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The case concerned acknowledged breaches of the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (Act) by TSB Bank Limited (TSB). These breaches gave rise to civil liability; accordingly, the Reserve Bank of New Zealand (RBNZ) and TSB sought an order from the High Court to impose an agreed penalty of $3.85 million. The Court concluded that TSB was entitled to a greater discount on the total penalty for cooperation and early admission, and reduced the penalty to $3.5 million.
This was the first civil proceedings taken by the RBNZ under the Act. The decision provides valuable guidance not just for future judgements but also for negotiations between reporting entities and the AML/CFT supervisors.
In this article, we provide a brief overview of some of requirements of the Act and discuss the above decision. If you would like to read the case, a copy can be found here.
Anti-Money Laundering and Countering of Financing and Terrorism Act
The Act came into full force on 30 June 2013. The purpose of the Act is to detect and deter money laundering and the financing of terrorism, to maintain and enhance New Zealand’s international reputation, and to contribute to public confidence in the financial system. To facilitate this, the Act imposes certain requirements on ‘reporting entities’. In brief, reporting entities are generally businesses that manage financial transactions on behalf of clients (such as financial institutions and real estate businesses). Some of the Act’s requirements include:
- conducting customer due diligence;
- keeping proper records of transactions, customers and suspicious activity reports;
- reporting suspicious activity;
- conducting and reviewing risk assessments for all regulated aspects of their business; and
- maintaining adequate and effective systems for a complete and regularly reviewed compliance programme (AML/CFT programme).
The AML/CFT supervisors – RBNZ being one of the three – are tasked with monitoring, investigating, and enforcing reporting entities’ compliance with the Act’s requirements. If a reporting entity fails to comply with any such requirement, the relevant AML/CFT supervisor may take a range of actions, including issuing a formal warning and applying to the Court for a pecuniary penalty.
The Act specifies certain pecuniary penalties can be imposed depending on the nature of the breach, being a maximum of either $100,000 or $200,000 for an individual, or $1,000,000 or $2,000,000 for a body corporate or partnership. These penalties are calculated on a per breach basis, and can cumulate where there are multiple breaches.
Reserve Bank of New Zealand v TSB Bank Limited
Facts
TSB is a New Zealand owned bank, it provides retail banking in New Zealand and operated a realty business up until 22 October 2020. At the time of the proceedings, TSB was a reporting entity for both its banking services and its realty operations up until 22 October 2020. TSB was therefore subject to the requirements of the Act.
In the proceedings, there was no suggestion that TSB was involved in financing terrorism, money laundering or was intentionally failing to comply with the Act. Rather, the case was concerned with aspects of TSB’s risk assessment and AML/CFT Programme being inadequate and not being reviewed when they should have been. TSB admitted to the following breaches:
- in its AML/CFT programme it did not have 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;
- it failed to review and maintain its AML/CFT programme;
- it failed to conduct an adequate risk assessment in respect of its realty operations; and
- it failed to have regard to certain countries it deals with in conducting its risk;
RBNZ and TSB together, agreed a penalty of $3.85 million for these breaches was appropriate and sought an order from the High Court accordingly. The High Court assessed the proposed penalty and ultimately reduced it to $3.5 million.
Quantum
In determining the quantum of the penalty, Mallon J noted that TSB as a registered bank, has a larger and more central role in New Zealand’s financial systems relative to other reporting entities. The Court assessed TSB’s culpability as being at the higher end. Moreover, TSB had received a formal warning from RBNZ in 2016. While TSB had commissioned a report from Deloitte following that warning and had taken steps to address compliance issues, for various reasons certain relevant information had not been considered by the Board when considering whether a new Compliance Roadmap had been approved. Consequently, the Court agreed that the proposed uplift of 5% (for two of the breaches) and 10% (for one of the breaches where there had been specific notice) was appropriate.
However, Mallon J considered that following receipt of a further report from Deloitte in 2019, TSB took immediate steps to improve compliance with the Act. The Court therefore took the view that the proposed 20% discount for TSB’s full cooperation and early complete admission was not sufficient. The Court noted that the High Court’s decision would provide precedent for future negotiations between AML/CFT supervisors and reporting entities. The Court was cognisant that discounts should be set at an appropriate level to encourage cooperation and negotiated resolutions in future instances. Accordingly, the Court adjusted the discount to 25% in light of TSB’s “full cooperation and early and complete admissions”.
Summary
This case demonstrates that the consequences of breaching the Act are severe, and that enforcement may be taken. As Geoff Bascand, the Deputy Governor and General Manager of Financial Stability at RBNZ, said:
“The AML/CFT Act came into effect eight years ago and we expect firms to be aware of, and to comply with, their obligations”
Parties are on notice that they ought to have robust systems and processes in place by now to ensure compliance with the Act. Where issues of non-compliance are identified, parties are best placed to act swiftly to remedy those breaches and cooperate fully with the AML Supervisors.
If you have any questions regarding AML/CFT compliance, please get in touch with our Business Advice team or our Disputes Team.
Disclaimer: The information contained in this article is current at the date of publishing and is of a general nature. It should be used as a guide only and not as a substitute for obtaining legal advice. Specific legal advice should be sought where required.
