Anti-Money Laundering Case Law Update
Anti-Money Laundering Case Law Update
•A brief outline of the regime
•First NZ criminal AML/CFT case - R v QF, FC and JFL [2019] NZHC 3058, Auckland, Walker J., 22 November 2019
•Issues arising under the first NZ criminal case
1. Money laundering is how criminals disguise the illegal origins of their money. Financiers of terrorism use similar techniques to money launderers to avoid detection by authorities and to protect the identity of those providing and receiving the funds.
2. The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act or the Act) places obligations on New Zealand’s financial institutions including money remitters and foreign exchange providers, lawyers, accountants, real estate agents, trust & company service providers, high-value dealers (jewellery , art & vehicles), the TAB and casinos to detect and deter money laundering and terrorism financing.
3. The Act ensures that businesses take appropriate measures to guard against money laundering (ML) and terrorism financing (TF). This enhances the reputation of individual businesses, and of New Zealand as a safe place in which to do business.
4. Primarily this seminar is about how the High Court has interpreted those obligations in the first criminal case in Auckland decided in November 2019. This seminar does not delve into the topic of prosecution under the Crimes Act 1961 for money laundering itself. However, a conviction for money laundering may result from a failure to abide by anti-money laundering obligations, if you, in fact knowingly or recklessly provide assistance to conduct money laundering activities.
5. There is a statutory defence to money laundering when the acts of laundering are undertaken, in good faith, for the purpose of, or in connection with intended enforcement of the AML/CFT Act. This appears to reference the obligation not to tip-off a customer of the existence of a suspicious activity report (SAR)[1]. In some instances, completing the activity or transaction is the only reasonable way a person subject to the Act will not tip-off the suspect of a report being made against them.
The Act – An outline of the regime
6. What is the objective of the Act?
The Act seeks to detect and deter potential ML and TF. Enforcement of the Act contributes to public confidence in New Zealand’s financial system, and puts New Zealand in line with international AML/CFT standards.
Compliance with the Act is determined after rigorous analysis of where the risks lie in a business. Compliance will be determined on the basis of the:
• Types of customers of a business; and
• The business’ model and processes.
7. Who must comply with the Act?
The Act places obligations on New Zealand’s financial institutions, trust and company service providers, many lawyers and accountants, real estate agents and some high value dealers (like auctioneers, jewelers, motor vehicle and boat dealers), betting agencies and casinos, all known as reporting entities under s 5 of the Act, to detect and deter ML and TF.
8. What is a reporting entity required to do to comply with the Act?
If you operate a business that falls within the definition of reporting entity under section 5 of the Act you need to have:
· A Risk Assessment of the ML and FT that you could expect in the course of running your business.
· An AML/CFT Programme that includes procedures to detect, deter, manage and mitigate ML and FT.
· A Compliance Officer appointed to administer and maintain the AML/CFT programme and AML/CFT staff to be vetted.
· Customer Due Diligence (CDD) processes including customer identification and verification of identity, on-going customer account and transaction monitoring and enhanced due diligence processes.
· Suspicious Activity Reporting, Auditing and Annual Reporting systems and processes.
· Record keeping to show that the above obligations have been compiled with.
9. Who monitors reporting entities for compliance with their obligations under the Act?
The Act has three supervisory agencies, the Reserve Bank, the Financial Markets Authority (FMA) and the Department of Internal Affairs (DIA).
The Reserve Bank supervises some financial institutions being registered banks, life insurers and non-bank deposit takers.
The FMA supervises issuers of securities, licensed supervisors, fund managers, brokers and custodians, financial advisers, derivatives issuers, DIMS providers and peer to peer lending and equity crowd funding service providers.
The DIA supervises casinos, non-deposit taking lenders, money changers, money remitters, payroll remitters, debt collectors, factors, financial leasors, safe deposit box vaults, non-bank credit card providers, stored value card providers, cash transporters, lawyers, accountants, real estate agents, sports and betting services and high value dealers (those dealing in jewelry, precious metals, precious stones, watches, motor vehicles, boats, art or antiquities) and any other financial institutions not supervised by the Reserve Bank or the FMA, such as foreign currency exchange services and money remitters.
10. What is customer due diligence?
Customer due diligence (CDD) is a cornerstone of an AML/CFT Programme. CDD is the process through which a reporting entity develops an understanding about its customers and the risks they pose to the business.
CDD involves gathering and verifying information about a customer’s identity, beneficial owners or representatives, as well as other information, depending on the nature of the business relationship and the level of risk involved.
In some higher ML/FT risk circumstances an increased level of CDD is required. This is known as enhanced CDD or “ECDD”. As part of standard CDD you must obtain sufficient information to determine whether you require ECDD on your customer.
ECDD has two core requirements over and above standard CDD:
• You may need to use more sophisticated measures to obtain and verify your customer’s details, their beneficial ownership structure, and the details of representatives and other key persons. You must take reasonable steps to do this according to the level of risk involved.
• You must obtain and verify information relating to the source of wealth or funds of your customer.
11. What is account monitoring?
Account monitoring involves reviewing a customer’s account activity and transaction behaviour. This requires a risk-based approach and consideration of the reporting entity’s knowledge about a customer, their business, transaction history and the type of CDD undertaken when the relationship was established.
Account monitoring must allow a reporting entity to identify grounds for SAR. Suspicious activities must be reported to the Financial Intelligence Unit (FIU) of the Police no later than 3 working days after a reporting entity forms its suspicion. Reporting entities submit reports to the FIU using goAML, an online tool for exchanging information with the FIU.
12. What is record keeping?
The record-keeping obligations of the Act require a reporting entity to keep records relating to their customers and the transactions that they undertake. These records must enable all transactions to be fully reconstructed at any time. For complex, unusually large or patterned transactions, there are further requirements to examine them in detail and keep written findings. There are a number of periods that apply to the length of time that different types of records must be kept, generally the period is 5 years.
13. What action can be taken if a reporting entity does not comply with the requirements of the Act?
Where reporting entities engage in alleged infringing conduct, supervisors have various enforcement actions available to them. This includes civil or criminal action, which could result in (but is not limited to) the imposition of:
•Civil pecuniary penalties of up to $200,000 in the case of an individual, and $2m, in the case of a body corporate; and
•Criminal penalties of imprisonment for up to two years or a fine of up to $300,000, in the case of an individual, and a fine of up to $5m in the case of a body corporate.
The 3 civil cases to date
As context to NZ’s first prosecution under the Act, there have been three preceding civil pecuniary penalty cases brought by the DIA against money remitters.
i. Ping An
The first case against Ping An Finance (Group) Limited proceeded by way of undefended trial in April 2017. The civil liability penalty imposed by Toogood J. in his judgment dated 28 September 2017 was $5.29m.
The judgment provides interpretation of some key provisions:
· The meaning of the phrase “a complex, unusually large transaction or unusual pattern of transactions that have no apparent or visible economic or lawful purpose”, a trigger for ECDD to be performed. The Court found that ECDD is triggered when a transaction that is either “complex” or “unusually large” (not a combination of both) [s 22(1)(c)]
· “Reasonable grounds to suspect” [s 39A(b)] a suspicious transaction (which must then be reported to the Police within 3 working days) is an “objective” test;
What matters is what a reporting entity reasonably ought to have known from available information, not what it says it actually knew.
· Put another way; if a reporting entity becomes aware of circumstances that a reasonable person would consider provide grounds to suspect that a transaction, or a proposed transaction is or may be relevant to one of the listed unlawful activities, a suspicious transaction report must be submitted.
· The 3 day suspicious transaction reporting deadline starts when the reporting entity has information that constitutes reasonable grounds for suspicion, not when the suspicion is actually formed.
· While maximum pecuniary penalties are specified for most “civil liability acts” they aren’t for a contravention of the obligation to report suspicious transactions. The Court adopted, as a “practical guideline”, a maximum penalty of $2m and imposed an actual penalty of $1.495m.
ii. Qian Duoduo
Qian DuoDuo (QDD) was the second civil case decided by Powell J. on 27 July 2018. The DIA applied to the High Court for civil penalties, requesting an overall penalty of $2.496m out of a maximum potential penalty of $7m. Defending the quantum of penalty, QDD admitted the civil liability acts, but argued that the final penalty should be no more than $500,000. The penalty imposed by the Court was $356,000, strangely less that the amount contended by the defendant.
The Court accepted that QDD did not deliberately intend to breach the Act and that QDD had endeavoured, albeit unsuccessfully, to comply with its obligations in respect of all of the breaches. QDD submitted that a lower penalty was appropriate having regard to three factors:
· QDD had relied on advice from an external consultant on its compliance obligations, as well as feedback from the DIA, neither of which had alerted it to the breaches of the Act;
· The Act is complicated and unclear in places, making compliance difficult. There was one other undefended case (Ping An), so there is little court guidance on the Act’s interpretation;
· QDD’s owner and compliance officer had poor English language skills which further complicated matters.
iii. Jin Yuan Finance
Jin Yuan Finance Ltd’s (JYFL) case was decided by Woolford J. in the Auckland High Court on 3 October 2019, this case proceeded by way of an undefended trial. His Honour categorised this case in keeping with the Ping An case in terms of seriousness and ordered that a pecuniary penalty of just over $4m be paid.
JYFL was using a total of 17 undisclosed bank accounts to carry out its money remittance business. During the relevant period some 55,097 transactions with a gross value of $278.5 million were conducted by JYFL. The DIA pointed to examples of JYFL processing large transactions that should have been reported as suspicious, which were made in divided portions in an apparent effort to avoid suspicion.
The Court infered that JYFL’s actual business, including through non-disclosed bank accounts, involved higher amounts. Reports to the DIA by other entities disclosed a significant volume of suspicious transactions involving JYFL. The Court held that given the DIA’s extensive engagement with JYFL to educate it about the Act’s requirements, as well as JYFL’s own risk assessment and compliance programmes, it can be inferred that JYFL was aware of its obligations and that its civil liability acts were intentional.
NZ’s first criminal case
R v Fuqin Che, Qiang Fu and Jiaxin Finance Limited [3]
14. Jiaxin Finance Limited (JFL) is another money remittance busniess operated by Mr Qiang Fu. Both Mr Fu and his mother Ms Fuquin Che were charged with aiding or procuring JFL to fail in its obligations under the Act. This derivative liability arises under s 66 (1)(a),(b) or (c) of the Crimes Act 1961. The case was tried over 7 days in October and Novermber 2019 before Justice Walker in the Auckland High Court.
15. JFL, mother and son faced 3 representative charges of:
· failing to conduct CDD under s 91,
· failing to report a suspicious transaction under s 92, and
· failing to keep or retain records relating to a suspicious transaction under s 95.
16. Ms Che was also charged with structuring a transaction to avoid the application of one or more AML/CFT requirements under s 101.
17. The charges related to 311 transactions between April 2015 to May 2016 in which money was transferred to one customer’s New Zealand bank accounts from bank accounts associated with JFL, totalling $53.4m.
18. That customer is Mr Gong, a Chinese national living in Canada. He is currently being investigated by both the Economic Crime Investigation Department of the Chinese Public Security Bureau and the Ontario Securities Commission in Canada. The investigations concern a pyramid scheme associated with the sale of health supplements 024 and the distribution of shares in a related company.
19. Mr Gong is also the owner of a hotel chain and television channel in Toronto.The NZ Police allege that Mr Gong remitted some $77m obtained from pyramid scheme to New Zealand, and used that money to purchase assets in New Zealand. At the time of JFL’s trial Police had, on a without notice application, obtained restraining orders over Mr Gong’s property, preventing disposal or any dealing in it, and putting it under the Official Assignee's custody and control.
20. The allegation against JFL, mother and son were that they were instrumental in the movement of a large chunk ($53.4m) of Mr Gong’s funds to New Zealand while knowingly or recklessly being in breach of JFL’s obligations under the Act.
21. The defence raised by Mr Fu was that his mother was never part of JFL’s business, and that she was a customer of JFL who had arranged and conducted transactions for Mr Gong using JFL as a broker. JFL and Mr Fu alleged that they had no direct contact with Mr Gong, and never received remittance money directly from any of his accounts, only from his mother’s accounts. Further Mr Fu said that none of the transactions involving Mr Gong were objectively suspicious, bearing in mind the profile of Mr Gong as a wealth businessman, who had been a customer of his mother since 2011.
22. The Court found differently, deciding that the evidence showed that mother and son treated the businesses operated by them as one family run business. WeChat messages between them painted a picture of business associates operating together to structure and manage Mr Gong’s transactions. The Court went further to say that Mr Fu and Ms Che adopted a course of conduct to consistently conceal transactions relating to Gong from the DIA.
23. The Court adopted Ping An’s objective test for reporting suspicious transactions, focussing on what information the defendants had at the time of the transactions. The requirement to report arises when, on the information available to the defendant, a reasonable person would form a suspicion[4].
24. Her Honour stated, when considering the charge of failing to report a suspicious transaction:
The most telling indicia is the volume and frequency of remittances over an extended period without any stated or recorded commercial objective other than the inherent purpose of removing money from China. …
I find that I am sure that Jaixin had reasonable grounds to suspect that these transactions were suspicious as defined under the AML/CFT Act.
25. When considering the mother and son’s culpability as secondary parties Walker J. confirmed that the necessary mental element was intention. After considering what could be described as worried WeChat communications between the pair[5], the Court concluded that Mr Fu and Ms Che considered that Mr Gong’s transactions were suspicious and had deliberately excluded his transactions from their otherwise compliant business operations, for no plausible commercial reason. This was a conscious undertaking by both acting in concert to retain the profitable buisiness, while minising oversight because of the risk that Mr Gong’s business would cease[6].
26.. All three were found guilty of failing to conduct CDD, keep adequate records and report a suspicious transaction (representative charges) between April 2015 and May 2016. Ms Che was also found guilty of structuring a transaction to avoid requirements under the Act.
27. At sentencing on 3 March 2020, the mother and son escaped jail for their offending, with fines of $202,000 and 180,000 respectively . Justice Walker fined JFL $2.55 million. The fines served two purposes; to ensure the defendants did not profit from their activities and be higher than the profits made in order to deter and punish them.
28. Justice Walker stated it was clear CDD was needed on Gong when he started transferring money through JFL, as both Mr Fu and Ms Che knew he was its customer. But they structured Mr Gong’s transactions by naming the mother as JFL’s customer, avoiding the need to comply with the Act in respect of Mr Gong and acting as a “buffer” against regulatory scrutiny.
29. While Walker J. said the offending was premeditated in the sense it was a “deliberate work-around” of the regime to avoid scrutiny and conceal Ms Che’s involvement in Jaixin, it also occurred during some confusion among reporting entities over when suspicious transactions needed to be reported. The Court also recognised that money remitters were facing a hostile banking environment, where bankers were de-risking their businesses by closing remitters’ bank accounts, leading to the use of third party accounts by remittance businesses.
30. The Court set the fines’ overall starting points at 60% of the maximum because “the offending, although serious, falls below the most serious of its kind in the context of an industry getting to grips with regulations.”
31. JFL received a 15% discount as a first time offender. Che’s fine was discounted by 10%, with the judge recognising character references from friends and her daughter-in-law portrayed her as a giver to her family and the Chinese community. An apparent lack of remorse or insight into her offending prevented a further drop.
32. The Court heard details about Mr Fu’s alleged previous convictions in China. The four convictions were for forex trading without permission, dating back to March 2013. A report from the Ministry of Public Security in China had been faxed to NZ Police and translated by Internal Affairs as evidence of those convictions. Justice Walker described the Crown’s proof of the convictions as “slim,” saying she would have liked better-quality evidence.
33. Her Honour decided, while a foreign conviction was relevant to a sentence as evidence of previous misconduct, it couldn’t trump the requirement for it to be proved and the documentary evidence fell short of what was expected. As a result, there was no uplift to Mr Fu’s fine. However, the judge did not consider that he was a first offender with no previous convictions, and refused to give a discount on the grounds of good character.
Issues arising from the first criminal case under the Act
This case is fact specific, other than confirmation of the Ping An objective test in the civil context for the ‘reasonable grounds to suspect’ obligation to report a suspicious activity, I doubt it will have wide reaching applicability.
The relationship and communications between mother and son determined the case.
The Act[7] states that a customer who is an individual and who the reporting entity believes on reasonable grounds (objective test) is not acting on behalf of another person is to be treated as if he or she is also the beneficial owner, unless the reporting entity has reasonable grounds to suspect (another objective test) that the customer is not the beneficial owner.
The supervisors have defined beneficial owners to include a natural person on whose behalf a transaction is conducted. In this case, the Court found that Mr Gong was in substance Jiaxin’s customer and therefore the beneficial owner of the transactions brokered by Ms Che, although the case wasn’t decided in those terms.
This case may encourage supervisors to require reporting entities to conduct CDD on customers’ customers. Given NZ’s high quantity of closely held SMEs, imposing arduous obligations on them to conduct due diligence down the customer chain, increases the time and cost of compliance.
In all circumstances, reporting entities should take a risk-based approach of how far down the supply chain they should continue making inquiries before they reach the natural person on whose behalf a transaction is conducted. Whether a reporting entity has inquired sufficiently will be assessed by the Court on an objective standard, having regard to the context known to the reporting entity at the time of the transaction or activity.