Real Estate Agents AML/CFT Guide – Some More Clarity

Real Estate Agents AML/CFT Guide – Some More Clarity

The Department of Internal Affairs (DIA) recently released the ‘AML/CFT Guideline for Real Estate Agents’ (the Guideline). The Guideline is a strong document which assists the real estate agents (REA) sector to comply with the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act).

As part of a group of experienced AML/CFT consultants, there were, however, some areas where we sought clarification/confirmation of the guidance to implement appropriate and effective responses for our affected clients.

We had the opportunity to meet and discuss these matters with the DIA. While we understand that the DIA may itself release some further guidance on these points, we set out below our key takeaways from the discussion.

When will a REA acting for a vendor be expected to undertake CDD on a purchaser?

Our primarily issue related to when a REA acting for a vendor would be expected to undertake customer due diligence (CDD) on a purchaser. While this is stated as a single issue, it encompassed a number of wider interpretation issues including the definitions of ‘customer’, ‘occasional transaction’ and ‘occasional activity’, and the application of the wire transfer provisions.

A REA does not need to conduct CDD on a party to a real estate transaction that is not its client (the client is the person entering into an agency agreement with the REA), other than where a person conducts an occasional transaction with the REA.

Occasional transaction – Receipt of cash or cash equivalents

Receipt of physical currency from a purchaser of NZ$10,000 or more in cash will give rise to CDD on the party presenting it and require a prescribed transaction report (PTR). The receipt of a cheque from a purchaser over this same amount will also give rise to a PTR (as the definition of ‘cash’ also includes cheques[1]) but will not require CDD to be completed (as the definition of ‘occasional transaction’ specifically excludes cheque deposits). 

Occasional transaction – Wire Transfers

While the Guideline covers the requirements for wire transfers (and corresponding PTR requirements), it does not include any specific examples of the application of these. We have set out some examples of the application of wire transfers to expected circumstances below:

  • In a typical house deposit scenario, the purchaser is likely to be the Originator, with the purchaser’s bank being the Ordering Institution (as those terms are defined in the Act). The REA’s bank is likely to be a Beneficiary Institution that is crediting the account for its beneficiary, being the REA. However, given the REA receives the funds on trust for its vendor client, it is also likely to be a beneficiary institution. As the REA will be in a business relationship with its client (the vendor), in accordance with the supervisors’ interpretation of Regulation 13A[2] the Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Regulations 2011 it appears there will be no expectation for CDD on the purchaser.

 

  • When these funds are transferred to the vendor/vendor’s solicitors, being potentially some time subsequent to (a) above and usually less commission and expenses, it amounts to a separate wire transfer in which the REA would be considered the Ordering Institution. The REA is holding funds on trust for the vendor, and transferring those funds by electronic means on instruction of the vendor (making the vendor the Originator of the wire transfer) to be made available to a beneficiary at another reporting entity. As the REA will be in a business relationship with its client (the vendor), there will not be any additional CDD required under ss27-28 of the Act.

 

  • In a scenario where a REA acting for a vendor finds itself holding a deposit where a sale does not complete requiring the funds to be refunded to the purchaser, the REA holds the funds and acts on instruction of the purchaser (and not its client, the vendor). This would make the REA an Ordering Institution with the purchaser the Originator in respect of a wire transfer. As such, the purchaser would require identification as per section 27(1) and verification of that information as per s28 of the Act. Given the Guideline and new definition of customer for REA purposes[3], it would also seem to trigger the need for CDD in line with section 11 in our view, as the purchaser would be conducting an occasional transaction through the REA.

 

On the basis of the above, the receipt of a bank transfer from a purchaser into a REA’s trust account will not give rise to CDD on a purchaser. However, a refund to a purchaser of those funds will require CDD on the purchaser.

Is property management, whilst specifically excluded, in part brought into the regime by other covered activities?

We consider that the exclusion of property management activities as discussed in the Guideline is intended to also exclude the associated captured activities of managing client funds[4] and managing client assets (e.g. the property under management) although we consider that this could have been more clearly stated.

REAs should note that while commercial property management is included in the definition of property management activity, 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).

Based on our discussions, if an REA is engaging in both agency agreements and residential property management then both activities should be covered by the REA’s AML/CFT programme. However if a business is only engaging in residential property management then it is not subject to AML/CFT obligations.

Given the wording of the Act and associated regulations, we consider that the best way to ensure that excluded property management activities (as outlined in the Guideline) are not inadvertently captured is to have those excluded activities undertaken through a separate legal entity from that which undertakes real estate agency work (within the meaning of section 4(1) of the Real Estate Agents Act 2008).

Initialism are a group of independent consultants who share a passion for AML/CFT and a common interest in providing high quality advice and support to our clients. This includes discussing interpretations (resulting in at times heated debates) and liaising with AML/CFT Supervisors with the goal of advancing AML/CFT understanding and compliance.

The members of the group who participated in this initiative are Fiona Hall, Martin Dilly, and Neil Jeans.

 

[1] We do not consider that this should apply to cheques that are not ‘bearer’ nor ‘negotiable’ (e.g. a cheque marked as non-negotiable and with “or bearer” crossed) but acknowledge that the Act does not specifically state this.

[2] Wire Transfer Guidance paragraph 26.

[3] See the new Regulation 5B of the Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Regulations 2011.

[4] It is noted that Regulation 6 of the AML/CFT (Definitions) Amendment Regulations 2018, whilst excluding the collecting of rent for use, and funds to maintain or repair, does not exclude the onward transmission of rent to the owner, which could presumably be a covered activity of managing client funds.