$7.5m in penalties for serious anti-money laundering breach
/Dept of Internal Affairs v OTT Trading Group Ltd [2020] NZHC 1663
Introduction
In this decision, the Department of Internal Affairs (the Department) claimed that between May 2014 and April 2019, OTT Trading Group (OTT) and MSI Group Limited (MSI) breached their obligations under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (the Act).
The Department commenced this proceeding seeking injunctions against OTT and MSI, as well as their sole directors and shareholders, Mr Qi and Ms Duan. It also sought orders against Ms Woon, who was OTT’s compliance officer between February 2017 and April 2019.
AML/CFT Act – purpose & obligations
The Act serves several purposes including detecting and deterring money laundering. Under the Act, an entity which transfers money or value for customers is regarded as a “financial institution” and is therefore deemed to be a “reporting entity”. Reporting entities must have an AML/CFT programme and must conduct due diligence regarding the clients on whose behalf they conduct business.
Facts
MSI and OTT are two members of a group of entities that provided money remittance and foreign exchange services within New Zealand and Australia. The group began operating in October 2001, when Wisdom Financial International Co Ltd (Wisdom) was incorporated. Mr Li was its sole director and shareholder. Wisdom also employed Ms Duan and Mr Qi. In 2012, Wisdom transferred a substantial portion of its business to MSI Financial Ltd (MSI Financial). MSI Financial was wholly owned by Ms Duan, and it employed Mr Qi. MSI Financial operated out of premises in central Auckland.
MSI undertook or processed at least $213 million in transactions, but it never registered as a financial services provider, nor submitted annual reports. OTT was incorporated and registered as a financial services provider and processed at least $196 million in customer transactions between 2015 and 2019.
The Department began investigating OTT and MSI from August 2014 and carried out several on-site visits. The investigation revealed a number of areas where OTT and MSI were egregiously failing to meet their AML/CFT obligations. In particular, OTT had inadequate (or non-existent) due diligence and record keeping practices. Its compliance officer did not know of the circumstances in which OTT would be required to undertake enhanced due diligence. MSI did not undertake any procedure when establishing a new business relationship with a client. It said that its customers were not comfortable with providing enhanced due diligence information, and that if MSI pushed for that information it risked losing business to its competitors. The majority of a sample of transactions showed that MSI did not carry out enhanced due diligence, and many lacked any verification of the customer’s identity.
Claims against MSI & OTT
The Department brought four causes of action against MSI and OTT, alleging the following breaches:
Failure to establish, implement or maintain an AML/CFT programme – maximum penalty $2 million.
OTT’s AML/CFT programme was not appropriately implemented. The Department therefore submitted a starting point of $650,000, which the Judge agreed to. There were no mitigating factors to consider.
For MSI, the Department submitted that a starting point of $1.5m was appropriate. The Judge agreed to this, too. The higher starting point reflected MSI’s varying representations about its compliance programme, and the fact that the company operated for a prolonged period and in a “reasonably substantial way”.
Failure to conduct customer due diligence – maximum penalty $2 million.
OTT’s breaches in this respect were regarded as serious given its ongoing failure to conduct standard customer due diligence, as well as its failure to undertake enhanced due diligence on relevant transactions totalling more than $60 million. The Court said there was no reason to believe OTT had ever undertaken enhanced customer due diligence. A further aggravating factor was that OTT had processed a significant volume of transactions – totalling at least $196m. In terms of penalty, a starting point of $1.3m was considered appropriate.
MSI’s breaches were aggravated by their duration and extent. At least 746 transactions undertaken by MSI exceeded the threshold of $50,000. The aggregate value of those transactions alone was $213m. It was particularly concerning that MSI did not seek information required for enhanced due diligence out of fear of losing customers. A starting point of $1.4m for the penalty was appropriate.
Failure to adequately monitor accounts and transactions – maximum penalty $1 million.
OTT failed to obtain sufficient information about its clients throughout and never implemented an account monitoring policy. A starting point of $500,000 was submitted by the Department. The Judge, however, felt that a starting point of $250,000 was more appropriate. Despite the fact that OTT’s systems were inadequate, the Judge regarded OTT’s practice of regularly reviewing transactions as a redeeming factor.
MSI, on the other hand, undertook no accounting monitoring at all, notwithstanding the fact that it had 100 to 200 regular customers. The Judge agreed with the Department that a starting point of $500,000 was appropriate.
Failure to keep records – maximum penalty $2 million.
On multiple occasions, OTT was unable to immediately provide the Department with the records requested and it could not provide any records prior to September 2015. A starting point of $500,000 was therefore appropriate. This reflected the fact that there was overlap with breaches of other obligations and that OTT did not totally fail to keep the records required under the Act.
MSI also failed to produce any records for the period prior to September 2015. Its poor systems for record-keeping hampered the Department’s ability to gain an accurate understanding of the role played by MSI and the transactions that it undertook. A starting point of $500,000 was also appropriate, which too reflected some overlap with other heads of liability.
Penalties & Injunction
OTT’s overall starting point was $2.7 million. This was increased by 15%, or $400,000, to $3.1 million after the Court took into account aggravating factors. Particularly detrimental to OTTs case was the fact that it intentionally misled the Department in relation to MSI and OTT’s relationship with MSI Financial, and that it was generally unwilling to cooperate.
MSI’s overall starting point was $3.9 million which was for similar reasons increased by 15%, or $585,000, to $4.485 million. A significant aggravating factor was that MSI took steps to disguise its status as a reporting entity by leading the Department to believe that MSI Group was either a branch, subsidiary or agent of OTT.
No reductions were made for either mitigating factors or to reflect the totality principles.
An injunction was granted restraining both OTT and MSI from carrying out any financial activities that would cause either of them to be deemed to be a financial institution under the Act. The Court was satisfied that, if an injunction was not granted, OTT was likely to continue to contravene the Act.
Comment (Matthew Atkinson)
Matt says that this case is another example of the Department targeting the money remittance industry. It is also another example of it seeking, and obtaining, substantial penalties for failure to comply with the obligations of the AMLCFT Act.
He also says that while much of the Department’s regulatory action to date has been focussed on the financial sector, it may not be long before it turns its focus to compliance by the professions. Lawyers, accountants and real estate agents were brought into the regime progressively from 1 July 2018. The significant penalties imposed for those who fail to comply should give professionals and their insurers food for thought.
Matthew Atkinson is a Partner at Fee Langstone
