Warning - Make sure you comply with AML laws or your bank account can be shut down.

Over the past few years we have seen a number of banks close customer’s accounts where they have determined that the customer poses a money laundering risk that the bank does not wish to accept. This has been highlighted by the courts endorsing Kiwibank’s right to choose who it deals with, as well as another recent case where a shop’s bank accounts were closed by ANZ and Kiwibank due to perceived gang associations. 

It is common for banks to request reporting entities to provide copies of their Risk Assessment and AML/CFT Programme along with the most recent audit report. A Compliance Manager at one of our main banks recently commented that the quality of audit reports they see differs significantly. Obviously, this impacts on how reporting entities are perceived by banks and supervisors and how important it is to engage an experienced auditor who specialises in this field. Supervisors are also concerned that auditors appear on the scene with little experience. At this stage the Supervisors do not intend to establish a register of approved auditors so this responsibility rests with the reporting entity to be confident that the auditor is sufficiently qualified. 

Should you have any questions or require assistance please contact us to discuss.

News items

Bankers relieved and money remitters knocked back by High Court ruling allowing Kiwibank to close E-Trans' accounts

Bankers are popping the champagne following a High Court judge ruling it was lawful for Kiwibank to last year try to close the accounts of one of its remittance clients to reduce its exposure to money laundering risks.

The case, brought by E-Trans International Finance, sets a precedent for the way banks and money remitters operate in line with tough new rules under the Anti-Money Laundering/Countering Financing of Terrorism (AML/CFT) Act.

Justice Heath has essentially endorsed Kiwibank’s right to choose who it does business with, and decide whether or not it wants to invest in the systems necessary to monitor its remittance clients in line with the Act.

He’s discharged the interim injunction placed on Kiwibank in June last year, preventing it from closing E-Trans’ accounts.

E-Trans has been operating in New Zealand for 15 years; its focus almost exclusively on servicing customers in China, Hong Kong and Australia. It also has operations in Australia and Canada.

Justice Heath has made his call as remitters around the world accuse banks of crushing the US$600 billion industry by using a “blanket de-risking” policy to systematically get rid of them.

The Reserve Bank of New Zealand has flagged this as an issue, as a number of migrants - Pacific Islanders in particular - rely on remittance firms to send money back home.

The problem for banks is that it can be difficult for them to monitor exactly how much money is being sent between whom, when processing funds through remitters.

During the nine-day trial in February, E-Trans said that by 2014 Kiwibank was the “bank of choice” for remitters ditched by the other banks operating in New Zealand.

E-Trans accused Kiwibank of breaching: 1) its statutory duty owed to E-Trans under the AML/CFT Act, 2) the contract between the two parties, 3) the Commerce Act 1986 and 4) the Fair Trading Act 1986.

Yet Justice Heath has ruled all of E-Trans’ claims fail for the following reasons:

1) Kiwibank didn’t breach its statutory duty

Justice Heath says Kiwibank didn’t breach its statutory duty under the AML/CFT Act to supply E-Trans with banking services.

E-Trans argued Kiwibank had a legal obligation to put all the right systems in place to conduct the necessary due diligence on its customers. It said it couldn’t avoid fulfilling its obligations under the AML/CFT Act by simply refusing to do business with a class of customers.

However Justice Heath has ruled: “Although a particular class of customer might be adversely affected by a reporting entity’s decision not to do business with it, there is nothing in the legislation [AML Act] to suggest that such an entity should be entitled to bring a private claim, invoking statutory obligations.

“The public law purposes of the Anti-Money Laundering Act eliminate that possibility.”

This legality aside, Justice Heath acknowledges the headaches caused by the AML Act. He says it is “sound public policy” for the Government to crack down on the trade of dirty money, protect the ability of foreign workers to send funds to their homelands, and to promote competition in financial markets.

“The problem is that those laudable policy aims conflict. The co-existence of statutory provisions designed to promote each of those public policy goals seems to have brought about unintended consequences,” he says.

Justice Heath recognises requiring enterprises to act as reporting entities under the AML Act comes at the cost of reputational risk to financial institutions. Therefore he says it is “understandable” for banks to reduce their exposures to risks to avoid damaging their reputations.

He recognises the costs of complying with AML standards are high, and it’s likely banks would pass these down to their customers through higher fees for example.

Justice Heath adds: "The policy choices to be made are ones for Government. It is conceivable that they could be given effect through exemptions, guidance from a supervisor, some other existing statutory mechanism or a specific amendment to the Anti-Money Laundering Act."

2) Kiwibank didn’t breach the contract between the two parties

Justice Heath has upheld Kiwibank’s ability to terminate a customer’s contract without giving them a reason but providing 14 days’ notice, as outlined by the general terms and conditions of the contract that governs its relationship with E-Trans.

He’s turned down E-Trans’ argument that in terminating the contract, Kiwibank’s also bound by the New Zealand Bankers' Association’s Code, which obliges it to act “fairly and reasonably”.

The issue of whether the Code can be incorporated in the contract between a bank and customer has been contested in court cases involving Westpac and ANZ before.

Justice Heath concludes that for the Code to be adopted in the contract, someone from the bank with “actual or ostensible authority” would have had to endorse it.

“There is no evidence that the person from whom Mr Sun [E-Trans’ sole director and shareholder] obtained a copy of the 2007 version of the Code had actual authority to bind Kiwibank to a variation to its contract with E-Trans. Nor is there sufficient evidence that the person with whom he dealt had ostensible authority to do so,” Justice Heath says.

He says it’s “inherently implausible” Xiaohua Sun believed the “staff member at the counter” of the bank who gave him the Code, would’ve had the authority to bind Kiwibank to a variation of its contract with E-Trans.

3) Kiwibank didn’t behave anti-competitively

Justice Heath denies E-Trans’ claim Kiwibank behaved anti-competitively by attempting to close its account.

This is despite E-Trans arguing Kiwibank had ditched around 100 of it remittance clients [figure contested by Kiwibank] before it was E-Trans’ turn, and despite the fact remitters need bank accounts to operate.

Justice Heath says Kiwibank hadn’t “colluded in some way with other banks to eject money remitters from the relevant market, or abused market power”.

Yet his main point is that Kiwibank exercising its contractual right to terminate a contract doesn’t fall within the realm of the Commerce Act.

“A termination provision is not one that, of itself, has the purpose, or is generally likely to have the effect, of substantially lessening competition in a market,” he says.

He admits two or more terminations taken in aggregation may be anti-competitive, but “this would still require each clause to have an inherent anti-competitive effect”.

This technicality of the Commerce Act aside, he believes Kiwibank closing E-Trans’ account won’t substantially lessen competition.

He acknowledges banks’ moves to get rid of their remittance customers have “caused an appreciable decrease in the number of such entities”. Yet, “banks have the ability to fill the vacuum, at least in part, by offering money remittance services, most likely at a higher price”.

Furthermore, Justice Heath sides with Kiwibank’s lawyers in arguing Kiwibank only serviced around 30% of the money remitters in the market mid-last year.

4) Kiwibank hasn’t breached the Fair Trading Act

Justice Heath has ruled Kiwibank hasn’t breached the Fair Trading Act by giving what E-Trans says are false reasons for its decision to terminate its contract.

He says that even if Kiwibank was misleading, E-Trans’ accusation doesn’t stand under the Act.

“There is no causal link between what was said and any loss or damage suffered by E-Trans. Whatever reasons were given by Kiwibank for closing the account could not affect the legitimacy of its decision, provided it had not breached the contract or infringed some statutory obligation.”

For background and more on E-Trans’ side of the story, see this story and this one, written at the beginning and end of the trial.

Another one of Kiwibank's remittance clients, KlickEx, says it was last night re-issued a 14-day closure notice from Kiwibank. In April KlickEx issued High Court proceedings against Kiwibank, after the bank attempted to close its accounts. At the time, the Court issued Kiwibank with an injunction preventing it from closing the accounts pending the outcome of the E-Trans case. (via Interest.co.nz – 2 June 2016)

It's cash only at the famous Maketu takeaways after ANZ shut down its accounts

There's a sign in the window of Maketu Takeaways - the fish 'n chip shop immortalised in Robin White's 1975 painting - saying "no eftpos, sorry for the inconvenience".

It's not some technical glitch, but the result of the latest move by the state - and now private companies - to crack down on the shop's owner, senior Mongrel Mob member Valentine Nicholas.

Nicholas has been in police sights ever since he was acquitted of money laundering charges at trial in 2015.

Police used the Criminal Proceeds (Recovery) Act, which has a lower threshold than criminal charges, to seize assets worth more than $1m, including three adjoining waterfront properties in Maketu, a forestry block in Gisborne, nine bank accounts containing $26,000, shares worth $14,000, motorbikes and cars and $8000 cash.

They claimed it was the proceeds of criminal offending, namely cannabis dealing - which Nicholas denies. 

The Court of Appeal allowed Nicholas to challenge the High Court finding, arguing that the ancestral land, left to him by his father, is of cultural and spiritual significance to him.

The case remains before the courts.

Nicholas accuses police of having a personal vendetta against him, but Detective Inspector Craig Hamilton, of the Hamilton police asset recovery unit, said police actions were "appropriate and justified".

"People who are involved in crime which harm our communities will naturally attract our attention, and we will respond to their activities accordingly."

Nicholas is now fighting another battle - against his bank.

In March he bought the takeaway shop, after his brother, fellow Mongrel Mob member William Nicholas, put the business into liquidation owing more than $100,000 to the IRD.

Nicholas started a new company, Maketu Takeaways, of which he was director and shareholder.

The shop's banking was with ANZ, where Nicholas had held an account for 52 years since opening one as a five-year-old schoolboy.

He says he was never overdrawn and always paid his credit cards on time.

But then out of the blue, without explanation, ANZ closed his personal accounts and told him it would no longer offer him banking services.

"They said 'under general terms and conditions, we don't have to have a reason - we can pull the plug whenever we like'," Nicholas said, in his first full media interview.

Nicholas consulted a lawyer and was advised to stand down as a director of Maketu Takeaways so its banking wouldn't be affected.

He did that, and put his shares into a trust, although he continued to help his mother-in-law and daughter-in-law run the place.

A friend who runs a honey business and has no Mongrel Mob connections was appointed a director and shareholder and bank accounts were in his name.

For a couple of weeks everything continued as usual, until last week Nicholas got a call from food wholesaler Bidvest, which supplies his chips, spring rolls and sausages.

"There's an automatic payment going out of the fish shop account, they went to draw out their money and it wouldn't let them."

ANZ had closed that account as well.

It's forced the shop to become cash-only.

"Eftpos is 80 to 90 per cent of the fish shop business," Nicholas said. 

"It's a bugger. The shop owner across the road has been good - he's giving out eftpos cash for the locals to come over and buy their fish and chips.

"But he closes at six, so we've got an hour where you can't get eftpos. If they're locals we've been going 'come in and pay it tomorrow'."

Nicholas believes police tipped off ANZ. "I don't think it's [ANZ], I think it's the police who've got a bug in their arse.

Hamilton said it was common for police to make inquiries with banks when investigating suspected criminals.

"As such, banks will inevitably learn of a police investigation through this process."

Nicholas has also been forced to stand down from his role as treasurer of the local kohanga reo - a position he'd held since 1994 - after police contacted the organisation's head office.

After his ANZ accounts were closed, Nicholas opened an account with Kiwibank. A week later it sent him a letter saying it would no longer offer him banking services, again without explanation.

Both ANZ and Kiwibank refused to discuss an individual customer, but said they were within their rights to close accounts without explanation. 

"We take a number of factors into consideration," an ANZ spokesman said. "We're upfront about it - our rights to end a contractual relationship are set out in our terms and conditions."

A Kiwibank spokeswoman said: "If the customer believes there has been a mistake they are welcome to make contact with the complaints team."

Banking ombudsman Nicola Sladden said banks were under no obligation to continue doing business with a person or company, but they should not close an account without good reason.

 "Banks should give reasonable notice of an account closure, so customers have enough time to make alternative banking arrangements. We consider 'reasonable notice' as at least 14 days."

Nicholas said police had accused him of making his money through selling cannabis, which he denied.

"My record is violence from when I was a young man...not drugs or pinching."

He said the proceeds of crime legislation was "crazy".

"What they're basically saying is, 'the jury's wrong and we're right, so we're gonna carry on anyway'.

"They say the onus is on you to prove where you got your stuff from. I told them, 'how do I prove a figment of your imagination?"​ (via Sunday Star Times)