In Lordianto v Commissioner of the Australian Federal Police; Kalimuthu v Commissioner of the Australian Federal Police  HCA 39 (Lordianto; Kalmuthu), the High Court considered when property ceases to be property of or an instrument of on offence under the Proceeds of Crime Act 2002 (Cth) (POCA). This article reviews the High Court’s decision and considers its consequences for the financial crime control community.
Section 330(4)(a) POCA stipulates when property ceases to be proceeds of an offence or an instrument of an offence. It states that property ceases to be proceeds of or an instrument of an offence if the property had been:
[A]cquired by a third party for sufficient consideration without the third party knowing, and in circumstances that would not arouse a reasonable suspicion, that the property was the proceeds of an offence or an instrument of an offence (as the case requires).
What is ‘cuckoo smurfing’ and how does the High Court see it?
Lordianto; Kalmuthu both involved ‘cuckoo smurfing’ money laundering. The majority of the High Court (at ) adopted the following explanation:
[I]t relies on identifying a person offshore who wishes to transfer funds to a bank account in Australia using a money remitter. The remitter withholds amounts corresponding to the amount of money he has been told is to be laundered in Australia. The customer’s bank account details are provided to people in Australia. A team of depositors in Australia deposits cash into the bank account, generally at a series of bank branches and below the threshold [currently $10,000 AUD] for reporting transactions involving physical currency. The account holder sees deposits that match the amounts they intended to remit. Because the amounts of each deposit are below the threshold, there is generally no record that could enable regulatory agencies to intervene.
Because no money is transferred between borders, cuckoo smurfing shares some similarities with the alternative remittance system, ‘hawala’. Hawala is a method of transferring money without the funds moving in the traditional sense. A key difference between hawala and cuckoo smurfing however is that whilst hawala, as an alternative remittance practice, posing money laundering risks, cuckoo smurfing is deliberate money laundering behavior. So while Hawala relies on a legitimate trust-based alternative remittance system, cuckoo smurfing makes use of a criminal network to launder money under the noses of the authorities.
The procedural history of both cases
In Lordianto v Commissioner of the Australian Federal Police  NSWCA 199, the primary judge held that the appellants had failed to discharge the burden of proof of showing that s 330(4)(a) applied to certain bank balances. The NSW Court of Appeal of the Supreme Court of NSW unanimously agreed. In Australian Federal Police v Kalimuthu [No 2]  WASCA 192 the primary judge held that the appellants had discharged the burden of showing that s 330(4) POCA applied but the Court of Appeal of Western Australia unanimously allowed the appeal. The High Court then dismissed the appeals.
Bank balances as the proceeds of crime or instruments of crime
As shown above, cuckoo smurfing requires the use of bank accounts in a dishonest manner, where they become money laundering instruments. Interestingly, the phrase ‘money in the bank’ isn’t really an accurate legal description of a bank account as property. For instance, cash is tangible property until it is deposited into a bank account. Instead, the bank account and its balance is intangible property – a chose in action.
While it is clear that a bank account is a chose in action, in both cases mentioned earlier, the hearing courts and courts of appeal considered three ways at looking at this. The courts assessed whether a bank account could be viewed as a single chose in actiona series or bundle of choses in action or a single inchoate chose in action. Ultimately, the courts of appeal went for the latter. This comes as the High Court didn’t expressly consider the matter at all.
Does the Proceeds of Crime Act 2002 view fluctuations in a bank account as ‘property’?
At first instance, Justice Simpson in Lordianto answered this question in the negative. The Court of Appeal however considered that the statutory definition of property in s 338 POCA includes interests in personal property. A fluctuation in a bank balance for example as a result of cuckoo smurfing is at least an interest in intangible personal property for the purposes of s 338 POCA.
Proceeds of crime or instrument of crime
Deposits made by ‘smurfs’ may be the proceeds of crime as a consequence of them being derived, for example, from illicit drug sales. Such deposits may also become the proceeds of crime as a consequence of the smurfing activity itself. This is because structuring transactions to avoid reporting obligations is an offence under both the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) and the Financial Transactions Reports Act 1988 (Cth) (AML/CTF ACT)(structuring offence).
In Lordianto; Kalmuthu, at least by the time the matters reached the High Court, it was conceded that the property was the proceeds or an instrument of an offence prior to the commission of the structuring offence.
POCA (and Division 400 Schedule to the Criminal Code Act 1995 (Criminal Code)) covers money laundering typologies even if the activity only involves a structuring offence and uses legitimate bank accounts. An understanding of these typologies and breadth of the application of the POCA and Criminal Code is relevant to financial institutions’ risk assessments for AML/CTF compliance purposes.
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When does property cease to be proceed of crime?
The meaning of ‘third party’ for the purposes of s 330(4)(a) POCA was considered by Simpson J in Lordianto. The majority of the Court of Appeal agreed with her Honour’s analysis. The majority held that ‘third party’ within s 330(4)(a) POCA refers to a person who is not involved in the transactions by which the property in question becomes proceeds of an offence, but rather is wholly removed from that property at the time of the relevant criminal conduct. In Kalamuthu, at first instance, the Court concluded that third party did not simply refer to someone not a party to the offence. The Court of appeal followed the NSW Court of Appeal in Lordianto.
The High Court held that the Court of Appeal’s interpretation of third party had no basis in the text of the provision. It found that the phrase ‘third party’ is no more than a descriptor of a person who otherwise satisfies s 330(4)(a). In other words, POCA does not narrow the circumstances in which people are not connected in any way to the connection of an offence may have property excluded from restraint and forfeiture.
Where (for example) a financial institution seeks to exclude property restrained by a POCA restraining order on the basis that it unknowingly provided a facility to a money launderer, separate or in the alternative to arguing that the subject property is not proceeds of unlawful activity (see s 29 POCA), s 330(4) POCA may be relevant. Here a ‘third person’ for s 330(4) POCA purposes means (and only means) a person who acquires property for sufficient consideration in circumstances that would not arouse a reasonable suspicion that the property was the proceeds of an offence or an instrument of an offence. These elements exclusively determine whether property ceases to be proceeds or instrument of an offence.
There is now no doubt that sophisticated and modern variations of cuckoo smurfing are caught by the POCA. Lordianto; Kalmuthu is also a reminder that the regime will apply to persons who although not complicit in the process of cuckoo smurfing themselves are unable to prove that the subject property was acquired by them in circumstances that would not amount to a reasonable suspicion.