High Court clarifies approach to AML penalties

Yesterday, the High Court in Wellington released its judgment setting out the reasons for its earlier decision imposing a $3.5 million civil penalty on TSB Bank Limited (TSB) for contraventions of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act).  This followed a statement of claim from the Reserve Bank of New Zealand (Reserve Bank), as TSB’s anti-money laundering and countering financing of terrorism (AML/CFT) supervisor.

The text of the judgment, as well as the Reserve Bank’s press release, can be found on the Reserve Bank’s website.

Who needs to read it?  Why?

This will be of particular interest to all three AML/CFT supervisors and their reporting entities, and their advisers, for the guidance it gives as to how civil penalties should be set in the event of breaches.

What does it cover?

In this case, the Reserve Bank and TSB had provided to the Court an agreed statement of facts and a joint submission on a proposed penalty (namely $3.85 million).  As a result, the Court was not concerned with coming to its own view of an appropriate penalty; rather, it was considering whether the penalty proposed was within the proper range for such penalties.

However, given that its endorsement of the penalty would set a precedent for future cases, the Court was open in its willingness to make some adjustments.  For instance, the Court was of the view that the 20% discount agreed for TSB’s cooperation was too low, and adjusted that up to 25% (as the minimum of a “discount of not less than 25 per cent” for “full cooperation and early and complete admissions”).  In relation to some elements a 5% premium was applied for the aggravating factors, including failure to respond adequately to a prior warning and the period over which the breaches occurred.

The Court recognised that there was no suggestion of any actual money laundering or terrorism financing through TSB, or of any intentional noncompliance.

The four contraventions that TSB admitted to were:

  • failing to have, in its AML/CFT compliance programme, adequate and effective procedures, policies, and controls for monitoring and managing compliance with, and the internal communication of and training in, those procedures, policies, and controls;
  • failing to review and maintain its AML/CFT compliance programme;
  • failing to conduct an adequate risk assessment in respect of its realty operations; and
  • failing to have regard to certain countries that it deals with in conducting its risk assessment.

Our view

The Court’s willingness to allow a bigger discount for cooperation underscores the benefit, once a noncompliance is identified, of working closely with the supervisor to facilitate the investigation and remedy the position.

However, final size of this penalty also underscores the importance of swift and effective remediation following a warning from a supervisor around noncompliance.  Being warned yet failing to respond promptly and sufficiently will be considered an aggravating factor if later proceedings end up being brought.

It also serves as a resounding reminder that the AML/CFT supervisors have been taking an increasingly firm approach to the enforcement of the AML/CFT Act, as the regime has matured and following comments from the Financial Action Task Force in its latest Mutual Evaluation of New Zealand earlier this year (our discussion of which can be found on our website).

What next?

A similar penalty hearing was held at the High Court in Auckland in early July 2021, in FMA v CLSA Premium New Zealand Limited (CLSAP NZ), a provider of financial services.  That also involved an agreed statement of facts including CLSAP NZ admitting to a number of breaches.

We expect this judgment, which will provide further guidance on the matters considered in Reserve Bank v TSB, to be released in the near future.  When this judgment is available, we intend to release a more in-depth analysis of what both of these cases reveal about the current approach taken by the AML/CFT supervisors and the Court to penalties under the AML/CFT Act.

If you have any questions in relation to compliance with the AML/CFT regime, please contact one of our experts.

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