High Court provides further clarification for AML penalties approach
Last week, the High Court in Auckland released its judgment imposing a civil penalty on licensed derivatives issuer CLSA Premium New Zealand Limited (previously named KVB Kunlun New Zealand Limited and referred to as such in the judgment) (KVB) for contraventions of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act). This follows proceedings filed by the Financial Markets Authority (FMA) last year as KVB's anti-money laundering and countering financing of terrorism (AML/CFT) supervisor, being the first proceedings brought by the FMA under the AML/CFT Act.
This follows the prior week's release of another judgment imposing a civil penalty on TSB Bank Limited (TSB) for AML/CFT contraventions and detailing the High Court's approach to AML/CFT penalty proceedings. We intend to release an analysis of these cases together and what they show about the current approach to AML/CFT penalties, which we will link here.
Who needs to read it? Why?
As with the earlier TSB judgment, this will be of interest to all three AML/CFT supervisors and their reporting entities, as well as their advisers, as it provides guidance as to how civil penalties should be set where the AML/CFT regime is contravened.
What does it cover?
Again mirroring the TSB judgment, here the FMA and KVB agreed on and submitted to the Court a statement of facts. Unlike in that case, however, here the parties disagreed on the appropriate penalty. Due to differing views on the gravity of the breaches and the overlap between them, the FMA sought a $1.2 million total penalty while KVB argued for a figure of $420,000. The Court ultimately imposed a total civil penalty of $770,000.
The contraventions in this case were four civil liability acts (in essence, non-compliance with particular obligations) relating to around $49.5 million of transactions with 10 customers. Specifically, these were failures to:
- conduct standard customer due diligence (CDD) on 1 customer and enhanced CDD in respect of 12 transactions;
- terminate existing business relationships when the required CDD could not be completed;
- report suspicious transactions or activities on 9 occasions; and
- keep records.
Out of an available maximum penalty of $7 million, the FMA argued that this case warranted a starting point of $1.5 million, while KVB argued for a starting point of no higher than $600,000. The Court worked through each of the contraventions in detail, and ultimately came to an overall position between the parties' with a starting point of $1 million. It then progressed through discounting factors to reach the amount referred to above. Notable features are discussed below.
Comment was made around executive director interference in compliance matters, resulting in two compliance officers resigning over disagreements with directors and a comment being made about requiring a “bendier” compliance officer (although who made that comment was disputed, the Court held that it only mattered that any director had made it, and that such was included in the agreed statement of facts). This was said to be one indication of deliberate non-compliance in order to preserve relationships. We understand that, since 2017, the management and board of KVB have been fundamentally changed.
One penalty per conduct
A key feature of the decision is the Court's discussion of the one penalty only rule (under s 74 of the AML/CFT Act, where a person can only be required to pay a single penalty in relation to the same, or substantially the same, conduct) in the context of the failures to conduct the required levels of CDD and to terminate existing business relationships when CDD could not be completed.
While the obligations at issue were considered linked, there was enough of a distinction to preserve separate claims and penalties. However, the Court found that even if the interrelationship was not sufficient to trigger the one penalty only rule, it should still be taken into account in assessing penalties. As a result, the potential penalty for the second claim was substantially discounted (by two thirds).
Frustration by third party
KVB’s failure to “keep records” resulted from a third-party service provider refusing to provide KVB access to its own records (which had been kept by an offshore provider) when it required them. That did not absolve KVB of liability. However, that fact, together with KVB taking all reasonable steps (including taking legal proceedings in Hong Kong to obtain access), was held to mitigate the non-compliance to some extent.
The Court expressly cited the TSB judgment, and the earlier cases referred to in it, in relation to the discounting of penalties for cooperation, and took a consistent approach. On assessment, a slightly lower discount was considered appropriate here (23% compared to the 25% in TSB) for the admission of liability and cooperation.
Subsequent steps to rectify compliance failings did not justify a separate discount (being a requirement of the regime), but bolstered the application of the existing discount by showing the admissions and cooperation to be genuine.
In combination with the TSB judgment, this reveals a trend lately of reporting entities agreeing statements of facts with their AML/CFT supervisors and going to the Court to set or confirm a penalty, rather than requiring the Court to determine the facts as well. The decisions now set some clear guidelines.
The KVB penalty again underscores the benefit of rapidly moving into compliance with the AML/CFT regime following a formal warning from a supervisor. Here, the warning actually related to different non-compliance issues than these later proceedings. However, the fact that there had been a warning in the past was seen as an indication of an approach to AML/CFT compliance, at the relevant time, that fell short of the required standard.
Similarly, the comments around director interference make clear that seeking to tone down compliance obligations to attract or retain customers brings great risk, and will aggravate any non-compliance that results. Maintaining and following a strong process, even in the face of commercial pressures, remains very important.
The question of the one penalty only rule will, we expect, arise again in future cases. By their nature, many of the obligations under the AML/CFT Act are interconnected and necessarily stem from related conduct. Even though the existence of separate provisions is a strong sign that they are intended to operate in parallel, the Court's decision to substantially discount the penalty for one failure due to the conduct overlapping with that of another failure will likely temper the total penalties imposed on non-compliers going forward and limit the effect of stacking up claims of non-compliance against them.
That said, this judgment remains another clear sign of the AML/CFT supervisors' increasingly firm approach to enforcement, and the best mitigant of the costs of non-compliance of course remains being compliant.
As raised in our earlier discussion of the TSB judgment, we intend to release a more in-depth analysis of these two cases together and what they reveal about the current approach taken by the AML/CFT supervisors and the Court to penalties under the AML/CFT regime. We will link this here when it is released.
If you have any questions in relation to compliance with the AML/CFT regime, please contact one of our experts.