 January 2019.

The REAA is yet to issue guidance on this, but we understand this is due to be released in early August.

Why does this legislation apply to agents?

Given the nature, size and complexity of property dealings, real estate transactions are extremely vulnerable to money laundering activity, and have therefore been classed as a medium to high risk under the legislation. The legislation’s objective is to mitigate risks of money laundering involved in property transactions as far as possible.

The legislation creates an obligation to carry out ‘risk-based’ assessments of transactions and report suspicious behaviour.

Real estate agents are often more ‘customer facing’ than other sectors included under the legislation, which may allow more insight into behaviours classed as ‘suspicious’ such as  ‘flipping’ properties, frequent switching between different legal firms, possible collusions between vendors and purchasers, and consciously undervaluing or overvaluing properties.  These are red flags when assessing the risk of a particular transaction.

Further to reporting suspicious behaviour, real estate agents need to be aware of money laundering methods.  This legislation seeks to prevent these methods from continuing to be used.

Examples of money laundering methods are:

Deposit – request for repayment

  • An international purchaser puts a conditional offer on a large commercial building and pays a deposit of $500,000 (NB, they will be very keen to pay the deposit!).
  • The offer includes several difficult conditions and in reality the offer is unlikely to proceed further.
  • The negotiations eventually fall over and the deposit is paid back to the purchaser from a real estate or law firm trust account (freshly laundered).

“Flipping” properties          

Another money laundering method is buying and selling properties in short succession in order to confuse the audit trail of “dirty money”.

Customer Due Diligence

The legislation requires complying entities to undertake due diligence on customers (which we expect will include vendors, and potentially purchasers).  This involves obtaining verified copies of identification from them.  The best form of identification to use is a passport, but otherwise you can use a driver’s licence plus a credit card, letter from the customer’s bank or from IRD (among other options).

Verification of identification documents will need to be undertaken by someone in the “trusted referees” category under the legislation before any monetary transaction can take place. This verification requires the “trusted referee” to sight the identification documentation with the customer face to face, to ensure that the person who has supplied the identification “represents a true likeness” to that of the photo on the document.

Enhanced Due Diligence

Property transactions with trusts or companies involved are considered ‘high risk’ under the legislation.  This is because the identities behind the transaction and the source of the funds involved can be kept anonymous.

With companies and trusts, you will need to identify the trustees and beneficiaries of trusts and the directors and shareholders of companies who have effective control (over 25% shareholding in the company). You will be required to enquire into the source of funds used in certain transactions.

The practicalities of CDD are quite likely to change the fast-paced nature of the property market in instances like the auction room, where buyers have often called in, for example.

There are companies that have set up in order to assist with CDD, including in the space of electronic verification.  REAA may provide some guidance as to the use of those in due course.

Real estate agents and lawyers are going to fall within the same requirements, and therefore will be able to share some information in terms of CDD, however each party remains equally responsible to have the CDD carried out to a sufficient standard under the regulations.

What do you need to do prior to 1 January 2019?

We recommend taking the following steps towards compliance with the legislation before it takes effect in January:

  1. Identify a Compliance Officer; this person should be an employee of the business who reports to a senior manager or partner. 
  2. Complete a risk assessment; assess the kinds of transactions that your agency completes.  This will likely be done by the managers.  As property transactions have been listed as medium to high risk most transactions are likely to be within this range; and
  3. Implement procedures and policies within your agency; the risk assessment programme should be ‘living and adaptable’, as it is a requirement under the legislation to ‘maintain your compliance programme’. Ideally, this would be done before the end of the year, and would include training sessions with all staff to explain how the practical elements of compliance will run.

We recommend you start gathering the required documentation before the legislation becomes applicable to you so that you can implement procedures and be aware of practical complications before being required to be compliant with the legislation.

What happens if you don’t comply with the legislation?

The legislation sets out harsh sanctions for non-compliance with AML regulations. These penalties include formal warnings for minor breaches, or fines and prison terms for serious breaches.  Individuals may face sentences of up to two years imprisonment and could be fined up to $300,000.  Body corporates (e.g. companies) may be fined up to $5 million.

As above, further guidance for real estate agents is set to be released at the beginning of August 2018.  In the meantime, real estate agents are encouraged to familiarise themselves with the requirements of the risk assessment and some of the more practical day-to-day requirements for reporting entities.