Lessons from the first defended hearing under the AML/CFT Act

by Contributor10 Aug 2018

Department of Internal Affairs v Qian DuoDuo Limited [2018] NZHC 1887 (27 July 2018) is the first defended case under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009. Given admissions by the defendant, the judgment determines the appropriate penalty for civil liability acts taking into account relevant aggravating and mitigating factors under section 90(4).

The case is very important for anyone trying to comply with the Act or providing advice on compliance with the Act, as is the only other prior undefended case of Department of Internal Affairs v Ping An Finance (Group) New Zealand Co Ltd [2017] NC 2363. This involved flagrant breaches of many aspects of the Act. The High Court delivered a lengthy judgment analysing the objectives of the Act, the enforcement regime, and the approach to be taken by the Court in assessing liability for civil pecuniary penalties under Part 3 of the Act, ultimately imposing a total penalty of $5,290,000. Justice Powell in Qian DuoDuo Limited upheld the approach taken by Justice Toogood in Ping An, but applied it to very different facts with relevant mitigating (and one aggravating) factor(s), which resulted in a total penalty of$356,000.

The Act has commenced in stages since 2011, and applies to the legal profession with effect from July 2018.

Qian DuoDuo Limited (“QDD”) is a financial services business in Auckland specialising in foreign currency transactions and international money transfers. QDD was a small business with a single shareholder and director who also acted as its compliance officer for the purposes of the Act. After conducting an investigation, DIA alleged that QDD had breached its compliance obligations under the Act by:

  • failing to undertake risk assessments in breach of section 58 of the Act;
  • failing to undertake enhanced customer due diligence in breach of section 22;
  • failing to carry out ongoing customer due diligence and account monitoring requirements required under section 31; and
  • failing to keep adequate records of its transactions in breach of section 49.

The DIA applied to the High Court for civil penalties, requesting an overall penalty of $2,496,000 out of a maximum potential penalty of $7 million. Defending the charges, QDD admitted the civil liability acts, but argued that the final penalty should be no more than $500,000.

The Statement of Agreed Facts was 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. However, QDD argued 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, 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.

The Court accepted all of these arguments to varying degrees, imposing a penalty of $356,000. First, the Court accepted that compliance with the Act is complex and onerous, and that QDD could not reasonably have been expected to comply with the requirements of the Act without the advice and support of external consultants, particularly having regard to the owner’s limited command of English. The Court concluded that “it was unlikely QDD could have complied with the AML Act regime without assistance.”1 QDD was entitled to seek and rely on the advice it received, and having done so, was entitled to a substantial reduction in penalty.

In this context, the Court drew a distinction with the approach taken to reliance on legal advice under the Commerce Act 1986, concluding that:

“Ultimately, the issue here where liability has been accepted by QDD is not whether [the consultant] gave legal advice or even whether it was accurate, but whether given the advice it provided to QDD it was reasonable for QDD to conclude it was doing everything it could to amply with its AML/CFT obligations.”2

Having regard to the mandatory nature of the Act and the fact that businesses may have no choice as to whether they engage in regulated activities, the Court was willing to extend far more credit for reliance on incorrect advice than would have been available for an analogous proceeding under the Commerce Act.

The Court was critical of the advice QDD had received from the consultants it had engaged, noting that the complexity and ambiguity of the Act “did not and does not lend itself to stock solutions.”3 However, none of the consultants engaged to advise on compliance “appeared to have any real understanding of QDD’s business model, how the business actually worked, how records were kept and, in particular, the roles of… money remitters, in terms of QDD’s obligations within the AML Act framework.”4

The decision clearly demonstrates potential pitfalls both for businesses which are reporting entities under the Act, and for their advisors.

For reporting entities, the main lesson is that while it may be reasonable, or even essential, to take external advice on compliance obligations, it is not sufficient. Reliance on the advice of a consultant, or even feedback from the DIA itself, is not a defence. If the advice is wrong, and the reporting entity has breached the Act, then the reporting entity bears the liability under the Act. Reporting entities cannot outsource their liability under the Act, and while that liability may be reduced if advisers make mistakes, it will not be eliminated. It follows that reporting entities cannot simply accept at face value advice that they are compliant with the Act. That advice must be tested carefully to ensure that it has properly engaged with the substance of the business being undertaken.

For advisers, the main lesson is that “stock solutions” are simply not good enough. Compliance with the Act cannot be reduced to a simple formula and there is no substitute for having a proper understanding of the reporting entity, including how records are kept and the nature of transactions being undertaken. The compliance advice provided by QDD’s consultant was described as “predominantly process driven in the absence of any detailed understanding of QDD’s business…” This provided an illusion of thoroughness which ultimately proved to be misleading, to the cost of the reporting entity.

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1 Department of Internal Affairs v Qian Duoduo Limited [2018] NZHC 1887 para [128]

2 Para [135].

3 Para [128].

4 Para [133].

 

Mai Chen is managing partner of Chen Palmer Partners and was counsel for Quan Duo Duo Ltd in the above case. She also chairs the Superdiversity Centre, is a director on the BNZ Board, and is an adjunct professor at the School of Law at the University of Auckland.

 

Related stories:
Lawyers urged to keep file notes on AML/CFT decisions
Law Society updates AML/CFT briefing

 

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