Of Interest

Deputy Governor Christian Hawkesby says the Reserve Bank's (RBNZ) Monetary Policy Committee might have taken a different stance in May if the economic activity forecasts had been more accurate.

In May, forecasts had anticipated 1% GDP growth for the calendar year. But by August, that had been revised to a 0.4% contraction, with a deep decline in the June quarter.

The RBNZ chose to cut the Official Cash Rate from 5.50% to 5.25% last Wednesday partly in response to these lower economic activity forecasts.

Another key factor was that businesses have been adjusting their wage and price-setting behaviour more quickly than anticipated in response to the low inflation environment.

Speaking in the latest episode of interest.co.nz's Of Interest podcast, Hawkesby said the committee would not have adopted such a hawkish stance if these data points had been available during the May meeting.

“The uncertainty was around the speed and intensity that [tight policy] would be felt in the economy … Since then we've had a whole heap of evidence on the downside playing out”. 

Uncertain

He said the OCR projection, published in that Monetary Policy Statement, was “flat with a slight upward bias” but with “big uncertainties” that were outlined in the record of meeting.

Weaker than forecast GDP was not cited as a risk in the May meeting record, and uncertainty about price-setting behaviour was described as an upside risk. The committee agreed that interest rates need to “remain at a restrictive level for a sustained period.”

The chapter on economic projections included a disclaimer that said there was “significant uncertainty” about the assumptions used in the baseline forecasts. But the possibility of easing rates in the near future was not mentioned in the 60-page document.

This shift led some economists to describe the August decision as a 'U-turn.' However, there was consensus that it was the correct move, given the clear signs of a weakening economy.

Stay off the track

Hawkesby also said there had been a “misconception” that the central bank was going to keep the OCR at 5.50% until it saw inflation below 3%. 

“You need to work on the basis that monetary policy is going to work. You don’t have to wait until the number is within the band, you just have to have confidence it will settle there.” 

However, the May monetary policy statement projected the OCR would remain above 5.50% until September 2025, by which time inflation would have been below 3% for a full year.

This was true in the February 2024 and November 2023 monetary policy statements as well. 

Hawkesby said the OCR track that published in each statement often gets overanalyzed, without enough recognition that it is based on a set of assumptions.

“There's something quite peculiar that happens when someone sees a line on a chart, or they see a number in a table, it has this sense of being real and factual,” he said.

“My advice to people would be to focus more on the record of the meeting than the OCR projection."

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The balance of power in the labour market sits firmly with employers, with a big rise in job applicants over the past year chasing a significantly diminished number of jobs, says Frog Recruitment Managing Director Shannon Barlow.

"For our recruitment agency, we're probably experiencing around three to four times the volume of applications compared with last year. And that's across the board, across different industries and job types," Barlow says in the latest episode of interest.co.nz's Of Interest podcast.

"At the extremes, it can be even more than that. So for some business support [roles], other industries like supply chain or operational roles where we were happy to get, say, 30 applications, we'd be celebrating last year. Now those can reach up to nearly 300 applications and that's within a week. So you have to pull the ad so that you've got the time to get through all those applications."

"I'd say with the higher volumes of applications as well, I think the biggest factor isn't actually about there being more people looking for work...the big factor is there are less jobs available. So there's less than half the number of job postings in the market today compared with 2022," says Barlow.

Her comments come ahead of the June quarter labour market data from Statistics NZ, due out of Wednesday, August 7 and expected to show an increase in unemployment.

Barlow previously appeared on the Of Interest podcast in August 2022 at a time when the border had just fully reopened following its closure due to Covid-19, and the balance of power in the labour market was firmly in favour of job seekers, or workers.

Since then there has been a massive surge of inward migration, which hit a record high for a calendar year of 126,000 in 2023, according to Statistics NZ. Despite this Barlow says it hasn't solved skill shortages.

"The problem is that quantity doesn't always equal quality. There've been problems with the new accredited employer programme and the new government is still working through changes to those immigration settings. So we haven't got it quite right yet. So although we've refilled the talent pool, we haven't necessarily attracted the right people to be able to cover our areas of skill shortages;" says Barlow.

"Plus we might have had record migration, but we've also had record numbers of Kiwis leaving New Zealand this year."

Statistics NZ's latest figures show a net loss of 2,000 people due to migration during May.

In the podcast audio Barlow also talks about the regions were job seekers are really feeling the pinch, and regions where job listings are actually increasing, how and why some workers are having to take pay cuts, how the labour market has got harder for graduate or entry level roles, what the biggest challenge is for employers now, lingering effects of Covid-19 including attitudes and expectations for working from home, whether she thinks the jobs market has bottomed out yet, and more.

*You can find all episodes of the Of Interest podcast here.

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The Government's push to have more apartments, including shoebox apartments, built should be welcomed over time by a range of buyers including first home buyers, property investors and retirees, suggests John Bolton, founder of mortgage broker, lender and savings product provider Squirrel.

Speaking in a new episode of interest.co.nz's Of Interest podcast, Bolton, also a former banker who has dabbled in property development, says apartments, including small ones, offer people who otherwise couldn't afford to buy in Auckland the opportunity to do so. He gives the example of a recent client who wanted an Auckland CBD shoebox apartment.

"He was actually just over 50 and a first home buyer. He had about $150,000 in savings and an income of about 120,000 and he was just keen to get something. Now, the interesting thing for him is that we worked it out and he could pay it off before retirement and that was his goal. So he was looking to pay it off in about 15 years and the only way he was gonna be able to do that was with a shoebox apartment. He was really happy with that...He'd be a classic example, I guess, of the target market for someone that otherwise couldn't buy."

Investors will always look at it on a yield basis, Bolton notes.

"The numbers have to stack up. The attraction for investors historically with the shoebox apartments has been purely yield, straight yield play. They [can] get much better yields on them than a standard apartment."

Bolton also says there's a growing number of retirees struggling to find places to live.

"When we talk about shoebox apartments or just small living spaces, it could be some single level brick and tile units in the suburbs. It doesn't have to be a traditional high rise apartment with shoeboxes in it, you know, just little living spaces out in the suburbs, all on one level, which gives them easy access."

"It's a really important market, and I think it's a market that is going to come with a whole lot of issues in the future because rents are so high. Retirees on the pension simply cannot afford to rent houses or even townhouses. And multi level townhouses are not the right product for them. And so I think getting affordable solutions that cater to our growing retiree market, of whom an increasing proportion of them don't own property, or if they do, they need to downsize because they're taking mortgage debt into retirement. I think there's a real market there, and I think it's not the inner city shoebox that we're talking about. What we're starting to talk about is how do you cater to those communities, and then how do you build a property that's appropriate for them, that's affordable? And I can see that being out in the suburbs, I can see that being in the provinces. So I think there's an opportunity here to reshape the way that parts of our market are operating," says Bolton.

Last month Housing Minister Chris Bishop gave a speech outlining the Government’s plans for housing.

Included in Bishop’s speech was a pledge to remove the ability for councils to set rules or guidelines requiring balconies, or floor areas of apartments to be of a minimum size. This, Bishop says, will increase housing supply by enabling more homes to be built at cheaper prices.

Auckland Council's rules currently set the minimum net floor size for an apartments at 30 square metres, or 35 in the city centre. The latter can be reduced by five square metres if there's outdoor living space, a balcony, ground floor terrace or roof terrace. The smallest apartment allowed by Wellington City Council is 35 metres squared, and the city centre also has requirements for outdoor living space area with the smallest a minimum area of five metres squared and a minimum dimension of 1.8 metres.

In the podcast audio Bolton also talks about the size of deposits needed to get bank loans to buy different sorts of apartments, banks' apartment lending appetites and why they can be reluctant to lend for smaller apartments, apartment developers and pre-sales, construction costs for apartments and financing of new builds, locations for apartments and more.

*You can find all episodes of the Of Interest podcast here.

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Mainstream economics courses teach students money is a scarce resource and nature has boundless capacity to be exploited when in fact it's the other way around, argues Modern Monetary Theory (MMT) economist Steven Hail.

Advocates say you don't do MMT, rather it's a description of how the monetary system works. And countries like New Zealand, where the Government - via the Reserve Bank - is the monopoly issuer of a fiat currency, are monetary sovereigns and thus can't run out of money. 

"We think the monetary system is central to the way modern economies work. And so it's really important to base a discussion of macroeconomics and public finance on having a proper description of the monetary system," Hail says in the latest episode of interest.co.nz's Of Interest podcast.

"When the Government has plans to invest in healthcare, transportation, climate change, housing, anything else that they're going to be spending on, when people say where are you going to get the money, that's the wrong question to ask. The question that we need to ask about national government spending is always where are the productive resources coming from? Where are the people? Where are the materials where's the technology? Where's the institutional capacity, which businesses have spare capacity to meet the Government's demand for what it wants to do? And that transforms your discussion about government economic policy," Hail says.

I first interviewed Hail in 2020 as Covid-19 swept the globe as one of a series of interviews trying to make sense of what was going on and what it all meant. A recurring theme in these interviews, as governments spent lots more money than they had in decades, was MMT. Hail was then a lecturer at the University of Adelaide School of Economics. He now runs Modern Money Lab, a not-for-profit, in partnership with Torrens University.

Looking back now, to what extent does he think the massive government spending contributed to the subsequent global inflation surge?

"Well, the first thing to say is that we've just been through about three of the four horses of the apocalypse. So if the worst problem we're going to have in terms of reacting to that is a temporary increase in the inflation rate in New Zealand to just over 7% per annum, we've done pretty well...The second thing to say is what was the alternative to supporting businesses and supporting people during the pandemic and during lockdowns?" Hail asks.

"Did the spending contribute to inflation? Well, to an extent. But every major central bank in the world that's researched the drivers of inflation following the pandemic said that most of it was to do with the supply side. That's not surprising, is it? A, we built a global economy with very fragile, incredibly complex supply chains, and they just collapsed during the pandemic. And subsequently, of course, once we got over the worst of that, we then had the Russia-Ukraine war driving energy prices up and food prices, too."

"You can argue that some of the government spending was not as effective or efficient as it might otherwise have been. But we're talking about what immediately before would have seemed almost an unimaginable catastrophe that governments were having to react to overnight," says Hail.

And what about the role of quantitative easing (QE), through which the Reserve Bank spent $53 billion buying government and local government bonds on the secondary market from banks during 2020-21? Used for the first time in NZ during the pandemic, QE had been used by central banks in other countries such as Japan, the United States, Europe and Britain for years before that.

"Now, in all those other countries where quantitative easing was used to a very large extent over many years prior to the pandemic, it caused a significant increase in inflation, or it caused an uncontroversial so that everybody accepts it significant increase in total spending in the economy, on precisely no occasions. And there's a good reason for this, which is that quantitative easing is not really the creation of new money," says Hail.

"It's certainly not giving money away. It's an asset swap, and it's actually an asset swap of two very similar assets these days. Because, after all, central banks pay interest on the reserves private banks hold at central banks, and most central banks are part of the broadly defined government sector. So those reserves are an interest bearing financial liability of the government, really. And when central banks buy treasury bonds from private banks, what are they buying? While, those treasury bonds. What are they? Interest bearing liabilities of the government sector."

"So when you practise quantitative easing, you're really swapping apples for very similar apples. You are not adding to the net financial assets of the private sector. What you are doing is putting a little bit of downward pressure on long-term interest rates."

Still Adelaide-based, Hail is visiting New Zealand during August to run an interactive seminar in Auckland, and show the documentary Finding the Money- featuring Hail's friend and high profile US MMT economist Stephanie Kelton - in both Auckland and Wellington. As well as an introduction to MMT, the seminar will look at the economy as a subsystem of the natural environment and probe human behaviour, inequality and global trade. It'll also cover planetary boundaries and climate change.

Listen to more on these topics and others, including economic growth, sustainability and reducing our impact on the environment, in the podcast audio. 

*You can find all episodes of the Of Interest podcast here.

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New Zealand's nascent private credit industry could account for up to 5% of business lending to operating companies over time, suggests Aotea Asset Management (AAM) executive director Will Carnachan.

AAM, which launched three years ago, is a corporate debt fund manager organising wholesale investorsto contribute to direct secured loans to businesses. Private credit, a form of shadow banking, has made headlines in the US, Europe and Australia over the past couple of years. The International Monetary Fund estimates the fast growing "opaque" and " highly interconnected" private credit market topped US$2.1 trillion globally last year, and over time "could become a systemic risk for the broader financial system."

In a new episode of interest.co.nz's Of Interest podcast, Carnachan says in NZ the largely unregulated private credit industry's probably a decade behind where it's at in larger economies, including Australia's.

"I don't necessarily think this industry will, or should, become heavily regulated over time because a big part of the driver here is to move risk away from deposit taking institutions which carry systemic risk. But it is really important, I think, for the longevity of the industry that managers are being really transparent around how they're conducting themselves, how they're valuing their assets," Carnachan says.

"There is huge potential for this industry to grow...If you look at that business lending segment in New Zealand, it's roughly $120 billion, a lot of that's property linked. If you say half of that relates to operating companies, $60 billion, I think realistically where private credit investors like ourselves could come in to help manage some of the risk it's really between 2% to 5% of that over time. A relatively small chunk of the market, but will create options for those great kiwi businesses that are looking to grow, looking to expand, looking to acquire."

In the podcast Carnachan talks about who the private credit investors and borrowers are, the interest rates they earn and pay, how the floating rate loans are priced, loan covenants and syndications involved, the fees AAM charges, the impact of high interest rates and falling interest rates on private credit, where the sub-investment grade borrowers rank in S&P Global Ratings' methodology, how AAM's portfolio currently has no credit loss issues or impairment issues, and more.

"In terms of the return profile that we offer, we're a floating rate product, so we provide a spread or a margin above. We use the Official Cash Rate as the benchmark because it's well understood. So what that means is we are an inflation hedge because as inflation rises or falls, typically market rates move commensurately. But we can always lock in an attractive margin over that benchmark rate," says Carnachan.

"And I think it's important to understand in terms of that marginal credit spread, we do a lot of work around ensuring that that is driving really good risk adjusted returns for our investors, and also taking into account the fact that these underlying investments are relatively illiquid. So it's not a product that you can trade in and out of. It's a hold to maturity product."

"We are effectively a fixed income product that provides, we think, a really attractive diversifier away from bonds and yield stocks."

*You can find all episodes of the Of Interest podcast here.

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The Reserve Bank surprised the market on Wednesday by dropping hints it was open to cutting rates sooner than planned, due to signs the economy was getting too weak.

While the tone shift was unexpected, the central bank was reacting to the same data which had caused ASB’s economics team to change their own interest rate forecast the week prior.

Nick Tuffley, the retail bank’s chief economist, said economic data was sending very different signals in July than it had been prior to the RBNZ’s meeting in May.

Monetary policymakers had then been facing consecutive inflation data releases which showed domestic pressure tracking well above forecasts, he said. 

“When we roll forward to where we are now, it's just clear that the economy is performing weaker than what they had been anticipating [in May]. We are now forecasting another mild double dip recession; that may not occur but it just highlights how weak things look”. 

The RBNZ had been forecasting slight economic growth from here, picking up momentum in each subsequent quarter, but fresh forecasts look like there will be further contractions. 

Tuffley told the Of Interest podcast that the Monetary Policy Committee would have been looking at new forecasts, even though they don’t get released to the public.

“When the Reserve Bank does these monetary policy reviews, it will have re-cranked its forecasts again and will be working on an updated view,” he said. 

“Undoubtedly, what that view is showing is that GDP is going to be much weaker over the course of this year than they anticipated”. 

This would likely mean higher unemployment, slower wage growth, and disinflation happening faster than forecast as well. Tuffley expects annual inflation was 3.3% in June.

“The other thing we are mindful of is that [monetary policy] is like an oil tanker going at full speed, when you put it in reverse you don’t see much impact on momentum for a while”.

For a long time, the Reserve Bank has been most worried about cutting rates too soon and leaving the embers of inflation smoldering, ready to bust back into flames.

Now the central bank was becoming very confident inflation was coming under control and was shifting focus to the risk that interest rates are damaging the economy unnecessarily.

Since the Coalition Government removed RBNZ’s employment mandate, the policymakers are nominally not required to consider economic damage in their decisions. 

However, inflation may drop below 2% if they allow the economy to become too weak and the committee is tasked with avoiding “unnecessary volatility” in output and employment.

Tuffley expects the Official Cash Rate to be cut in November, while the RBNZ most recently suggested it was planning to hold off until next August — although that is likely to change.

Bond traders and other financial market participants have priced in a decent change of a rate cut at the RBNZ’s next meeting this August, and possibly a 50 basis point cut in November. 

Tuffley said this sort of gap between the central bank and the market was fairly common.

“Markets tend to forecast rate cuts tomorrow, whilst the Reserve Bank might be looking at next year, and often you end up meeting a bit in the middle,” he said.

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New Zealand exporters to the United States might be at greater risk of being disrupted than those exporting to China, according to one trade expert.

Despite talk about the need to diversify away from China due to geopolitical differences, it may be the United States that hits Kiwi businesses with tariffs intended to shut them out.

Stephen Jacobi, the executive director of the NZ International Business Forum, said a second Trump presidency was a “sword of Damocles hanging over the global economy”. 

Speaking on the Of Interest podcast, Jacobi said the 45th president had imposed “enormous tariffs” during his first term and plans to go further if elected for a second time in November.

“This time, the big thing is the 10% tariff he keeps talking about. If a 10% tariff was imposed on New Zealand exports to the United States across the board, a lot of trade would be killed off,” he said. 

As part of his election campaign, Donald Trump has proposed a 10% tariff on all imports and a 60% tariff on imports from China. This would go much further than what he did after 2016. 

Earlier tariffs of between 10% and 15% were applied to a specific list of goods, which were largely targeted at China but also included various other countries. 

New Zealand was subjected to a 15% tariff on steel and aluminium, for example. This was bad enough, but a blanket tariff would hit much more important exports such as beef and dairy. 

Jacobi said these sectors already faced strong competition from local US producers and there was also a risk that some international competitors might be able to dodge the tariff. 

For example, Australia was exempted from the steel and aluminium tariffs because it had a free trade agreement with the United States — which NZ does not have.

“Go figure. This is the country that won't give us a trade agreement,” Jacobi said. 

“I spent 10 years of my life trying to argue for an FTA with the United States and thought we had it in TPP, only to see them leave when President Trump got elected”.

It was this lack of guaranteed market access that makes the United States look like a riskier bet than China, where NZ does have a free trade agreement.

“Look, it's not always easy doing business with China, let's face it. But they have opened the market to us and it has transformed our economy”.

Chinese consumers were often the only ones who wanted to buy Kiwi products at the volumes and prices businesses require, he said. 

Jacobi said he was not supportive of efforts to shift trade away from China, or join the AUKUS security agreement — which was clearly directed at China.

“Well, the risk [of disruption] is greater from the United States, potentially with a change of government”.

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The first New Zealand and international wave of electric vehicle (EV) uptake is probably over, with cheaper cars and better public charging infrastructure required for further major growth in the uptake of these "batteries on wheels," says James Foster.

 In a new episode of interest.co.nz's Of Interest podcast, Foster, who runs the EVDB website, says EVs reaching price parity with internal combustion engine (petrol) vehicles, will be a very significant development. The rise of Chinese EVs should help with this.

"At the beginning of 2022 we didn't really have any Chinese brand vehicles [in NZ] and now 20% of those on the road are [Chinese]. It's happened in two years. And that kind of shows you, I guess, why maybe the US have freaked out and implemented protectionist policies to try and protect their own car market. The amount of momentum coming out of China is extraordinary. And the build quality, I wouldn't say is taking people by surprise. But I know historically in New Zealand when we have new brands come to market...way back with the Japanese brands or Korean brands, at first you're kind of like, 'I don't know about this.' And then eventually they become normalised. They just become another brand that's part of the story," Foster says.

"I keep a running tally all the time of the 10 cheapest EVs in New Zealand, and then I get an average from that and that gives me an indication of where we're at. Those are all Chinese vehicles."

From a personal perspective Foster enjoys his EV being a part of energy self sufficiency, or sovereignty.

"That's something that I find quite profound. Since I got the solar panels on the roof I feel like I'm in science fiction...I've actually got the sun's rays going into my house's power and then into a battery in my car and I drive it. Compared to drilling oil, refining it, putting it on a ship, sending it over, driving it down..."

In the podcast Foster also talks about the reasons for the dramatic drop in EV uptake in NZ this year, the popular models and brands, prices including in the secondhand market, battery range, home and public charging, insurance and repairs, other EVs beyond cars such as utes, vans and heavy transport, hybrids and hydrogen vehicles, his expectations for NZ's future vehicle fleet and how electricity supply will cope.

*You can find all episodes of the Of Interest podcast here.

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Ask Cameron Bagrie how to improve business and rural banking and some words reoccur in his answers. Three of them are "risk", "productivity", and "bankability."

With two parliamentary select committees set to hold an inquiry into banking competition, the business and rural banking markets will feature, unlike in the Commerce Commission probe into competition in the personal banking market. In the latest episode of interest.co.nz's Of Interest podcast, Bagrie, now of Bagrie Economics and Chaperon and formerly ANZ NZ's chief economist, speaks about why banks favour housing lending over lending to the business and rural sectors, and whether it would be good to entice them to change this and how it could be done.

At the top of the select committee inquiry's terms of reference ought to be balance between the pricing of risk versus the taking of risk by banks, and how that's impacting productivity, Bagrie says.

"I think we need to have a really good, hard debate about where the money is actually going, the composition of bank lending, whether it's short-term behaviour versus a long-term growth maximising strategy. Let's have a serious conversation about risk going forward, because risk is a big enabler. It's not open season on risk, but risk is an enabler of innovation, driving productivity. It just seems like we've screwed things far too far towards a low risk approach, and ultimately we pay the price for that over time," Bagrie says.

"I go back to the fundamentals of banking. The fundamentals of banking is pricing for risk and taking risk. And what we're seeing out there at the moment is that SMEs and farmers are certainly being priced for risk... Let's have a look at return on equities out of the banks by segment, not the aggregate top down number. Let's break it down into personal lending, including home lending. Let's have a look at business lending. Let's have a look at farm lending and the institutional [loan] book, and have a look at where those ROEs [returns on equity] actually sit. And I think we're going to be surprised how high those ROEs are for certain segments."

"The key here is to go through each segment and look at the risk adjusted returns," he says.

Figures from the International Monetary Fund show housing lending at 35% to 40% of total bank lending in some countries, whereas in NZ it's nearer 65%, having risen significantly over the past five years.

Bagrie also argues that banks' regulatory capital settings encourage them towards housing lending instead of business and rural lending, when there's "more productivity bang for your buck" when you're lending into the business sector. 

"We need to have a look at this through the eyes of economic efficiency, economic growth, productivity, innovation. Because when you make banks a lot more safer, there's a price that you pay on the other side."

"The whole process of credit intermediation is a pretty critical part of economic development. And I don't think we've got financial system settings right on a whole lot of areas," he says.

Financial system settings and banking don't tend to be areas thought of when people think about what to do to make NZ a better place economically in regard to taking risk and driving productivity growth, Bagrie says.

"We sort of overlook what's a fundamentally essential one and that's that flow, that process of credit intermediation, [it] is absolutely essential. The Prime Minister has been talking a lot about encouraging the taking of risk...Well, yeah, in order for firms to take risk, you need the financial system to be prepared to take risk."

In the podcast Bagrie also talks about NZ businesses having a bankability problem and how to rectify this, the role of the Reserve Bank's regulatory capital settings, banks' becoming more vanilla, the rise and rise of bank profits over the past 30 years or so, the low level of banks' non-performing loans, the need for better competition policy across the economy, how housing lending has grown as a percentage of total NZ bank lending over the past 20-odd years, and especially over the past five years, Australian influence at the big four banks, open banking, his thoughts on the idea of a Business Growth Fund, and more.

*You can find all episodes of the Of Interest podcast here.

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By Gareth Vaughan

How seriously is the public sector taking the fight against money laundering and terrorism financing?

This question comes up in a new episode of interest.co.nz's Of Interest podcast, featuring barrister and solicitor Fiona Hall and anti-money laundering auditor and consultant Martin Dilly.

In a recent article the two raised concerns about impending job cuts to the team at the Department of Internal Affairs (DIA) tasked with supervising compliance with the Anti-Money Laundering and Countering Financing of Terrorism Act (AML/CFT Act). 

Dilly says the DIA proposal to cut 40% of AML/CFT staff "gives us concern that that's going to affect their ability to enforce and supervise this act." There's concern whether the next evaluation of New Zealand by the Financial Action Task Force (FATF), an inter-governmental body that sets international standards and is considered the global money laundering and terrorist financing watchdog, will show NZ technically compliant with FATF's recommendations, and whether we're effective in supervising the reporting entities who must comply with the law.

"I have heard some reporting entities clapping their hands with joy if they're supervised by the DIA, but it's not the good reporting entities. And I like to think that most businesses are good businesses that want to comply with the law. And the risk you have is, yes, sure, if there are far fewer DIA investigators, you're less likely to get a knock on your door. But the problem is, if you do get a knock on your door, you now might be being investigated by someone who really doesn't have a good handle on the legislation, let alone a good understanding of your business. And you are going to be in a much worse position," Hall says.

Dilly made an Official Information Act (OIA) request to DIA in an attempt to get more information, which he says "shows a pattern of under resourcing of the AML team within the DIA."

 "They were essentially budgeted to have 55 staff members. That's what they had determined was necessary...The information provided shows at no point did they ever hit 55 staff. They've been consistently below that. In 2022, they only had 37 staff instead of 55... So the question becomes, why is that?"

"One of the other questions I specifically asked was, has any of the budget been reallocated from the AML team to other areas of the Department of Internal Affairs? And we get some government speak here. So one of the things they talk about is they don't talk about reallocation. They use the terminology 'a permanent reprioritisation of constant underspend.' And my question is, well, what does constant underspend mean? Why would you be underspending your budget in an area where you are tasked with implementing AML and educating and supervising these new entities [lawyers, accountants and real estate agents]?" Dilly asks.

Other issues Hall and Dilly cite include different agendas and lack of consistency to AML/CFT Act supervision between the DIA, and NZ's two other AML/CFT Act supervisors, the Reserve Bank and Financial Markets Authority.

The two are hopeful that Associate Minister of Justice Nicole McKee's proclamation that reforming the AML/CFT Act is "one of my priorities this parliamentary term," could lead to improvement. They would both like to see a shift to a single standalone supervisor.

"I think the results from the [DIA] OIA show that if it's within other ministries that you cannot trust them to not reallocate budget, whatever language they want to put on that. The other point I would really like to see is a move back to a more risk based approach. The act itself is risk based, which essentially means that we accept that people have limited resources and you are supposed to direct those resources towards the areas of highest risk in your business," says Dilly.

Hall would like to see better supervision of the supervisors.

The two also have many tales of frustration and contradiction. Hall gives the example of a client that collects school donations, arranges school lunches, the uniform shop, and sells tickets to school shows, and has been deemed high risk of money laundering.

"I sat with the Minister and said, 'look, how does buying two pairs of grey shorts from a school uniform shop ever get anywhere near, I mean, this is where I'm going to launder my money?' It is ridiculous."

On the flip side she points out the likes of Ticketmaster, selling tickets to shows, aren't considered reporting entities None of those are considered reporting entities, and neither are travel agents who have trust accounts and manage funds.

"So we have this real disconnect, in my view, even about who is and isn't a reporting entity," Hall says.

Meanwhile in the real estate sector, they have to do customer due diligence.

"Their customer is the vendor, it's not the buyer, which I always find so interesting because that's where the money is. And often a property's been bought years and years before, and suddenly, you know, the vendor's been asked to prove how they purchased this and how they funded it, and there is resistance."

There are also personal anecdotes. Dilly says the bank he has been a customer of for more than 40 years asked him about an account he has had for 25 years.

"They have full visibility of every one of my financial transactions. And I was interrogated as to what my plans were for that account. And my thinking was why? Why would you rely on anything I tell you when you've got 25 years of data on my behaviour? If I was an actual money launderer, why would I give you a straight story?"

And here's Hall; "I was at the supermarket checkout and I'd been having a particularly trying day for poor entities [clients] that I didn't think should be captured [by the AML/CFT Act] at all. And I was standing in line and I looked up and I was behind a whole lot of gang members...They were buying lots of meat, lots of alcohol, and out came the wads of cash. And I thought, 'my poor clients who are spending all their money trying to comply, and really there's the money that we probably are looking for right in front of me."

Much more is discussed in the podcast including why the public should care about the fight against money laundering and terrorist financing and the impact of it, the purpose of it, concerns NZ could end up on a grey list, concerns over whether the Police Financial Intelligence Unit is reactive and doesn't have the capacity to deal with all the suspicious activity reports they receive, quick wins with asset seizure where there's a lower threshold from a legal perspective, and more.

*You can find all episodes of the Of Interest podcast here.

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