Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited (No 4)

[2022] FCA 1353

FEDERAL COURT OF AUSTRALIA

Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited (No 4) [2022] FCA 1353   

File numbers:

VID 1085 of 2017
NSD 1158 of 2018

Judgment of:

YATES J

Date of judgment:

11 November 2022

Catchwords:

PRACTICE AND PROCEDURE – ruling on the admissibility of expert’s report

Legislation:

Corporations Act 2001 (Cth) ss 674, 677

Evidence Act 1995 (Cth) s 79

Division:

General Division

Registry:

New South Wales

National Practice Area:

Commercial and Corporations

Sub-area:

Commercial Contracts, Banking, Finance and Insurance

Number of paragraphs:

14

Date of hearing:

11 November 2022

Counsel for the Applicants in VID 1085 of 2017 and NSD 1158 of 2018:

Mr W Edwards SC
Mr D Fahey

Solicitor for the Applicant in VID 1085 of 2017:

Maurice Blackburn

Solicitor for the Applicants in NSD 1158 of 2018:

Phi Finney McDonald

Counsel for the Respondent in VID 1085 of 2017 and NSD 1158 of 2018:

Ms E Collins SC
Mr I Ahmed

Solicitor for the Respondent in VID 1085 of 2017 and NSD 1158 of 2018:

Herbert Smith Freehills

ORDERS

VID 1085 of 2017

BETWEEN:

ZONIA HOLDINGS PTY LTD (ACN 008 565 286)

Applicant

AND:

COMMONWEALTH BANK OF AUSTRALIA LIMITED (ACN 123 123 124)

Respondent

ORDER MADE BY:	YATES J
DATE OF ORDER:	11 NOVEMBER 2022

THE COURT:

1.Makes the ruling set out in [14] of the reasons for judgment published today as Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited (No 4) [2022] FCA 1353.

Note:   Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011.

ORDERS

NSD 1158 of 2018

BETWEEN:

PHILIP ANTHONY BARON

First Applicant

JOANNE BARON

Second Applicant

AND:

COMMONWEALTH BANK OF AUSTRALIA LIMITED (ACN 123 123 124)
Respondent

ORDER MADE BY:	YATES J
DATE OF ORDER:	11 NOVEMBER 2022

THE COURT:

1.Makes the ruling set out in [14] of the reasons for judgment published today as Zonia Holdings Pty Ltd v Commonwealth Bank of Australia Limited (No 4) [2022] FCA 1353.

[Note:  Entry of orders is dealt with in Rule 39.32 of the Federal Court Rules 2011]

REASONS FOR JUDGMENT
(RULING ON ADMISSIBILITY OF EVIDENCE)

YATES J:

1. Objection is taken to the report of Teresa Pesce dated 27 September 2022, which the applicants propose to tender. 

2. Ms Pesce was asked to review and provide an opinion on certain statements made in certain affidavits and reports on which the Bank proposes to rely.  As I understand it, the statements on which the Bank proposes to rely are directed to the issue of the materiality of information (s 677 of the Corporations Act 2001 (Cth) (the CorporationsAct)) which the applicants allege the Bank should have disclosed in accordance with its obligations under s 674 of the Corporations Act.

3. The applicants put forward Ms Pesce as “an industry leader and subject matter expert in financial crimes regulatory enforcement and compliance…”. She has been retained “based on [her] expertise, experience, and knowledge of global regulatory standards and expectations, industry practices and the enforcement environment in the area of financial crimes”. The applicants contend that her report is relevant, and admissible as opinion evidence covered by the exception in s 79 of the Evidence Act 1995 (Cth) (the Evidence Act).

4. In undertaking her assigned task, Ms Pesce reviewed the selected statements and identified what she refers to as “several consistent themes”.  From these “themes” she expresses the opinion in paragraph 19 of her report that, collectively, the statements minimised the Bank’s “serious compliance failures” and did not acknowledge that those failures exposed the Bank to certain risks, namely compliance and enforcement risks, the risk of the Bank being used to facilitate financial crimes (including money-laundering and terrorist financing), and reputational risk arising from these matters.  The various strands of this opinion are not tethered to any particular statement to which Ms Pesce’s attention was directed.  Her opinion in that regard is really based on her synthesis of the statements she reviewed.

5. Properly viewed, this “opinion”, as expressed, is no more than commentary involving what appears to be evaluative judgments made by Ms Pesce from her perspective as a person involved in financial crimes regulatory enforcement and compliance of the importance of regulatory compliance.  Further, I am unable to discern the fact or facts in issue to which this “opinion” is directed.

6. To explain: The succeeding paragraphs in Ms Pesce’s report refer to (what seems to me to be) uncontroversial statements of fact expressed at a high level of generality.  These statements do not seem to me to be based on specialised knowledge as opposed to informed knowledge.  Importantly, for present purposes, they do not seem to be responsive to the material she was asked to review.  These statements include: 

   (a)Banks in Australia and around the globe have a legal obligation to combat financial crime;

   (b)To achieve a risk-based approach, financial institutions should, and in some jurisdictions must, conduct an enterprise-wide AML/CTF risk assessment to understand their exposure to being used to facilitate financial crime;

   (c)When new products are developed, they should be risk assessed, most commonly in concert with financial crimes risk professionals, and should not be offered until it is clear that any inherent risks are mitigated by corresponding controls;

   (d)In addition to conducting a risk assessment, there are several key controls present in a sound financial crimes program;

   (e)Anti-money laundering laws and regulations are in place to prevent the proceeds of crime from being introduced into the global financial system, disguised or delayed through transactional activity, and returned to criminals appearing to be legitimate assets;

   (f)Such laws are intended to prevent financial institutions from participating, knowingly or unknowingly, in the financing of terrorism;

   (g)Regulators globally require banks to monitor for potential suspicious activity and report that activity at low or no dollar thresholds;

   (h)Cash activity and cash-intensive products are particularly high-risk for financial crime because cash is easily disposable, and the source or prominence of cash is not transparent;

   (i)It is industry practice for compliance teams to review cash reports to determine if there are outliers or if a customer is conducting more cash transactions than is reasonable when viewed against the customer’s profile.

7. Ms Pesce then expresses “astonishment” in paragraph 29 of her report that an expert in the field of financial crimes enforcement or a bank executive would view the potential laundering of $624 million as “an acceptable cost of doing business because the absolute dollar value is small when compared to the size of the bank, or because given the volume of transactions there would be an expected level of non-compliance”. 

8. It is not clear to me that any intended witness in these proceedings will be advancing the proposition that Ms Pesce asserts.  No such proposition was advanced in the Bank’s opening.  If such a proposition were to be advanced, it does not call for any answer directed to the need for, and importance of, full and proper regulatory compliance.  The question in issue is the materiality of information that the applicants allege the Bank should have disclosed, but did not disclose, to the market.

9. The same is true of other statements which Ms Pesce addresses. For example, in paragraph 30 of her report she takes issue with a statement made in Mr Singer’s report of 8 August 2022 with respect to the materiality of the Account Monitoring Failure Information. Mr Singer’s statement is that the Account Monitoring Failure Information is “not quantitatively material viewed in its numerical context”. Once again, it is to be borne in mind that Mr Singer is addressing the materiality of information for the purposes of s 677 of the Corporations Act. I note that Ms Pesce misinterprets Mr Singer’s statement as advancing the entirely different concept that the Account Monitoring Failure Information is “not quantitatively relevant”. She then goes on to address the regulatory importance of account monitoring, which is not in issue in these proceedings.

10. A further example is provided in paragraph 32 of Ms Pesce’s report.  In that paragraph, Ms Pesce takes issue with the Bank’s failure to provide certain TTRs and its failure to carry out some monitoring of some accounts as “operational issues”.  Ms Pesce goes on to state that these issues are not mere “operational issues” but “legal and compliance issues” through which “bad actors were free to conduct unlawful activity though the [B]ank undetected and unreported”.

11. Finally, Ms Pesce provides commentary on statements concerning intended witnesses’ perceptions of what, at the relevant time, AUSTRAC’s response to the Bank’s failings might be.  Ms Pesce then addresses, once again, the importance of regulatory compliance and expresses her own subjective evaluations, such as:  “It is difficult to understand why CBA ever took comfort from AUSTRAC’s lack of prior civil enforcement before Tabcorp or felt confident that it would be subject to a small fine”.  Such musings are not the province of admissible evidence, let alone expert opinion evidence.

12. Apart from expressing uncontroversial views about the nature and importance of regulatory compliance in the context of anti-money laundering and counter-terrorism financing laws, Ms Pesce’s report appears to provide no more than commentary, and her own evaluation, of other people’s statements on which the Bank proposes to rely in evidence. I do not see her report as addressing any fact in issue, let alone a fact in issue involving the deployment of her specialised knowledge. If, by her report, Ms Pesce is purporting to express an opinion on the materiality of information for the purposes of s 677 of the Corporations Act, then I am not satisfied that her opinion is based on specialised knowledge which she has for that purpose.

13. The Bank also submits that Ms Pesce’s report is not evidence in reply and should be rejected for that reason.  It follows from what I have said that her report could not possibly be evidence in reply.  However, its defects are such that one never really gets to the question of whether the evidence is in reply or properly evidence in chief.

14. It follows that the report should be rejected.

I certify that the preceding fourteen (14) numbered paragraphs are a true copy of the Reasons for Judgment of the Honourable Justice Yates.

Associate:

Dated:       11 November 2022