AML offending doesn’t pay: First criminal sentencing under the AML/CFT Act
On 3 March 2020, Her Honour Justice Walker handed down the first criminal sanctions under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) in R v Jiaxin Finance Limited. The judgment has now been released and is available online.
Who needs to be aware of the judgment? Why?
All “reporting entities” under the AML/CFT Act should be aware of the substantial potential criminal penalties (as well as civil penalties) which may be imposed for breaches of the AML/CFT regulatory regime, as outlined in this judgment.
The criminal activity in this case was breaching New Zealand’s rigorous regime to prevent the financing of terrorism and money laundering: this was not a case about substantive money laundering.
Money remitter, Jiaxin Finance Ltd (Jiaxin), and two individuals Mr Qiang Fu and Ms Fuqin Che, had previously been found guilty of criminal offences relating to 311 transactions with a total value of around $53 million as follows:
- failing to conduct customer due diligence (knowingly or recklessly, which made this a criminal offence); and for
- failing to keep adequate records relating to a suspicious transaction, and to report a suspicious transaction (both under the standalone criminal offences).
Ms Che was also found guilty of structuring a transaction to avoid the AML/CFT requirements.
The maximum penalties under the AML/CFT Act for each of the offences were a $5 million fine for Jiaxin, and either/both of a $300,000 fine and two years’ imprisonment for the Mr Fu and Ms Che. Justice Walker sentenced the parties to:
- $2.55 million for Jiaxin;
- $180,000 for Mr Fu; and
- $202,000 for Ms Che.
In coming to these sentences, Justice Walker considered the nature of the offending. The business was otherwise compliant with the AML/CFT regime, except for in respect of a single customer. In addition, the offending was committed at an early stage of the AML/CFT regime. Organisations were “coming to grips” with their obligations and there was little judicial guidance. While the offending was serious, Her Honour found it fell below the most serious of its kind.
However, Justice Walker observed:
“Money laundering is an activity which is highly detrimental to the New Zealand financial system and very difficult to detect. This is one reason why the AML/CFT regime must deal robustly with non-compliance which risks permitting laundering by third parties.”
In sentencing the defendants, Her Honour made several observations which are likely to have a more general impact, in particular:
- A fine should be set at a level to ensure defendants do not profit from their offending, but it should also exceed the profit in order to deter and punish the defendants.
- The AML/CFT Act was designed to deter by also punishing individuals responsible for the company’s conduct. Accordingly, Justice Walker rejected a submission from Mr Fu’s counsel that a significant fine against Jiaxin, and Mr Fu as the sole shareholder, director and controlling mind of the corporation, amounts to double punishment. However, the fine for Jiaxin was “germane” to Mr Fu’s.
- Severe economic impact is an ordinary consequence of offending, and so Justice Walker rejected a submission from Jiaxin’s counsel that a significant monetary penalty would have a “crushing” effect such that it may have to liquidate.
- In accordance with the Sentencing Act 2002, Justice Walker was required to treat a fine as the presumptively appropriate sentence. Her Honour was not persuaded that the fines for Mr Fu and Ms Che were on their own “clearly inadequate in the circumstances” and no additional sentence (such as imprisonment) was required.
There is a commonality between some conduct that amounts to civil, or criminal offending in relation to compliance under the AML/CFT regime. In Jiaxin, Justice Walker observed that she was not persuaded the offending in this case was necessarily more serious than the conduct in two of the civil proceedings under the AML/CFT Act, despite the higher hurdles for a criminal prosecution. In those two civil proceedings the companies concerned were ordered to pay far higher pecuniary penalties than the criminal fines imposed in Jiaxin: Ping An Finance (Group) New Zealand Company Ltd was ordered to pay $5.3 million and Jin Yuan Finance Ltd $4 million (our discussion of these cases is available here and here). Justice Walker noted those cases involved higher transaction values, systematic non-compliance covering a “significant” number of customers, complete absence of knowledge of those customers and a “contemptuous disregard” for the AML/CFT Act requirements.
More generally, it was clear Justice Walker was influenced by the offending in Jiaxin occurring relatively early-on in the AML/CFT regime, at a stage when there was some “confusion in the marketplace” about the obligations. As we predicted in our 2020 Litigation Forecast, we expect enforcement action to increase now the regime is fully rolled-out and has matured. It appears from Justice Walker’s sentencing that future courts may also take a harder line in sentencing in the future.
If you have any questions about your businesses’ compliance under the AML/CFT Act please contact one of our experts.