Falling foul of anti-money laundering laws results in multi-million dollar fines for Kiwi companies

Sending money offshore while bypassing the main banks is lucrative business. Two linked operations processed well over $400 million of transactions between 2015 and 2019 in breach of laws designed to deter money laundering. Now they have been punished. Martin van Beynen reports.

Abandoned offices generally leave telltale clues about their previous occupants.

But not Unit 2, 110 Mandeville St, in the Christchurch suburb of Riccarton, wedged between counselling rooms and a private education business.

Peering through the locked glass door of the office reveals emptiness framed by a swathe of bare carpet and blank walls.

The office was, until about March, humming with financial transactions. Its business, operated under the name MSI Group, was currency changing and the remittance of money, mainly from New Zealand to China.

Customers attracted by the cheaper commissions and possibly the lack of scrutiny, put at least $213 million through the company’s bank accounts between 2015 and 2019. 

An operation in the same group, OTT Trading, was doing the same thing in Auckland, running up $196m of transactions in the same period.

The clients came into the offices with cash or transferred money from their bank accounts.

It became clear this month why the companies had stopped trading when they were fined a combined total of $7,585,000, in court action by the Department of Internal Affairs (DIA). 

The DIA doesn’t expect to see the money. The companies don’t appear to have any assets and their bank accounts appear to be empty. 

MSI Group was removed from the Companies Register in May 2019 because it had not filed an annual return since 2016. The DIA had to go to court to get it restored so it could be fined.

The Department told the court its main aim was to send a message that non-compliance would essentially bring hell down on the heads of perpetrators.

The penalties were imposed under legislation that is little known.

The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 came into force in 2013. Its purpose was to detect money laundering and terrorism financing and to maintain New Zealand’s reputation as an honest broker.

Money remittance businesses pose a high risk for money laundering as they often use cash and specialise in moving money quickly between countries. 

The head of Internal Affairs’ Anti-Money Laundering group Mike Stone says about $1.35 billion from fraud and illegal drugs is laundered through New Zealand businesses each year.

Under the act, businesses like money remitters and currency changers must vet customers before taking their business. The level of scrutiny depends on the nature and circumstances of the customer.

The act imposes a duty on financial institutions to tell the police about suspicious activities and requires strict record keeping. Businesses under the act must have a compliance programme that includes ways the business assesses the risk each customer poses. 

High-risk customers – those requesting large and unusual transactions – oblige money remitters to perform “enhanced due diligence” and to obtain verified information about the source of the customer’s funds or wealth.

In imposing the fines on July 10, Justice Graham Lang said MSI Group and OTT had failed every aspect of the legislation, a failure aggravated by the extent and duration of the businesses.

The story of how these crippling fines came to be ordered against a couple of low profile operators goes back to 2001 when a company called Wisdom Financial International began business in Auckland. 

Within a few years, Wisdom’s sole director and shareholder was Remuera businessman Jiantao Li. The company employed a couple of young clerks, Ye Duan and Tonghui Qi. It appears all are New Zealand residents.

In 2012, Wisdom transferred most of its business to a new company called MSI Financial, the shares of which were owned by Duan and Qi was on staff.

The business expanded and a new company called MSI Group was set up in May 2014 to provide remittance services in Christchurch. Duan was a director from the beginning and from February 2016 its only shareholder.

About six months after the MSI Group arose, another company, OTT Trading Group, was formed with Qi as a shareholder and director. Jiantao Li was also a director for six months in 2016.

The DIA’s first contact with the group came in August 2014 when a compliance officer visited the Auckland office of MSI Financial (not to be confused with MSI Group). The officer was assured all was in order and in early 2015 the DIA received documents that purported to show the company was adhering to the act.

Within weeks, MSI Financial told the department it planned to stop business in a few weeks and the department shelved its review.

Unbeknown to the DIA, MSI Financial then began transferring all its business to MSI Group and OTT. 

DIA was still ignorant of the link when in February 2015, it turned its attention to OTT. In response to questions, Qi emailed the department with a slide show and blank document to show he had a compliance scheme up and running.

This called for another visit from a compliance officer who went to OTT's premises in Mt Albert, Auckland, on April Fools' Day, 2015. While he was there he noticed material from MSI Financial and told Qi he thought MSI Financial had closed its doors.

Qi then rang an unknown person and began a long chat in Mandarin which resulted in him telling the officer OTT was set up to open a bank account in its own name for the benefit of MSI Financial.

Qi eventually outlined the transfer of MSI Financial's business to OTT but didn't mention the business handed over to MSI Group, run by Duan in Christchurch.

In a check on OTT in November 2015, OTT staff told officers the company was operating several bank accounts not on its risk documentation and was using an informal method of funds transfer quite unlike the one outlined in its risk processes. 

It soon became clear that OTT had failed to carry out any enhanced customer due diligence and in February 2016, the department issued a formal warning requiring OTT to rectify its procedures.

That was about it until February 2018, when the department made another visit to OTT and interviewed its compliance officer Lee Woon who revealed OTT had essentially taken over MSI Group in 2017 and that most of its customers were in Christchurch.

She accepted she didn't really have a clue about what was required of a compliance officer.

A subsequent report by the department showed OTT never investigated the source of its clients' funds. One of its clients had transferred about $2.5m in a series of transactions without meeting anybody from OTT.

Further contact between the department and OTT showed little improvement. Another inspection in January last year revealed a dealing where a client had suddenly transferred $174,000 after a number of much smaller transactions. Woon could not show she had spoken to the customer nor had she filed a suspicious activity report.

The department's attention had switched to MSI Group in Christchurch in 2016 when it learned of the connection with OTT. Duan told officers she was only a branch of OTT, which paid the staff’s wages and processed its transactions through its bank accounts.

When in September 2016 she was told MSI Group would need to comply with the anti-money laundering legislation, she responded she had legal advice saying MSI Group was exempt, and she attached copies of a false agency agreement between her company and OTT.

On a departmental visit to MSI Group's offices in Christchurch on 7 September 2017, Duan said MSI had wound up and transferred its business to OTT in April. 

Despite the indication MSI Group was closing down, it was still going 18 months later with about 100 to 200 regular customers and about 2000 in total. She told the compliance officers that prior to July 2018, she had not asked her customers to provide evidence of the source of their funds and had not done any account monitoring. However, that had changed, she claimed.

She said her customers were not comfortable providing details about their source of funds and if she pushed for it, she risked losing business.

The officers looked at a sample of transactions from after July 2018, and found many lacked any verification of the customers’ identity and the majority had escaped any enhanced due diligence.

Duan told investigators she had set up MSI Group because Jiantao Li had been unable to get bank accounts for Wisdom, and she did as she was told by OTT.

When approached at her large home in a new subdivision in Christchurch by Stuff, Duan is reluctant to talk.

“Actually I’m not the boss,” she says.

Asked who was the boss, she says Internal Affairs knows. She did not think her customers were laundering money.

She and others will make a decision soon on how to pay the fines, she says. Otherwise, she has no comment.

Qi could not be contacted.

He and Duan have been barred from working in a financial institution for three years. Woon is not allowed to work as a compliance officer for a financial institution until further order of the court. 

The penalties are another feather in the cap for the Anti-Money Laundering unit, even if Duan and Qi are low hanging fruit and the fines will never be paid. 

Stone, whose unit works with the Financial Marketing Authority, the Reserve Bank and the Police’s Financial Integrity Unit, says the fines imposed on the two companies reflect “aggravating conduct”.

“This included failing to co-operate with the department and attempts to mislead, including trying to disguise the status of MSI as a reporting entity.

“There were multiple failings and the department provided many opportunities for them to show how they were meeting their obligations. Our attempts were ignored or obstructed.”

Stone says he is sure the breach of the legislation was not due to language or cultural issues. The ability of the companies to operate in the New Zealand business environment showed neither were a problem.

Asked why the companies had been allowed to operate for about five years despite numerous failures and breaches, Stone says the unit’s main focus is on lifting compliance. 

“Our primary tool is education. We are not like the police. We try to understand the challenges businesses are facing and help them.”

The legislation was new and initially his unit was looking at whether the companies had compliance and risk assessment programmes. Over time, it became clear there was deliberate non-compliance and obstruction. It also took time to prepare the complex evidence for court proceedings. 

“Yes, it does take time and that can be concerning in that the business is allowed to continue to transact so we are looking at ways we can improve.”

Stone was unable to comment on whether the companies had actually been used for money laundering. 

The unit will have to ensure the individuals who have been banned from working in the sector do not “rebirth” as a new company or under a new identity, he says.

It is another challenge everyone is working on, he says. No public register of banned individuals has been set up.

People who still work in the building tenanted by MSI Group remember the people even if nothing much of the company remains. One recalls MSI clients constantly parking in parks allotted to other tenants.

MSI Group had three carparks with its tenancy and this is where you find the last remnant of the business. Among the greenery, signs saying OTT are the one tangible remaining record of the business. 

However, the business will live on, infamously, in court judgements. Fines of nearly $8m are hard to forget. (via Stuff)