CLSAP NZ ordered to pay $770,000, and more daily news

The details of a judgment in a case brought by the FMA highlight the importance of good governance and director education. In the details below I draw your attention particularly to the comments by the judge in the last five paragraphs in the quoted section below.

CLSAP Premium New Zealand Limited, formerly known as KVB Kunlun, has been ordered by the FMA to pay $770,000 for anti-money laundering breaches under the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act. The FMA made a case in the Auckland High Court in June claiming that CLSAP NZ didn’t comply with its obligations under the AML/CFT Act between April 2015 and November 2018. The FMA’s case was focused on transactions undertaken by 10 CLSAP NZ customers. The FMA and CLSAP NZ filed an agreed statement of facts where CLSAP NZ admitted:

  • failures to conduct enhanced customer due diligence in relation to 12 transactions;
  • failure to conduct customer due diligence in relation to one customer;
  • failures to terminate existing business relationships when customer due diligence could not be completed;
  • failures to report suspicious transactions / activity on nine occasions; and
  • failure to keep records as required under the AML/CFT Act

“CLSA Premium New Zealand Limited (CLSAP NZ) has been ordered to pay a total pecuniary penalty of $770,000 for breaches of the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act, following proceedings brought by the Financial Markets Authority – Te Mana Tātai Hokohoko (FMA).

The FMA filed proceedings in June 2020, in the Auckland High Court, alleging CLSAP NZ failed to comply with its obligations under the AML/CFT Act between April 2015 and November 2018. These were the first court proceedings brought by the FMA under the AML/CFT Act.

In a judgment determining the penalty, Justice Edwards noted CLSAP NZ’s failure to obtain any evidence of source of wealth or source of funds for some of the transactions where enhanced customer due diligence was required and “the inadequate information obtained when it was sought, is particularly concerning.”

The Judge said although CLSAP NZ had an AML/CFT programme, policies, and dedicated compliance staff, the mitigating effect of those features on the penalty  was undermined by several factors:

CLSAP NZ was warned by the FMA about its substandard AML/CFT programme in 2014 and, despite improvements, the FMA identified further issues in 2018

CLSAP NZ’s executive directors interfered with compliance, including by suspending information collected on source of wealth/funds in 2017, and one director vouching for a customer’s source of wealth/funds

Two CLSAP NZ compliance officers resigning over the relevant period due to disagreements with CLSAP NZ directors, with one director saying a “bendier” compliance officer was required

When one customer refused to provide information sought, CLSAP NZ was willing to accept inadequate information, including objectively suspicious information, to retain business.”

Click here to read more

In other news

Cigna: New customers to receive two months of free cover

Cigna: Existing customers that increase their level of insurance will receive the first two months of increased cover at no additional cost

Cigna: financial advisers will receive twice the servicing commission for two months for all new business and increases sold during the campaign period

FMA: Samantha Barrass appointed as new FMA CEO

FMA: FMA has said that they will take a ‘no-action’ approach when market participant breaches, or expects to breach, a regulatory obligation and seeks relief from the FMA

Financial Advice: Economic Update from Tony Alexander

Financial Advice: Toolkit for FAP Directors

Financial Advice: Financial Advice NZ 2021 Awards now open

Compliance culture

While not necessarily immediately obvious, everyone in financial services needs a compliance culture to meet the expectations of the regulatory environment now in place, even while noting it is being developed further to capture conduct concepts.

Further, Boards and management often have their own additional internal requirements that are expected to be met. Regardless of size, all businesses need compliance culture in place, even if that simply means ‘ensuring that things are done the way we decided to get them done’. A good friend, who is also a business coach, puts it this way: ‘never put in place a rule you aren’t prepared to enforce’. New law and regulation ask us to put in place rules and policies – so we must have a way of forcing ourselves and others working in the business to observe them.

The customer-focused nature of most governance requirements means that the implementation of a compliance culture ensures that you focus on them. If we take a look at financial adviser businesses, they deal with risk, may handle client money, and now have new requirements to abide by, it is evident that a compliance culture necessary to have in place to ensure that regulator’s expectations are met.

How do you build a compliance culture?

  1. Start with a whole of business approach – Compliance needs to be a focus from the Board down through management and on to the individual workers at all levels.
  2. Commence with an emphasis on higher risk business operations – Identify those risks with the greatest probability of occurrence and/or the potential to have the greatest impact, and concentrate management and mitigation on those risks
  3. Build from your core activities: if you give advice, advice process is the heart of your operations.
  4. Learn – read the guides, laws, contracts, and regulations that together form the sum of the commitments that your business must meet.
  5. Challenge yourself: what level of risk, in financial terms is unacceptable to you? If a dollar loss of $100,000 is unacceptable, you will need to eliminate the risk of that happening.
  6. Fraud is real, people can be very self-interested: ask yourself – if someone else was doing your job, how to you think they could rip off the company, your suppliers, and your clients?

If you want to know more about how to test whether your culture is supportive of compliance, make contact with one of the team.

RBNZ: Insurance sector must evolve in line with increased public expectations and changing risks

Adrian Orr, Governor from RBNZ delivered a speech at the Insurance Council of New Zealand Conference today about building confidence and reducing risks in the insurance sector. You can read his full speech here.

Here are some key points that I really enjoyed:

  • There are significant information-asymmetries between an insurance provider and their customer, and the risks of providing poor or outdated information run in both directions. ‘Who is good for what, and when?’.
  • ...often there is a long period of time after a customer-relationship has been established. In very difficult circumstances, a customer may find that they do not have the coverage they believed would be available to them. And, on the other side of the ledger, insurers rely on accurate information from customers about their own circumstances.
  • Orderly and well-articulated changes in insurance and pricing strategies are needed, so that all participants in the financial sector – and wider economy - can adapt their behaviour without creating unintended outcomes.
  • How a firm monitors and addresses conduct and culture issues will be a part of our ongoing ‘business as usual’ supervision with all insurers. We will also monitor insurers to make sure their planned actions are implemented effectively.
  • The public is demanding that both insurers and regulators play a part in providing greater confidence in the health and conduct of the sector. The Reserve Bank’s insurance agenda for the coming year (or years) is thus very full.

The section on three disciplines, which is too big to quote, is also well worth a look.

I liked the comment about changes in insurance and pricing strategies. I think that this is probably about the more visible marketplace - general insurance - and the role it has in affecting decisions that people make about where they live and the buildings in which they live, and also what buildings get built and where. But it could equally well apply to the marketplace for income protection too, which is in a product design and pricing crisis that has some similar features to insuring buildings in earthquake and flood prone areas. Both life and property insurers have efficiency challenges. The point about information asymmetries cannot be made strongly enough and needs to be remembered in the insurance contract law review process. It is a comfort to insurers (and should be to consumers as well, although they don't tend to be) that officials are signalling that they understand these fundamental concepts. 


Introduction to advisory boards course

While necessary, it is no longer enough to have processes in place…

While necessary, it is no longer enough to have processes in place to identify and deal with problems - such as monitor for and apply a management plan when a problem is identified. Instead, to obtain a license, it is now necessary to be able to state and demonstrate how one is actively working good processes and monitoring to ensure that there are no problems, and then regularly report and record that fact at the appropriate level within the entity.

That’s why so much compliance work is focused on recognizing conflicts, creating appropriate processes, and then setting up controls and monitoring. Good governance is more than effective management, but it entirely supports and facilitates effective management.

Business, by definition, is not a solo activity. Governance, more so. I don’t think effective governance can possibly be performed by one person either. It’s essence is checks and balances, requiring a perspective bigger than any one individual. If you’re scared of letting go of all the control you have as ‘the boss’ you need good governance more than most - and it will be harder for you to achieve it. But here’s the key, if you’ve ever been frustrated at your ability to get your business to change in the way you want, good news: good governance is exactly the tool you need to use.