DIA Guidelines for Real Estate – Clarity and Confusion

DIA Guidelines for Real Estate – Clarity and Confusion

The Department of Internal Affairs (DIA) has finally published their guideline for real estate agents who are being brought into New Zealand’s AML/CFT regime at the end of 2018.

https://www.dia.govt.nz/diawebsite.nsf/Files/AML-CFT-Real-Estate-Guideline/$file/AML-CFT-Real-Estate-Guideline.pdf

Whilst the Guideline provides some valuable clarity and guidance about what AML/CFT compliance means for real estate businesses, there a number of items that will require further thought and positioning by real estate businesses to ensure compliance is as effective, whilst minimising the impact on business operations as much as possible.

We have analysed the guidelines published by the DIA and the following commentary aims to highlight some of the issues that real estate agents will need to work through.

To DBG or not-DBG?

The DIA reiterated the ability for real estate business to create Designated Business Groups (DBGs) and take a common approach, therefore sharing the burden of compliance effort if the reporting entity (real estate business) is a related real estate agent/agency OR a subsidiary.

The guidelines confirm that a group of “related” real estate agents or subsidiaries of a real estate agent may form a DBG. The guidelines state that term “related” is deliberately undefined to allow flexibility in forming DBGs to better fit your circumstances.”

This will allow related businesses to share their ML/TF Risk Assessment and AML/CFT Programme, as well as centralise reporting activity to the NZ Police FIU.  However, the guidelines do not provide additional guidance on what to consider when making the decision whether to form a DBG and need to document the DBG approach as part of an AML/CFT Programme.  The guidelines are also silent on how to manage the challenges of managing a DBG, including oversight, assurance and governance over the operation of disparate businesses within a common DBG framework.

Property management is not managing a client’s asset!

The DIA guidelines appear to offer a concession through the interpretation of a real estate “transaction” based on the definition in the Real Estate Act 2001, which excludes “residential tenancy” as defined by the Residential Tenancy Act 1986 from the transactions covered by AML/CFT requirements.

This could be interpreted that the residential tenancy side of a real estate business can be completely excluded from AML/CFT requirements, which is supported by the DIA’s statement that property management services are excluded from the AML/CFT Act.

In support of the statement that property management is excluded the DIA points back to Regulation 6 of the AML/CFT (Definitions) Amendment Regulations 2018.  However, these, whilst published have yet to come into force (scheduled for January 2019).

Regulation 6 which will amend section 21B of the Act defines property management activity as:

  • Acting, or offering to act, for reward in respect of the negotiation, grant, approval, or assignment of tenancies in relation to residential premises (within the meaning of section 2(1) of the Residential Tenancies Act 1986), irrespective of whether that activity is carried on by itself or in conjunction with other businesses; and
  • In relation to any real property (whether residential premises, commercial premises, or other real property),
    • collecting or offering to collect money payable for the use, maintenance, repair, improvement, or oversight of any property; and
    • holding or disbursing money received for the use, maintenance, repair, improvement, or oversight of any property; and
    • holding or disbursing money received for the advertising of, or negotiating the use of, any property; and
    • including advertising or negotiating, or any other act done directly or indirectly for the purpose of carrying out any activities referred to above.

It should be noted that the definition, whilst including the collecting of rent for use, and funds to maintain or repair, does not exclude the onward transmission of rent to the owner, which presumably is covered by the managing client funds obligation.

Additionally, the broad exclusion of residential tenancy from the AML/CFT Act suggested in the DIA guideline appears to conflict with other parts of the guideline, and therefore may not be able to be applied to all facets of a residential tenancy activity:

  • The guideline specifically identifies the mixing of legitimate income from property with illicit proceeds, as a significant ML/TF risk for the real estate sector.
  • The guideline also makes it clear that managing a client’s funds, accounts, securities or other assets is an activity that is covered by the AML/CFT Act and must be addressed by real estate businesses. However, the guidelines only refer to funds received as a result of the sale/purchase of property, despite broader interpretation of managing client funds etc. in other DNFBP guidelines.
  • The guideline also identifies commercial leasing as an area of ML/TF risk and states that this type of activity is covered by the AML/CFT Act.  As a result, the guideline appears to be treating one part of the “property management” sector differently and requiring AML/CFT on the landlord and tenant of commercial property transactions.
  • Regulation 6 relied upon by the DIA to exclude of property management activity from AML/CFT includes commercial property in its definition of property management activity, but then makes it clear that the exclusion does not apply to:

Acting, or offering to act, for reward in respect of the negotiation, grant approval, or assignment of a tenancy agreement for commercial premises (whether described as a lease, tenancy agreement, right to occupy, or otherwise) in relation to commercial premises (within the meaning of section 2(1) of the Residential Tenancies Act 1986)

The guideline further states residential leasing and other property management activity is not “real estate agency work” and therefore is not subject to AML/CFT requirements, but is silent on whether it should be deemed as managing an asset.

Because of the apparently conflicting and confusing positions in the DIA guidelines, real estate businesses will need to take a pragmatic view to ensure compliance across its business.

To develop a defendable approach, real estate businesses could consider that it may be a reasonable/appropriate approach to exclude the tenant (based on the transaction definition) from the AML/CFT Act requirements, but apply AML/CFT requirements to the property owner who is offering the property for lease and for whom the real estate business is managing the asset and will be paying rental income.

Is a cheque really cash?

It is well understood that under the AML/CFT Act the client for real estate is the owner of the property, not the purchaser, but under certain circumstances (receiving $10,000 and above in cash) CDD must be undertaken on the purchaser.

An example in section 5 of the guideline “Do you know your client?” provides a potentially confusing position on the AML/CFT Act’s requirement for real estate businesses to perform CDD on the purchaser.

The DIA guideline states an occasional customer includes those party to a real estate transaction that are not clients and from whom you receive NZ$10,000 cash or a bearer negotiable instrument.  However, the DIA have included cheques as bearer negotiable instruments.

If real estate were to apply this example they would undertake CDD on any purchaser paying for the deposit by cheque, however, it is our experience is that cheques are usually neither bearer or negotiable!

It is accepted that the other monetary instruments listed in the example are bearer and negotiable, and real estate business if they ever receive bills of exchange, promissory notes, travelers’ cheques, money orders or postal orders to pay for real estate should undertake CDD on the purchaser. However, so long as the cheque has a payee and is crossed, it would not create a bearer negotiable instrument.

Base on the occasional client definition above real estate businesses need to think very carefully about how and when they are going to conduct CDD on a purchaser and when they meet the definition of an occasional customer.

Must you identify and verify your customers before engaging in covered service?

The AML/CFT Act (section 16) requires that a reporting entity must carry out verification of identity before establishing a business relationship or conducting an occasional transaction or activity, unless certain exemptions apply, namely:

  • It is essential not to interrupt normal business practice; and
  • You effectively manage ML/TF risks through appropriate risk management procedures; and
  • You complete identity verification as soon as practicable once you have established the business relationship

In the guidelines the DIA make it clear that whilst they expect identification and verification of identity to be completed before offering a covered service in most cases, they highlight the fact that real estate business can establish exception processes, which means that verification can take place after a real estate business has commenced to offer a covered service (i.e. after the Agency Agreement has been signed).

This could be helpful, particularly where the client is a non-individual such as a trust or company and more time will be needed to fully complete CDD.  However, to take advantage of these exemptions real estate businesses should establish in their AML/CFT Programme the circumstances when they can apply the exemption, and at what point they must have fully completed CDD.

Auctioneers – so you thought they weren’t covered?

The DIA Guidelines and Regulation 6 clearly sets out that from the 1st January 2019 the current exemption for auctioneers under section 21A of the AML/CFT Act will removed.  This will bring auctioneers into the AML/CFT regime and require they are compliant with AML/CFT requirements.

Real estate business who use the auction sales method will need to think about how they will work with the auctioneer to ensure both meet their AML/CFT obligations and work out how they can avoid doubling up of activity, in particular CDD.

Do you need to verify the identities of the beneficiaries of Trust?

The CDD obligations for trusts one of the most significant and complex CDD situations which many real estate businesses are coming to grips with, given a significant proportion of trusts that own real estate in New Zealand.

The DIA guidelines appears to contradict the guidance previously issued by the DIA on the CDD for Trusts that requires the identification (Name and Date of Birth) of beneficiaries but importantly not the verification of identity.

The residential sale – family trust example in the DIA’s real estate guidance states that a real estate agent should verify the trustee and beneficiaries of the trust, when this is clearly not required by the guidance previously issued by the DIA, FMA and RBNZ.

This level of inconsistency needs to be worked through and clarity achieved to ensure real estate businesses are collecting the right level of CDD.

Conclusion

The DIA Guidelines are useful and provide a degree of guidance, however, they in no way provide a how-to solution that means that real estate business can comply with AML/CFT by simply following the guidelines. In some circumstances the guidance will create more uncertainty for real estate business who are new to AML/CFT.

As such many real estate businesses will require a degree of expert support to help them navigate their AML/CFT compliance obligations.   Initialism as a highly experienced and specialist AML/CFT business is uniquely positioned to offer that support.

Based on years of experience thinking through issues like those outlined above to help business comply with AML/CFT, Initialism’s solutions offer fast, effective, and business friendly ways to address AML/CFT compliance without unnecessarily impacting the day today business operations.