Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell
Reserve Bank Governor Graeme Wheeler. Photo / Mark Mitchell
The banking sector remains vulnerable to potential money laundering and terrorism financing risks, says the Reserve Bank of New Zealand in its latest assessment.
"The banking sector continues to have a relatively high potential risk, because money launderers and terrorist financiers are more likely to target financial institutions in that sector, rather than targeting in other sectors," the central bank said in its Sector Risk Assessment, published yesterday.
Non-bank deposit takers and life insurers faced lower risks, it said.
The RBNZ stressed the assessment did not take into account the adequacy or effectiveness of any existing money laundering (ML) or terrorism financing (TF) controls.
The study was "an assessment of potential inherent risk across each subsector and the sector as a whole", it said.
The assessment is the second the central bank has carried out, the first being in 2011. It now expects the institutions supervised by the Reserve Bank to update their own written risk assessments.
Toby Fiennes, head of prudential supervision, said the bank sector risk rating had not changed since the Reserve Bank's last assessment, but more detail had been added to the different risks.
On non-bank deposit takers, Fiennes noted more attention had been given to the money laundering and terrorist financing risks potentially experienced by New Zealand's credit unions, which have a strong domestic customer focus.
Regarding the scope of the problem, the central bank cited data from the New Zealand Police Financial Intelligence Unit, which estimated that $1.35 billion of domestic criminal proceeds were laundered in New Zealand every year and the "social harm caused by the laundering and its associated offending is estimated at many times this figure".
The estimate related principally to drug and fraud offending.
The value of money laundering associated with tax evasion had not been established "but is thought to be significant".
While the terrorism threat that New Zealand itself faced was rated as "low" by the international community, the Financial Intelligence Unit noted it was still exposed to threats relating to terrorism financing overseas, including the potential for financiers of overseas groups within New Zealand, and overseas-based groups which might seek to use the country as a conduit for funds.
"Given the global nature of TF and the constantly changing nature of international tensions and conflicts, the risks associated with TF are highly dynamic. As such, reporting entities need to ensure that their CFT measures are current, regularly reviewed and effective," the RBNZ report said.
According to the RBNZ, the high potential risk in the banking sector was due to its relative size, the large number of customers and the high number and value of transactions compared with other areas.
The banking sector continues to have a relatively high potential risk.
Combined with the wide availability and easy accessibility of products and services and access to international financial systems, the banking subsector presented a much greater risk of money laundering and terrorism financing than the other subsectors, it said.
"The value, volume and velocity of banking transactions provide an environment which conceals, disguises or obfuscates the proceeds of crime."
Within the sector, retail banking and business/commercial banking were rated high risk while wholesale/institutional banking was rated medium.
Non-bank deposit takers were rated medium, reflecting the "relatively smaller size and complexity of this subsector compared to the banking subsector."
It did note, however, the sector was vulnerable to a number of ML/TF factors and might present an attractive avenue for ML/TF.
The overall "low" risk rating for the insurance industry remained unchanged and reflected the smaller size and relatively simple life insurance products and services.
The assessment identified 12 key potential vulnerabilities that cut across all three subsectors including trusts and shell companies, as it said New Zealand's open business environment and common use of trusts were highly vulnerable to ML/TF abuse.
"All shell companies and trusts, including family trusts, should be considered highly vulnerable to ML/TF activity," the RBNZ said.
Other potential weaknesses included new payment technology as it might create vulnerabilities that emerged faster than ML/TF controls could respond.
"ML/TF via internet and online banking presents a quick and easy anonymous, cross-border channel which moves funds faster than enforcement can keep up with. This vulnerability also includes Alternative Banking Platforms and e-currencies," it said.
The RBNZ supervises 110 reporting entities including 24 registered banks, 14 life insurance providers, 27 non-bank deposit takers and 45 reporting entities which are the members of a designated business group.
