Anti-Money Laundering and
Countering the Financing of Terrorism

Submissions on the second discussion document regarding new anti-money laundering proposals

Real Estate Institute of New Zealand Inc

SUBMISSION TO THE MINISTRY OF JUSTICE ON THE FINANCIAL TRANSACTIONS REPORTING ACT 1996 DISCUSSION DOCUMENT
August 2006

REAL ESTATE INSTITUTE OF NEW ZEALAND INCORPORATED

August 2006

To: The Ministry of Justice

On: Financial Transactions Reporting Act 1996 Discussion Document

Introduction

The Real Estate Institute of New Zealand Incorporated ("the Institute") has consulted with Cindy O'Brien of the Ministry of Justice in respect of the discussion paper issued regarding the Financial Transactions Reporting Act 1996 ("the Act"). As a result of the meeting two particular issues were raised which the Institute wishes to make submissions on.

Issue One

Does the Institute have the capacity as the self regulating body of the Real Estate Agents act 1976 to supervise the real estate industry to ensure compliance with the Financial Transactions Reporting Act 1996 (and the proposed amendments)?

Issue Two

To what degree and process in the verification of identity under the Financial Transactions Reporting Act 1996 Act is appropriate for real estate practitioners in real estate transactions (and proposed amendments)?

SUBMISSION ONE

"The Institute is satisfied that it has the necessary processes and procedures to supervise the real estate industry's compliance with the Act at the first phase or from the outset, and that supervision can be effected efficiently and in accordance with the Act.

Proposed Supervision Structure

The Institute currently administers the Real Estate Agents Audit Regulations 1977 ("the Audit Regulations"). It is a requirement under the Audit Regulations that Real Estate Licensees provide to the Institute monthly reconciliation statements. The Institute has undertaken a review of the Audit Regulations with the help of Graham McGlinn of Grant Thornton Accountants in order to update and streamline the reconciliation reporting requirements under the Audit Regulations.

The recommendation by Mr McGlinn is to establish a reporting requirement similar to that used by solicitors' trust account auditing. This involves the use of a preformatted form whereby Real Estate Licensees acknowledge that they have complied with the requirements of the Real Estate Agents Act, for instance the requirement to hold deposit monies for ten days and the requirement to administer trust accounts in accordance with the Act and the Audit Regulations, etc. What the Institute proposes to do in respect of financial transaction reporting is to incorporate within the proposed form a section whereby Licensees acknowledge that they have verified the details of all purchasers and vendors, they have reported all suspicious transactions where necessary and that they have acknowledged that they will retain all documentation and files in respect of any suspicious transactions.

The Institute considers that with the proposed review of the trust account reporting and the incorporation of financial transactions reporting that the Institute can and will be in a position to supervise the real estate industry to ensure that there is compliance with the Act.

Legislative and Regulation Changes

Regulatory Changes

The Institute acknowledges that there will be a requirement to amend the Audit Regulations. The Institute considers that the proposed changes to the Audit Regulations are not onerous and simply require a proposed agreed form to be completed which can be attached to the schedules in the Audit Regulations and then an amendment to regulation 7, (9) & (10).

Statute

The Institute also considers it may be appropriate to provide for the statutory power of the Institute to have Licensees provide to the Institute on demand copies of all documentation relating to listings and sale and purchase agreements for inspection, or a provision for the Institute to enter and seize relevant documents. This effectively means expanding the scope of sections 33 and 88 of the Real Estate Agents Act 1976.

The Institute also considers it may be prudent to provide a statutory requirement of Licensees to retain all documentation for a period of not less than seven years.

The Institute also proposes that it may be prudent to provide a statutory requirement for Licensees, Branch Managers and Salespersons to answer any questions in respect of any transaction that they are involved in, in respect of the compliance with the Financial Transactions Reporting Act.

Education

The Institute has the current processes and procedures to provide training to all persons involved in the industry. The Institute has the ability to provide that training nationally through seminars, the Institute's website and the real estate monthly magazine. Further, the Institute has the ability to incorporate into the National Certificate of Salesperson's course, the Branch Managers course and the Licensee's course, and education component which will educate those undertaking the courses on the requirements in respect of the Act.

Prosecution for Non Compliance

Whilst the Institute has the capacity to prosecute members for non compliance it would be prudent for the Police to prosecute.

Conclusion

The Institute considers that its ability to provide supervision in respect of the compliance with the Act is not particularly onerous. The Institute currently requires members to be compliant with all legislation and has the ability to provide education to industry members.

SUBMISSION TWO

"The Institute submits that the appropriate degree and process for the verification of identity under the Act is a process and procedure similar to the wallet test."

The Wallet Test

The "wallet test" is coined from the Real Estate Institute of Australia who have undertaken a similar process in its jurisdiction. The wallet test is a test whereby members of the Real Estate industry can verify at the point of negotiations the identity of the purchaser through the documentation that they possess on their person in their wallet. The Institute acknowledges that the Act requires photo identification and the Institute understands that in most cases people will have a driver's license and/or availability to an up to date passport.

The Institute submits that in a real estate transaction this is the most appropriate process of verification and this is reflected in the nature of a real estate transaction. A typical real estate transaction involves the real estate agent contracting with the vendor to market the sale of a property. That contract of agency will obviously require the verification of the vendors particulars, but in most cases that can be done by virtue of the fact that they would be registered on the certificate of title for that particular property. The real estate agent then markets the property through various mediums and will then introduce a purchaser to the sale. Obviously at the time that a sale and purchase agreement is entered into there will be a requirement in accordance with the Act to verify that purchaser's details. Once the contract is concluded through acceptance by the vendor the involvement by the salesperson in the transaction typically ceases. All documentation is then referred to solicitors who arrange for the conveyancing requirements with the Land Transfer Office to be undertaken, and also the arrangement for mortgage finance if necessary.

Therefore the Institute is satisfied that because of the "introductory" nature of real estate agents part in the transaction that it is the "wallet test" which is more favourable because of the conveyancing process required after acceptance.

In some cases the Institute acknowledges that where a purchaser purchases a property through either the purchaser's own name and then inserts 'and/or nominee' the Institute considers that the real estate agent should request from the purchaser who that nominee is and if it is a trust then ask the purchaser, once they have verified the purchaser's details, to provide details in respect of that trust or company. In cases where the purchaser is not sure who the nominee is then it would be appropriate in the Institute's view to require the verification to be conducted in the second phase of the transaction.

Conclusion

The Institute submits that the most appropriate test in respect of the typical real estate transaction is that similar to the model used in Australia and Canada, the "wallet test". Given the nature of the real estate agent's involvement in a transaction, and noting that the involvement ceases once the contract has been agreed, then this in the Institute's view is sufficient given that the transaction is then handled by other professionals who can make any further necessary verification as they see fit. The Institute submits that in cases where a property is purchased by an 'and/or nominee' that in the absence of the purchaser being able to identify who the nominee shall be, this again can be handled at the second phase or the conveyancing phase of the transaction. Where the purchaser can identify who the nominee is then the onus should be on the purchaser to provide to the real estate agent sufficient particulars to identify the legal identity of that nominee, whether it be a trust or a company.