Wednesday 21 February 2018

Don't blame the bank, blame the Vogons

This kind of headline used to be exclusive to the Inside of the Asylum. But we've imported American Anti Money Laundering rules. And so we get this.

Big kudos to the prior nannying National government. Heckofajob.
You might be 94, but you'll still need an 18+ card: ANZ Bank

He may have fought in World War II, had children and lived in New Zealand since he was 16, but proving his identity is turning out to be tough for an Auckland 94-year-old.

All John Lokes wanted to do was open an account at ANZ Bank after his wife died.

But he doesn't drive or travel overseas, so proving who he was at the bank was tricky.

Loke's daughter Marie Richardson said she took her father into the Henderson branch on Friday and was shocked to discover that neither his expired passport nor his driver's licence, current gold card or credit card was enough to satisfy staff.
Marie said after repeatedly reminding bank staff that her father was 94 years old, they agreed to file for an exemption - meaning his request to open an account could be applied for without photo identification.

"They just said, they've got this criteria of what you have to have and they said the auditors are very picky on it ... we had everything we could possibly have. I mean, he can't get a Gold Card in New Zealand without having proved his ID, I wouldn't imagine?

"I was dealing with it, so I got rather stroppy. When they said can you apply for an 18+ card for him, I said, 'you've got to be joking, that is just ridiculous, he's a 94-year-old man applying for an 18+ card?'.

"It is funny but it is silly, too, that you have to go through this performance."

An ANZ Bank spokesman said although the bank couldn't comment on specific cases, due to privacy laws, there were customers who did not have the required ID but the ANZ worked them out on a case-by-case basis.
It's easy and obvious to blame the banks when you're stuck in this kind of stupid spot. But the costs to the bank of getting anything wrong in this stuff are not small. Some jackass official could decide that that 94-year-old was really a money laundering risk, and if the bank hadn't been careful enough, well, there'd be trouble. Blame instead should go to the Vogon National Government who passed the AML rules in 2009.

HT: Stephen Franks. Stephen suggests that the prior Labour cabinet may share some blame.

The same Vogon approach to the rules killed iPredict.

We covered the iPredict debacle in our report on regulations and technology. Here's what there happened.
No one suspected that money laundering regulations designed to block big criminal enterprises would kill tiny iPredict.

iPredict was a real-money prediction market owned by Victoria University of Wellington. The market let traders buy and sell contracts that would pay out based on political or economic events. Prices in such markets have provided remarkably efficient predictions of election outcomes. Traders could not deposit more than $10,000 into their accounts, and the total amount of money held in trader accounts in 2015 was about $200,000.

iPredict’s launch in the lead-up to the 2008 election represented the best of New Zealand’s regulatory culture. The Securities Commission took on a facilitator’s role to help iPredict fit the futures exchange into existing regulations. As one insider put it, the commission thought the market was ‘cool’ and wanted to make it work.

iPredict was arguably the world’s leading real-money prediction market of its time.110 The Reserve Bank even cited iPredict’s inflation predictions in its Monetary Policy Statement.111 Political commentators used iPredict’s election contract prices to make their forecasts.112 Meanwhile, anti-gambling pressure groups, and lobbyists for legal gambling operations made for fairly restrictive terms governing the only authorised prediction market in the United States.113

Nonetheless, iPredict was never a financial success. Hopes of running sponsored markets for large corporates forecasting sales, for example, proved overly optimistic. It continued to operate thanks to the generosity of Victoria University and the value of its data to academic research.

But iPredict was hit with two regulatory shocks. The Financial Markets Conduct Act 2013 upended much financial markets regulation, including the provisions under which iPredict operated. While the Financial Markets Authority (FMA), which succeeded the Securities Commission, worked creatively with iPredict to help it fit into the new structure, the legal costs involved were not small. As a securities lawyer who helped iPredict put it, figuring out how to fit iPredict into the Act was almost like taking a securities law exam.114 When regulations designed for big banks hit small players, legal costs can be almost insurmountable.

While iPredict had been successfully working through Act compliance with the FMA, compliance costs involved with anti-money laundering legislation proved overwhelming. Know-your-customer regulations are expensive enough for banks. For iPredict, where hundreds of traders maintained accounts around the $5 mark, and the total amount traded was less than half the value of the average house in Auckland, it was impossible. The arm of the FMA responsible for anti-money laundering compliance seems to have taken a conservative view; the Ministry of Justice then recommended against exempting iPredict. Expecting hundreds of thousands of dollars in ongoing legal costs for a venture that barely otherwise earned its keep, Victoria University closed iPredict.

iPredict’s initial authorisation represented the kind of regulatory nimbleness that would have showcased New Zealand in the digital age. iPredict’s closure demonstrated a rather more hamfisted approach.

Glenn Boyle, professor of finance at the University of Canterbury, helped develop iPredict during his time at Victoria University. On the discussions with the Securities Commission, he says:
I recall the money laundering bogeyman coming up only once, and then only in jest. I don’t remember the exact wording, but it was something along the lines of “you’ll probably get hit with money laundering charges if the Americans invade or we ever elect a communist government.”115
The FMA could and should have recognised that iPredict did not pose any substantial money laundering risk. The market was not sufficiently liquid for anyone to move more than trivial amounts through it. The Ministry of Justice could have recommended an exemption to the anti-money laundering requirements, and reconsidered whether iPredict could operate under exemptions that more closely suited its situation. And all of them should have considered that little iPredict couldn’t likely afford protracted legal negotiations with the government.

Instead, the government loaded a tiny academic enterprise with compliance costs befitting one of the big banks – and broke its back.

110 Disclaimer: One of the authors of this report, Eric Crampton, served as academic advisor to iPredict in the late 2000s.
111 Reserve Bank of New Zealand, “Monetary Policy Statement” (September 2011).
112 See, for example, Niko Kloeten, “iPredict launches new election website,” National Business Review (28 July 2011) and Bryce Edwards, “The infuriating and fantastic Winston Peters,” The New Zealand Herald (11 April 2014).
113 See Iowa Electronic Markets, “About the IEM: Frequently Asked Questions,” Website.
114 Personal interview.
115 Eric Crampton, “Unless the Americans invade or we elect communists,” Offsetting Behaviour Blog (27 November 2015).
Since shifting to Wellington, I don't know how many hand-wringing sessions I've attended where bureaucrats from one Ministry or another agonize over whether New Zealand firms are keeping up with technology, whether firms are innovative enough, why there's a long tail of unproductive firms, and what government might do to induce presumably-complacent NZ firms to push harder.

They never stop to consider whether maybe, just maybe, they could be the problem. Whatever bureaucratic impediments they've put in the way of innovation - those are either invisible to the Vogons or are just fixed facts of the world that cannot be changed.

And yet this remains the place where the Vogons have made the fewest inroads. What hells be all the others.

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