Department of Internal Affairs v Qian Duoduo Limited
[2016] NZHC 2114
•1 September 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-002165 [2016] NZHC 2114
UNDER the Anti-Money Laundering and
Countering Financing of Terrorism Act
2009, Part 19 of the High Court RulesIN THE MATTER OF
an application for a pecuniary penalty
BETWEEN
THE DEPARTMENT OF INTERNAL AFFAIRS Applicant
AND
QIAN DUODUO LIMITED Respondent
Hearing: 1 September 2016
[On the Papers]
Counsel:
D G Johnstone for the Applicant
Judgment:
1 September 2016
Reasons:
6 September 2016
JUDGMENT OF EDWARDS J
This judgment was delivered by Justice Edwards on 6 September 2016 at 4.30 pm, pursuant to
r 11.5 of the High Court Rules
Registrar/Deputy Registrar
Date:
Solicitors: Meredith Connell, Auckland
DEPARTMENT OF INTERNAL AFFAIRS v QIAN DUODUO LTD [2016] NZHC 2114 [1 September 2016]
Introduction
[1] The Department of Internal Affairs (Department) applies on a without notice basis for:
(a) Freezing orders under Part 32 of the High Court Rules in respect of property (including interests in property) of the respondent (QDD); and
(b)Permission to commence a proceeding by way of originating application.
[2] I granted the application for freezing orders on 1 September 2016. My reasons for doing so are set out below together with my decision on the application for permission.
Application for freezing orders
Legal requirements
[3] There are three requirements for a freezing order to be made: (a) A good arguable case on the substantive claim;
(b) Assets to which the order can apply; and
(c) Having regard to all the circumstances, a real risk that the respondent will dissipate or dispose of those assets.
[4] The Court must also consider the overall justice of the case and balance the interests of the applicant in ensuring any judgment is not rendered nugatory against the prejudice and hardship to the respondent in making the orders.1
Good arguable case
[5] QDD is a registered financial services provider. It is registered in respect of “changing foreign currency” and “operating a money or value transfer” service. The company was incorporated in 2011 and trades as “Lidong Foreign Exchange”.
[6] The Department seeks a pecuniary penalty pursuant to s 90 of the Anti- Money Laundering and Countering Financing of Terrorism Act 2009 (Act) in respect of multiple alleged breaches of Part 2 of the Act. The claims are summarised by the Department as follows:
12 In particular, the claims arising in the substantive proceeding are that
QDD committed the following civil liability acts:
(a) failed to establish, maintain and implement an adequate AML/CFT programme, as was required by ss 57 and 59 of the Act.
(b) failed to undertake and keep current an adequate risk assessment, as was required by s 58 of the Act.
(c) failed to conduct enhanced customer due diligence in accordance with ss 23 and 24 of the Act where it was required to by s 22(1)(c) and/or (d) of the Act.
(d) failed to conduct enhanced customer due diligence in respect of wire transfers for which it was the ordering institution (as defined in s 5 of the Act), as was required by ss 27 and 28 of the Act.
(e) failed, in respect of customers with whom it had business relationships (as defined in s 5 of the Act):
(i) to conduct ongoing customer due diligence or undertake account monitoring;
(ii) to regularly review the account activity and transaction behaviour of those customers; and
(iii) to regularly review information obtained about those customers,
as was required by s 31 of the Act.
(f) failed to report suspicious transactions when or in the manner required by ss 40 and 41 of the Act:
(i) QDD filed suspicious transaction reports that failed to meet the requirements of the Act; and
(ii) QDD failed to report suspicious transactions when required to do so.
(g) failed to keep transaction records that were reasonably necessary to enable a transaction to be readily reconstructed at any time, as was required by s 49 of the Act.
(h) failed to keep other records relating to, and obtained during the course of, its business relationships that were reasonably necessary to establish the nature and purpose of, and activities relating to, each business relationship (as was required by s 51(1)(c) of the Act).
[7] Each of the alleged breaches occurred between 9 September 2014 and
12 May 2015. A pecuniary penalty of up to $1 million, and in some instances
$2 million, for each breach, may be ordered under the Act.
[8] The claims arise out of the Department’s investigation into QDD’s compliance with anti-money laundering and counter financing terrorism (AML/CFT) requirements.
[9] A comprehensive affidavit of Mr Robert Milnes filed on behalf of the Department sets out the investigations into QDD and its customers.2 Those investigations commenced in 2014 and have included a number of onsite inspections, inquiries, investigations and bank account and transaction analyses since that time.
[10] A central part of the investigations concerns transactions between QDD and six money remitters. Mr Milnes deposes that his investigations have established that of the 1,327 money remittance transactions reviewed during the review period, 1,277 of them were payments to the six money remitters, or to persons on their behalf. A further 50 payments were received from those six money remitters. The total value of those transactions amount to NZ $136,172,825.78. Of those transactions, at least
796 were $50,000 or over, and accordingly the Department alleges that they should have attracted enhanced customer due diligence as a result. Furthermore, Mr Milnes deposes that in at least 1,171 of the transactions, QDD was the “Ordering Institution”
and was therefore required to comply with the enhanced customer due diligence requirements relating to wire transfers.
[11] On the basis of Mr Milnes’ affidavit I am satisfied that the Department’s allegations are capable of tenable argument, and are supported by sufficient evidence, bearing in mind the early stage at which the application is brought.3
[12] Accordingly, I consider the good arguable case requirement for a freezing order is met.
Assets to which the order can apply
[13] Mr Milnes also deposes to the investigations into QDD’s assets.
[14] On the basis of that evidence, I am satisfied that QDD has assets (or interests in assets) in the jurisdiction comprising:
(a) All funds held in a term deposit bank account held with Heartland Bank (03-1783-0536577-024). As at 4 August 2016, the total funds held in that account were $314,047.43;
(b) A 2014 BMW X1 vehicle, registration QDD888; and
(c) Any and all property in the personalised registration plate “QDD888”.
[15] This requirement is also met.
Risk of dissipation
[16] Rule 32.5(4)(b) provides:
32.5Order against judgment debtor or prospective judgment debtor or third party
…
(4) The court may make a freezing order or an ancillary order or both against a judgment debtor or prospective judgment debtor if the court is satisfied, having regard to all the circumstances, that there is a danger that a judgment or prospective judgment will be wholly or partly unsatisfied because—
…
(b) the assets of the judgment debtor, prospective judgment debtor, or another person might be—
(i) removed from New Zealand or from a place inside or outside New Zealand; or
(ii) disposed of, dealt with, or diminished in value
(whether the assets are in or outside New Zealand).
…
[17] I am satisfied that there is a risk that the assets may be disposed of, dealt with, or diminished in value in this case for the following reasons.
[18] First, Ms Hua is a director of QDD and has been a director since its incorporation in 2011.4 Until recently Ms Hua was the sole shareholder, but is now an 80 per cent shareholder in the company. Ms Hua has been QDD’s compliance officer since June 2013. Mr Milnes deposes to concerns that Ms Hua failed to disclose multiple commercial relationships during an onsite inspection on 27 May
2014. He claims that she has not been open and honest with the Department and in fact has misled it in material respects. I accept the Department’s submission that this conduct raises a concern about disposal of assets to defeat a judgment creditor should the Department be successful in its claim.
[19] Second, the allegations made in the substantive proceeding are serious, and the penalty sought is potentially very significant. The allegations raise underlying concerns about the nature of the transactions undertaken by QDD. A large number of the transactions carried out by QDD were reported as suspicious by other reporting entities (for example retail banks). The Department alleges that aspects of
QDD’s conduct could be the subject of charges in respect of offences committed
4 By memorandum of counsel dated 2 September 2016, counsel for the Department corrected an error in the memorandum of counsel in support of the application for freezing orders which referred to the affidavit of Mr Milnes as establishing that Ms Hua was a dual New Zealand and Chinese citizen. The affidavit did not state that. I did not consider the error was material to my assessment of risk and did not therefore warrant rescinding the orders already made.
under subpart 3 of Part 3 of the Act (for example, a failure to report a suspicious transaction and/or providing false or misleading information). The pecuniary penalties sought by the Department are also significant given the number of breaches alleged and the prescribed maximum penalties to be imposed. The seriousness of the offending, and the substantial penalties sought, elevates the risk of disposal or dissipation in my view.
[20] Third, QDD’s business is well placed to immediately move significant sums of money from its New Zealand bank account to its overseas based accounts or between New Zealand and China. I accept the submission on behalf of the Department that such movements are very difficult to trace and practically impossible to reverse.
[21] Accordingly I find that that the risk of disposal requirement has been met in this case.
Balance of convenience and overall justice
[22] The Department will be prejudiced if it is successful in its claim and is unable to recover any funds to meet the pecuniary penalties imposed.
[23] The prejudice to QDD of making the orders sought is mitigated by a number of factors in this case.
[24] First, the Department does not seek to freeze QDD’s trading account, nor the personal bank accounts belonging to the director of QDD. They remain available to QDD.
[25] Second, r 32.6(3) provides that the freezing order must not prohibit QDD from dealing with the assets covered by the order for the purposes of paying ordinary living expenses, paying legal expenses related to the freezing order, or disposing of assets or making payments in the ordinary course of business, including business expenses incurred in good faith.
[26] Third, as set out below, I intend to limit the duration of the freezing order to
10 working days and direct that QDD may apply to set aside the orders on three working days’ notice. The limited duration of the orders will also mitigate any prejudice to QDD.
[27] The balance of convenience and overall justice of the case support the application for freezing orders in my view.
Undertaking as to damages
[28] The Department seeks dispensation from the requirement in r 32.2(5) to provide an undertaking as to damages.
[29] The Court of Appeal has recognised the court’s ability to dispense with an
undertaking where there are special circumstances.5
[30] I accept the Department’s submission that any undertaking as to damages given by the Department would be given on behalf of the Crown. That is because the Department is a Government department and it brings the proceeding as a functionary of the Crown pursuant to s 2(2) of the Crown Proceedings Act 1950.
[31] The Department is therefore constrained by s 65ZC of the Public Finance Act
1989 which provides that except as expressly authorised by any Act, it is not lawful for any person to give a guarantee or indemnity on behalf of, or in the name of, the Crown.6
[32] The Department referred me to a number of cases where the statutory restrictions on the Crown providing undertakings in support of freezing orders have been recognised, and the requirement dispensed with accordingly. Those cases were considered by Palmer J in Official Assignee v Sharma & Family Trustee Ltd.7
His Honour was satisfied in that case that the constitutional and legal context meant
that the dispensation for the Official Assignee to offer an undertaking could be
5 Auckland Steel Fixers Ltd (In Liq) v Watson [2015] NZCA 274 at [20].
6 The exception set out in s 65ZE Public Finance Act 1989 does not apply in this case.
7 Official Assignee v Sharma & Family Trustee Ltd, above n 1, at [20]–[21].
regarded as a general default presumption, as could the Court’s expectation that the
Crown will meet any order as to damages made by the Court.8
[33] I consider those principles to be equally applicable in this case. In the circumstances I dispense with the requirement for the Department to provide an undertaking as to damages.
Duration
[34] Rule 32.7(1) requires a freezing order made without notice to be limited to a particular date. Rule 32.8 provides that a freezing order must reserve leave to the respondent to apply to the Court to discharge or vary the freezing order on whatever period of notice to the applicant the Court considers just.
[35] The application has been made on a without notice basis and determined as a matter of urgency. It appears that QDD has legal representation and there has been correspondence exchanged between counsel for the parties on these matters. I anticipate that many of the allegations will be contested.
[36] Whilst I am satisfied that the requirements for making a without notice freezing order have been met, it will be for the Department to satisfy the Court that such a freezing order should be continued or renewed when the matter is placed on notice.
[37] Accordingly, the freezing order will be limited to 10 working days from the date of the order and QDD will be able to apply to discharge or vary the order on three working days’ notice to the applicant.
Application for permission to commence originating application
[38] The Department seeks permission to commence the proceeding by way of originating application. The application is made without notice pursuant to r 19.5(2) of the High Court Rules.
[39] There do not appear to be any other cases where proceedings of this sort have been brought by way of originating application.
[40] As noted above, QDD appears to be legally represented and there has already been an exchange of correspondence regarding the allegations between the parties. It seems likely that QDD will contest many of the allegations against it, and the Department accepts that this is the case.
[41] The fact that the proceeding involves contested factual matters does not necessarily mean that the proceeding is ill-suited to the originating procedure. As Venning J noted in McCullagh v Il Villaggio Ltd, the rules authorise the originating application procedure for a number of applications involving live issues and competing parties.9
[42] However, the extent of that contest will be a significant factor in determining the best route to secure the just, speedy and inexpensive determination of the proceeding. I am unable to ascertain the scope and extent of any contest, and factual dispute, at this preliminary stage and without hearing from QDD.
[43] In the circumstances, I consider the preferred course is to direct that the application be served on QDD and listed for mention in the next available duty judge list.
Result
[44] The terms of the freezing orders made were set out in my minute dated
1 September 2016. I reproduce them here for convenience:
[2] The application is granted. I make orders in accordance with the draft form of the order provided subject to the amendments to orders 7 and 8 which shall read as follows:
7.As the freezing order has been made without notice to you, it will have no effect after 10 working days from the date of this order, unless on or before that date it is continued or renewed by the Court. You are entitled to be heard by the
Court on any application for continuation or renewal of this order.
8.You may apply to the Court by interlocutory application to discharge or vary the order. If you apply you must give the applicant notice of not less than three working days.
[3] I also grant a dispensation to the Department of Internal Affairs from the requirement to provide an undertaking as to damages.
[45] The without notice application for permission to commence the proceeding by way of originating application shall be served on QDD, and listed for mention in
the duty judge list commencing at 10.00 am on Thursday, 15 September 2016.
Edwards J
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