Department of Internal Affairs v Qian Duoduo Ltd
[2016] NZHC 2544
•25 October 2016
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
CIV-2016-404-002165 [2016] NZHC 2544
UNDER the Anti-Money Laundering and
Countering Financing of Terrorism Act
2009; Part 19 of the High Court RulesBETWEEN
DEPARTMENT OF INTERNAL AFFAIRS
Applicant
AND
QIAN DUODUO LIMITED Respondent
CIV-2016-404-002166
BETWEEN DEPARTMENT OF INTERNAL AFFAIRS
Applicant
ANDPING AN FINANCE (GROUP) NEW ZEALAND COMPANY LIMITED First Respondent
XIAOLAN XIAO Second Respondent
Hearing: 19 October 2016 Counsel:
M Harborow for Applicant
G Hughes for RespondentJudgment:
25 October 2016
JUDGMENT OF DOWNS J
This judgment was delivered by me on Tuesday, 25 October 2016 at 4 pm pursuant to r 11.5 of the High Court Rules.
Solicitors:
Meredith Connell, Auckland. Forest Harrison, Auckland.
Registrar/Deputy Registrar
DEPARTMENT OF INTERNAL AFFAIRS v QIAN DUODUO LTD [2016] NZHC 2544 [25 October 2016]
The issue
[1] The Anti-Money Laundering and Countering Financing of Terrorism Act
2009 is significant legislation which seeks to deter and detect money laundering and the financing of terrorism; maintain New Zealand’s reputation for probity in relation to its financial system; and enhance public confidence in that area.1 The Act uses a variety of measures to achieve these objectives. And one measure is the use of civil pecuniary penalties.
[2] Section 90 of the Act provides the High Court may order a person to pay a pecuniary penalty to the Crown, or any other person specified by the Court, if satisfied the person has engaged in conduct that constitutes a “civil liability act”. That phrase is exhaustively defined in s 78. It is sufficient for present purposes to observe various failures to comply with the statute’s obligations and other positive acts in contravention of the statute constitute civil liability acts. Some civil liability acts have an evaluative component. For example, a reporting entity which fails to
adequately monitor accounts and transactions commits a civil liability act.2
[3] With deterrence firmly in mind, potential penalties are stiff. Civil liability acts of individuals attract pecuniary penalties of up to $200,000—companies
$2 million.
[4] The Department of Internal Affairs wishes to commence pecuniary penalty proceedings against two unrelated companies, Qian Duoduo Ltd and Ping An Finance (Group) New Zealand Company Ltd, and Mr Xiaolan Xiao, the director of the latter. The proceedings are the first of their kind. And, the Department wishes to commence them by way of originating application pursuant to r 19.5 of the High Court Rules.
[5] Qian Duoduo Ltd, more easily QDD, opposes the application. Ping An Finance (Group) New Zealand Company Ltd, or Ping An for short, does not have counsel. Neither does Mr Xiao. To the extent they have a position on the
application, it appears to be neutral.
1 Anti-Money Laundering and Countering Financing of Terrorism Act 2009, s 3.
2 Section 78(b).
Background
[6] QDD is a registered financial services provider. The company was incorporated in 2011 and trades as Lidong Foreign Exchange. Ping An was a registered financial services provider, but is currently unregistered. The Department of Internal Affairs investigated both companies as part of a wider probe into companies allegedly in breach of the Act.
[7] QDD is alleged to have committed a host of civil liability acts arising from failures to:
(a) Establish “AML/CFT” programmes as required under ss 57 and 59 of the Act. “AML/CFT” is shorthand in the Act for anti-money laundering and countering the financing of terrorism.3
(b) Undertake and maintain adequate risk assessment under s 58 of the
Act.
(c) Conduct enhanced customer due diligence in accordance with ss 23,
24, 27 and 28 of the Act.
(d)Report suspicious transactions in a manner required by ss 40 and 41 of the Act.
(e) Keep records reasonably necessary under s 49 of the Act.
(f) Keep other records relating to and obtained during business relationships necessary to fulfill record-keeping requirements under s 51 of the Act.
[8] A lack of ongoing customer due diligence under s 31 of the Act is also alleged.
3 Section 5.
[9] QDD has filed a brief affidavit through its director, Ms Ye Hua. Ms Hua says she believes QDD has complied with its obligations, including by hiring “expensive” consultants. But she says the Act’s requirements are not without complexity, and there might have been a misunderstanding between the Department of Internal Affairs and QDD about the latter’s obligations under the Act. Ms Hua says she believes her limited English has compounded the problem.
[10] Ping An is alleged to have committed similar, albeit fewer, civil liability acts. Its position in relation to the allegations is unclear: it is without counsel, and its charged director, Mr Xiao, acts for himself.
A brief précis of the respective cases
[11] The Department of Internal Affairs invites attention to the increased use of the originating application procedure, noting its use is more liberal than it once was. It observes a number of contentious proceedings have been brought as originating applications, including interim injunctions under the Fair Trading Act and an application to restore a company to the Companies Register when the company would face significant liability if that occurred.
[12] The Department contends extensive factual dispute is most unlikely. The contest will be whether (likely) acknowledged conduct constitutes civil liability acts as defined in the statute. It notes because the tests are statutory in nature, the originating application procedure is more apt. And any deficiencies in relation to the notices of application can be cured by particulars in the context of the originating application procedure, or more informally through correspondence between the parties.
[13] QDD argues the Department’s application is a “dramatic extension” of the originating application procedure. It notes no other civil pecuniary penalty regime permits originating applications as of right, save for the Criminal Proceeds (Recovery) Act 2009, which is expressly catered for under r 19.2(r) of the High Court Rules.
[14] It contends the streamlined procedure would deprive QDD of the benefits associated with the more conventional route, including a full statement of claim, the provision of particulars and interrogatories. In this respect, QDD expresses particular concern about the notice of application, which it contends leaves QDD in real doubt about what is being alleged.
[15] As to Ping An and Mr Xiao, it is hard to know what their position is. When I asked Mr Xiao at the hearing what he wanted to do, he said he knew “nothing about procedure”. I reminded him of the benefits of legal representation; the possibility he may be eligible for legal aid; the dangers in self-representation, and that he faces the possibility of receiving a very large fine. But as observed earlier, to the extent Ping An and Mr Xiao have a position on the application, it appears to be neutral.
Analysis
[16] First, the rules.
[17] Part 19 of the High Court Rules provides for the originating application procedure. The procedure is simple. No statement of claim is required; the proceeding is commenced when a notice of application is filed. There is no presumption in favour of standard interlocutory pre-trial applications.4
[18] Rule 19.2 provides certain applications must be made by way of originating application. As will be apparent, proceedings under the Act are not listed under r 19.2. However, r 19.5 invests a Court with a broad discretion to allow any proceeding to be commenced by way of originating application in “the interests of justice”.
[19] The applicable principles are well-tilled. The parties agreed the decision of
Asher J in Hong Kong and Shanghai Banking Corporation Ltd v Erceg contains an accurate statement of them.5 There, the Judge observed:6
4 See High Court Rules, rr 19.10 and 19.11.
5 Hong Kong and Shanghai Banking Corporation Ltd v Erceg (2010) 20 PRNZ 652 (HC).
6 At [19]–[26].
(a) The standard procedure includes a range of mechanisms to ensure the parties have a fair hearing, including discovery and interrogatories. Asher J considered the “no ambushes, cards on the table” approach was pre-eminent.
(b)The originating application procedure is short and simple. There is no need for a statement of claim particularising the causes of action, or for statements of defence, replies or counterclaims. A number of the types of claims which can be commenced by way of originating application involve the determination of substantive rights, so that fact alone is not a barrier to use of the procedure.
(c) Leave is often permitted for applications analogous to those permitted by r 19.2, and the applications governed by that rule generally involve the determination of a specific statutory discretion or power, as do most of the cases in which leave has been granted. Cases requiring detailed pleadings or interlocutory orders for their fair resolution are not well suited to the originating application procedure.
(d)So too cases involving the application of common law doctrines, at least insofar as they concern the determination of substantive rights.
(e) While the originating application procedure is not confined to cases in which there is no opposing party, it is exceptional for contested proceedings.
(f) Finally, the originating application procedure should not be treated as a shortcut for urgent cases.
[20] The test, however, is broad and untrammelled. Factors of the type above are helpful indicators but not more.
[21] Now, the statute.
[22] Section 72 of the Act provides:
72 When and how civil penalty proceedings brought
(1) An application for a civil penalty under this Part may be made no later than 6 years after the conduct giving rise to the liability to pay the civil penalty occurred.
(2) In proceedings for a civil penalty under this Part,—
(a) the standard of proof is the standard of proof that applies in civil proceedings; and
(b) the relevant AML/CFT supervisor may, by order of the court, obtain discovery and administer interrogatories.
[23] Section 72(2)(b) suggests Parliament envisaged civil penalty proceedings would be brought, at least typically, through use of the standard civil procedure: discovery and interrogatories do not usually arise in the originating application procedure. Two other factors lend support to this analysis. First, with only one exception, civil penalty proceedings under other enactments are not provided for in
r 19.2. So, they all assume use of the standard procedure.7 Second, the one
exception is the Criminal Proceeds (Recovery) Act 2009. That Act was passed in the same year as this enactment, as was the concurrent modification to include it within the applications mandatorily brought under Part 19. This in turn suggests Parliament made a deliberate choice in relation to the applicable procedural pathway.
[24] Of course, this does not preclude recourse to the originating application procedure in appropriate cases. But it is a strong legislative signal the standard procedural pathway will normally be appropriate. The question then becomes whether the interests of justice support usage of the alternative pathway in one or both of the cases before me. The analysis is best conducted by first considering the factors going each way, and then standing back to make an overall assessment.
Factors in support of the originating application procedure
[25] This case involves the determination of substantive rights, but under statute. A broad analogy can be drawn with cases commenced under the Criminal Proceeds
(Recovery) Act: both enactments are directed at the deterrence of wrongdoing
7 See Law Commission Civil Pecuniary Penalties (IP33, 8 November 2012) at [3.11].
through arguable draconian penalties in the absence of any criminal conviction. And there may be linkage in terms of subject matter, for example, money laundering.
[26] While some factual contest is likely, I agree with the Department’s assessment it should not be extensive. I agree also the likely focus will be whether QDD’s conduct gives rise to one or more civil liability acts. As observed, the tests are statutory, not common law.
[27] There is nothing inherently complex about the case, albeit the evidence is extensive. There are only two parties in relation to the proceedings involving QDD, and three in relation to Ping An and Mr Xiao. But obviously, no difficulties in the nature of set-off or counterclaim arise. So, the proceedings are “clean”.
[28] Language difficulties arguably support a streamlined procedure. Perhaps too does the fact Ping An and Mr Xiao are without representation.
Factors against leave
[29] The subject-matter of the proceedings is novel. There may be much to be gained from the steady and discrete processes associated with the standard procedure. Each issue can be considered as it arises.
[30] The QDD proceeding is contested. Use of the originating application procedure in these circumstances is exceptional.
[31] The two notices of application are brief documents; each extends to only five pages. Doubt attaches to whether either provides a level of detail that would otherwise be expected of a statement of claim.
[32] Some of the alleged civil liability acts have an evaluative component. For example, it is alleged QDD failed to establish, maintain and implement an adequate AML/CFT programme as required by ss 57 and 59 of the Act, and to undertake and keep current an adequate risk assessment as required by s 58 of the Act. The phrase “adequate” appears to presuppose it is not sufficient there be an AML/CFT programme or risk assessment, but rather each must meet some minimum standard.
[33] Here, a particularised statement of claim may well be important in identifying the precise nature of the allegations and hence the issues in the proceeding. Mr Harborow responded with the submission the modest notices of application need to be read in context of the substantial affidavit evidence filed by the Department. Undoubtedly that is correct. It is also correct, as Mr Harborow submitted, the affidavit evidence identifies in greater detail the nature of the allegations contained in the notice, and there are only so many ways to plead an omission. However, the pleadings in a civil case define and delimit the issues. The requirement to obtain
leave in certain circumstances of amendment serves to illustrate their importance.8
Given the nature of potential penalties under the Act, defendants should not be in any doubt about what is alleged. In this respect, the statement of claim and related particularisation are important safeguards.9 Novelty of subject-matter adds to my concern here.
[34] While it is true interlocutory applications can be accommodated within the originating application procedure, there are dangers in distorting the careful procedural fabric created by the High Court Rules.10
[35] For completeness, two other matters raised by Mr Hughes struck me as make- weights. First, Mr Hughes contended the case may well need discovery and interrogatories. But the Department has already provided, more or less, its entire case under oath. And in any event, it is generally quicker and cheaper to write to the Crown when one is in doubt about an aspect of its case or evidence. The Crown is expected to respond, unless of course the correspondence is frivolous, vexatious or
otherwise unreasonable.11 Second, Mr Hughes submitted because facts may be in
dispute, that favoured conventional briefs of evidence over affidavit evidence, and hence the standard procedure over the originating application procedure. In this
context, any distinction between a brief of evidence and an affidavit is elusive.
8 High Court Rules, r 7.7
9 Law Commission Pecuniary Penalties: Guidance for Legislative Design (R133, 28 October
2014) at [1.17], and chapters 6 onwards of that report.
10 Hong Kong and Shanghai Banking Corporation Ltd v Erceg, above n 5, at [20].
11 Crown Law “Attorney-General’s Values for Crown Civil Litigation” (30 August 2013)
< at 5.2 and
5.3.
Standing back
[36] While there are factors in support of the Department’s applications for leave to use the originating application procedure, I do not consider these are sufficient to outweigh the clear legislative preference for the usual procedure in relation to the circumstances of either case. Novelty of subject matter looms large, as does the need for careful pleading of the Department’s case. Again, doubt attaches to whether the two notices of application contain the level of detail commensurate with a carefully framed statement of claim. And as observed, the potential penalties are large. Due process in these cases is more consistent with the application of standard procedure. Or in terms of the test in r 19.5, the interests of justice tell against leave.
[37] Both applications are dismissed.
Addendum
[38] To avoid doubt, this judgment does not exclude the possibility of subsequent originating applications in this area, perhaps when the applicable law is better shaped. Neither does it exclude the possibility of the originating application procedure to other cases under the Act, say, apparently straight-forward instances of omissions giving rise to civil liability acts. That will be for other Judges to decide on other occasions—as those circumstances arise.
……………………………..
Downs J
4
0
1