20 April 2017 Parliamentary Select Committee AML/CFT Amendment Bill Dear Committee Real Estate Institute of New Zealand (REINZ) Submission on the Draft AML/CFT Amendment Bill (Draft Bill) REINZ is grateful for the opportunity to submit on the Draft Bill. REINZ recognises that some AML/CFT obligations must apply to the real estate sector and will support its Members to comply with these obligations. REINZ actively participated in the consultation process led by the Ministry of Justice (MOJ) and filed two separate written submissions during that process. REINZ also participated in the AML/CFT Workshops held by the Ministry of Justice in December 2016. Summary The key points in this submission are: a. In the MOJ s Information Paper (Information Paper), the Ministry stated that, generally, CDD is only required to be carried out on the client of a real estate agent, which is the vendor. REINZ agrees with this approach but it has not been carried through to the wording of the Bill. b. The proposed definition of a designated non-financial business or profession (DNFB) is too broad in the context of real estate agents. The Act should only apply to real estate agents in the context of part (v) of the definition of a DNFB (with the amendment noted above). Otherwise, there will be significant uncertainty as to when a real estate agent is a reporting entity. PO Box 5663, Wellesley St, Auckland 1141, New Zealand FP: 0800 473 469 T: +64 9 356 1755 F: +64 9 379 8471 W: www.reinz.co.nz
c. A vendor should only become a customer of a real estate agent for AML/CFT purposes when a vendor signs an agency agreement with the relevant real estate agent. However, the Act should provide that CDD can be completed at any time prior to a sale and purchase agreement being executed by the vendor (and not necessarily before the business relationship is formed). d. The mechanics of the DBG regime need simplifying, and there needs to be more clarity around who can form a DBG in the context of real estate agents. e. The implementation period should be, at a minimum, 24 months. Even if the Draft Bill is amended to take these submissions into account, becoming AML/CFTcompliant will still be a significant task for the real estate industry, and will necessitate a fundamentally different approach to the way real estate agents do business. Real estate agents must be given enough time to prepare, and 18 months is not sufficient. These points are addressed in turn below: A. CDD should only be required on a vendor (client) In the New Zealand real estate context, an agents client is the vendor and its customer is the purchaser. At page 7 of its Information Paper, the Ministry stated We propose that real estate agents will only have to conduct CDD on their client. REINZ agrees with this position but notes that it is not reflected in the Bill. To remedy this, part (v) of the definition of a DNFB (see clause 5(1) of the Draft Bill) needs to be amended by deleting the words or purchaser. As noted in REINZ s original submission to MOJ dated 16 September 2016, real estate agents should only be required to conduct CDD on a vendor, except where the Act already requires a reporting entity to conduct CDD on a person with whom it does not have a business relationship (e.g. a purchaser), namely: - when the suspicious transaction reporting regime, and clause 5A of the Anti-Money Laundering and Countering Financing of Terrorism (Requirements and Compliance) Regulations 2011 (Compliance Regulations), apply; and - where a person (in this case, a purchaser) seeks to conduct an occasional transaction through the real estate agent
The Act must make this clear. We reiterate that in the course of a conveyancing transaction, other reporting entities (such as a lawyers/ conveyancers and banks) will have concurrent CDD obligations at some (likely earlier) point in the transaction process, during which a purchaser s details will be captured. Buyers Agents Rare Buyer s agents or buyer s advocates (i.e. circumstances where a real estate agent forms a business relationship with a purchaser) are rare in New Zealand. However, overseas, this is a much more common concept. That may suggest why the FATF Recommendations refer, in the real estate context, to an agent conducting CDD on both a vendor and a purchaser. In a New Zealand context, this language is not appropriate given the infrequency with which that type of representation occurs. New Zealand should not adopt a definition which will not work in the local context. Retaining the reference to a purchaser will only cause widespread confusion as to when a real estate agent is considered to be a reporting entity, which is unwarranted given the rarity of agents representing purchasers in New Zealand. In our view, it would be a misguided approach to retain the reference to a purchaser in order to capture a (very) infrequent circumstance, at the expense of clarity. This is particularly so where a vendoronly regime plus the existing provisions of the Act (see further the Exceptions paragraph on page 4 below) adequately address the actual risks of ML/TF in the real estate industry. Practical Issues In addition to the above, from a practical perspective, we do not consider it feasible for agents to have CDD responsibilities in respect of purchasers (putting aside the fact that agents very rarely form a business relationship with a purchaser, in any event). We canvassed this in our previous submission on MoJ s August consultation paper, but to recap: 1. Agents do not have visibility of the identity of the ultimate purchaser in any given transaction. The standard form sale and purchase agreement for residential property, which is commonplace in the market, allows the purchaser to settle a transaction themselves, or through a nominee. Once a sale and purchase agreement is signed, real estate agents generally have very little continued involvement with the parties, save for receiving and paying deposit amounts, which is addressed elsewhere in this submission. As such, there would be little merit in requiring real estate agents to conduct CDD on purchasers, as the party signing an agreement may not be the party who settles the purchase. 2. In the auction scenario, it would be especially problematic to conduct CDD on purchasers. It is common for bidders to arrive while an auction is underway (or bid via representatives, or on the phone) and for there to be a large number of bidders, particularly in a buoyant market. It would be unreasonable to expect an agent to conduct CDD on each potential bidder (e.g. at registration, before an auction could begin). Further, even where a bidder
refuses to register, the auctioneer is still required to accept the bid. In this scenario, it is not possible to conduct CDD prior to the auction completing, and to make any sale subject to satisfactory completion of CDD would be completely unacceptable (and fundamentally compromise the function of an auction). 3. There would be significant conflict of interest issues if a vendor s agent was also deemed to be in a business relationship with, and thus required to conduct CDD on, a purchaser. As such, the Act should be explicit that agents are only required to conduct CDD on the person with whom they have a business relationship i.e. the vendor. Exceptions The exception to carrying out CDD on a vendor only is where the Act already requires a reporting entity to conduct CDD on a person with whom it does not have a business relationship (i.e. the purchaser). That is when: - clause 5A of the Compliance Regulations apply i.e. the reporting entity has determined that there is a suspicious transaction, and is required to conduct enhanced CDD; or - the purchase seeks to conduct an occasional transaction through the real estate agent. In both cases, this would likely only apply where the purchaser is using the real estate agent s trust account which, in our view, is the primary point in the real estate transaction process where money laundering can occur. As such, the Act already sufficiently caters for those circumstances where there is a risk of ML/TF in respect of a purchaser. For completeness, REINZ will promote an industry standard whereby real estate agents do not accept cash deposits. This will in turn limit the circumstances where a purchaser (or other person with whom the real estate agent does not have a business relationship) can conduct an occasional transaction through the real estate agent. This will also ensure that, where deposits are received, they have necessarily been processed through another Phase One entity (most obviously, a bank), in respect of which AML/CFT measures are already in place. We also note that deposits are not always paid to real estate agents. Often, they are paid by the purchaser directly to the purchaser s lawyer. Also, once a real estate agent is entitled to release to the vendor any deposit funds it holds (i.e. when the contract becomes unconditional), the balance of deposit funds after deduction of the agent s commission is often paid to the vendor s lawyer, not to the vendor. Notwithstanding the above, if the ultimate policy decision is to leave the reference to a purchaser in part (v) of the definition of a DNFB, it is important to ensure that there is clarity as to when a real estate agent will be seen to represent, and form a business relationship.
That is, the circumstance where a real estate agent will be seen to represent, and form a business relationship with, a purchaser should be limited to those (rare) circumstances where there is a genuine business relationship between the purchaser and the agent, such as where there is an agreement for the agent to act as a buyer s advocate or buyer s agent for the relevant purchaser. B. Definition of a designated non-financial business or profession The current structure of the Draft Bill means that a real estate agent would be a reporting entity if they carry out any one or more of the activities listed in the definition of a DNFB. We do not think this is the correct approach. Instead, real estate agents should only be reporting entities where they carry out the activity described in part (v) of the definition of a DNFB (as amended by deleting the words or purchaser, discussed above). Otherwise, the remaining limbs of the definition of DNFB (particularly parts (iv), (vi) and (vii)) will continue to apply to real estate agents and cause the Act to apply in a manner inconsistent with the statements made in the Ministry s Information Paper. The Information Paper is clear that the Act should only apply to real estate agents where they represent either a seller or a buyer in the sale or purchase of real estate. Part (v) of the definition of a DNFB reflects this intent (although see our comments above regarding the purchaser aspect). However, parts (iv), (vi) and (vii) of the definition of a DNFB cover activities that also may, incidentally, be carried out by real estate agents, and would cause the Act to apply to real estate agents in a much broader context that that provided in part (v). In particular, the retention of parts (iv), (vi) and (vii) would, in many instances, likely cause the Act to apply to real estate agents in respect of purchasers, even where the real estate agent is not representing the purchaser. We do not believe that this is the intention of the Draft Bill, particularly given the statements in the Information Paper, and our understanding of how Phase Two of the Act is intended to apply to real estate agents. It is paramount that the application of the Act is clear, so that reporting entities understand when, and the extent to which, they are subject to the Act. The way a DNFB is currently defined will have significant unintended consequences in relation to real estate agents. There is an opportunity here to avoid that, by amending part (v) of the definition of a DNFB by deleting the words or purchaser, and limiting the application of the Act to real estate agents to that part (v) only. We strongly urge MoJ to implement this proposal in the next draft of the Bill. New section 6 application of the Act to real estate agents In terms of the structure of the Draft Bill, it is not clear how the new section 6(3)(c) is intended to apply.
That section provides that the Act will apply to a real estate agent when: - the real estate agent carries out an activity described in the definition of a DNFB (i.e., as per our submission above, the real estate agent carries out real estate agency work on behalf of a vendor); and - that activity may give rise to a risk of money laundering or financing of terrorism. Does this mean that, where a real estate agent carries out real estate agency work on behalf of a vendor, the Act would not apply if the real estate agent considered that the particular work does not give rise to a risk of ML/TF? If that is the intention, we consider this is too subjective to be implemented in practice, at least not without very clear guidance as to how this assessment should be made. In our view, the better approach would be for the definition of a DNFB to be refined, to determine in advance which activities are likely to carry a risk of ML/TF, and limit the definition of a DNFB to those activities, without introducing a secondary appraisal of risk. C. Formation of the business relationship and when CDD should be required The Act (or accompanying regulations or guidance) should specify that a real estate agent is deemed to form a business relationship at the time the agent signs an agency agreement with the relevant client (i.e. vendor). For other industries, the formation of the business relationship is more obvious e.g. where the product or service required is more absolute, e.g. the opening of a bank account. In the real estate agency context, given the (sometimes) prolonged relationship between a vendor and an agent, the Act (or accompanying regulations or guidance) should provide more clarity hence our submission that agents should be deemed to form a business relationship with a vendor when the vendor signs an agency agreement (and at no time prior to that occurring). Regarding CDD, the Act should provide more flexibility as to when CDD is required. Given there is no risk of money laundering until a transaction occurs, real estate agents should be allowed to conduct CDD after signing an agency agreement, provided it is done so prior to the vendor executing a sale and purchase agreement. In this regard, we see an analogy with regulation 20 of the Anti-Money Laundering and Countering Financing of Terrorism (Exemptions) Regulations 2011, in particular the ability for providers of certain superannuation schemes to conduct CDD at a later date than when the business relationship is formed, recognising that the actual risk of ML/TF only occurs at a later point (namely, where the first payment under a relevant scheme is made). We suggest a similar approach be taken for real estate agents.
D. Reliance regime We agree with the Draft Bill s approach regarding the appropriate reporting entity in the real estate agent context i.e. it should be the agent as defined in the Real Estate Agents Act 2008 (and not persons who hold a branch manager or salespersons licence only). There are over 15,000 individual real estate licencees operating in New Zealand, from a very broad demographic, many of whom may execute only a small number of transactions per year. For each of these individuals to be a reporting entity is impractical from a compliance perspective. We welcome the expansion of the DBG regime to include related real estate agents. For completeness, we assume that related in this context will include agents within the same franchise group and branches linked to a head office. More generally, guidance should be provided as to what is intended by related in this context, so that agents understand the extent of their abilities to form DBGs. Further, there may be merit in allowing industry bodies, such as REINZ, to prepare parts of compliance programmes and risk assessments on behalf of industry members, and allowing real estate agents to adopt relevant aspects i.e. expanding the membership opportunities for DBGs to also accommodate representative industry bodies. Regarding the DBG structure itself, we still consider (as per our original submission) that this regime could be more straightforward. Rather than the existing model, which contemplates reporting entities adopting part of existing risk assessments and compliance plans, it should be clear that members of the relevant DBG can simply rely on the processes carried out and materials prepared by the ultimate complying entity/individual. This will in turn make the DBG mechanism a more attractive option, thereby increasing the overall standard and uniformity of compliance across the industry.
E. Implementation period Implementing AML/CFT measures will be a huge undertaking for the real estate industry, and will fundamentally alter the compliance obligations of real estate agents. At a minimum, the industry needs 24 months to prepare. Any lead in time less than this may create significant compliance issues. Beneficial ownership Lastly, we are aware that, for Phase One entities, there are significant issues with the concept of a beneficial owner, and how that concept should be applied in practice. Those issues need to be resolved contemporaneously with the implementation of Phase Two of the Act. This matter will be particularly relevant to real estate agents, who may often have obligations to identify, and verify, the beneficial owner of a vendor. These types of issues are not matters that real estate agents, as an industry, are particularly well placed to determine on their own particularly given that we understand more sophisticated Phase One entities, such as bank, are themselves struggling with this concept. It is important that Phase Two of the Act does not reintroduce existing issues to a new group of entities. Conclusion Our key comment is that real estate agents should only be required to conduct CDD on a vendor, and the Act should make this clear. The only exception to this should be those circumstances where the Act already requires a reporting entity to conduct CDD on a person with whom it does not have a business relationship (e.g. a purchaser). There is no justification for imposing any broader obligations on real estate agents particularly given that, in almost all circumstances, another reporting entity (such as a lawyer, conveyancer or bank) will have concurrent CDD obligations at some (likely earlier) point in the transaction process. Thank you again for the opportunity to submit on the draft Bill. Yours sincerely Lisa Gerrard LLB (Hons) Chief Legal Officer