AML/CFT Obligations and Trust Administration
You are a trustee company providing trustee services for the NZ Family Trust. The settlor is a New Zealand resident, but the trust has a beneficiary who is a resident of a high-risk country. The trust receives a large lump sum of $1 million from the settlor's overseas business. The settlor has provided documentation showing the source of funds as the sale of a business, but the documentation is in a foreign language and appears incomplete. The settlor has requested that the trust make a distribution of $200,000 to the overseas beneficiary. You are subject to AML/CFT obligations under the Financial Markets Conduct Act and the AML/CFT Act.
1. What are your AML/CFT obligations in this situation and how should you respond to the settlor's request?
Read the worked answer
As a trustee, you are a reporting entity under the AML/CFT Act and must comply with customer due diligence (CDD) and enhanced due diligence (EDD) requirements. You must: (1) verify the identity of the settlor and beneficiaries; (2) understand the nature and purpose of the trust; (3) conduct ongoing monitoring; (4) obtain and verify information on the source of funds. The $1 million lump sum from overseas requires scrutiny. The documentation provided is in a foreign language and incomplete, which raises red flags. You should not proceed with the distribution until you have satisfactorily verified the source of funds. You should request complete documentation in English or obtain a certified translation. You may need to conduct EDD due to the high-risk country beneficiary. If you cannot verify the source of funds, you must consider filing a suspicious activity report (SAR) to the Financial Intelligence Unit (FIU) and should not proceed with the transaction. You should also consider whether the trust's risk assessment requires updating. You must keep records of your CDD and decisions.
2. What are the potential consequences of failing to meet your AML/CFT obligations?
Read the worked answer
Failure to comply with AML/CFT obligations can result in: (1) civil penalties; (2) criminal liability for serious breaches; (3) regulatory action by the FMA or other supervisors; (4) reputational damage; (5) loss of ability to provide trustee services. You could be fined or imprisoned. It is essential to maintain robust AML/CFT procedures. In this case, proceeding with the distribution without proper verification could be a breach. You should also consider whether the trust itself could be used for money laundering. You must act diligently and document your compliance.