Cost of non-compliance: falling foul of AML/CFT obligations
By: Jack Stringer
Published: 9/11/2018
Introduction

The recent decision of the High Court in Department of Internal Affairs v Qian Duoduo Limited comes as a timely reminder to reporting entities about the risks associated with failing to comply with the Anti-Money Laundering (AML) and Countering Financing of Terrorism (CFT) regime under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (Act). 

In the second sentencing decision the High Court has issued under the Act, Qian DuoDuo Ltd (QDD), an Auckland based financial services provider, has been ordered to pay a pecuniary penalty of $356,000 after breaching several of its duties under the regime. 

Breaches

The Department of Internal Affairs (DIA) commenced an investigation into QDD’s conduct in 2015.  The investigation disclosed four civil liability acts which related to QDD’s failure to:
  • Adequately identify and record the nature of several money remittance relationships with other businesses in risk assessments which were required under the Act;
  • Carry out extended client due diligence in respect of a number of large or complex transactions and wire transfers;
  • Conduct adequate ongoing client due diligence and account monitoring; and
  • Keep adequate records for most of its transactions during the relevant period.  On several occasions, QDD failed to adequately record both the nature of the transactions and the parties to the transactions.

Mitigation

QDD was heavily reliant on advice provided by its AML/CFT consultants, Starfish Consulting Limited (Starfish), with regard to its compliance with the Act.  In submissions, QDD argued that at all times it intended to comply with the regime and that it placed reliance on Starfish and the Department of Internal Affairs in order to achieve this.  QDD argued its culpability in committing the civil liability acts should be reduced accordingly in light of this. 
 
Comment

The Court’s decision is noteworthy for its discussion of the extent to which those providing captured services can rely on the expertise of independent AML/CFT consultants to meet their obligations under the Act.  On this occasion, the facts clearly illustrated that QDD had placed considerable reliance on advice provided by Starfish to achieve compliance with the Act.

The Court acknowledged that the technical and complicated nature of the compliance regime under the Act and the need for QDD to develop tailored solutions to achieve compliance meant that QDD was essentially entirely reliant on Starfish.  Despite the apparent shortcomings in QDD’s compliance program, the Court noted that there were indications that on several occasions Starfish believed that QDD was largely compliant or on track to achieve compliance.

It was accepted that QDD was genuine in its desire to comply with the Act.  Given its reliance on Starfish, and in light of representations made by the consultants, the Court considered it difficult to identify what additional steps QDD could have been expected to have taken to ensure it was meeting its obligations.  Starfish’s approach was criticised as being process driven and lacking necessary insight into how QDD actually operated its business.

The Court considered that this provided critical context to the shortcomings of QDD’s actions.  QDD’s culpability in failing to comply with the Act was reduced considerably, and its liability assessed as being at the lowest end of the scale.

Despite this, Qian should not be seen as a decision which passes the buck of compliance from service providers to AML/CFT consultants.  Ultimately, those providing regulated services are still responsible for their compliance with the AML/CFT regime, irrespective of whether they engage the services of independent consultants or not.

While the sums QDD were ordered to pay are much less than those ordered in the previous decision of Ping An[1], a penalty of $365,000 for conduct considered to be at the lowest end of the culpability scale serves as a stark reminder of the significant cost consequences of falling foul of the regime.
 
[1] Department of Internal Affairs v Ping An Finance (Group) New Zealand Company Ltd [2017] NZHC 2363 where the High Court ordered penalties in the sum of $5,290,000.
 
 
 
 
 
 
 
 
 
 
 
 
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