For the information of mainstream banking, lending, deposit taking, insurance, retail investment, casinos, lawyers, real estate agents and sharebrokers

Updated 14 March 2006

Issued by the New Zealand Police Financial Intelligence Unit
National Bureau of Criminal Intelligence (NBCI)
New Zealand Police, Police National Headquarters
180 Molesworth Street, P O Box 3017
Wellington, New Zealand
Tel: + 64 4 474 9499
Fax: + 64 4 498 7405

These guidelines have two main objectives.

First, to help financial institutions understand and comply with their obligations as required by the Financial Transactions Reporting Act 1996 and second, to explain money laundering methods, as well as assist with identifying suspicious transactions.

For the most part, the information provided in these guidelines has been sourced directly from the Financial Transactions Reporting Act 1996 and undoubtedly, internal procedures in most financial institutions will already be in place.

Suggestions, examples and information from other agencies and legislation have also been included to either enhance existing procedures within financial institutions or in some cases, assist with their creation.

While these issues are not directly relevant to financial institutions, they have been included simply to provide knowledge of the existence of other avenues that may potentially be used to launder illegal funds.

As a result of pending changes to legislation in relation to New Zealand’s compliance with international standards concerning money laundering and terrorist financing, these guidelines will be updated again, once the proposed legislation is finalised.

In the meantime, it should be remembered that the definitive source of information on the law must always be the statutes and regulations themselves. If in doubt, the statute should be referred to or legal advice sought.

The basic purpose of money laundering is to convert funds or assets derived from crime into seemingly legitimate funds or assets derived from honest sources. It essentially turns dirty money into clean money.

Money laundering transactions are often deliberately complex to make it difficult to trace the money back to its origins. Then again, a relatively simple transaction, such as changing New Zealand dollars into Australian dollars, has the same effect.

We all know that profit is the motivation behind most crime. Experience worldwide has shown that organised crime is particularly lucrative and generates considerably large amounts of money.

Money laundering, by virtue of its ability to disguise and legitimise illegal proceeds, enables criminals to keep their profits. It also provides the incentive and resources to continue offending. By depriving criminals of the monetary benefits of their activities, the motivation to offend is likely to diminish.

Internationally, the most significant initiative against money laundering is the United Nations Convention against Illicit Traffic in Narcotic Drugs and Psychotropic Substances 1988, often referred to as the UN Convention or the Vienna Convention.

Along with other legislative measures, the UN Convention requires signatories to legislate against the laundering of proceeds of drug offences and to provide legal mechanisms for the seizure and confiscation of assets derived from such offences.

New Zealand is a signatory to the UN Convention.

Similarly, the Financial Action Task Force (FATF) on Money Laundering, established in 1989, was a response to widespread drug offending in many countries.

The FATF is an independent, inter-governmental organisation that develops and promotes both national and international policies to combat money laundering and terrorist financing. The key purpose of this group is to generate the necessary political drive to create legislative and regulatory reforms in these areas.

In 1990, the FATF published a report, later revised in 2003, that incorporated Forty Recommendations which focussed on much needed improvements in national legal systems to facilitate counter-measures to combat money laundering. These recommendations were also intended to strengthen international co-operation in relation to this issue.

In 1991, New Zealand became a member of the FATF.

The FATF have called upon all countries to take the necessary steps and effectively implement procedures, to bring national systems into compliance with the recommendations.

Following the September 11 terrorist attacks on the United States in 2001, Nine Special Recommendations were also devised, which, when combined with the Forty Recommendations, outline the basic framework to detect, prevent and suppress terrorist financing.

Reporting by financial institutions of suspicious transactions is one of the cornerstones of the FATF recommendations. Law enforcement agencies throughout the world acknowledge that the successful investigation of money laundering offences depends largely on information received from the financial community.

Financial institutions are not being asked or expected to assume the role of law enforcers of money laundering. A positive approach to legislative requirements, however, will greatly improve the efforts of those agencies responsible for enforcement.

Throughout the remainder of these guidelines, the Financial Transactions Reporting Act 1996 will be referred to as the FTRA96.

The Financial Intelligence Unit (FIU) is available to assist financial institutions with any problems or questions arising from the FTRA96.

Please Don’t hesitate to call on (04) 474 9499.

This section summarises the law in relation to money laundering, in particular the Crimes Act 1961 and the FTRA96.

There are currently four Acts of Parliament which have direct relevance to money laundering:

1. Crimes Act 1961
2. Financial Transactions Reporting Act 1996
3. Proceeds of Crime Act 1991
4. Mutual Assistance in Criminal Matters Act 1992

Penalties for failing to comply with the requirements of this legislation are significant.

Under this legislation, a money laundering offence is committed by engaging directly in a financial transaction or transactions for the purpose of concealing money derived from crime or having possession of money derived from crime with the intent to launder it.

The main offence (engaging in a money laundering transaction) is punishable by seven years imprisonment and the second (possession) by five years.

The legislation provides a defence to a charge on money laundering to any person who engages in a money laundering transaction in good faith for law enforcement purposes.

Under this legislation, it is an offence to:

• Engage in a financial transaction knowing or believing that the property involved is derived from any serious crime or be reckless as to whether this is the case.

• Any serious crime means any offence punishable by five years imprisonment or more, for example, drug offences, robbery, theft, fraud and others.

• Assist any person to conduct a transaction knowing or believing that the property is derived from any serious crime or be reckless as to whether this is the case.

• A money laundering transaction includes dealing with any property or assisting any other person to deal with that property for the purpose of concealing it or enabling any other person to conceal it.

• Obtain or possess any property (including money), which is derived from any serious crime, with the intention of engaging in a money laundering transaction knowing or believing the money or property is derived from any serious crime or being reckless as to whether this is the case.

• Property includes land and personal property, cash, cheques, drafts, letters of credit, shares and insurance policies.

This legislation imposes obligations on financial institutions including:

• Verification of customer identity, for example, when new accounts are opened, certain transactions conducted or where money laundering is suspected.

• Retention of transaction records and customer verification details.

• Reporting suspicious transactions.

It also provides for protection of the identity of people making suspicious transaction reports and immunity from liability of any breach of secrecy or customer confidentiality.

• If a transaction is conducted or attempted through a financial institution, and it is suspected that the transaction involves money laundering or the proceeds of crime, it must be reported to the Commissioner of Police.

• The existence or consideration of an STR may only be disclosed to certain people who are authorised to receive such information.

• Any person making an STR is protected from civil, criminal or disciplinary action in respect of any information contained in the report, unless the information was disclosed in bad faith.

• The identity of any person making a report will not be revealed except for law enforcement purposes or on the order of a court.

• Transaction records are to be kept in a form that will allow a transaction to be completely reconstructed at any time by the Commissioner of Police.

• Verification records must be retained in order to establish how customer identification was carried out.

• It is not uncommon in legal transactions for the transaction to be carried out through a trustee, nominee or via one of several people and there will usually be a valid reason for this. It may be useful to keep a record of why the transaction was conducted in this way.

• Employers and principals are liable for any offences committed by their employees.

• Principals and employers are liable whether or not the employee acted with their knowledge or approval.

• Employers and principals are liable for any offences committed by any person acting as their agent.

• This liability applies unless the agent acted without the express or implied authority of the principals.

The Proceeds of Crime Act 1991 provides for the restraining of assets derived from serious crime and their eventual forfeiture to the Crown following conviction. It also provides for the imposition of Pecuniary Penalty Orders which necessitate Crown assessment of the benefits derived from the commission of an offence, and may be enforced as if they were debts due from the offender to the Crown.

This legislation implements New Zealand’s international obligations to facilitate requests to and by New Zealand for assistance in criminal investigations and prosecutions, including money laundering investigations and asset forfeiture actions.

The main points of the law in relation to money laundering are outlined below:

• The offence provisions apply to any person involved in the money laundering process, including:

• The person who committed the original serious offence, from which the property was derived.

• A person who knowingly or recklessly launders the proceeds of the offence, even if they were not involved in the original offence.

• Any person who assists in the laundering process by being in possession of the proceeds of a serious offence with the intent to launder them.

• Where any person is prosecuted for a money laundering offence, proof that the person knew or believed or was reckless as to the proceeds being from a particular serious offence is not necessary. It is sufficient that they knew or believed that the property was the proceeds of any serious offence or were reckless as to whether this was the case.

• A person charged with a money laundering offence can not claim that he/she believed that the property was the proceeds of a particular offence when in fact it was derived from a different offence. The fact that the property is the proceeds of any serious offence is sufficient, as described in the case study below:

• One defence to a charge of money laundering is if the person charged proves that they were acting in good faith for the purposes of:

• The enforcement or intended enforcement of Section 243 (money laundering) or any other provision of the Crimes Act 1961 or of any other act relating to a serious offence.

• The enforcement or intended enforcement of the Proceeds of Crime Act 1991.

If an institution or employee knows or believes that money involved in a transaction is the proceeds of crime and they proceed with the transaction they must do so on good faith for law enforcement purposes to avoid possible prosecution.

Understanding the meaning of some of the terms used throughout both the Crimes Act 1961 and the FTRA96, as they apply to money laundering legislation, will help with interpretation.

The following list includes only those terms likely to be most often encountered by institutions and staff. Some of the definitions have been summarised to assist with understanding.

The following entities are included in the definition of financial institution under the FTRA96:

• Accountants (within specified limits)
• Anyone carrying on the business of banking in New Zealand
• Building societies
• Friendly societies or credit unions
• Lawyers (within specified limits)
• Licensed casinos
• Life insurance companies
• New Zealand Racing Board
• Real estate agents
• Registered banks
• Reserve Bank of New Zealand
• Sharebrokers
• Trustees or managers of superannuation schemes
• Trustees or managers of unit trusts
• "Any person whose business or a principal part of whose business consists of any of the following: (i) borrowing or lending or investing money; (ii) administering or managing funds on behalf of other persons; (iii) acting as trustee in respect of funds of other persons; (iv) dealing in life insurance policies and (v) providing financial services that involve the transfer or exchange of funds, including (without limitation) payment services, foreign exchange services, or risk management services (such as the provision of forward foreign exchange contracts); but not including the provision of financial services that consist solely of the provision of financial advice", as per Part 1, Section 3(k) of the FTRA96.

The FTRA96 imposes duties on financial institutions as to when identification is necessary.

There are four main components, which are briefly outlined below:

• Identity must be verified when people apply to become facility holders for the first time, have an existing facility assigned to them or become a signatory on an existing facility.

• Verification must be obtained before any new facilities are opened or changes made, unless it is impracticable to do so at the time, in which case, it must be obtained as soon as possible thereafter.

• Where there are three or more facility holders, the identity of all of them need not be verified. It is sufficient to identify the principal facility holder or holders only.

• In relation to transferring superannuation schemes, verification is not required, provided all members of the facility transfer simultaneously.

• Identity must be verified when people conduct occasional transactions when the amount of cash involved in a transaction exceeds the prescribed amount of NZ$9,999.99 or the New Zealand equivalent of a foreign amount.

• Verification must be obtained if a person or persons appear to conduct a series of occasional transactions, where the total cash involved exceeds the prescribed amount of NZ$9,999.99 and the financial institution suspects that the transactions are being structured.

• Verification must be obtained before the transaction is conducted, unless it is impracticable to do so at the time, in which case, it must be obtained as soon as possible thereafter.

• Identity must be verified when people conduct occasional transactions on behalf of other people when the amount of cash exceeds the prescribed amount of NZ$9,999.99.

• Verification of the person conducting the transaction must be obtained, as well as the person on whose behalf the transaction is being conducted, regardless of whether they are present or not.

• Verification must be obtained before the transaction is conducted, unless it is impracticable to do so at the time, in which case, it must be obtained as soon as possible thereafter.

• Where a facility holder conducts a transaction on behalf of a non-facility holder, verification is only required for the non-facility holder.

• Identity must be verified when people conduct a transaction or transactions that are considered suspicious by the financial institution, regardless of whether or not the transaction involves cash.

• The financial institution must verify the identity of the person if there are reasonable grounds to suspect that a transaction or proposed transaction is relevant to either the investigation or prosecution of any person for money laundering or enforcement of the Proceeds of Crime Act 1991. The financial institution must verify the identity of that person as soon as practicable.

Where a financial institution is required by the FTRA96 to verify the identity of a person, the verification must be carried out by means of documentary or other evidence that is reasonably capable of establishing the identity of that person.

The FTRA96 is deliberately silent on the exact documentation considered reasonably capable of proving a person’s identity. Not everyone owns a passport or some people, due to citizenship status, may be unable to obtain a passport immediately. Likewise, in some cases, people may simply have no need for one.

As a general rule, institutions are required to verify identity from a document or documents obtained from a reputable and identifiable source, such as New Zealand Government issued identification, or by way of reference from a reputable and identifiable party.

In any case, the following list provides examples of possible forms of identification:

• ATM/credit card from another financial institution, only if signature is verified
• drivers licence
• passport
• refer to standard procedures as implemented by the financial institution

It is also advisable that secondary identification is taken. Certified photocopies or original utilities bills are also useful to verify addresses, for example, a telephone bill.

In a situation where there has been a significant time lapse between dealings with a particular customer, it may be sensible to renew the verification to ensure that the financial institution is dealing with the same person.

If a financial institution is unable to verify the customer or if the customer fails to provide any reliable identification, then the transaction must not be carried out and likewise, the account facility must not be opened. To do so would be a breach of the FTRA96.

The FTRA96 requires that suspicion of money laundering to be reported to the Police. Similarly, the Crimes Act 1961 prohibits the handling of funds for anyone suspected of laundering the proceeds of serious crime, except in specific circumstances, for example, to assist the Police with an investigation.

In order for someone to commit a money laundering offence they must know or believe that the money involved in a transaction is the proceeds of crime. Note that the Crimes Act 1961 specifies that belief includes the concept of recklessness.

Suspicion is not knowledge or belief. For that reason, if a transaction is carried out, even after a suspicion has been formed, the institution or employee is not committing any offence by being involved in it.

Likewise, where an institution or individual knows or believes that money involved in a transaction is the proceeds of crime, but continues with the transaction with the intention of reporting it, no allegation can be made later that the intent was to assist the money launderer.

Failure by financial institutions to comply with the law, that is, report suspicious transactions, may lead to prosecution. Furthermore, publicity in respect of assisting a money launderer may also irreparably damage personal and professional reputations.

With this in mind, it is essential to be vigilant to the possibility of money laundering, although, vigilance should not equate to paranoia. The law does not require anyone to play detective or presume all clients and prospective clients are money launderers unless the client can prove otherwise. A common sense approach is vital.

If suspicion is aroused in the normal course of business, it should not be ignored. Necessary steps should be taken to report any suspicions, according to appropriate procedures within the organisation.

It is essential, therefore, to have a basic understanding of how money laundering works, as well as possible indicators and techniques that may give rise to suspicion.

Money laundering is the process by which criminals attempt to conceal the origins of their finances. If successful, it also allows them to maintain control over those finances and ultimately provide an outwardly legitimate cover for their source of income.

In recent years, it has increasingly been recognised that an essential part of the fight against crime is to prevent criminals, wherever possible, from legitimising the proceeds of their activities by converting dirty money into clean money.

New money laundering methods are being devised constantly, some simple, some sophisticated. In a number of cases the amounts are relatively small, while others involve millions of dollars.

In most instances the money begins as cash, which, from a criminal perspective has the advantage of being anonymous. Unless marked or recorded in some way, it carries no indication of ownership or source and there is no question of its value.

A high proportion of laundered money originates from drug trafficking, where cash is the normal medium of exchange. Cash is difficult to handle and move, however, in large amounts. In most business contexts, particularly in New Zealand, cash is rarely used and will generally attract attention if carried in sufficiently large amounts.

Drug trafficking and organised crime is big business. Some estimates have put the worldwide turnover in illegal drugs at over US$500 billion per annum, a figure which is comparable with the gross national product of many industrialised nations.

There are no official figures available in New Zealand to substantiate the amount of money generated by drug dealing and other crime, although, based on annual seizures and prosecutions, it is estimated to be in the hundreds of millions of dollars.

In addition to drug trafficking, substantial sums are laundered from crimes such as theft, robbery, burglary, fraud, receiving stolen goods, illegal prostitution, people smuggling, blackmail, extortion, racketeering and acts of terrorism.

An effective money laundering operation normally follows three stages:

If all three processes are successfully completed, the money will appear to have been legitimately obtained.

The main opportunity for identifying money laundering operations occurs at the placement and layering stages.

Both of these stages involve transactions that require contact between money launderers and financial institutions. This is particularly true at the placement stage.

Some simple examples of each of the three processes are outlined below.

The objective of placement is to move cash into the non-cash economy.

Methods of placement include, but are not limited to:

• Direct deposits of cash into a bank or other institution offering account services.

• Attempts to purchase insurance or investment products for cash, or to make part of the payment for them in cash.

• Cash purchase of high-value items such as gold, art, antiques, property, gambling chips or cars.

• Cash purchase of travellers’ cheques, foreign currency, as well as telegraphic or wire transfers.

The objective of layering is to disguise the origin of the cash by carrying out many transactions between the placement of the cash and the final goal, which is integration of the illegitimate money into the legitimate economy.

Transactions of this kind may be revealed by their lack of normal commercial motive. If the only motive appears to be to carry out the transaction itself, and the result is likely to be uneconomic, there may be reasonable grounds for suspicion.

There is no standard layering procedure. The following example includes banks, insurance, foreign exchange and investment products and begins after the placement stage has been completed.

In the following scenario, the money is already in the form of a cheque:

This example demonstrates many different transactions and several breaks in the chain of ownership, all of which would make it difficult for an investigator to construct an audit trail.

The objective of integration is to assimilate the money into the legitimate economy in such a way that its criminal origins would never be suspected.

The example below outlines a possible method of integration:

It is difficult to define a suspicious transaction. As a general rule, however, a suspicious transaction will often be one which is inconsistent with a customer’s known, legitimate business or personal activities or with the normal business for that type of customer.

In the FTRA96, a suspicious transaction is referred to in the following terms:

Where any person conducts or seeks to conduct any transaction through a financial institution (whether or not the transaction or proposed transaction involves cash) and the financial institution has reasonable grounds to suspect that the transaction or proposed transaction is or may be relevant to the:

• Investigation or prosecution of any person for a money laundering offence.

• Enforcement of the Proceeds of Crime Act 1991.

As mentioned previously, the reporting by financial institutions of suspicious transactions is one of the cornerstones of the FATF Forty Recommendations and the successful investigation of money laundering offences depends largely on information received from the financial community.

As a normal part of daily business, financial institutions should be aware of indications that funds are being used for money laundering.

The next section provides examples of potentially suspicious or unusual activities. These examples have been broadly separated into the type of financial institution that is most likely to encounter a certain situation.

Many of the situations described in these examples would be reasonably normal in some business contexts, whereas in others they would not. It is the unusual that should put financial institutions and their staff on alert.

It should be noted, however, that the existence of one of these activities alone may not necessarily mean that a transaction is suspicious. In this way, using a combination of common sense and intuition is advisable.

Transactions conducted through accounts operated in the following circumstances may give reasonable grounds for suspicion:

• Customers who wish to maintain a number of trustee or client accounts that do not appear consistent with the type of business, including transactions involving nominee names.

• Customers who, for no apparent or logical reason, have numerous accounts and deposit cash to each of them in circumstances where the total credit, if or when combined together, would be a large amount.

• Customers who have active accounts with several financial institutions within the same locality, particularly when the institution is aware of a regular consolidation process from such accounts prior to a request for onward transmission of funds.

• Matching payments paid-out with credits paid-in by cash on the same or previous day.

• Payments in large third party cheques endorsed in favour of the customer.

• Customers who give conflicting information to different staff members.

• Large cash withdrawals from a previously inactive account, or from an account which has just received an unexpected large credit from abroad.

• Reluctance to use normal banking facilities, for example, avoiding high interest rate facilities for large balances.

• Large number of individuals making payments into the same account without adequate explanation.

• Customers who appear to be acting together, simultaneously using separate tellers to conduct large cash transactions or foreign exchange transactions.

• Company representatives who avoid contact with bank staff when opening accounts or making business transactions.

• Substantial increases in deposits of cash or negotiable instruments by a professional firm or company, using client accounts or in-house company or trust accounts, especially if the deposits are promptly transferred between other client company and trust accounts.

Cash transactions involving the following types of activities may give reasonable grounds for suspicion:

• Company accounts that are dominated by cash transactions, for example, an absence of other monetary instruments normally associated with commercial businesses, such as cheques or credit cards.

• Frequent exchanges of cash into other currencies, where there appears to be no logical explanation for such activity.

• Transfers of large sums of money to or from overseas locations with instructions for payment in cash.

• Accounts operated by customers who refuse to provide appropriate identification or use misleading identification, or make it difficult to verify information. Bank accounts may be opened with forged documentation, which is difficult to detect.

• Several transactions conducted on the same day and at the same branch of a financial institution with a deliberate attempt to use different tellers.

• Cash deposits or withdrawals fall consistently just below occasional transaction thresholds. This practice is commonly referred to as structuring or smurfing and is often used to avoid threshold amounts that trigger identification requirements.

Complex transactions often involve several different types of transactions or breaks in the chain of ownership of the funds. These types of transactions will normally have no apparent economic or obvious purpose. If it is suspected that a particular transaction is not legitimate, it should be reported and, as far as possible, the background and results be made available to assist the FIU if required.

Unusual transactions that are out of character with known customer routines or behaviour may give reasonable grounds for suspicion:

• Stated occupation of an individual does not correspond with the type of transactions conducted.

• Unusual discrepancies in identification, such as, name, address or date of birth.

• Individuals involved in cash transactions who share addresses, particularly when the addresses are also business locations.

• Customers seemingly acting together simultaneously using separate tellers to conduct large cash transactions or foreign exchange transactions.

• Company representatives who avoid contact with bank staff when opening accounts or making business transactions.

The following types of deposits and withdrawals may give reasonable grounds for suspicion:

• Inactive accounts that contain a minimal sum and then unexpectedly receive a deposit, or several deposits, followed by constant withdrawals that continue until the sum has been completely removed.

• Deposits that contain counterfeit notes or forged instruments, as well as cash that has an unusual appearance or smell.

• Large cash deposits using automatic teller machines (ATMs) or drop boxes to avoid direct contact with bank staff.

The following types of off-shore international activity may give reasonable grounds for suspicion:

• Use of letters of credit and other methods of trade finance to move money between countries, where such trade is not consistent with the customer’s usual business.

• Customers who make regular, large payments, including electronic transfers, that are unable to be clearly identified as genuine transactions to, or receive regular and large payments from, countries which are commonly associated with the production, processing or marketing of drugs; or tax haven countries.

• Build up of large balances, not consistent with the known turnover of customer’s business, and subsequent transfer to accounts held overseas.

• Unexplained electronic fund transfers by customers on an in-and-out basis or without passing through an account.

• Frequent cashing of travellers’ cheques or foreign currency drafts, particularly if originating from overseas.

Wire transfers have long been considered one of the more popular and convenient means of transferring money across international borders. The speed and sheer volume in which wire transfers are carried out makes them an ideal mechanism for criminals to hide transactions.

Examples of potentially suspicious wire transfers include:

• Irregular and often small amounts transferred in an attempt to avoid identification or reporting requirements.

• Information concerning the originator is not provided.

• Multiple personal, business or non-profit organisation accounts are used to collect then channel funds to a small number of foreign recipients.

The following types of investments may give reasonable grounds for suspicion:

• Purchase of securities to be held by the financial institution in safe custody, where this does not appear appropriate given the customer’s apparent worth.

• Back-to-back deposit/loan transactions with subsidiaries or affiliates of overseas financial institutions in known drug trafficking areas.

• Requests by customers for investment management services (either foreign currency or securities) where the source of the funds is unclear or not consistent with customer’s normal business activity or worth.

• Buying and selling a security for no discernible purpose or in circumstances that appear unusual.

These examples have been structured around the basic processes within any investment business, for example, sales, dealing and settlements.

This list is not exhaustive and individual examples are not totally exclusive to any one type of industry or firm and should be read in their context and their applicability within the particular firm or business assessed.

Compared to long-standing customers, new customers are more likely to be laundering money through an investment business by using one ore more accounts for a short period of time, as well as using false names and fictitious companies.

Investment may be undertaken directly with a New Zealand investment business or indirectly via an intermediary who doesn't ask too many awkward questions, especially in a jurisdiction where money laundering is not legislated against or where the rules are not rigorously enforced.

The following situations may give reasonable grounds for suspicion when presented individually or in conjunction with other circumstances. Additional inquiries may dispel, or confirm, such suspicions. Such transactions may include those that:

• Require customer identification, of a personal client, for whom verification of identity proves unusually difficult and who, for no apparent reason, is reluctant to provide details.

• Involve a corporate/trust client when there are difficulties and delays in obtaining copies of accounts or documents of incorporation, where these are required by the institution.

• Involve a client with no apparent reason for using the service, for example, clients with distant addresses who could find the same service closer to their home base.

• Are not normally conducted by the institution, however, the client insists on using the institution’s services when his/her needs could be more easily serviced elsewhere.

• Involve a new investor who is introduced by an overseas bank, affiliate or other investor, both of whom are based in countries where production of drugs or drug trafficking are prevalent, or the source of whose money is obscure.

• Involve an unknown counterparty.

There are many clearly legitimate reasons for a client’s use of an intermediary. The use of intermediaries, however, does introduce further parties into the transaction, reducing its transparency and depending on the designation of the account, preserving anonymity. This is also a useful tactic which may be used by the money launderer to delay, obscure or avoid detection. Any apparently unnecessary use of an intermediary in the transaction could give reason for suspicion.

The aim of the money launderer is to introduce as many layers as possible. This means that the money will come from a number of sources and pass through a number of different people or entities. Long-standing and apparently legitimate customer accounts may be used to launder money innocently, as a favour, or due to the exercise of undue pressure.

The following types of transactions may give reasonable grounds for suspicion:

• A large number of security transactions across a number of jurisdictions.

• Transactions not in keeping with the investor’s normal activity, the financial markets in which the investor is active and the business that the investor operates.

• Buying and selling a security with no discernible purpose or in circumstances that appear unusual.

• Low grade securities purchased in an overseas jurisdiction then sold in New Zealand and high grade securities purchased with the proceeds.

• Bearer securities held outside a recognised custodial system.

The following types of transactions may give reasonable grounds for suspicion:

• A number of transactions, carried out by the same counterparty, in small amounts of the same security, each purchased for cash and then sold in one transaction, the proceeds being credited to an account different from the original account.

• Any transaction in which the nature, size or frequency appears unusual. Early termination of packaged products, for example, at a loss due to front end loading, early cancellation, especially where cash had been tendered and/or the refund cheque is to a third party.

• Transfer of investments to apparently unrelated third parties with no explanation proffered.

• Transactions that are not in keeping with normal practice in the market to which they relate, for example, with reference to market size and frequency, or at off-market prices.

• Other transactions linked to the suspicious transaction, which could be designed to disguise money and divert it into other forms or other destinations or beneficiaries.

Money launderers will often have substantial amounts of cash to dispose of and will use a variety of sources. Cash settlements through an independent financial consultant may not necessarily be suspicious, although, large or unusual settlements of securities, dealings or settlements in cash to a large securities house will usually provide good reason for further enquiry.

Examples of what may be unusual settlement payments include:

• A number of transactions, carried out by the same counterparty, in small amounts of the same security, each purchased for cash and then sold in one transaction.

• Large transaction settlements by cash.

• Payment by way of third party cheque or money transfers where there is a variation between the account holder, the signatory and the prospective investor.

• Purchases of shares through summary accounts held by banks with security houses. Such purchases show the bank and not the money launderer as the purchaser of the shares.

Bearer securities, held outside a recognised custodial system, are portable and anonymous instruments, which may serve the purposes of the money launderer well. Presentation in settlement or as collateral may in some circumstances give reason for suspicion, as might settlement made by way of bearer securities from outside a recognised clearing system.

As previously stated, the aim of money launderers is to take dirty money and turn it into clean money or to use it to finance further criminal activity, for example, more drug shipments. The aim of many criminals will be to remove the money from the country in which it originated so it can be passed on to other criminal elements where it is ultimately destined. The methods used will often be deliberately complex to make tracing the final beneficiaries difficult.

The following situations may give reasonable grounds for suspicion:

• Payment to a third party without any apparent connection with the investor.

• Settlement, either by registration or delivery, of securities to be made to an unverified third party.

• Abnormal settlement instructions including payment to apparently unconnected third parties.

The following types of activities may give reason for suspicion:

• While it may be a source of relief to the lender when a customer, who has struggled with a loan or line of credit, suddenly repays in full, such an occurrence may, in some circumstances, be so unusual or unexpected that it may be considered suspicious.

• The early settlement of what appears to be a routine loan, however, may also lead to suspicion particularly if it involves cash. This is a classic money laundering technique that has been detected on numerous occasions overseas.

• A request to borrow against assets held by the financial institution or a third party such as another institution, where the origin of the assets is not known or the assets are inconsistent with the customer’s standing.

• A request by a customer for the financial institution to provide or arrange finance where the source of the customer’s financial contribution to a deal is unclear, particularly where property is involved.

Shell or front companies can be purchased off-the-shelf. They consist of nothing more than the basic company documents, but can legally receive and pay out money. Money launderers use shell companies to give credence to bogus deals. Such entities may be more commonly referred to as shelf companies in New Zealand.

A money launderer may establish a company or companies in a country with an off-shore banking centre or tax haven. The company’s articles of association allow it to conduct banking business, including foreign exchange. With the appropriate amount of capital it can actually register as a bank.

The company may then issue bearer shares, so that no-one will be able to identify the actual owner. Criminal money can then be deposited into the company, changed into other currencies and transferred abroad through regular channels.

The following case study outlines a relevant New Zealand situation:

It is not uncommon for an entity to be required quickly for the purpose of undertaking transactions, and the use of shell or shelf companies in most situations would not in itself be suspicious.

Again, it is the unusual which should give reason for suspicion. The use of a shelf company in a transaction where the use of such an entity appears unnecessary is, for example, somewhat suspicious.

Many of the following situations would be quite normal in some instances, where in others they may be unusual.

The following scenarios may give reasonable grounds for suspicion:

• Patrons wanting to exchange large quantities of low denomination notes for higher denominations. This type of activity is particularly suspicious if they do not seem to participate in any of the gaming activities or if they are known to staff to be involved in a business that would normally generate cheques or other instruments, rather than cash.

• Unusually large amounts of cash exchanged for chips made by a patron whose business is known by casino staff to normally generate cheques or other instruments, rather than cash.

• Frequent exchange of cash from other currencies to New Zealand dollars where there appears to be no logical reason for such activity.

• Patrons whose transactions contain counterfeit notes or forged instruments or whose cash has an unusual appearance or smell.

• Patrons conducting a number of separate transactions in an apparent attempt to avoid any of the requirements of the FTRA96, for example, a number of transactions under $9,999.99 to avoid customer identification requirements.

• A group of patrons who appear to be acting together and simultaneously, or within a short period of time, use separate cashiers to conduct large cash or foreign exchange transactions.

• Patrons purchasing large amounts of casino chips, do not gamble or do very little gambling and then attempt to cash the chips for a casino-issued cheque.

• Patrons buying-in with large amounts of cash at the tables or gaming machines, do not gamble and then cash out at the cashier’s cage.

• Patrons making verbal statements as to their involvement in criminal activity.

• Patrons depositing cash, or making wire transfers, with no intention to wager.

• Patrons establishing and using cheque cashing facilities with no intention to wager.

The following scenarios may give reasonable grounds for suspicion:

• A transaction is proposed, however, the client is not the person being dealt with. The client wants a lawyer to act on behalf of their niece or elderly relative, for example, who is unknown, not available for contact, and has not provided any instructions.

• A client requests a lawyer to hold a sum of money on the client’s behalf, which is unrelated to any particular transaction or the provision of any legal services and where there is no other reasonable explanation for it being held by the lawyer.

• New client approaches a firm with a simple proposition. Once access has been gained to the firm’s trust account, the proposal is radically changed or developed.

• Client uses lawyer’s trust account for transactions that may be more appropriately conducted through a bank or other type of account.

• Client wants to deposit a sum of cash into a firm’s trust account pending the proposed purchase of a house in New Zealand. The purchase never eventuates or falls through and the client requests a transfer of the funds to a third party without providing an adequate reason for the transfer.

• Payment to a lawyer by means of a cheque drawn on an account other than that of the client in circumstances where no sound reason is given for the third party making funds available.

• Clients or representatives providing conflicting information to different members of a law firm.

The following scenarios may give reasonable grounds for suspicion:

• Initial deposit is paid by purchaser with a large amount of cash.

• Initial deposit is paid with a cheque from a third party, for example, an associate or relative (other than a spouse).

• A purchaser uses a significant amount of cash to close a real estate deal.

• Property is purchased in the name of a nominee, for example, an associate or relative (other than a spouse).

• Purchaser refuses to put his/her name on any document associated with the property or uses a different name on contracts, agreements or deposit receipts etc.

• Client unsatisfactorily explains the last minute substitution of the purchasing party’s name.

• Client purchases property without inspecting location.

The following checklist outlines various warning signs that may indicate that a transaction is suspicious. It is not intended to be an exhaustive list. Not every unusual situation is automatically suspicious. Often there are innocent explanations for a person’s behaviour.

For that reason, one single attribute may not necessarily give rise to suspicion, whereas when there are a number of indicators appearing together, further inquiry may be in order.

Similarly, many of the circumstances outlined below would be quite normal in some business situations. In others, however, they would be unusual and it is the unusual that should put financial institutions and their staff on alert.

As mentioned earlier, financial institutions are not expected to be detective agencies or take the stance that all clients are suspicious until shown otherwise. Some extra attention when faced with certain situations, however, may prove invaluable at a later time.

The following scenarios are not specific to any particular part of the financial sector and are intended only as a general guide.

Consider further inquiries when customers:

• Travel a great distance to use an institution’s services, for no apparent or logical reason, when the equivalent is available much nearer to home.

• Insist on using an institution’s services for transactions that are not within that particular institution’s normal business and for which there are other firms with publicly acknowledged expertise.

• Are reluctant to co-operate with identity verification or provide false or misleading information or information that is difficult or expensive to verify.

• Decline to provide information that in normal circumstances would make them eligible for credit, or for other banking services, that would be regarded as valuable.

• Wish to buy an insurance or investment product and are more interested in cancellation or surrender terms than long-term performance.

• Request a cancellation or surrender of a long-term investment shortly after arranging the contract, for no apparent or logical reason.

• Insist on entering into financial commitments that appear to be considerably beyond their means.

• Wish to invest significant amounts of money using cash, or top up payments using cash.

• Use a cheque drawn on an account, other than their own, in circumstances where there does not appear to be a logical reason why the person should be acting on another’s behalf.

• Wish to make an investment that has no obvious purpose.

• Are happy to accept relatively uneconomic terms when, with a little effort, they could have a much better deal.

• Suddenly vary their pattern of insurance or investment, for example, ask for a lump sum contract when they have previously only invested in small, regular amounts.

• Ask for settlement to a third party where there appears to be no apparent reason for the investor to be acting on someone else’s behalf and where it would appear simpler or more logical for payment to be made to the original investor.

Before entering into an investment transactions consider:

• Is the investor known personally? If not, what is known about him or her?

• Is the transaction in keeping with the investor’s normal activity that is known to the financial sector business, the financial markets in which the investor is active and the investor’s own business?

• Is the transaction in keeping with the normal practice in the market to which it relates, that is, with reference to market size and frequency?

• Is the role of any agent involved in the transaction unusual?

• Is the transaction to be settled in the normal manner?

• Are there any other transactions linked to the transaction in question that could be designed to disguise money and divert it into other forms or to other destinations or beneficiaries?

The following is a very limited list of possible situations, which may lead to a belief that an employee or agent of a financial institution is involved with a money launderer to assist them in moving funds through that institution.

Money laundering involving employees and agents from financial institutions may include:

• Changes in employee characteristics, for example, lavish life styles or avoiding taking holidays.

• Changes in employee or agent performance, for example, the salesman selling products for cash has remarkable or unexpected increase in performance.

• Any dealing with an agent where the identity of the ultimate beneficiary or counterparty is undisclosed, contrary to normal procedure for the type of business concerned.

• Customers that always insist on dealing with the same employee, even for apparently routine business, may be money laundering. Customers may even cease trading with the institution for a period when the employee is away or change branches if the employee is transferred.

Transactions must be reported to the Police when any person conducts or seeks to conduct any transaction through a financial institution (whether or not the transaction or proposed transaction involves cash), and there are reasonable grounds to suspect that the transaction or proposed transaction is or may be relevant to the:

• Investigation or prosecution of any person for a money laundering offence.

• Enforcement of the Proceeds of Crime Act 1991.

The financial institution should decide whether there are reasonable grounds for suspicion. Whether or not an STR should be made is also for the financial institution to decide. If there is doubt, advice from a supervisor, manager or the Police should be sought. Any internal instructions that organisations have in place regarding suspicious transaction reporting must be followed.

If a decision is made to complete an STR, the person directly involved in the transaction need not necessarily submit the report to the Police. Reports can be made to supervisors, managers or to people within the financial institution who are appointed to receive such reports. It is then the responsibility of that supervisor, manager or person so appointed to submit the report to the Police.

Establishing the true identity or location of a person while armed with only one first name, a surname, a vague address, no date of birth and vague or non-existent identification details, is difficult and in many cases, impossible. This is particularly so if the person is not a New Zealand resident.

Unless urgent attention is required, reports must be made in writing to:

For standardisation purposes, the Police would prefer that the STR form supplied by the FIU is used. These forms are available free of charge from the FIU. It contains the information needed to develop the basis of an investigation and is tailored to suit Police databases. Use of this form, however, is not a requirement of the FTRA96. If an organisation has its own internal form for reports, that form may be used to report a suspicious transaction if it contains all the appropriate sections.

The FIU is authorised to receive reports on behalf of the Commissioner.

Reports should be mailed or faxed. They may be sent electronically (if agreement on the type of electronic transmission has first been reached with the FIU or Commissioner of Police).

The address, telephone and fax number of the FIU is on the STR form and on the first page of these guidance notes.

The FTRA96 requires reports be made to the Commissioner of Police in writing.

There is one exception, however, where the urgency of the situation requires a suspicious transaction report to be made orally to any member of the Police.

An oral report could be made when an institution’s impression of a transaction has gone beyond suspicion and amounts more to knowledge or belief that the transaction involves the proceeds of crime.

In practice this means that if an institution thinks that a situation requires immediate Police attendance, they can make an oral report. Similarly, if it is considered that Police attendance is not required at the institution, but that the Police should be made aware of a transaction as a matter of urgency, an oral report can and should be made.

If an institution feels that a situation warrants the immediate attendance of the Police the local District Police Station should be contacted.

In the case of bank branches and bureaux de change at airports, the airport Police should be contacted where possible.

If it is felt that immediate attendance by the Police is not required but the matter should be quickly brought to Police attention, the FIU may be contacted.

Auditors are not financial institutions for the purposes of the FTRA96. This legislation does recognise, however, that auditors may in the course of their duties uncover transactions that they consider suspicious.

An auditor may report a transaction to any member of the Police, where in the course of carrying out the duties as an auditor, has reasonable grounds to suspect in relation to any transaction that:

• The transaction is or may be relevant to the investigation or prosecution of any person for a money laundering offence.

• The transaction is or may be relevant to the enforcement of the Proceeds of Crime Act 1991.

Reporting by an auditor is not required by the FTRA96, it is voluntary. There is no obligation to report to the Commissioner of Police. Voluntary reports may, however, be forwarded to the Police National Headquarters. This is the preferred option. The auditor may also report to any member of the Police.

The same protections against civil, criminal or disciplinary action provided for financial institutions are applicable to auditors.

There are a number of offences, which can be committed by financial institutions and individuals, explained mainly in Part 3 of the FTRA96.

The penalties for breaches or non-compliance are quite severe. Financial institutions need to be familiar with the requirements of the legislation to avoid any possible breaches.

The legislation also contains provisions that make employers and principals of financial institutions vicariously liable for the actions of their employees and agents.

The following list outlines offences in relation to reporting suspicious transactions:

• Where any transaction is conducted or is attempted to be conducted through a financial institution and that institution is required to report the transaction to the Police, an offence is committed if the financial institution fails to report the transaction as soon as practicable after forming the suspicion.

• Where any financial institution commits an offence against the above, it is liable in the case of an individual for a fine of $20,000 and $100,000 in the case of a body corporate.

• When reporting a suspicious transaction, an offence is committed and a fine not exceeding $10,000 is liable, when a person:

• Makes any statement which he/she knows is false or misleading in any way.

• Omits from any statement, any matter or thing without which he/she knows that the statement is false or misleading in any way.

The offences in relation to customer verification mirror the verification requirements explained in Part 2, Sections 6 to 11 of the FTRA96. These sections deal with failure to verify identity in the various circumstances where it is required.

Where any financial institution commits an offence against any of the provisions of Part 2, Section 13 of the FTRA96, it is liable in the case of an individual to a fine of $20,000 and $100,000 in the case of a body corporate.

Part 3, Sections 20 and 22 of the FTRA96 are particularly important for financial institutions and their staff. The offences contained in them may, in some cases, be committed by employees as well as the institutions themselves.

These sections deal with what is commonly referred to as tipping off. A situation where an institution or employee alerts some unauthorised person to the existence of an STR, the information in the report; or that the making of a report is contemplated.

The people who are permitted to deal with the information, and the circumstances under which they are permitted, are covered in Part 3, Section 20 of the FTRA96.

This section also deals with the supplying of false or misleading information in an STR. In the case of an individual, it is an offence punishable by six months imprisonment or a fine not exceeding $5,000. In the case of a body corporate, it is an offence punishable by a fine not exceeding $20,000 to knowingly contravene the provisions of Section 20.

Furthermore, Part 3, Section 22 of this legislation deals with the more serious situation of tipping off to gain some sort of advantage, pecuniary or otherwise, or to prejudice a money laundering investigation.

It is an offence punishable by two years imprisonment to tip off to gain an advantage or to prejudice a money laundering investigation.

• Where a financial institution has made, or is contemplating making, an STR that institution is not authorised to disclose the existence of the report, or that the making of a report is contemplated, to any person except:

• The Commissioner of Police or any Police member authorised to receive such reports.

• An officer, employee or agent of the financial institution, for any purpose connected with the performance of that person’s duties.

• A barrister or solicitor for the purpose of obtaining legal advice or representation in relation to the matter.

• The Reserve Bank of New Zealand, for the purpose of assisting the RBNZ to carry out its functions under Part V of the Reserve Bank of New Zealand Act 1989.

• No officer, employee or agent of a financial institution to whom disclosure of information has been made, is permitted to disclose information to any person other than another officer, employee or agent of the financial institution for the purposes of performing the first mentioned person’s duties or obtaining legal advice or representation in relation to the matter.

• No barrister or solicitor to whom disclosure of information has been made is permitted to disclose that information to any person other than another barrister or solicitor for the purpose of giving legal advice or making representations in relation to the matter.

• Depending on the protection of identity of persons making suspicious transaction reports, nothing in Part 3, Section 20 of the FTRA96 prevents the disclosure of any information in connection with, or in the course of, proceedings before a court.

• Every person commits an offence that knowingly contravenes any of the provisions mentioned above and is liable, in the case of an individual, to imprisonment for six months or a fine of $5,000 or, in the case of a body corporate, to a fine of $20,000.

• Every person commits an offence who, for the purpose of obtaining, directly or indirectly, an advantage or pecuniary gain for him or herself or any other person, or with intent to prejudice any investigation into the commission or possible commission of a money laundering offence, contravenes any of the provisions above. A person who commits an offence against this section is liable for imprisonment for a term not exceeding two years.

• Every person commits an offence who, being an officer, employee or agent of a financial institution, and having become aware that any investigation into any transaction or proposed transaction that is the subject of an STR is being or may be conducted by the Police, and knowing that he/she is not authorised to disclose the information:

• Either for the purpose of obtaining, directly or indirectly, an advantage or pecuniary gain for him or herself or any other person.

• With intent to prejudice any investigation into the commission or possible commission of a money laundering offence, discloses that information to any other person.

• A person who commits an offence against this section is liable for imprisonment for a term not exceeding two years.

The offences in relation to record keeping mirror the record keeping requirements contained in Part 4, Sections 29 to 31 of the FTRA96. These sections deal with failure to keep records in the various circumstances where they are required.

Offences for failure to comply with record keeping requirements are contained in Part 4, Section 36.

Where any financial institution commits an offence against any of the record keeping provisions, it is liable in the case of an individual for a fine of $20,000 and in the case of a body corporate, $100,000.

The presence of vicarious liability makes it essential for principals and managers of institutions to be aware of the requirements of the legislation and to ensure that their employees and agents are also. These requirements are covered in Part 6, Section 53 and 54 of the FTRA96.

• Employers and principals are liable for any acts done or omitted by employees whether or not the act or omission was done with the knowledge or approval of the employer or principal.

• Where any person is acting as the agent of another, then that other person is liable for any acts or omissions of the agent unless the acts or omissions were done by the agent without the authority, either express or implied, of the principal, either before or after the event.

• Where any body corporate is convicted of an offence against the FTRA96 or any regulations made under the legislation, every director or officer involved in the management of the body corporate is also guilty of the offence if it is proved that the act or omission that constituted the offence took place with the knowledge, authority, permission or consent of the director or manager.

• Where any information is disclosed by an auditor, as required by the reporting obligations under the legislation, the same protections apply, unless the information was disclosed in bad faith.

• Part 3, Section 17 of the FTRA96 offers complete immunity for financial institutions and their staff for disclosure of information that might normally be covered by professional privilege, customer confidentiality or contractual requirements, unless the information was disclosed in bad faith.

• In respect of the doing of that act, that person would have a defence to a charge under that section.

• That person discloses, to any member of the Police, any information relating to the money laundering transaction or suspected money laundering transaction.

• That information is disclosed, in good faith, for the purpose of or in connection with the enforcement or intended enforcement of the criminal law.

• That person is otherwise under an obligation to maintain secrecy in relation to, or not to disclose, that information, then, notwithstanding that the disclosure would otherwise constitute a breach of that obligation of secrecy or non-disclosure, the disclosure by that person, to that member of the Police, of that information is not a breach of that obligation of secrecy or non-disclosure or (where applicable) of any enactment by which that obligation is imposed.

While offering similar protections as Part 3, Section 17 of the FTRA96, this section differs in a number of significant ways. It applies to any person, not just a financial institution or an employee, who finds him or herself confronted with a transaction in which they know or believe to be a money laundering transaction.

If they proceed with the transaction in circumstances which make the defence under Section 244 of the Crimes Act 1961 available and then report the transaction to the Police, they are entitled to similar protections as if they had made a suspicious transaction report under Section 15 of the FTRA96.

Any disclosure made under Part 3, Section 18 of the FTRA96, may be made to any member of Police and does not need to be in any particular form.

This section applies to any information provided in an STR and also any information that, if disclosed, will, or is reasonably likely to, identify any person who has handled a transaction that has res