Recently, many of our clients received a bank letter that required them to prove the source of funds in their bank accounts. They had no idea how to prove it, so they came to seek our professional advice. In fact, it relates to Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT).
New Zealand began to implement the AML/CFT in 2013. There are three main purposes of the AML/CFT: the first one is to detect and deter money laundering and the financing of terrorism; the second one is to maintain and enhance New Zealand’s international reputation by adopting, where appropriate in the New Zealand context, recommendations issued by the Financial Action Task Force; and to contribute to public confidence in the financial system.
Some people might think it is only related to the activities of money laundering and terrorism, and it will not involve our normal life. If you have the same point, you are wrong.
We will give you some common cases below.
Case 1: Wang came to study and stayed in New Zealand after graduation. In order to support Wang’s purchase of real estate in New Zealand, his parents in China used a New Zealand financial company to remit a total of NZ$300,000 from China to his New Zealand bank account. Wang recently received a letter from the bank asking for an explanation of the source of these funds.
In this case, Wang needs to explain the source of the NZ$300,000 to the bank. You might think this is very simple, because it is just a gift from the parents. However, according to the AML/CFT, the bank will require Wang to provide a Deed of Gift, documents of the funds flow and the proof of the parents’ income. The documents of the funds flow are required to prove how the funds were accumulated in the parents’ bank account and then transferred to Wang’s New Zealand bank account. This includes the currency exchange documents of the financial company.
New Zealand Inland Revenue Department (IRD) does not know how Wang obtained the funds, so IRD will define the funds as income from unknown sources, which is subject to income tax. Thus, Wang needs to provide supporting documents to verify that the money is a gift from his parents rather than income. In addition, the Deed of Gift is required to be in a formal format issued by a professional third party.
Case 2: A child came to study in New Zealand, and the parents also came with him. Because the parents did not work in New Zealand, they would regularly transfer money from China to New Zealand’s bank account for the child’s tuition and the family’s living expenses. They recently received a letter from the bank requesting an explanation of the source of funds in the bank account.
In this case, you should know a point from taxation, “New Zealand tax residents pay tax to New Zealand on their worldwide income”. Once the parents are recognised as New Zealand tax residents, it means that they need to pay tax on all their income, including the income from China. Due to the Double Tax Agreement between China and New Zealand, the income will not be double taxed, but they might need to pay the amount of tax difference because of different tax rates.
Case 3: Zhang’s family live in New Zealand. Zhang is doing business in China, so he needs to leave New Zealand for a long time and live in China. Zhang is the main source of income for the whole family. He regularly transfers money to New Zealand bank accounts through exchanging money from his friends. Recently, Zhang received a letter from the bank requesting an explanation of the source of funds in his bank account.
In this case, Zhang has a high risk of being reviewed by the IRD. The IRD might ask him: Are the funds transferred in his bank account borrowing from his company? Or are they shareholder salaries or dividends? And many more questions. As Zhang is a New Zealand tax resident, the IRD will review his overseas income. More importantly, when Zhang provides documents to the bank, all documents should be consistent with those provided to the IRD and other government departments. Otherwise, there will be suspicion of providing false documents.
Case 4: Huang bought a real estate in New Zealand, and the loan for the real estate was under Huang’s name. For the purpose of asset protection, Huang approached a lawyer to establish a family trust and prepared to transfer the real estate and loan under his personal name to the family trust. Huang received a letter from the bank requesting an explanation of the source of funds in his bank account.
Most people might believe that the real estate belongs to Huang, and the trustee of the family trust is also him, and when the loan is made, isn’t all the bank information available? This is because the AML/CFT was implemented in mid-2013. The previous regulatory requirements are different, so the documents provided are also different. Now, the bank requires Huang to provide more supporting documents to supplement the existing regulatory requirements.
According to our experience, many clients did not save these documents after many years. Once they were requested by the relevant department, it seemed hard for them to provide. Therefore, we remind everyone that once the funds enter into your bank account, please prepare the supporting documents in time. If there is any uncertainty, you need to contact a professional accountant or tax agent as soon as possible. We also hope that everyone will develop a good habit of saving files correctly.
Except for these four cases we mentioned above, there are many more complicated cases.
It should be emphasized that you must provide the information, which satisfies the requirements of the bank. If not, the bank has the right to temporarily restrict, freeze or cancel your bank account. Of course, the bank is doing this due to the supervision of the government. In addition to banks, there are other industries that are under supervision, such as accountants, lawyers and real estate agents. They all need to collect the information of clients according to the AML/CFT.
Finally, we want to remind everyone that after receiving similar letters, please contact your accountant or tax agent as soon as possible for professional consultation. If you have any questions, please contact us: 09 303 2868
