Another eye-catching civil penalty judgment has been issued by the High Court under the Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML Act). This is the fourth civil penalty issued by the High Court under the AML Act over the last four years since enforcement began in earnest, with penalties ranging from $356,000 to $5.29 million. These proceedings were brought by the Department of Internal Affairs (DIA) against money remitters and foreign currency exchange service providers OTT Trading Group Limited (OTT) and MSI Group Limited (MSI).
Both OTT and MSI, by way of formal proof, were found to have seriously breached their obligations under the AML Act, with the Court imposing penalties on both entities totalling $7.585 million.
The case underlines that the DIA is willing to take enforcement action when entities "repeatedly fail to meet their AML/CFT obligations" and purposely try to mislead it (see the DIA's comments in its press release on this judgment).
The Court found that OTT "consistently" failed to meet the requirements of the Act. A key failure was not establishing, implementing or maintaining an AML/CFT programme, partly caused by deficient risk assessments. This in turn led to failures relating to:
Conducting consumer due diligence (CDD): OTT regularly failed to conduct even standard due diligence. There was no reason to believe it had ever conducted enhanced CDD. The Judge observed that OTT showed a "complete disregard" towards its obligations in this respect, given the volume of transactions it processed amounted to at least $196 million.
Adequately monitoring accounts and transactions: OTT's systems were inadequate, although its one redeeming action in this category was that it at least regularly reviewed transactions.
Record keeping: OTT was unable to immediately, or upon request, provide records to the DIA.
OTT's compliance officer acknowledged that she was effectively incapable of performing the role, no doubt contributing to these failures.
MSI was found to have breached the same AML Act requirements due to similar shortcomings. However, there were a few factors distinguishing MSI from OTT, including:
MSI did not register as a financial services provider, despite processing at least $213 million in transactions. It had never submitted an annual AML/CFT report.
Ms Duan, the sole director and shareholder of MSI, noted that prior to July 2018, MSI did not ask customers to provide evidence of their source of funds, nor did it monitor accounts, as its customers were not comfortable providing that information and if MSI pushed for it, MSI risked losing business to its competitors.
MSI led the DIA to incorrectly believe that MSI was either a branch, subsidiary or agent of OTT (using OTT's risk assessment and AML/CFT programme) rather than a reporting entity in its own right. This involved the execution of a false agency agreement between OTT and MSI, which did not accurately reflect how MSI operated in practice.
Penalties and injunctive relief
The High Court imposed penalties of $3.1 million on OTT, and $4.485 million on MSI. These penalties fall at the higher end of the spectrum of civil pecuniary penalties imposed in the other three High Court civil proceedings. Such large penalties in this case were the result of no mitigating factors and significant aggravating factors, including an uplift to the starting point of the penalty for both entities of 15% due to false representations that were aimed at compartmentalising regulatory risk and limiting the scope of the DIA's enquiries.
Additionally, the Court granted an injunction against OTT preventing it from carrying out any financial activities that would cause it to be deemed a financial institution as defined in the AML Act. The Court considered that if the injunction were not granted, OTT would be likely to continue to contravene the Act. No such order was needed in respect of MSI, as it was unlikely that this entity would resume trading.
The Court had previously granted injunctive relief against the sole directors and shareholders of OTT and MSI, and the compliance officer of OTT, restraining them from acting as senior managers of any reporting entity, engaging in any business activity that would make them a reporting entity, or acting as a compliance officer of a reporting entity (as appropriate).
This case, as well as other recent developments in the AML space, will be discussed in a CPD presentation in the coming months. However, in the meantime, if you would like to discuss any of the issues in this update, please contact one of our experts below.
(Judgment available here)
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