New Zealand DIA’s 5th AML court case sharpens the knife for individuals

Anti-Money Laundering (AML) enforcement has been steadily ramping up in New Zealand.

The 5th major High Court enforcement case moved to a conclusion recently, and it confirms an increasing trend to keep individuals on a sharp hook for compliance failings.

The Department of Internal Affairs (DIA) is one of three AML regulators, each handling different business sectors.

The DIA has the largest catchment of supervised businesses (after law changes added New Zealand lawyers, accountants, real estate agents, and high value dealers during 2018-19 to the regulatory net). It has been by far the most energetic of the regulators in pursuing court enforcement, taking all 5 cases concluded so far.

This article was first published in the Thomson Reuters Legal Insight hub on 1st July 2020. Please see here for that original.

This version is updated to include a 10 July 2020 court decision.

New Zealand’s AML/CFT regime is starting to mature

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

But directors, senior managers/quasi-directors, and the AML Compliance Officer also have a significant role to play at each reporting entity.  In small, close-held entities, especially, they may be seen as the reporting entity’s driving force, in effect as its “mind and will”.  Hence the DIA has shown itself eager to obtain court orders against directors, owners, and now compliance officers too. That is additional to big financial penalties against the corporate entities.

Under the AML/CFT Act the regulators have a choice. Depending on the circumstances, 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). It is understood that case remains under appeal – see table below.

 This latest case (OTT Trading) targeted two companies in the money remittance/forex industry: MSI Group and OTT Trading Group.

They were modest sized firms, each with a sole director/shareholder, and those people 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 case came to a partial conclusion in the Auckland High Court on 15 May 2020. That judgment dealt with the individual persons, eventually by way of negotiated/consent orders.

The two corporate defendants have now come back to court for a conclusion to their process separately, in a judgment of the High Court on 10 July 2020. It was not defended; only the DIA made arguments to the Court, determining it on the papers.

Trend to restrain/remove individual officers, as well as punish an entity

This represents the latest case in a definite trend towards sheeting home responsibility to individual actors as much as possible. That trend goes not only for AML/CFT regulators, but others such as the NZ Commerce Commission, Overseas Investment Office, Financial Markets Authority and Financial Service Providers Registrar.

For example, just last 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 particular 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 in future, and removing the company from the Companies Register.

In the OTT Trading case, similar 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 from running almost any financial services business, or being employed in senior roles within one.  The restraint period was for 3 years (for two of the defendants) and for an open-ended period “until further order of the Court” in the case of Ms Woon, the OTT Trading Group’s compliance officer.

More multi-million dollar penalties (for essentially defunct entities)

Inevitably, with the case no longer being defended, orders have soon followed imposing pecuniary penalties on the two companies, to effectively put them out of business too.  That judgment has now arrived, confirming 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.

Overview of the first 5 enforcement cases

A table below summarises briefly the outcomes in the 5 cases the DIA has taken to date.

It is certainly possible to detect a couple of trends. First, all have been taken against small CALD money remittance firms, closely controlled by the owners and primarily servicing a Chinese-speaking clientele.

And, with only two of the cases being defended or fully argued in court, some high monetary penalties have been meted out in these early undefended cases. Whilst not on the scale of some of AUSTRAC’s agreed penalty blockbuster cases in Australian Federal Court:

  • 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-million dollar outcomes against businesses of modest size.

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 CALD businesses where English-language difficulties abound, compliance processes are weak, and records may be kept in flimsy messaging systems (if at all).

That must be contrasted firmly with those entities that are trying hard, with a strong attitude to compliance, in the face of what is unquestionably complex legislation and regulations.

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 particularly fraught financial entities from serving consumer markets. That view may relate to the overall trend now becoming clearer where the regulator is 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 individuals 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 negotation has been at work in the current AUSTRAC v Westpac case.

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

Equally important, several of these DIA cases have seen allegations made that persons 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 Reserve Bank of NZ lurking too?

As mentioned above, 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 due course. (See my Radio NZ conversation recently).

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 at the end of June the FMA announced its first court action for a civil pecuniary penalty, against a derivatives issuer/broker business named CSLA Premium.  That case may have some distance to run yet, and the FMA has been careful to say at the outset that it is not targeting individual directors, only the New Zealand company, which is a subsidiary of a Hong Kong business.

All eyes may now turn to the Reserve Bank of NZ, 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 there is inevitably pressure and expectation for tougher enforcement action. Although the RBNZ has the most institutional challenges of the three Supervisors in moving to become an active enforcer, due to its many competing policy objectives, it would be no surprise to see enforcement activity in its sectors soon.


As always, these are personal opinions and expert commentary, not legal advice, and not indicative of views of any of my clients or instructing parties.

New Zealand DIA’s 5th AML court case sharpens the knife for individuals