Anti-Money Laundering Court Case Hones in on Individual Actors

The Department of Internal Affairs (DIA) is one of three Anti-Money Laundering regulators in New Zealand. Last month, the DIA’s 5th major High Court case moved towards a conclusion, and it confirms an increasing trend to keep individuals on the hook for compliance failings.

The DIA has the largest catchment of supervised businesses (after 2018 law changes added NZ lawyers, accountants, and real estate agents to the regulatory net), and has been by far the most energetic of the regulators in pursuing court enforcement.

Gary Hughes, the author of AML/CFT Workflow & Guidance, has provided an update on these issues drawing on his unique, subject-matter expertise.

NZ Anti-Money Laundering regime starting to mature

The Anti-Money Laundering and Countering Finance Terrorism Act 2009 (AML/CFT Act), like Australia’s equivalent 2006 Federal statute, controls the financial crime compliance activities of “reporting entities” of various sorts.

But directors, senior managers/quasi-directors, and the AML/CFT Compliance Officer also have a significant role to play at each reporting entity.  Especially so among small, close-held or family entities, these persons are regarded as the reporting entity’s driving force, its “mind and will”.  Hence the DIA has shown itself eager to obtain court orders against directors, owners, and now compliance officers too.

Under the AML/CFT Act, the regulators have a choice. They can commence civil proceedings seeking a pecuniary penalty (to all intents and purposes, similar to a monetary fine), or a criminal prosecution seeking conviction and a criminal fine. In either case, additional management bans or restraining orders can be requested from the Court.

DIA v OTT Trading Group Ltd & Others is the 4th civil claim by the DIA in the High Court for pecuniary penalties. It has also taken one criminal prosecution, resulting in conviction and fines for that company and the mother/son combination who ran it (R v Fu, Che & Jiaxin Finance Ltd – see table below).

This latest case came to a partial conclusion in the Auckland High Court on 15 May 2020. The two companies targeted are in the money remittance/forex industry: MSI Group and OTT Trading Group. They were modest size firms, each with a sole director/shareholder, and those individuals were sued as additional defendants alongside their companies. For good measure, another defendant was also sued personally, the staff member acting as AML/CFT Compliance Officer for OTT.

The May 2020 judgment dealt with the individual persons, eventually by negotiated/consent orders. The two corporate defendants will shortly come back to court for a conclusion to their process separately.

Punishing individual officers as well as entities

The latest case confirms a definite trend to sheet home responsibility to individual actors as much as possible. That goes not only for AML/CFT regulators, but others such as the NZ Commerce Commission, Overseas Investment Office, Financial Markets Authority (“FMA”) and  the Financial Service Providers Registrar.

For example, just this month the Commerce Commission succeeded in a false and misleading (Fair Trading Act) prosecution of a business in the fire extinguisher servicing industry. Mindful of critical safety elements in that line of work, the regulator pressed for court-enforceable undertakings from the principals that they would not be involved in offering those services or equipment, and removing the company from the Companies Register.

In the OTT Trading case that desire for personal accountability resulted not in a financial penalty against the individuals – something which has occurred elsewhere – but only in injunctive restraining orders excluding those people from the sector.  In particular, the orders preclude them from offering any services/activity that would make them a “reporting entity” (as defined in the AML/CFT Act), or from acting as “compliance officer”, or even a “senior manager” of a reporting entity.

The overall effect is to prevent these people running a financial services business, or being employed in senior roles of one.  The restraint period was for 3 years (for two of the defendants) and for an open-ended restraining period “until further order of the Court” in the case of Ms Woon, the OTT Trading Group’s compliance officer.

It seems inevitable that orders will soon follow imposing pecuniary penalties on the two companies, to effectively put them out of business too.  That judgment is expected in the next few weeks, with the case seemingly no longer being actively defended.

Overview of first 5 enforcement cases

Below is a summary of the outcomes in the five cases the DIA has taken to date.

Case 1: DIA v Ping An Finance (Group) NZ Company Ltd, and Xiaolan Xiao

  • 28 September 2017 – NZ$5.29m plus costs
  • Undefended, no steps taken, formal proof.
  • Company and its sole director/AMLCO/owner sued.
  • Personal management ban order against Individual director/owner.
  • Individual then appealed, which failed, was then bankrupted.

Case 2: DIA v Qian DuoDuo Ltd/Lidong Foreign Exchange

  • 27 July 2018 – NZ$356,000 plus costs.
  • Facts and liability mostly uncontested.
  • Quantum was disputed, as was the extent of mitigating factors, including criticism of AML consultants relied upon.
  • Company alone was sued – but it was alleged director had misled the DIA.

Case 3: DIA v Jin Yuan Finance Ltd, and Rex Young

  • 3 October 2019 – NZ$4.007m plus costs.
  • Undefended.
  • History of non-compliance between 2013 and 2017.
  • Previous formal warning issued by DIA in 2015.
  • Director and shareholder Mr Young did not oppose restraining order.
  • De-risking (closure of bank accounts) was a contextual feature in this case – the DIA was told the entity did its business through one company bank account, but in fact, it had lost its banking facilities. It later turned out to be using 17 bank accounts in different names, implying its actual transaction business could be much greater than had been declared.

Case 4: R v Qiang Fu, Fuqim Che & Jiaxin Finance Ltd

  • Prosecution seeking the criminal conviction of company and 3 individuals.
  • Sentencing 3 March 2020: Jiaxin Finance was fined NZ$2.55m; Mr Fu $180,000 Ms Che $202,000.
  • Case is now going on appeal.
  • Customer Ponzi alleged.

Case 5: DIA v MSI Group Ltd, OTT Trading Group Ltd, and T. Qi, L.C. Woon, Y. Duan

  • 15 May 2020.
  • Restraining orders imposed on three Individuals.
  • Companies defunct – formal orders made to restore one to the Company Register.
  • Initially defended, then negotiated conclusion as to court orders.
  • The three individuals were said to have misled the DIA during investigations, including by creation of false documents.
  • The agreed statement of facts at the consent hearing records Ms Woon as “not competently discharg[ing] her obligation to OTT as compliance officer.

Trends revealed by these AML cases

It is certainly possible to detect a couple of trends. First, all have been taken against small, Asia-Pacific based money remittance firms, closely controlled by the owners and primarily servicing a clientele outside of the Australia and New Zealand region.  

And, with only two of the cases being defended or fully argued, some high monetary penalties have been meted out in the undefended cases in particular. Whilst not on the scale of some of AUSTRAC’s agreed penalty blockbuster cases in Australian Federal Court (e.g AUSTRAC v Tabcorp AU$45m in 2017; AUSTRAC v CBA AU$700m in 2018; case against Westpac still in negotiations towards an outcome) –  in the relatively smaller NZ regulatory landscape, these were still significant multi-dollar outcomes against small companies.

RELATED: Court of Criminal Appeal Quashes Tax Crime Convictions After Crown’s Creative Accounting

In light of this series of cases, some have wondered if the DIA is simply going after “low hanging fruit” in its early years as an AML enforcer? All were Asia-Pacific based businesses exhibiting weak compliance processes, transactions not accounted for, and records kept in potentially unsecure social media platforms.

Looked at more roundly, however, the money remittance sector is notably considered high risk, and some of AUSTRAC’s early enforcement efforts also targeted similar businesses on the other side of the Tasman. In some cases at least, there may be arguably a public good in removing a few fraught financial entities from serving consumer markets. That also relates to the overall trend now becoming clearer with the OTT/MSI case, of the regulator focusing on excluding key individuals from providing such services/work in future.

Restraining orders, management banning orders, or director disqualifications, have been an adjunct feature of several cases – Ping An, Jin Yuan, Jiaxin Finance and now OTT/MSI. Notably, this OTT/MSI case (like Mr Young – in Jin Yuan Finance) saw the DIA not press for additionally a financial penalty imposed on the individuals. Presumably, restraints that would effectively force these people out of the industry was felt hefty enough.

Although eye-catching high penalties may be imposed on the companies, which is handy for deterrence and signalling effect to the rest of the regulated masses, a small company is often effectively insolvent. So the regulator may be forced to stand in line, and whistle along with other creditors in liquidation – or turn its focus upon the individual persons instead.

Undefended, versus negotiated, or contested outcomes

Three of those cases, importantly, have been effectively undefended. They went forward in one-sided fashion with only the DIA’s legal team making submissions (“formal proof”), or upon agreed statement of facts and in some cases agreed penalty positions.

The latter is often a heavily negotiated process where the parties/lawyers navigate suitable areas of admitted breach, and then an agreed quantum or type of penalty, or argue only over the various aggravating and mitigating factors.  A similar negotiation process has been at work in the current AUSTRAC v Westpac case.

The DIA v Che, Fu, & Jiaxin case is now under appeal to the NZ Court of Appeal. After a defended hearing, which you may expect more likely to happen when criminal charges are involved, guilty verdicts were delivered against all parties and significant fines at sentencing. All findings are potentially up to be revisited at the appeal hearing

Equally important, two of those cases have seen allegations made that certain individuals involved in the running of the companies may have misled the regulator, either by what was put into its AML compliance documents, or by statements made during the course of investigations. Those types of allegation make the matter more difficult to settle or find common ground. And of course, if there is evidence of actual money-laundering, as opposed to compliance failures of a strict liability nature regardless of whether laundering existed, the negotiations and eventual penalty are likely to be worse.

NZ Financial Markets Authority and the Reserve Bank gearing up too

I mentioned above that the DIA is one of three AML/CFT Supervisors, unlike Australia which has a singular agency in the shape of AUSTRAC.  This triple-headed regulatory framework has proved unwieldy at times, and may be revisited in the legislation in future, with a statutory review process planned for 2021.

Those other two supervisors have not taken court action in the past few years on the scale of the DIA, preferring to rely on public and private warnings and other regulatory tools instead.

But they have signalled for some time this softer stance was changing, and last week the FMA announced its first court action for a civil pecuniary penalty, against a derivatives issuer/broker business named CSLA Premium.  That case has just commenced, and may have some distance to run yet. Compared to the DIA action, the FMA has been careful to say at the outset that it is not targeting the directors, only the New Zealand company, a subsidiary of a Hong Kong business.

All eyes may now turn to the Reserve Bank of New Zealand, which supervises the banking, life insurance, non-bank deposit taker and credit union sectors. In a year when New Zealand is going through Mutual Evaluation by the global FATF body (Financial Action Task Force), there is inevitably pressure and expectation for tougher enforcement action. Although the Reserve Bank has the most institutional challenges of the three Supervisors in moving to become an active enforcer, given its conflicting objectives around market stability and monetary policy, it would be no surprise to see activity in its sectors soon.

Late July update from the author

After this article was first published on 1 July 2020, there was a significant development. The New Zealand High Court (at Auckland) subsequently released the reserved decision against the entities MSI and OTT, as foreshadowed in the article above.

The two corporate defendants had their part of the case return to court for a conclusion to their process separately. This part was not defended; so only the DIA made arguments to the Court, with the judge determining it on the written submissions without an oral hearing.

That judgment has now confirmed hefty monetary penalties of NZ$3.1m against OTT, and $4.485m against MSI Group.

A restraining injunction against OTT not to carry out any financial activities that would cause it to be a “reporting entity” under the AML/CFT Act was additionally granted. MSI was already out of business, or else would have met the same injunctive fate.

This development tends to confirm the regulator’s increasingly apparent strategy to pursue both the corporate entity for large fines, but also (and especially if the company has no real ability to pay up) the key individual human beings actually running the business.

If you liked this, try reading: Protecting Vulnerable Investors During the COVID-19 Pandemic & Beyond.

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