R v Harris
[2023] NZHC 2635
•21 September 2023
IN THE HIGH COURT OF NEW ZEALAND AUCKLAND REGISTRY
I TE KŌTI MATUA O AOTEAROA TĀMAKI MAKAURAU ROHE
CRI-2019-004-11829
[2023] NZHC 2635
THE KING v
PETER ALAN HARRIS CARDEN JAMES MULHOLLAND
Hearing: 17-18 April; 20-21 April; 24 April; 26-28 April; 1-2 May; 4-5
May; 8-9 May; 12 May; 15-17 May; 22 May; 24-26 May; 29-30
May; 2 June; 6 June 2023Appearances:
B Dickey, D Luo and K Parkash for the Crown
R Reed KC, D Salmon KC, J Cundy and T Hu for Mr Harris
D Jones KC, C Morris, S Cameron and B Shen for Mr MulhollandJudgment:
21 September 2023
Verdicts:
21 September 2023
JUDGMENT OF ROBINSON J
[Reasons for Verdicts]
Solicitors: MC, Auckland; LeeSalmonLong, Auckland; Cook Morris Quinn, Auckland
Counsel:R Reed KC, Auckland; D Salmon KC, Auckland; D Jones KC, Auckland; B Dickey, Auckland; T Hu, Auckland; J Cundy, Auckland
R v HARRIS [2023] NZHC 2635 [21 September 2023]
BACKGROUND AND INTRODUCTORY MATTERS [1]
Introduction [1]
Background [1]
The charges [5]
The Samoa Transactions charges (charges 6-8) [7]
The RBNZ Directions charges (charges 1 – 5) [8]
Verdicts [9]
Relevant rules of law and practice [11]
Judge alone trial [11]
Presumption of innocence, burden and standard of proof [20]
Separate trials [23]
Prejudice and sympathy [24]
Circumstantial evidence and inferences [25]
Question Trail [26]
Regulatory framework [27]
Insurance (Prudential Supervision) Act 2010 [29]
Purposes and principles of IPSA [33]
Licensing [36]
Investigation [39]
Recovery plan [42]
Directions [43]
Appointed Actuary [47]
Solvency Standards [49]
Insurance solvency [51]
CBLI’s business (from Robert Cole’s Formal Witness Statement) [59]
THE SAMOA TRANSACTION | CHARGES 6 - 8 [63]
Introduction [63]
Summary of charges [66]
Relevant chronology [71]
Negotiations with Alpha [71]
The transaction [98]
Documentation [98]
The payments [105]
(Alleged) concealment [110]
Events post liquidation [145]
CHARGE 6 | OBTAINING BENEFIT BY DECEPTION (FRAUDULENT STRATAGEM) [152]
The charge [152]
Legal principles [155]
Question 1: Am I sure that between 9 May 2014 and 22 October 2014 Mr Harris, directly or indirectly, obtained a pecuniary advantage, benefit, or valuable consideration (benefit); namely the €12.5m paid to and for the benefit of Alpha Insurance A/S (Alpha) on or about 15 October 2014 from or through the National Bank of Samoa (NBoS)? [160] Question 2: Am I sure that Mr Harris engaged in a fraudulent stratagem as described and particularised in charge 6 of the Crown Charge Notice and set out above (stratagem)? [161]
The documents [166]
Discussion [169]
Question 3: Am I sure that Mr Harris used the stratagem with intent to deceive the RBNZ or the FMA? [178]
Question 4: Am I sure that the stratagem was a material cause of the defendant obtaining the benefit? [180]
Question 5: Am I sure that when Mr Harris engaged in the stratagem, he did not believe that it was lawful to do so? [181] CHARGE 7: OBTAINING BENEFIT BY DECEPTION (OMISSION OF MATERIAL PARTICULAR) [183]Introduction [183]
Elements of the charge [185]
Question 1: Was the deposit of €12.5m at NBoS together with the Surety Bond issued by CBLI in favour of NBoS collateral for the €12.5m lent by NBoS to FPGS? [187]
The background [191]
The documents [193]
Samoa Law [194]
The Form of Undertaking/Surety Bond [198]
The Instrument to Receive [199]
Analysis [200]
What did the witnesses say? [206]
Why did NBoS not return the €12.5m deposit to CBLI’s interim liquidators?
[210]
Summary [215]
Did Messrs Harris and Mulholland omit to disclose the alleged particular with the intent to deceive CBLI’s auditor, actuary and the RBNZ? [220]
3 March 2015 letter [222]
17 August 2015 letter [223]
Discussion [226]
Did the defendant directly or indirectly obtain a benefit as a result of the deception? [234]
CHARGE 8: FALSE ACCOUNTING [243]
RBNZ DIRECTIONS | CHARGES 1 - 5 [248]
Introduction [248]
Background [248]
The offence [250]
Summary – the directions and the charges [253]
First direction – charges 4 and 5 [254]
First direction [254]
Charge 5 [257]
Charge 4 [260]
Second (and third) direction – charges 2 and 3 [262]
Second direction [262]
Charge 3 [268]
Third direction [270]
Charge 2 [272]
Fourth direction – charge 1 [279]
Background to the fourth direction [279]
Fourth direction [283]
Charge 1 [286]
Do directions under s 143 of IPSA qualify as “requirements” under s 220 of the Crimes Act 1961? [291]
The RBNZ’s role as regulator [293]
Supervision [297]
Legislative history [304]
Section 220 – Interpretation [315]Case law [322]
Discussion [330]
CHARGE 5: 70.54 PER CENT AGREEMENT WITH TEXCAZ [339]
Introduction [339]
Question 1: Did Mr Harris have control over property, namely the assets and/or interests of CBLI (property)? [342] Question 2: Did Mr Harris have control over CBLI’s property in circumstances that required him to deal with it in accordance with the requirements of the RBNZ as set out in paragraph 1(b) of the RBNZ’s direction dated 25 July 2017? [346]
Stated grounds for first direction [350]
Evidence [353]
Section 121 notice – 14 June 2017 [360]
CBLI’s proposed acquisition of Elite’s 20 per cent [361
Drafting the first direction [371]
Appointment of independent investigators [376] Was the first direction validly issued? [379] The “holding pattern” [381]
Mr Spencer’s state of mind [386]
Discussion [393]
CBLI – Elite [401]
Question 3: Did Mr Harris know of the requirement to deal with property in accordance with the requirements of paragraph 1(b) of the First RBNZ direction? [409]
Question 4: Did Mr Harris deal with CBLI’s property by entering into the
70.54 per cent TexCaz Agreement on or about 13 October 2017? [411] Question 5: Did Mr Harris intentionally enter the 70.54 per cent TexCaz Agreement? [413]
Question 6: By entering into the 70.54 per cent TexCaz Agreement did Mr Harris deal with the property otherwise than in accordance with paragraph 1(b) of the RBNZ’s first direction? [414]
First direction not issued under s 144(1)(b) [418] Entering the 70.54 per cent and 100 per cent TexCaz Agreements did not amount to “providing…financial support” [420] The 70.54 per cent and the 100 per cent TexCaz Agreements were renewals which an RBNZ direction could not lawfully prohibit [424]
Capacity/cover [429]
Ordinary course of business [432]
Mr Harris’ inquiries of Mr Barber [435]
Discussion [444]
Question 7: When Mr Harris entered into the 70.54 TexCaz Agreement did he intend to breach the requirements of the first direction? [448] CHARGE 4 | THE 100 PER CENT TEXCAZ AGREEMENT [451]
CHARGE 3 | COLLATERAL PROVIDED TO UNITED SPECIALTY ON 18 JANUARY 2018 [452]
Introduction [452]
The second and third directions [453]
The charge [457]
Mr Harris’ defence [458]
Question 2: Was Mr Harris “required” to deal with CBLI’s property in accordance with the second/third directions? [459]
Is an obligation to consult a “requirement” [459]
Was the second direction validly issued? [470]
Castlerock transaction [481]
CBLI’s s 24 Notice [486]
Question 3: Did Mr Harris know of the requirements of the second direction? [489]
Question 4: Did Mr Harris deal with CBLI’s property by authorising the payment of USD 4,824,798? [491]
Question 5: Did Mr Harris intentionally authorise the payment? [492] Question 6: When Mr Harris authorised the payment did he deal with the property otherwise than in accordance with the requirements of the second direction? [493]
Was the Provision of collateral a payment or transfer of funds? [510]
Provision of collateral to United Speciality [512] Question 7: When Mr Harris authorised the payment, did he intend to breach the second direction? [526]
CHARGE 2 | PROVISION OF COLLATERAL ON 14 AND 15 FEBRUARY 2018 [540]
Relevant factual background [545]
Question 1 – Question 6 (inclusive) of the agreed Question Trail [561] Question 7: Am I sure that when Mr Harris authorised the payment did he intend to breach the requirements in the second direction? [563]
Discussion – Mr Harris [566]
Discussion - Mr Mulholland [571]
CHARGE 1 | €25M PAYMENT TO ALPHA [576]
Introduction [576]
Question 2: Was Mr Harris “required” to deal with CBLI’s property in accordance with the RBNZ’s requirements set out in the fourth direction?
[584]
Relevant factual background [585]
CBLIE [589]
Alpha [591]
Discussion [603]
Did the fourth direction state the ground upon which it was given? [606] Questions 3 to 6 (inclusive) of the agreed Question Trail [617] Subsequent events [624]
Analysis [631]
ANNEX 1: ACRONYMS AND ABBREVIATIONS USED IN JUDGMENT [632]
BACKGROUND AND INTRODUCTORY MATTERS
Introduction
Background
[1] Messrs Harris and Mulholland are charged under the Crimes Act 1961.1 The charges arise out of aspects of their involvement in the affairs of CBL Insurance Limited (CBLI) and other companies in the CBL Group, including the ultimate parent company CBL Corporation Limited (CBLC). Mr Harris was the CEO and a director of CBLI. He was also a director of CBLC and other companies in the CBL Group. Mr Mulholland was the CFO of CBLI.
[2] Mr Harris faces eight charges - charges 1 to 8. Mr Mulholland faces three charges – charges 2, 7 and 8. In charge 2, Mr Mulholland is charged as a party to Mr Harris’ principal offending. In charges 7 and 8, Mr Mulholland is charged as Mr Harris’ co-defendant.
[3] The eight charges can be spilt into two groups. Charges 1 – 5 relate to statutory directions that the Reserve Bank of New Zealand (RBNZ) issued to CBLI and CBLC between 25 July 2017 and 21 February 2018 (the RBNZ Directions).
[4] Charges 6 – 8 relate to a deposit of €12,500,000 (€12.5m) that CBLI placed with the National Bank of Samoa (NBoS) on 15 October 2014.2
The charges
[5] Mr Harris faces all five RBNZ Directions charges. Mr Mulholland faces charge 2 as a party to Mr Harris’ principal offending. Each charge alleges that Mr Harris was in control of CBLI’s assets in circumstances which he knew required him to deal with those assets in accordance with the requirements of the RBNZ, as set out in the relevant RBNZ direction; and that Mr Harris intentionally dealt with CBLI’s assets otherwise than in accordance with those requirements.
1 A list of the defined terms and acronyms used in this judgment is set out in Annex 1 at the end of this judgment.
2 The Samoa transactions offences are set out more fully below.
[6] The charges in numerical order deal with events in reverse chronological order. I understood Mr Dickey for the Crown to explain that this reflects the way in which matters came to light during the investigations that followed the appointment of interim liquidators to CBLI and CBLC on 23 February 2018 and CBLI’s subsequent liquidation on 12 November 2018. In any event it is convenient in these reasons to deal with each of the RBNZ Directions charges in chronological order; and so in reverse numerical order.
The Samoa Transactions charges (charges 6-8)
[7] The Samoa Transactions relate to charges of obtaining by deception and false accounting. In broad terms, they are as follows:
(a)Charge 6: The Crown allege that Mr Harris was part of the inception, preparation and execution of a fraudulent stratagem, comprising a series of transactions which, when executed, created the appearance of an unencumbered term deposit in the sum of €12.5 million by CBLI with NBoS, when in fact the deposit, along with a surety bond, was used as collateral to secure a €12.5 million loan from NBoS to Federal Pacific Group (Singapore) Pte Limited (FPGS), which FPGS then lent to Alpha Insurance A/S (Alpha). The Crown allege that in this way, Mr Harris facilitated and instigated what was in substance a loan of €12.5 million from CBLI to Alpha, but which was obscured to make it appear that the lender was FPGS. The Crown say this was carried out in order to avoid the scrutiny of the RBNZ and, collaterally, the Financial Markets Authority (FMA); and to avoid the risk that RBNZ would stymie the transaction in exercise of its powers under s 30 of the Insurance (Prudential) Supervision Act 2010 (IPSA). In this way the Crown allege that Mr Harris, by deceptive fraudulent stratagem with intent to deceive, obtained a benefit for Alpha.
(b)Charge 7: The Crown allege that Messrs Harris and Mulholland, by deception, obtained a benefit for CBLI by omitting to inform the RBNZ the NBoS deposit was encumbered, and thereby claiming a lower risk
charge for the €12.5 million term deposit held with NBoS. The Crown allege that Messrs Harris and Mulholland obtained this benefit for CBLI by omitting to disclose a material particular with intent to deceive. The Crown allege that by inaccurately presenting the deposit in CBLI’s financial statements as an unencumbered term deposit it led CBLI’s auditors and actuaries to calculate the NBoS deposit as having a lower risk charge then it should have had. The Crown says this resulted in the deposit being treated more favourably when calculating CBLI’s solvency return for the year ended 31 December 2014, and the RBNZ applying a lower risk charge to the deposit for the period from June 2015 to 21 March 2018.
(c)Charge 8 - False accounting – s 260(b) of the Crimes Act 1961: The Crown allege that Messrs Harris and Mulholland, by deception, attempted to conceal the true nature of the NBoS deposit by disguising it as an unencumbered deposit in CBLI’s financial statements as at 31 December 2014 when the true position was that the €12.5 million term deposit, together with a surety bond issued by CBLI in favour of NBoS, was collateral for the €12.5 million lent by NBoS to FPGS.
The RBNZ Directions charges (charges 1 – 5)
[8] Each RBNZ Directions charge is laid pursuant to s 220 of the Crimes Act and alleges theft in a special relationship. The Crown gave particulars of each charge which I set out more fully below when dealing with each charge. In broad terms:
(a)Charge 5: On 13 October 2017, Mr Harris, on behalf of CBLI, executed an agreement with TexCaz Transborder Insurance Intermediaries (TexCaz) and United Specialty Insurance Company (United Speciality). The Crown allege that in doing so Mr Harris breached paragraph 1(b) of a RBNZ direction issued to CBLI and CBLC on 25 July 2017 (first direction). The agreement took effect as an addendum to an earlier agreement between CBLI and TexCaz, entered into on 30 January 2017 to allow CBLI to reinsure 30 per cent
of TexCaz’s insurance business, in exchange for which it would receive a share of TexCaz’s earned premiums. The Crown allege that the 13 October 2017 agreement increased CBLI’s share to 70.54 per cent, which allowed TexCaz to increase its premium revenue and increased CBLI’s share of that revenue. The Crown say the agreement also increased CBLI’s exposure to TexCaz’s insurance risk. The Crown alleges that by executing this agreement Mr Harris intentionally dealt with CBLI’s property other than in accordance with the RBNZ’s requirements under the first direction, thereby committing theft.
(b)Charge 4: On 8 December 2017, Mr Harris, on behalf of CBLI, executed a third agreement with TexCaz and United Specialty. This also allowed TexCaz to increase the premiums it could write and increased CBLI’s share of those premiums and exposure to TexCaz’s risk. The Crown allege that this was also contrary to the RBNZ’s first direction and that Mr Harris executed the 8 December 2017 agreement knowing the coverage, exposure to risk, and the solvency impacts that it would have on CBLI, and that he deliberately failed to disclose the agreement to the RBNZ despite being aware of the first direction.
(c)Charge 3: On 18 January 2018, Mr Harris authorised a collateral payment of USD 4,824,798 to United Speciality. CBLI made that payment in accordance with its contractual obligations to United Speciality. The Crown allege that by authorising this payment Mr Harris intentionally dealt with CBLI’s property other than in accordance with the requirements of the RBNZ’s direction to CBLI dated 22 November 2017 (second direction) requiring CBLI to consult the RBNZ before entering into transactions over NZD 5,000,000. The Crown allege that by authorising this payment Mr Harris dealt with CBLI’s property other than in accordance with the RBNZ’s requirements set out in the second direction, thereby committing theft.
(d)Charge 2: The Crown allege that on 14 and 15 February 2018, Mr Harris authorised payments of collateral to United Specialty of USD
3,099,999 (NZD 4,208,684), USD 3,330,027 (NZD 4,520,978) and
USD 3,330,027 (NZD 4,520,978), totalling USD 9,760,053 (NZD
13,250,640), to United Specialty in breach of the RBNZ’s requirements set out in the second direction (as clarified by the third RBNZ direction dated 29 January 2017). The Crown allege that Mr Mulholland intentionally assisted Mr Harris in making these payments knowing that they were contrary to the requirements of the RBNZ as set out in the second and third RBNZ directions.
(e)Charge 1: The Crown allege that on 16 February 2018, Mr Harris authorised the payment of €12.5m from CBLI to Alpha, thereby intentionally dealing with CBLI’s property otherwise than in accordance with the requirements of the RBNZ as set out in its direction dated 12 February 2018 (fourth direction).
Verdicts
[9]I have reached the following verdicts:
(a)Mr Harris is not guilty as charged in charge one.
(b)Mr Harris is not guilty as charged in charge two. Mr Mulholland is not guilty as charged in charge two.
(c)Mr Harris is not guilty as charged in charge three.
(d)Mr Harris is not guilty as charged in charge four.
(e)Mr Harris is not guilty as charged in charge five.
(f)Mr Harris is not guilty as charged in charge six.
(g)Mr Harris is not guilty as charged in charge seven. Mr Mulholland is not guilty as charged in charge seven.
(h)Mr Harris is not guilty as charged in charge eight. Mr Mulholland is not guilty as charged in charge eight.
[10]These are my reasons for returning those verdicts.
Relevant rules of law and practice
Judge alone trial
[11] In R v Connell the Court of Appeal stated what reasons a judge hearing a criminal trial without a jury is required to deliver:3
… in general no more can be required than a statement of the ingredients of each charge and any other particularly relevant rules of law or practice; a concise account of the facts; and a plain statement of the Judge’s essential reasons for finding as he [sic] does. There should be enough to show that he has considered the main issues raised at the trial and to make clear in simple terms why he finds that the prosecution has proved or failed to prove the necessary ingredients beyond reasonable doubt. When the credibility of witnesses is involved and key evidence is definitely accepted or definitely rejected, it will almost always be advisable to say so explicitly.
[12] In the context of fraud prosecution trials, the Court of Appeal in R v Eide confirmed the requirements described in Connell, but made the following additional observations:4
The problems with short-form judgments are particularly acute in fraud prosecutions. The parties (ie, the prosecutor and accused) are obviously entitled to know the key elements of the Judge’s reasoning. In a case of any complexity, this will not be possible unless the Judge provides an adequate survey of the facts… If the verdict is guilty, the Judge should explain clearly the features of the particular scheme which he or she finds to be dishonest. There is a legitimate public interest in having the details of such a scheme laid out in comprehensible form. Similar considerations apply if the verdict is not guilty. Further, some regard should be had to how the case will be addressed on appeal. A judgment which is so concise that some of the key facts in the case are required to be reconstructed by this Court on appeal is too concise.
[13] More recently, the Supreme Court in Sena v Police confirmed the kind of reasons judges in judge-alone trials should provide:5
3 R v Connell [1985] 2 NZLR 233 (CA) at 237–238.
4 R v Eide (Note) [2005] 2 NZLR 504 (CA) at [21].
5 Sena v Police [2019] NZSC 55, [2019] 1 NZLR 575 at [36].
They should show an engagement with the case, identify the critical issues… explain how and why those issues are resolved, and generally provide a rational and considered basis for the conclusion reached. Reasoning which consists of a conclusory credibility preference is unlikely to suffice.
[14] For the following additional reasons I consider it is appropriate in all the circumstances to give full reasons explaining my verdicts.
[15] The verdicts and reasons will be significant to New Zealand’s broader commercial sector, and especially so for its insurance industry. CBLI was a publicly listed insurance company. The charges follow investigations carried out by its liquidators and others. The RBNZ charges arise out of alleged breaches by CBLI of directions issued by the RBNZ using its statutory powers as regulatory supervisor of the New Zealand insurance industry.
[16] As will be seen, Messrs Harris and Mulholland’s defence to the RBNZ charges included an argument that, as a matter of law, directions issued by the RBNZ pursuant to s 143 of IPSA cannot constitute “requirements” giving rise to criminal liability for theft as a person in a special relationship under s 220 of the Crimes Act 1961.6 Alternatively, counsel for Mr Harris argued that none of the first four directions had been issued validly by the RBNZ.
[17] The Samoa Transactions charges relate to events taking place prior to CBLI’s listing on the New Zealand Stock Exchange (NZX) and concern arrangements CBLI had with banks and insurers in other jurisdictions. As will be seen, counsel for Messrs Harris and Mulholland submit (amongst other things) that the Crown has failed to prove a key element of those charges because it did not produce expert evidence on the law of Samoa.7
[18] For these reasons there is, in my view, a strong public interest in setting out my reasons relatively comprehensively. Having said that, this was a complicated trial with significant oral and documentary evidence and a large number of competing
6 Although neither defendant formally applied to have the charges dismissed after the Crown closed its case, counsel for Mr Harris submitted strongly during closing submissions that the RBNZ Directions charges could and should be dismissed on this basis.
7 Namely, whether the €12.5m deposit CBLI placed with NBoS is collateral for NBoS’s loan to FPGS, as the Crown alleges in each of the Samoa Transactions charges.
arguments. I do not consider it is necessary (nor is it feasible) to set out all the evidence or the lengthy submissions in full. I will deal with each of the legal arguments which counsel for the defendants submit would justify charges being dismissed under s 147 (although an application was not separately made). In relation to each of the RBNZ charges and the Samoa Transactions charges I will set out the overall factual background and then consider each charge separately, with reference to the evidence and submissions relevant to each element of the charge. In doing so I will answer questions contained in a Question Trail agreed with counsel before the Crown closed its case. Because the allegations and evidence overlap there is necessarily some repetition.
[19] As the finder of fact in this criminal trial I remind myself of a number of fundamental matters on which I would have otherwise directed any jury.
Presumption of innocence, burden and standard of proof
[20] My starting point is to presume that Messrs Harris and Mulholland are innocent. The Crown has the onus of proving their guilt. The Crown must prove that each defendant is guilty beyond reasonable doubt. In order to do so, the Crown must prove every essential element of a particular charge against a defendant beyond reasonable doubt before I can reach a verdict of guilty on that charge against that defendant.8
[21] Proof beyond reasonable doubt is a very high standard of proof. The Crown will only have met that standard if I am sure that the defendants are guilty. It is not enough for the Crown to persuade me that the defendants are probably guilty, or even that it is very likely they are guilty. A reasonable doubt is an honest and reasonable uncertainty left in my mind about the guilt of the defendant after I have given careful and impartial consideration to all of the evidence.9
8 The Crown is not required to prove beyond reasonable doubt every fact which may be relevant to proof of each essential element: see Thomas v R [1972] NZLR 34 (CA) at 38; R v Puttick (1985) 1 CRNZ 644 (CA) at 647; and Milner v R [2014] NZCA 366 at [15].
9 R v Wanhalla [2007] 2 NZLR 573 (CA) at [49]; and Hansen v R [2007] NZSC 7, [2007] 3 NZLR 1 at [30].
[22] Messrs Harris and Mulholland are each presumed to be innocent. I remind myself that they do not have to establish their innocence, and they are not required to give evidence or call evidence. It is for the Crown to prove their guilt to the requisite standard. Neither Mr Harris nor Mr Mulholland elected to give or call evidence. That in no way alters the onus of proof that rests on the Crown.
Separate trials
[23] I remind myself that these are separate trials that are being held together for convenience. The case against each of Mr Harris and Mr Mulholland is limited to the evidence admissible against them, not the totality of the evidence.10 The weight to be given to the evidence admissible against each of them is also to be considered separately.
Prejudice and sympathy
[24] I must reach my decisions based only on the evidence. I remind myself to put to one side all feelings of sympathy for or prejudice against any party associated with this case or potentially affected by it. I am aware that this case has attracted some media interest, and that there are others who will be interested in the outcome. Again, I put all of that to one side.
Circumstantial evidence and inferences
[25] In relation to circumstantial evidence and inferences, I remind myself that I need to identify the factual evidence I think is reliable, before I can determine what conclusions might follow from the facts that have been proven by that evidence. I also bear in mind that any conclusion I reach based on that evidence must be a safe, logical and rational conclusion, not one fixed on speculation or guess work. It is also important that I am satisfied beyond reasonable doubt before drawing an inference that the Crown asks me to draw about any essential element of any charge. If there is a reasonable doubt it must benefit Mr Harris and/or Mr Mulholland (as the case may be).
10 See for example: Ruling No 3 of Robinson J dated 30 May 2023.
Question Trail
[26] As noted above, prior to closing addresses I provided a draft Question Trail to counsel identifying what I considered to be the elements of each charge that the Crown had to prove in this case. Counsel had input into the Question Trail, and I have proceeded accordingly except where I have expressly indicated otherwise.
Regulatory framework
[27] I set out the relevant aspects of the regulatory regime arising out of IPSA below. This framework creates and regulates the relationship between RBNZ as regulator and CBLI as a regulated entity. The regulatory framework IPSA imposes is obviously relevant to the RBNZ directions charges, in each of which the Crown alleges (amongst other things) that Mr Harris (and, where relevant, Mr Mulholland) acted in breach of directions the RBNZ issued pursuant to s 143 of IPSA.
[28] The regulatory framework is also relevant more broadly to the Samoa Transactions charges.
Insurance (Prudential Supervision) Act 2010
[29] IPSA was enacted in 2010. It provided the first comprehensive framework for the prudential regulation and supervision of insurers carrying on business in New Zealand.
[30] IPSA requires insurers to be licensed. The RBNZ introduced the licensing process in 2013. Licensed insurers must comply with IPSA, the terms of their license, and other secondary regulatory instruments administered by the RBNZ including solvency standards issued under s 55.
[31] The RBNZ is required to undertake prudential supervision of licensed insurers in accordance with pt 3 of IPSA.11 For that purpose, the RBNZ may require any licensed insurer to supply information about any matters relating to its business,
11 Insurance (Prudential Supervision) Act 2010, s 120.
operation, or management.12 Part 4 of IPSA concerns distress management. Under subpart 1, the RBNZ may appoint an investigator to carry out an investigation of the licensed insurer’s affairs.13 Under subpart 2, the RBNZ may direct a licensed insurer to prepare a recovery plan.14 In certain circumstances, the RBNZ may issue a licensed insurer with written directions.15 However, before issuing a direction the RBNZ must consider whether, in the circumstances, it would be more appropriate to direct the insurer to prepare a recovery plan under subpart 1.16 Section 144 sets out the scope of what directions RBNZ may require a licensed insurer to do.17 However, the RBNZ may not direct a licensed insurer to cease to enter into contracts of insurance by way of renewal of contracts of insurance that were originally entered into before the direction was given.18
[32] A direction must state the grounds on which it is given.19 A licensed insurer commits an offence if it fails to comply with a direction.20 An officer or employee of a licensed insurer commits an offence if he or she obstructs, hinders or prevents the insurer from giving effect to a direction.21 An individual who commits an offence is liable to imprisonment for a term not exceeding three months or a fine not exceeding
$200,000 (or both).22 In charges 1-5 the Crown allege that Mr Harris acted contrary to the requirements of the RBNZ directions, but he has not been charged under s 148 of IPSA.
Purposes and principles of IPSA
[33] In her opening statement on behalf of Mr Harris, Ms Reed KC emphasised that the regulatory regime established by IPSA is intended to be a “light-handed” one. By way of example:23
12 Insurance (Prudential Supervision) Act, s 121(1).
13 Insurance (Prudential Supervision) Act, s 130(2)(b).
14 Insurance (Prudential Supervision) Act, s 138.
15 Insurance (Prudential Supervision) Act, s 143(1).
16 Insurance (Prudential Supervision) Act, s 143(2)
17 Insurance (Prudential Supervision) Act, s 144(1).
18 Insurance (Prudential Supervision) Act, s 144(2).
19 Insurance (Prudential Supervision) Act, s 147(1).
20 Insurance (Prudential Supervision) Act, s 148(1).
21 Insurance (Prudential Supervision) Act, s 148(2).
22 Insurance (Prudential Supervision) Act, s 148(3)(a).
23 (29 July 2010) 665 NZPD (Insurance (Prudential Supervision) Bill – Second Reading, Peseta Sam Lotu-Iiga).
This bill replaces outdated and disjointed legislation. It fills some of the gaps that currently exist in the prudential regulation of this industry, and it removes some of the inconsistencies in the legislation for the insurance sector. In a light-handed way it provides for the delivery of regulation so that we do not mire the industry in a compliance mentality. The bill focuses on licensing and prudential regulation, as many speakers have already alluded to. It provides for all insurers to be licensed and supervised by the Reserve Bank and to comply with its prudential regulations. The Reserve Bank will act as both the regulator and the supervisor.
[34] The express purposes of IPSA are to promote the maintenance of a sound and efficient insurance sector; and promote public confidence in the insurance sector.24 These purposes are to be achieved by:25
(a)establishing a system for licensing insurers;
(b)imposing prudential requirements on insurers;
(c)providing for the supervision by the RBNZ of compliance with those requirements; and
(d)conferring certain powers on the RBNZ to act in respect of insurers in financial distress or other difficulties.
[35] Section 4 sets out 10 principles that the RBNZ must take into account in the performance of its functions or duties imposed by IPSA, or in the exercise of the powers it confers.26 These principles include:
…
(c)the importance of dealing with an insurer in financial distress or other difficulties in a manner that aims to –
(i)adequately protect the interests of its policyholders and the public interest; and
(ii)ensure that any failure, or possible failure, of the insurer does not have the potential to significantly damage the financial system or the economy of New Zealand:
(d)the importance of recognising –
24 Insurance (Prudential Supervision) Act, s 3(1).
25 Insurance (Prudential Supervision) Act, s 3(2).
26 Insurance (Prudential Supervision) Act, s 4.
(i)that it is not a purpose of this Act to eliminate all risk of insurer failure; and
(ii)that members of the pubic are responsible for their own decisions relating to insurance:
(e)the desirability of providing to the public adequate information to enable members of the public to make those decisions:
…
Licensing
[36] Part 2 of IPSA provides for the licensing and prudential regulation of insurers. Every person carrying on insurance business in New Zealand must be licensed.27 It is an offence for an unlicensed person to carry on insurance business in New Zealand,28 or to hold itself out to be a licensed insurer.29
[37] An insurer is entitled to receive a license if the RBNZ is satisfied of various matters set out at s 19(1)(a)–(m) of IPSA. Amongst other things, the RBNZ needs to be satisfied that the applicant has the ability to carry on its business in a prudent manner.30 When the RBNZ is considering this, the RBNZ must confine its consideration to the following matters:31
(a)financial and human resources in relation to the size and nature of the business or proposed business:
(b)internal controls or proposed internal controls:
(c)the size and type of insurance risk that is, or are proposed to be, entered into:
(d)reinsurance arrangements that have been, or are proposed to be, entered into:
(e)the extent to which the business or proposed business involves activities that are not insurance business and the nature of those activities (and, in particular, whether those activities may be prejudicial to the solvency of the applicant or insurer or its ability to comply with this Act or the regulations):
27 Insurance (Prudential Supervision) Act, s 15(1).
28 Insurance (Prudential Supervision) Act, s 15(2).
29 Insurance (Prudential Supervision) Act, s 16.
30 Insurance (Prudential Supervision) Act, s 19(1)(b).
31 Insurance (Prudential Supervision) Act, s 20(2)(a)-(g).
(f)the nature and extent of transactions that the applicant or insurer has with, or in respect of, related parties (for example, loans to, or from, a related party or guarantees in respect of a related party’s debts):
(g)any other prescribed matters.
[38] Whenever the RBNZ is considering whether a licensed insurer is carrying on its business in a prudent manner its consideration is similarly confined to those matters.32
Investigation
[39] As set out more fully below, issues arise in this case as to whether the RBNZ validly issued the directions that the Crown allege Mr Harris breached in circumstances which constitute an offence under s 220 of the Crimes Act 1961. Amongst other things, Ms Reed submits the RBNZ did not have sufficient grounds to issue the relevant directions under s 143 of IPSA, particularly in circumstances where it had appointed an investigator under s 130(2)(b) of IPSA and was awaiting the outcome of the investigation.
[40] Section 130(2)(b) of IPSA provides that the RBNZ may appoint in writing any suitably qualified person to carry out an investigation of the affairs of a licensed insurer if the RBNZ considers that is reasonably necessary for the purposes of carrying out its functions and exercising its powers under IPSA. However, s 130(2) applies if the RBNZ has reasonable cause to suspect that one or more of the following applies:33
(a)a licensed insurer has failed, is failing, or is likely to fail to maintain a solvency margin:
(b)the business of a licensed insurer has not been, or is not being, conducted in a prudent manner:
(c)a licensed insurer has been or is operating fraudulently or recklessly:
(d)a licensed insurer or an associated person has failed to comply with any requirement to supply information, data, or forecasts under this Part, or any information or data supplied by the insurer or person under this Part is false or misleading in a material particular:
32 Insurance (Prudential Supervision) Act, s 20(1)(c).
33 Insurance (Prudential Supervision) Act, s 130(1)(a)–(e).
(e)a licensed insurer has failed, is failing, or is likely to fail to comply with any direction, condition, or any other requirement imposed by or under this Act or the regulations.
[41] In August 2017 the RBNZ appointed Andrew Grenfell and Kare Johnstone of McGrathNicol to investigate the affairs of CBLI, “and in particular, whether it was being conducted in a prudent manner”.
Recovery plan
[42] The RBNZ may give a licensed insurer a written direction to prepare a recovery plan if the RBNZ has reasonable grounds to believe that one or more of the following applies:34
(a)the insurer has failed, is failing, or is likely to fail to maintain a solvency margin:
(b)the business of the insurer has not been, or is not being, conducted in a prudent manner:
(c)the insurer has failed, is failing, or is likely to fail to comply with any direction, condition, or other requirement imposed by or under this Act or the regulations.
Directions
[43] The RBNZ’s power to give directions to a licensed insurer is set out in subpart 2 of pt 4 of IPSA concerning distress management.
[44]Section 143 of IPSA provides as follows:35
143 Bank may give directions to licensed insurer
(1)The Bank may give a licensed insurer a direction, in writing, if it has reasonable grounds to believe that 1 or more of the following apply:
(a)the insurer has failed, is failing, or is likely to fail to maintain a solvency margin:
(b)the business of the insurer has not been, or is not being, conducted in a prudent manner:
(c)the insurer, or a director or relevant officer of the insurer, has failed, is failing, or is likely to fail to comply with any
34 Insurance (Prudential Supervision) Act, s 138(1)(a)–(c).
35 Insurance (Prudential Supervision) Act, s 143.
direction, condition, or other requirement imposed by or under this Act or the regulations:
(d)the governance structure of the insurer has changed, since its licence was issued, in a manner that significantly reduces the extent to which it is appropriate (having regard to the matters specified in section 19(1)(i)):
…
(2)The Bank must, before giving a direction under subsection (1) to a licensed insurer, consider whether, in the circumstances, it would be more appropriate to give a direction to the insurer to prepare a recovery plan under subpart 1.
[45] Section 144 of IPSA sets out the scope of directions that the RBNZ may give to a licensed insurer as follows:36
144 Scope of directions to licensed insurer
(1)A direction given under section 143 may require a licensed insurer to-
(a)consult with the Bank, at the times and in the manner specified by the Bank, about the circumstances of the insurer and the actions or proposed actions of the insurer in respect of resolving any difficulties facing the insurer:
(b)cease entering into any new contracts of insurance:
(c)carry on its business, or any part of its business, in accordance with the direction:
(d)cease to carry on its business, or any part of its business, in accordance with the direction:
(e)take the action that is specified in the direction to address a failure, or potential failure, to comply with any direction, condition, or other requirement imposed by or under this Act or the regulations:
(f)ensure that any officer or employee of the insurer ceases to take part in the management or conduct of its business except with the permission of the Bank and so far as that permission extends:
(g)take the action that is specified in the direction to address any circumstances of financial difficulties.
(2)However, a direction must not require the licensed insurer to cease to enter into contracts of insurance by way of renewal of contracts of insurance that were originally entered into before the direction was given.
36 Insurance (Prudential Supervision) Act, s 144.
[46] The combined effect of these provisions under subpart 2 of pt 4 of IPSA is to prescribe the following criteria for the RBNZ to exercise its power under s 143 to issue directions:
(a)the RBNZ holds the state of mind required by s 143(1) (the RBNZ believes one of s 143(1)(a)–(f) applies);
(b)the RBNZ’s state of mind has an objectively credible basis (reasonable grounds to believe);
(c)the direction states the grounds upon which it is given; and
(d)the substance of the direction is within the scope of s 144(1) and does not purport to prevent renewals of insurance contracts entered into prior to the direction.
Appointed Actuary
[47] Licensed insurers are required to appoint an Appointed Actuary.37 Grant McKay was CBLI’s appointed actuary until November 2015. He was a director at PwC, reporting to Paul Rhodes. Mr Rhodes became CBLI’s appointed actuary in November 2015.
[48] Mr Rhodes gave evidence. He explained that the role of an appointed actuary involves:
(a)being engaged by the licensed insurer to carry out an annual review of the insurer’s actuarial information contained in, or used in the preparation of, the financial statements in accordance with ss 77 and 78 of IPSA (s 78 Report);
(b)being engaged by the licensed insurer to prepare an annual Financial Condition Report;
37 Insurance (Prudential Supervision) Act, s 76(1).
(c)being engaged by the licensed insurer to carry out a yearly and half- yearly review of the insurer’s solvency margin calculations; and
(d)making disclosures to the RBNZ in accordance with ss 127 – 129 of IPSA.
Solvency Standards
[49] In its capacity as prudential regulator of insurers, the RBNZ is empowered to issue solvency standards for the purposes of IPSA.38 A solvency standard may prescribe, amongst other things:
(a)Minimum amount of capital that an insurer must hold and maintain and the methods for determining or calculating that amount for the purposes of an application for a license or setting conditions of an insurer’s license.39
(b)The methods for determining or calculating a solvency margin for the purposes of a condition of a licence.40
(c)The methods for determining whether, and the extent to which, a solvency margin is being maintained.41
(d)Requirements relating to reports about the financial condition of a licensed insurer and other reports relating to its solvency.42
(e)For any of the above purposes, the methods for estimating or valuing the assets or liabilities of an insurer.43
[50] The RBNZ’s Solvency Standard for Non-Life Insurance Business was issued in October 2011 (2011 Solvency Standard). The 2011 Solvency Standard was replaced
38 Insurance (Prudential Supervision) Act, s 55.
39 Insurance (Prudential Supervision) Act, s 56(a).
40 Insurance (Prudential Supervision) Act, s 56(b).
41 Insurance (Prudential Supervision) Act, s 56(c).
42 Insurance (Prudential Supervision) Act, s 56(d).
43 Insurance (Prudential Supervision) Act, s 56(e)(i).
by the RBNZ’s Solvency Standard for Non-Life Insurance Business 2014 which the RBNZ issued in December 2014 pursuant to s 55 of IPSA, and which came into force on 1 January 2015.
Insurance solvency
[51] Licensed insurers are subject to specific solvency requirements. Solvency in this insurance context is different to the broader concepts of solvency arising under the Companies Act 1993 and the Insolvency Act 1986.
[52] Licensed insurers can be required by their conditions of licence to maintain a Solvency Margin calculated in accordance with the relevant Solvency Standard.
[53] Mr Rhodes explained that an insurer’s solvency margin is the difference between its Actual Solvency Capital and its Minimum Solvency Capital. Solvency is often expressed as a solvency ratio, which is the Actual Solvency Capital divided by the Minimum Solvency Capital, expressed as a decimal or a percentage.
[54] CBLI’s conditions of licence required it to maintain a solvency margin of $0, or a Solvency Ratio of 100 per cent. As discussed further below the RBNZ directed CBLI to maintain a Solvency Ratio of 170 per cent from 25 July 2017.
[55] In the 2011 Solvency Standard, calculating the solvency margin involved (amongst other things) calculating the Asset Risk Capital Charge (this became the Risk Weighted Exposure Charge in the 2014 Solvency Standard). This was calculated by applying an Asset Risk Capital Factor (called Resilience Capital Factor in the 2014 Solvency Standard) to each of the licensed insurer’s assets according to its Asset Class (called Exposure Class in the 2014 Solvency Standard).
[56] Essentially this involves categorising an insurer’s assets and applying a risk charge to the absolute value of each asset. In broad terms, the more easily or reliably an asset might become available to pay claims, the lower the risk charge will be.
[57] Table 2 of the 2014 Solvency Standard sets out the RBNZ’s Exposure Classes and Resilience Capital Factors. There are 14 Exposure Classes. I set out four to illustrate the point:
Table 2 – Exposure Classes and Resilience Capital Factors
Unless otherwise provided, in applying Table 2 the Counterparty Grade should be determined by reference to the issue rating from Table 5.1 if possible. If no such rating is available, the Counterparty Grade may be determined by reference an issuer rating from Table 6.
Exposure Class Definition Resilience Capital Factor 1 Cash and Sovereign Debt Notes and coin Cash at bank on call
Debt or other obligations issued by one guaranteed irrevocably by the New Zealand government or a
government or supra-national agency with a Counterparty Grade 1
0.5% 9 Other fixed interest and short term unpaid premiums Any debt obligation or cash management trust that has a Counterparty Grade 5 or is unrated Subordinated debt of a counterparty with Counterparty Grade 1, 2 or 3 Unpaid premiums (including premium funding receivables) that are more than six months but less than twelve months past the contractual due date for payment to the licensed
insurer)
15% 13 Other On Balance Sheet Assets not covered elsewhere Any other on balance sheet asset not described in this table, including assets associated with Non-insurance Activities that are not dealt with elsewhere, but not including reinsurance assets covered under Section 3.6 and not including any
coinsurance amounts recoverable from EQC
40% 14 Assets incurring a full Capital Charge (if this row applies it must be used even if another row of this table could apply) Loans to directors or associated parties of the licensed insurer Unsecured loans to employees or agents of the licensed insurer in excess of $1,000
Assets under a fixed or floating charge Obligations of a related party (except as provided in Exposure Class 7)
Unpaid premiums (including premium funding receivables) that are twelve months or more past thecontractual due date for payment to the licensed insurer
100%
[58] The Appointed Actuary’s s 78 Report must state whether, in the actuary’s opinion and from an actuarial perspective, the licensed insurer is maintaining the solvency margin specified in its conditions of license.
CBLI’s business (from Robert Cole’s Formal Witness Statement)
[59] CBLI (formerly Contractors Bonding Limited) was incorporated in 1971. Most of CBLI’s business was overseas. Only about one per cent of its business was providing insurance (or reinsurance) in New Zealand. Instead, CBLI provided insurance and reinsurance in over 20 countries around the world.
[60] CBLI was one of the larger insurance companies in New Zealand. It was granted a licence under the IPSA regime in September 2013. In October 2015, its holding company, CBLC was listed on the NZX and ASX.
[61] CBLI provided reinsurance for three European cedant insurers providing insurance to the French construction industry:
(a)Elite Insurance (Elite), which was domiciled in Gibraltar. Elite was supervised and regulated by the Gibraltar Financial Services Commission (Gibraltar FSC).
(b)Alpha Insurance (Alpha) domiciled in Denmark. Alpha was supervised and regulated by the Danish Financial Services Authority (DFSA).
(c)CBL Insurance Europe DAC, domiciled in Ireland (CBLIE). CBLIE was supervised and regulated by the Central Bank of Ireland. CBLIE, like CBLI was wholly owned by CBLC.
[62] Much of CBLI’s business was generated by two managing general agents (MGAs), Securities and Financial Solutions (SFS) based in Luxembourg, and European Insurance Services Ltd (EISL) based in London. CBLC wholly owned EISL
and had a 71 per cent shareholding in SFS. Their MGAs acted as agents for the ceding insurers and worked with brokers to source and write insurance business.
THE SAMOA TRANSACTION | CHARGES 6 - 8
Introduction
[63] On 15 October 2014, CBLI deposited €12.5m with NBoS. Charges 6 – 8 all relate to that deposit.
[64] On the same day, NBoS lent €12.5m to FPGS (NBoS/FPGS loan). Also on the same day, FPGS lent €12.5m to Alpha, a Danish cedant insurer reinsured by CBLI. NBoS paid the €12.5m directly to Alpha after it had received CBLI’s deposit.
[65] The terms upon which CBLI deposited the €12.5m with NBoS are set out in an Instrument to Receive Term Deposit (Instrument to Receive) dated 15 October 2014. At the same time CBLI executed a Form of Undertaking in favour of NBoS in relation to its €12.5m loan to FPGS (Form of Undertaking44). Mr Hutchison personally guaranteed FPGS’ loan to NBoS.
Summary of charges
[66] In charge 6 the Crown charge Mr Harris with obtaining by deception under s 240(1)(a) and 242(a) of the Crimes Act 1961. In broad terms, the Crown allege that the arrangement described above was a fraudulent stratagem intentionally used by Mr Harris to deceive the RBNZ (and collaterally also the FMA) by obscuring what was “in substance” a €12.5 million loan from CBLI to Alpha. The Crown allege that through Mr Harris’ use of this fraudulent stratagem, Alpha obtained a pecuniary advantage, namely the €12.5 million. The Crown’s case is that Mr Harris used the fraudulent stratagem in order to avoid the scrutiny of the RBNZ and the risk that it would stymie the transaction.
[67] In charge 7 Messrs Harris and Mulholland are charged with obtaining by deception under s 240(1)(a) of the Crimes Act 1961. The Crown allege that Messrs
44 The charge and some other documents also refer to this as a Surety Bond.
Harris and Mulholland intentionally deceived CBLI’s auditor, actuary and the RBNZ by omitting to disclose that the deposit, together with the Form of Undertaking/Surety Bond was collateral for NBoS’s €12.5 million loan to FPGS. The Crown allege that by this deception CBLI was able to claim a lower risk charge for the €12.5 million term deposit for the purposes of calculating its solvency margin in accordance with the 2011 and 2014 Solvency Standards.
[68] The Crown’s case is that because the deposit (together with the Form of Undertaking) was collateral for the NBoS/FPGS loan, a risk charge of 100 per cent should have applied; but due to Messrs Harris and Mulholland’ deceptive omission, the deposit was treated as a cash deposit available to CBLI with a risk charge of 15 per cent and then 0.5 per cent. The Crown’s case is that if the correct risk charge had been applied to the term deposit, CBLI’s solvency margin would have been below the 100 per cent requirement as a condition of its license.
[69] Charge 8 is that Messrs Harris and Mulholland engaged in false accounting, committing an offence under s 260(b) of the Crimes Act 1961. The Crown allege that with intent to deceive they omitted to disclose in CBLI’s Group Annual Report for the year ended 31 December 2014 that CBLI’s €12.5 million deposit at NBoS was, together with the Surety Bond, collateral for NBoS’s €12.5 million loan to FPGS.
[70] Although the charges are distinct there is considerable overlap in the allegations and evidence that is relevant to them. I therefore set out below a chronology of events before dealing with each charge in turn.
Relevant chronology
Negotiations with Alpha
[71] The Crown allege that what was to become the “Samoa Transaction” originated in an email on 10 May 2014, in which a “structured funding transaction” is discussed in some detail between Morten Helge from Alpha, and the defendants. In that email Mr Harris explained that CBLC would be investing additional regulatory capital into CBLI. This would give CBLI more flexibility, and it was looking to complete a proposed transaction with Alpha in order to gain (1) additional solvency for Alpha,
and (2) possibly an investment into Alpha for CBLI. Mr Harris also indicated that CBLI wished to use “locked up” cash reserves that CBLI had with Alpha.
[72] At this stage CBLI/CBLC had an outstanding loan to Alpha Holdings of €8.4 million. CBLI/CBLC and Alpha had entered into that loan in 2012. Alpha was also holding premium revenue due to CBLI as reserves in respect of CBLI’s reinsurance liabilities to Alpha.
[73] In an email dated 15 May 2014, Mr Harris explained his broad thinking to Mr Hutchison. He said that apart from the “structured” funding transaction, he thought CBLI could make better use of its funds lodged in premium deposits at Alpha. He explained that if Alpha could repay its current debt to CBLI and increase its solvency, CBLC could make an equity investment into Alpha for the same amount.
[74] On 5 June 2014, Mr Helge emailed Messrs Harris and Mulholland. He explained that he would not be able to release all of the deposits held for CBLI because those amounts had grown significantly and would leave a deficit in Alpha’s asset register larger than they could make up immediately with other funds. He proposed the following:
1. Alpha releases the full deposit amount – 130 plus 50 million DKK – and will not withhold deposits going forward.
2. CBL provides Ahpla Aps with a 15 million euro (115 million DKK) subordinated loan.
3. CBL invests 50 million DKK or more (could be up to 80 million DKK) into Alpha Holdings at the same terms [sic] as the lego fund. A 50 million DKK investment would give CBL a share of 10%, which by the time lego comes in with additional 300 million DKK will be diluted to a 6% share…
4. Alternatively if CBL does not wish to invest in Alpha Holdings A/S, we could release 130 million DKK and retain 50 million DKK until we would be able to cover this amount through other means.
[75] On 12 June 2014, Mr Mulholland emailed Mr Harris and (perhaps inadvertently) Mr Helge as follows:
Peter I am working through the Alpha proposal but reading Mortens [sic] email it appears he thinks CBL will make the loan to Alpha.
…
If we make the deposit to BOS then I would have thought the party borrowing to on lend to Alpha will need to draft the loan agreements so I don’t think I can do that.
Apart from that I think we just sign Mortens letter (you could possibly do that in Europe) and correct his email around the lender but that is essentially the terms we agree. I could put that into a more formal document but I don’t think we need to do you?
[76]Mr Helge replied on the same day:
Dear Carden and Peter, it was my impression from our meeting that CBL would use the released deposits to secure a loan from a friendly bank, for instance the Bank of Samoa, at an interest rate around 1,5-2% and then in turn lend on to Ahpla Aps at an interest rate of 8-9% in other words that CBL would lend the funds to Ahpla Aps and not a third party bank. I think we even spoke specifically to the fact that we would not need to get involved with the third party bank and that CBL will handle this behind the scenes?
[77]On 13 June 2014 Mr Helge clarified:
Further to my mail below I also wanted to confirm that if your preference is that you deposit funds with a bank and the bank in turn lends onto us, then that is fine by us also. I assume you can then arrange the interest spilt behind the scenes with the bank.
[78] At that time Alpha, Elite and CBLIE each held reserves or “reinsurance deposits” on behalf of CBLI. CBLI’s appointed actuary at the time, Peter Davies, considered that those deposits should be treated as “cash on call” in CBLI’s solvency returns. However, his draft file note of discussions with the RBNZ on 22 August 2014 recorded that Mr Cole was not sure that this was the correct classification.
[79] On 16 June 2014, following a meeting in Tunbridge Wells, Mr Helge sent an email to Messrs Harris and Mulholland. This recorded their agreement that Alpha would release to CBLI funds currently held on deposit, and make a general amendment to all existing reinsurance contracts that deposits would no longer be withheld. Mr Helge also recorded their agreement that CBLI would use some of the released funds to facilitate a loan to Alpha’s parent, Ahpla Aps. Mr Helge recorded as follows:
Furthermore at our meeting we agreed CBL would use some of the released funds to deposit with a bank partner as security for a loan of minimum 15 million euros. Whether this loan would be first taken out by CBL and then lent onto Ahpla Aps or the loan would be given by the bank directly to Ahpla Aps needs to be agreed and the actual loan document needs to be drafted and agreed. Preferably before the end of the month (this is probably our
biggest challenge time wise as it involves a third party). Both solutions would be acceptable to Ahpla Aps. We also need to agree the exact interest rate and term of the loan. I would propose 8.5% PA and a 6 year term with interest payable annually. As a fair compromise for the ranges we agreed at our meeting. How CBL and its banking partner would share the interest earned is of no relevance to Ahpla Aps or Alpha. The loan given to Ahpla Aps will be used to replace the current bank loan Ahpla has and that otherwise expires December 2015.
[80] On 3 July 2014, Mr Harris emailed Mr Helge confirming CBLI’s agreement to facilitate a subordinated long-term advance of NZD 20 million to Alpha on terms to be agreed. In return Alpha would release its reinsurance reserves to CBLI with the right to obtain up to NZD 5 million of CBLI’s funds if required. Alpha would also agree not to hold further reserves in respect of CBLI’s ongoing reinsurance business.
[81] On 15 July 2014, Mr Hutchison emailed Mr Harris regarding the terms on which NBoS might make a loan to Alpha. Mr Hutchison was a director of both CBLI and NBoS. He emailed Mr Harris as follows:
Alpha funding
Dear Peter broad-brush suggestion – for discussion
Do you think something along these lines could work for CBL?
1.) CBL deposits €10m with NBS @ 3% p.a. (while “loan” to Alpha outstanding)
2.) NBS lends €10m to Alpha (CPS @ 3.5% p.a. for 3 years?
Credit wrap from CBL Insurance
3.) NBS charges establishment fee of 0.5%.
[82] Mr Harris replied that this would work, but the loan from NBoS would need to come from another party. Messrs Harris and Hutchison clarified that NBoS would make a loan to “Another Party” which in turn would loan funds to Alpha.
[83] On Saturday 2 August 2014 Mr Harris emailed Mr Helge (copying Mr Mulholland) proposing that:
(a)Alpha would release all deposits held on account of CBLI except for DKK 25 million;
(b)FPGS would lend Ahpla Aps or another party in the Alpha group €12.5 million on a fully subordinated basis for five years;
(c)Alpha would agree not to hold any further deposits on account of CBLI, and would release the remaining DKK 25 million in two equal tranches in June 2015 and June 2016; and
(d)Alpha Holdings or Alpha Insurance provide a separate guarantee of the loan to Ahpla Aps.
[84] Mr Harris then forwarded this email to Messrs Mulholland and Hutchison suggesting “that if this worked for Alpha then CBLI could invest €12.5m at NBoS at 6% for 5 years”. Mr Mulholland replied two minutes later: “that looks good…”.
[85] On 18 August 2014, Mr Harris sent draft agreements to Mr Helge (copied to Messrs Hutchison and Mulholland). The draft agreements concerned the release of the reinsurance deposits, and a draft loan agreement between Alpha as borrower and FPGS as lender.
[86] On 29 August 2014, Mr Hutchison signed a proposal to NBoS on behalf of FPGS requesting a €12.5m loan. The document states that:
Federal Pacific Group (Singapore) PTE Limited “FPS” are seeking to borrow EUR 12.5 million to finance an equity investment in Europe…the arrangement offered is cash neutral as the liquidity for the loan will be provided for by the term deposit. Both loan and deposit will permanently remain in EUR € to eliminate any foreign currency exposure to NBS. The loan will be secured by way of an irrevocable guarantee from CBL Insurance supported by its term deposit plus a personal guarantee from Alistair L. Hutchison… CBL guarantee supported by CBL’s EUR € 12.5m term deposit.
(emphasis added)
[87] On 12 September 2014, the credit committee of NBoS sent a memorandum to its board of directors seeking approval to make the €12.5 million loan to FPGS. In that memorandum the committee advised the board as follows:
Structure In a similar previous financing structure completed successfully by bank and involving Mr Hutchison, the liquidity will be provided for by a term deposit of equivalent amount to debt.
The term deposit will be financed by Contractors Bonding Insurance Limited (CBL) – a registered company and provider of credit surety in New Zealand.
…
The debt will be secured by way of irrevocable guarantee from CBL, supported by its term deposit, and a personal guarantee from Mr Hutchison.
Provision of funding and full guarantees enables bank to seek Central Bank approval for exemption under regulatory Single Borrower Limits – currently 4.7m for bank. Bank has held discussion with and sought approval in writing from Central Bank.
…
Assurance for bank is provided for fully via deposit and guarantee from CBL.
Bank to require a Loan Default Insurance Bond to be issued from CBL in favour of the bank guaranteeing repayment of the full loan amount plus interest in the event of default by the borrower, FPS. Bond enables bank to offset debt against deposit.
Secondary assurance for bank is provided by a personal guarantee from Mr Hutchison – guaranteeing full payment of full loan amount and interest in the event of default. Bank to request certified financial position from Mr Hutchison.
Terms & Conditions
(a) NBS to receive approval from the Central bank – exemption to Single Borrowers Limit and AML requirement
(b) Agreements to executed [sic] by all parties (through approvals and execution by governing bodies – i.e. Board of Directors, including a Financing Agreement, Instrument to Secure Term Deposit and Insurance Bond and Guarantee Agreement by Mr Hutchison.
(c) CBL will deposit EUR €12.5m with NBS. Deposits will fund 100% of debt and drawdown of funds will be subject to deposits being in place.
…
(h) NBS will be entitled to offset debt with Term Deposit (to the extent of the outstanding loan principal interest fees and any associated costs if they default and payment occurs and is not remedied within 30 days.
NBS has appointed a Solicitor, to prepare the loan documentation and all other supporting documentation – managing documentation risks.
…
Securities to be taken
(1) Lien over EUR €12.5m Term Deposit by CBL.
(2) Irrevocable guarantee for the debt full amount from CBL Insurance.
(3) Personal guarantee for the debt full amount from Mr A.L. Hutchison.
[88] The memorandum was signed by Mr Sialaoa, NBoS’s Manager Lending and Manager Credit.
[89] On 19 September 2014, Mr Sialaoa sent a similar memorandum to the Governor of the Central Bank of Samoa (CBS) seeking approval to make the €12.5 million loan to FPGS. The memorandum was essentially identical to that which NBoS’s credit committee had sent its board of directors on 12 September 2014.
[90] On 2 October 2014, Mr Mulholland sent an email to Messrs Harris and Hutchison after he was contacted by Alpha in relation to the transaction:
Alistair, Peter, I have just had another phone call from Bo, he was following up on the documents.
I advised him I am only involved in the receiving and on paying to BOS of the funds but would ask one of you to provide them with an update today.
Can you please advise them… thanks.
[91] On 6 October 2014 CBS approved the proposed transaction. This was subject to certain conditions including:
…
(b)The debt shall be fully supported by an equivalent term deposit and fully collateralised by a surety bond issued by Contractors Bonding Limited indemnifying NBS from the event of any loss in the transaction.
(c)Mr Alistair Hutchison’s personal guarantee is provided for the full debt.
[92]On 7 October 2014, Mr Hutchison emailed Mr Harris saying:
As discussed earlier today.
Can CBL provide a surety bond (guarantee insurance bond) as the primary security for the EUR 12.5M Loan that Federal Pacific Group (Singapore) Pte. Limited is obtaining from The National Bank of Samoa Limited.
The bond needs to also contain a clause that enables NBS to call on the CBL EUR 12.5M deposit held with NBS in the event of a default in repayments by FPG Singapore. That default is defined as FPGS not meeting scheduled repayments for 30 days and then CBL is given 21-days to make good on its guarantee.
[93]On 7 October 2014, Mr Harris emailed Mr Lundqvist at Alpha as follows:
Dear Bo,
National Bank of Samoa all agreed (some time ago), and yesterday the Central Bank formally confirmed their earlier preliminary agreement, so good to go.
Will liaise with Carden and one of us will be in touch tomorrow.
[94] Ms Reed emphasised that there is no evidence that CBS’s letter to NBoS was sent to CBLI or that Messrs Harris or Mulholland were ever made aware of it. In cross-examination Ms Pettifer confirmed that the Serious Fraud Office (SFO) did not identify the letter amongst CBLI’s documents despite extensive searches.
[95] Mr Dickey submits that these emails demonstrate that Mr Harris knew that CBS and NBoS had approved the transaction and had requirements, including that the Surety Bond would enable NBoS to offset FPGS’s debt against the term deposit. Mr Dickey says the evidence shows that Mr Harris was clearly in on the necessary collateralising of the transaction. He says it is logical Mr Harris must have known of CBLI’s requirements, and he had access to Mr Hutchison who was a co-director of CBL and a director of NBoS. He says it would be naïve to think the two did not talk, and the email above indicates that they did. Mr Dickey submits that thereafter, Mr Harris must have passed that on to Mr Mulholland to justify this aspect of the transaction; the plan was never to have a term deposit with NBoS; the purpose was to fund the transaction and, for the bank’s protection, security of some form was going to be necessary.
[96] Ms Reed submits there is no basis for the Court to draw an inference that Mr Hutchison showed Mr Harris the letter or made him aware of its contents. Mr Dickey
acknowledges there is no apparent email chain that shows either Mr Harris or Mr Mulholland receiving a copy of CBS’s approval letter. However, Mr Dickey submits that Messrs Harris and Mulholland’s actions following CBS’s approval are consistent with those of persons who were aware of that approval.
[97] Mr Dickey submits that this was the basis on which NBoS participated in the transaction, without which funds would not have made their way from CBL to Alpha. He suggests that neither Messrs Harris nor Mulholland would want the CBS letter attributable to them at CBLI, nor the transaction documents themselves, because these documents would disclose the true nature of the transaction. Mr Dickey submits that it is apparent from the email chains above that Mr Harris had full knowledge of what was happening and what was to occur next with the documentation, subject to the “nuance of the final drafting processes”.
The transaction
Documentation
[98] NBoS engaged Samoan solicitors, Schuster Betham Annandale (SBA) to prepare documentation and advise on the transaction. Mr Sialaoa’s evidence was that he asked them to prepare the documents in the spirit of the approvals. SBA’s time records show that on 3 October 2014 they emailed draft documents to NBoS including:
(a)Insurance Bond (in the Form of Undertaking from CBL);
(b)Instrument to Secure Term Deposits;
(c)Loan agreement between NBoS and FPGS; and
(d)Personal guarantee from Alistair Hutchison.
[99] On 7 October 2014, FPGS and Alpha executed a loan agreement. Mr Harris emailed the signed loan agreement to Mr Skifting from Alpha on 7 October 2014.
[100] On 15 October 2014, Mr Mulholland asked Mr Ray to transfer €12.5m to NBoS. He explained that “this was money recently received from Alpha that will be put on term deposit at a higher rate than was available at BNZ”.
[101]On 15 October 2014, the relevant parties executed the following documents:
(a)CBLI’s Form of Undertaking;
(b)Instrument to Receive Term Deposit (Instrument to Receive);
(c)Loan agreement between NBoS and FPGS; and
(d)Mr Hutchison’s personal guarantee;
[102] Mr Sialaoa signed the documents under Power of Attorney for NBoS. Mr Harris witnessed Mr Hutchison’s signing of the documents for CBLI.
[103] Although SBA had drafted an Instrument to Secure Term Deposit, in the end that document was not executed. I discuss the context of the documents in more detail below.
[104] On 31 October 2014, SBA provided NBoS with a “Solicitors’ Certificate”. This document recorded that the loan from NBoS to FPGS was secured by the personal guarantee from Mr Hutchison and the Surety Bond (Form of Undertaking) issued by CBLI. The certificate made reference to the instrument but did not include this in the list of (two) securities supporting NBoS’s loan to FPGS.
The payments
[105] On 9 October 2014, Mr Skifting had provided Mr Hutchison with details of the account to which funds could be transferred. He asked when he might expect them. Messrs Harris and Mulholland were copied on that email.
[106]On 16 October 2014, Mr Harris advised Mr Skifting that:
The funds have been processed today, but I believe they missed the international cut off this afternoon, so will move tomorrow morning.
Carden will give you specific details in the morning along with any wiring refs etc.
We are both in Samoa with Alistair, but his email is limited here.
[107]On 17 October 2014, CBLI transferred €12.5 million to NBoS.
[108]Later that day Mr Mulholland advised Mr Skifting:
Payments have been authorised and paid today. All banks have received the confirmations so your funds should flow shortly.
[109] NBoS received the funds on 20 October 2014 and released them to Alpha which received them the following day.
(Alleged) concealment
[110] The Crown allege that after the parties entered into the transaction(s) on 15 October 2014, Messrs Harris and Mulholland set about concealing:
(a)the true nature of the transaction (which the Crown allege was a loan from CBLI to Alpha in charge 6 against Mr Harris); and
(b)that CBLI’s €12.5 million deposit with NBoS was collateral for NBoS’s loan to FPGS (giving rise to charges 7 and 8).
[111] The Crown allege that the evidence of Messrs Harris and Mulholland’s concealment of the true nature and/or material particulars of the Samoa Transaction first arise out of a meeting of CBLI’s AFRC on 24 February 2015. On 20 November 2014, NBoS sent CBLI’s group financial controller, Henry Ray, a certificate for the term deposit. This was in response to a request from Mr Ray for assistance in getting a confirmation of receipt/statement for the €12.5 million. In response NBoS provided a Term Deposit Certificate recording the deposit of € 12.5 million at six per cent per annum from 20 October 2014 until 21 October 2019. The certificate came under cover of a letter from NBoS’s manager of retail banking recording a “new term deposit investment” on those terms.
[112] Similarly, on 19 January 2015, NBoS sent a statement for the deposit direct to CBLI’s auditors, Crowe Horwath. This records the term deposit as at 31 December 2014. Amongst other things, this recorded that CBLI had no direct or contingent liabilities, for example by way of Letters of Credit, Accommodation, Bills, Guarantees given by Customer. It also recorded CBLI’s “Term Investment Balance” on the same terms as previously, that being €12.5 million at six per cent per annum for a five-year term from 20 October 2014.
[113] On 23 February 2015, CBLI’s Group Financial Controller Mr Ray asked Mr Mulholland whether the deposit was for a term of five years or whether it could be recalled in less than a year. He was trying to determine whether cash should be recorded as a non-current asset in the accounts. Mr Mulholland replied:
It is a term deposit with a term of five years. It is no different than in any other term deposit. Yes it can be broken like any other term deposit.
[114] The deposit was discussed at a meeting of CBLI’s Audit and Financial Risk Committee (AFRC) on 24 February 2015. The AFRC meeting was attended by Messrs Hannon, Mulholland and Ray from CBLI; Messrs Sherlock, James and Watt together with Ms de Jongh from Crowe Horwath; and CBLI’s appointed actuary Mr Mackay.
[115]The signed board minutes of that meeting record as follows:
o[Mr Sherlock] mentioned a deposit of $20m in the Bank of Samoa dominated for 5 years and would like to obtain background information regarding the deposit as well as financial strength including rating for this institution.
oCJM stated that the National Bank of Samoa does not have a rating and that the deposit was entered into due to CBL receiving a 6% interest on the deposit and deposit placed to match long tail euro liabilities. He added that CBL has had term deposits with them previously and CBL is comfortable with the institution based on the fact that [Mr Hutchison] knows the involved parties and [Mr Mulholland] has also met them.
oKS accepted, then queried whether the funds held current or non- current, does CBL have the unconditional right to break the Term Deposit at any time. DDJ added that CH needs to see that CBL has this right over the Term Deposit.
oHKW asked [Mr Ray] to action a letter from the National Bank of Samoa that stipulates what KS and DDJ mentioned above.
oCJM mentioned that the letter from the National Bank of Samoa should have the terms and conditions of the deposit on it as well. Subsequently executed by National Bank of Samoa.
[116] On 26 February 2015, Mr Mulholland sent Mr Harris a draft of the points that Crowe Horwath wanted NBoS to confirm. Namely:
1. That the term deposit is not secured or encumbered.
2. That CBL Insurance could if required break the term deposit.
3. That CBL Insurance could withdraw funds if requested.
Also they would like to see the Term Deposit Statement and Terms.
[117] At 12:55 pm on 3 March 2015, Mr Harris sent Mr Mulholland the suggested wording of a letter from NBoS. Mr Harris’ email to Mr Mulholland, copied to Mr Hutchison, was as follows:
Dear Carden, I suggest that the letter says:
We can confirm:
1. We are a regulated entity, - regulated by the Central Bank of Samoa.
2. We hold a term deposit of EUR12,500,000 in the name of CBL Insurance Limited.
3. The current term of the deposit is x years at x % pa.
4. The deposit is not secured or encumbered.
5. CBL could break the term deposit if it wished to.
[Do we want the letter to be addressed to CBL or the Auditors? If to CBL, perhaps we could get the Bank to add a sentence along the lines of: “We understand that you require this letter to be able to show to your auditors for your annual audit. We confirm that you can provide a copy of this letter to your auditors for this purpose”.
[118]Mr Mulholland replied at 12:56 pm:
Thanks Peter, I will add the line in but I may also get them to address it directly once we have reviewed it.
[119]For his part, at 3:17 pm Mr Hutchison replied to Messrs Harris and Mulholland:
Dear Carden cc: Peter
Point 5 (which is of course essential) is the point that may need to be “talked through” with Tu’u’u.
Regards Alistair
[120] Earlier that day, at 10:27 am Mr Hutchison had provided Mr Mulholland with Mr Sialaoa’s contact details at NBoS, and suggested that Mr Mulholland telephone Mr Sialaoa either before or after sending the letter. In evidence Mr Sialaoa confirmed he only had email exchanges with Mr Mulholland and that before that exchange Mr Hutchison had spoken to him about something he needed assistance with.
[121] At 2:01 pm on 3 March 2015, Mr Mulholland emailed Mr Sialaoa explaining that CBLI’s auditors had requested a letter from NBoS that “covers the points below to allow them to sign off on our annual accounts”. Mr Mulholland asked Mr Sialaoa to arrange for this to be sent as soon as it could be attended to.
[122] Mr Sialaoa responded quickly the same afternoon, advising he would have the confirmation letter for CBLI before close of business the next day. As an aside, he made enquiries with Mr Mulholland about another “potential transaction”.
[123] At 3:32 pm on 3 March 2015, an employee of NBoS sent Mr Mulholland and Mr Sialaoa the confirmation letter as requested. It was in the terms CBLI had suggested except that Mr Sialaoa had amended point 5 as follows:
5. CBL could break the term deposit if it wished to anytime with prior notice to the bank.
(emphasis added)
[124] Mr Harris was copied in. At 4:09 pm Mr Mulholland sent the letter to its auditors, and to Mr Hannon.
[125]At 9:01 pm that evening Mr Harris sent an email to Mr Mulholland:
Dear Carden, this needs to be presented as it needed to go through some protocols to get it, - and if anything else gets asked for, we need to push back on the basis that it took some trouble to get this signed off and issued by the Bank, so if we are asked for anything else, it is unlikely that we will get anything else from the Bank.
[126]Mr Mulholland replied at 9:20 pm:
Kurt [that being Mr Sherlock] was happy with it so I think it is dealt with.
[127] On 10 March 2015, Mr Sherlock advised Messrs Mulholland and Ray that the term deposit should be classified as an Investment in the annual accounts with a note disclosing the asset as non-current. He advised that different considerations would apply in relation to the solvency treatment of the deposit, and the current/non-current classification of the asset might not impact this.
(a)Mr Mulholland aided, abetted, incited, counselled or procured Mr Harris in the commission of that offence by his words or conduct or both; and
(b)that at the time of providing any such assistance, Mr Mulholland intended to aid, abet, incite, counsel, or procure Mr Harris to commit that offence.140
140 A conviction under s 66(1) requires proof of an action by the defendant that aids, abets, incites, counsels or procures, and such action must be deliberately taken, with the intention that the
[572] The Crown’s case against Mr Mulholland rests largely on his email exchange with Mr Harris between 6:47 am and 7:53 am on 14 February 2014. They send two emails each. Mr Mulholland asks how a USD 10 – 15 million payment could be made with the “$5m limit placed on us by the RBNZ”. When Mr Harris suggests making payments of less than that amount Mr Mulholland expresses the view that he would be happy to “just do it” on the basis the payment is BAU.
[573] There is no evidence that Mr Mulholland was otherwise involved in making the payment, or the decision to make three separate payments rather than one.
[574] The Crown’s case is that Mr Mulholland knowingly and intentionally provided Mr Harris with a mechanism for breaching the direction. The Crown say Mr Mulholland first suggested to Mr Harris that the transaction was BAU. This was hardly a novel concept within CBLI. As I have noted, there is evidence that others within CBLI understood the direction not to apply to BAU transactions, including the provision of collateral.
[575] As such, I am not satisfied beyond reasonable doubt that by expressing the view that the collateral payment was BAU and outside the scope of the direction Mr Mulholland aided, abetted, incited, counselled or procured Mr Harris in the commission of an offence; or that he intended to do so.
CHARGE 1 | €25M PAYMENT TO ALPHA
Introduction
[576] On Sunday 11 February 2018 at 8:56 pm Mr Parrott advised Mr Barber that CBLI had agreed to reduce its reinsurance exposure to Alpha by making a €25m payment, in consideration of a credit reduction of €27 million of current and future reinsurance claims. Mr Parrott recorded CBLI’s view that this was the payment of BAU claims and therefore outside the scope of the direction, but nevertheless CBLI wanted to inform the RBNZ and discuss the matter.
conduct will so assist the principal offender in his or her criminal actions. What is essential includes both physical and mental aspects of the defendant’s conduct: that is, the actions to be taken and the intention with which they are done: Ahsin v R [2014] NZSC 153, [2015] 1 NZLR 493 at [82].
[577] On Monday 12 February 2018, the RBNZ issued its fourth direction to CBLI (and its third to CBLC) as follows:
CBL Insurance Limited must not make payment to Alpha Insurance A/S or any related company as proposed by Michael Parrott in his email to the Reserve Bank of 8:56pm, Sunday 11 February 2018.
CBL Insurance Limited must not without the prior written permission of the Reserve Bank enter into any other transaction or series of related transactions involving payment or transfer of assets of NZD $1 million or greater to Alpha Insurance A/S or any other companies in the Alpha Insurance Group. For the avoidance of doubt this includes any backdated transaction.
[578]In his covering letter Mr Bascand explained that:
Without the results of the completed independent investigation, the payment of €25 million to the benefit of Alpha Insurance A/S or another company in the Alpha Insurance Group could potentially be inequitable to other policy holders and creditors of CBL Insurance Limited and the CBL Group.
[579] On 15 and 16 February 2018, Mr Harris wrote to the RBNZ to try to change its position. Mr Harris was firmly of the view that CBLI should make the payment.
[580] At 3:40 pm on 16 February 2018, whilst waiting to hear back from the RBNZ and in advance of a teleconference at 4:30 pm, Mr Harris instructed Mr Mulholland (and in his absence Mr Ray) to make the payment. In his email to Mr Mulholland (which he forwarded to Mr Ray) Mr Harris wrote:
…
In which case I take full and sole responsibility to make the decision to make the payment of €25m to Alpha pursuant to the agreement already sign [sic]. I don’t feel the company has any other choice. Please go ahead and make the payment.
[581] At 4:08 pm Mr Ray confirmed to Messrs Harris and Mulholland that the payment had been made.
[582] For reasons I have set out more fully below I am satisfied beyond reasonable doubt that by instructing and authorising Mr Mulholland (and then Mr Ray) to make the payment Mr Harris intentionally dealt with CBLI’s property in a way he knew and intended would breach the fourth direction.
[583] However, I am not satisfied for the purposes of s 220(2) of the Crimes Act 1991 that the circumstances required Mr Harris to act in accordance with the requirements of the fourth direction such that he committed theft when he intentionally did not. That is because I do not consider the direction states the grounds upon which it is given as s 147(1) of IPSA requires that it must. I also consider that the RBNZ’s stated concerns were about a potential outcome in a liquidation of CBLI. However, at that stage no decision had been made to apply to put CBLI into liquidation. The RBNZ was still waiting on the outcome of the investigator’s report and had no predetermined view as to what that would be. In those circumstances I do not consider that the RBNZ’s stated concerns about the potential consequence for creditors in a hypothetical liquidation of CBLI provided it with reasonable grounds to issue the fourth direction.
Question 2: Was Mr Harris “required” to deal with CBLI’s property in accordance with the RBNZ’s requirements set out in the fourth direction?
[584] The relevant portion of Mr Bascand’s cover letter to CBLI dated 12 February 2018 provides as follows:
Effective from the date of this notice, the Reserve Bank of New Zealand (the Reserve Bank), under sections 145 and 146 of the Insurance (Prudential Supervision) Act 2010 (the Act) directs CBL Corporation Limited and all of its subsidiaries, as associated persons of licensed insurer CBL Insurance Limited, as follows:
CBL Corporation Limited must not make payment to Alpha Insurance A/S or any related company as proposed by Michael Parrott in his email to the Reserve Bank of 8:56pm, Sunday 11 February 2018.
Relevant factual background
[585] By the time RBNZ issued the fourth direction on 12 February 2018, CBLI was dealing with various challenges, including with its cedant insurers in Europe.
[586] On 30 January 2018, Mr Mulholland invited Messrs Harris, Ray and Clements to a meeting later that day to discuss solvency. He wrote:
Peter, can we please meet to discuss the solvency issue for CBL. On the current reserving for CBL we will be under 100%.
[587] On 5 February 2018, CBLC made a market announcement to the New Zealand Stock Exchange (NZX) and the Australian Securities Exchange (ASX) that for the 2017 financial year it expected to report a $75 million – $85 million loss, notwithstanding growth of 35 per cent. CBLC also expected to make a “further claims reserve strengthening adjustment of around $100 million, to its reserves, and a “one- off write-off of receivables of approx 44m”. CBLC also announced that as a result of these adjustments it considered a capital raising was appropriate.
[588]On 7 February 2018, CBLC announced the AM Best rating down grade.
CBLIE
[589] On 7 February 2018, the Central Bank of Ireland wrote to CBLIE advising that it was minded to issue a direction requiring CBLIE to cease writing business. It invited CBLIE to respond by 9 February 2018. On that date, CBLIE’s solicitors made a lengthy submission to CBI and provided information including the market announcements and internal documentation about the proposed capital raise. CBLI recorded that a direction along the lines of that described in CBI’s letter:
would cause grave and irreparable harm to CBLIE and the wider CBL Group. This concern is shared by CBL Corporation Limited and CBL Insurance Limited. Moreover, if CBLIE is forced to discontinue business, this may ultimately precipitate the closure of its entire operations….
[590] On 11 February 2018, Sir John Wells also wrote directly to the Central Bank of Ireland in response to its letter of 7 February 2018. He confirmed that CBLC had commenced a capital raising process on 3 February 2017 in order to strengthen its solvency position. He advised that a Due Diligence committee had been formed and that CBLC expected to be able to raise sufficient capital to address the Central Bank’s concerns promptly. In the meantime, he considered that a direction would be disproportionate and asked the Central Bank to consider the timing and potential impact of any such direction.
Alpha
[591] On 7 February 2018, Mr Leif Corinth-Hansen of Alpha advised CBLI that he believed the DFSA would soon require it to stop writing business with immediate effect unless CBLI made a significant prepayment of reserves.
[592] On 9 February 2018, CBLI and Alpha executed the LSA. This provided that CBLI would pay €25m to Alpha to be held in a dedicated bank account to reduce the reinsurance exposure between Alpha and CBLI, in exchange for which CBLI’s reinsurance liabilities to Alpha would be reduced by €27 million.
[593] As noted, Mr Parrott sent an email to Mr Barber at 8:56 pm on Sunday 11 February 2018, following which he forwarded it as sent to Sir John Wells and Messrs Hannon, Harris and Mulholland.
[594] Mr Barber forwarded the email to others at the RBNZ. At 9:36 pm Mr Fiennes sent a text to Sir John Wells:
John I’ve been informed of the proposed 25m payment to Alpha. It’s not clear to us this is outside the scope of our directions. Can I ask you please to put a hold on it pending our reviewing it tomorrow? We would expect to advise whether we believe it’s in scope, well in time for Europe opening. Can talk briefly now.
[595] Mr Parrott and Mr Barber spoke on the morning of 12 February 2018. Mr Parrott confirmed that the payment had been put on hold. At Mr Barber’s request, Mr Parrott also provided him with copies of the LSA, and the correspondence with CBI.
[596] At 10:50 am, Mr Barber circulated a list of options for the RBNZ team to consider, with “pros and cons” of each option. Mr Fiennes requested this to assist with the “short-term decision about the 25m payment”.
[597] The first option Mr Barber listed was to “Stop the transaction via direction”. Mr Barber described the pros and cons of that as follows:
Pros:
· More capital to distribute equitably post independent investigation.
· Maintain a consistent RBNZ position of preventing such transactions whilst the investigation is completing (we have stopped CBLIE’s LOC and the purchase of Elite’s French business).
Cons:
· Alpha may be put into run-off which may further impact the capital raise.
[598] The second option was that the RBNZ request that CBLI not complete the transaction following consultation:
Pros:
· Does not require an additional direction to be drafted/sent and CBL accepted our view following consultation on the CBLIE LOC.
Cons:
· Given the importance of Alpha, CBL may go ahead anyway (recent letter to CBI indicates they may stop the French business through CBLIE and may want to use Alpha for all French business).
o Reduces capital to be distributed equitably post investigation.
o Reputational risk – RBNZ could be seen as weak if CBL go against our view following consultation.
[599] More broadly Mr Barber considered that the “pros” of allowing the transaction were that it may have kept Alpha from being put into run-off, and would reduce CBLI’s exposure to Alpha. However, the “cons” were:
· We don’t have enough information to assess the true benefits of the transaction to the CBL Group.
· Reduces capital to be distributed equitably post investigation.
· Reputational risk – RBNZ could be seen as favouring Alpha over other policy holders/creditors.
[600] Mr Bascand received an internal memorandum on 12 February 2018 recommending that the RBNZ issue a direction. This recorded that without the results of the independent investigation the payment to Alpha could potentially be inequitable to other policy holders and creditors of CBLI and the CBL Group.
[601] The RBNZ team and the CBLI team (Sir John Wells and Messrs Harris and Parrott) had a teleconference. At the same time the RBNZ emailed the fourth direction
to Sir John Wells (copying Messrs Harris and Rhodes). The direction is set out above. The covering letter provided as follows:
…
The Reserve Bank wants to ensure it is consulted before the CBL Group becomes committed to any significant transaction. The email sent by Michael Parrott to Rupert Barber at 8:56 am, Sunday, 11 February 2018 indicated that a new significant transaction was agreed by the CBL Board on 9 February 2018 which included payment to Alpha Insurance of €25 million.
A copy of the agreement with Alpha was subsequently provided by Mr Parrott by email to Rupert Barber at 9:59am, Monday, 12 February 2018. From the agreement it is clear to the Reserve Bank that the payment represents an advance in timing of payment for past and future reinsurance claims, and that CBL Insurance Limited remains exposed to Alpha business (e.g. if the amount is insufficient further payments will be required).
Without the results of the completed independent investigation, the payment of
€25 million to the benefit of Alpha Insurance A/S or another company in the Alpha Insurance Group could potentially be inequitable to other policyholders and creditors of CBL Insurance Limited and the CBL Group.
The Reserve Bank has previously acted to prevent inequitable treatment of policyholders – by declining to approve proposals to acquire Elite’s retention and for CBL Insurance Europe dac to obtain a letter of credit from ANZ that would be backed by CBL Group guarantees.
Given these considerations, the Reserve Bank does not grant approval for the planned transaction. Furthermore the Reserve Bank wants to ensure its approval is obtained before CBL Insurance Limited or CBL Corporation Limited become committed to any significant transactions involving Alpha Insurance A/S or the Alpha Insurance Group. The Reserve Bank is therefore issuing further directions under section 143 and section 145 to that effect.
…
The Reserve Bank has determined CBL is not yet required to prepare a recovery plan. It wishes to be better informed before this action is considered. Following the conclusions of the investigation under section 130, a recovery plan aimed at increasing reserves or taking other steps may then be an option.
The Reserve Bank believes directions are a necessary step for it to fulfil the purposes and principles of the Act and to undertake its function under section 12(c) of taking appropriate action in respect of licensed insurers that may be in financial or other difficulties.
…
[602] Mr Bascand said in evidence that there had been some work done during that week to determine whether CBLI was balance sheet insolvent, but that the RBNZ did not have enough evidence to establish this and had not made a decision. However, Mr
Bascand was aware that, at the time, the consolidated group held $525 million in available cash balances.
Discussion
[603] In assessing whether the fourth direction was a requirement for the purposes of s 220, the first point to note is that the RBNZ did not consult with CBLI about the LSA or the €25m payable to Alpha under it in the manner contemplated in the second direction. The RBNZ did not give feedback to CBLI to which CBLI could have regard before entering the transaction or making the payment. Instead, the RBNZ treated Mr Parrott’s email as a request for approval to make the payment, which the RBNZ declined. As noted above, Mr Barber had observed earlier in the day that if the RBNZ had merely requested CBLI not to make the payment, it might have gone ahead and done it anyway.
[604] I also note that it was a term of the LSA that CBLI would pay Alpha €25m to be held in the Reinsurance Bank Account and applied in respect of CBLI’s reinsurance obligations to Alpha. Sir John Wells confirmed in evidence that the CBLI board had approved its entry into the LSA and considered this to be in CBLI’s best interests.
[605] As such, the fourth direction is effectively a prohibition on CBLI performing its otherwise lawful and contractual obligations. Consequently, even if the direction was otherwise entirely valid, it is difficult to imagine that when s 220 was enacted in 2003 that Parliament would have intended that the performance of otherwise lawful contractual obligations to third parties should be theft.
Did the fourth direction state the ground upon which it was given?
[606] Section 147(1) of IPSA provides that a direction from the RBNZ “must state the grounds on which it is given”.
[607] Ms Reed submits that the fourth direction was unlawfully issued because (amongst other things) it did not cite any ground under s 143(1). She submits the Crown should not be allowed to “back fill” this more than five years after the direction was issued.
[608] Mr Dickey submits that the grounds for the direction are those set out at s 143(1)(a) (failure to maintain a solvency margin) and s 143(1)(b) (business not being conducted in a prudent manner). He submits that the RBNZ’s explanation that without the results of the completed independent investigation the €25m payment to Alpha could “potentially be inequitable to other policyholders and creditors” is plainly a reference to CBLI’s solvency. He submits that CBLI raised the Alpha transaction with the RBNZ knowing of the RBNZ’s solvency and prudency concerns and would have understood that these were the grounds on which the RBNZ issued the fourth direction. Even if the RBNZ did not use the particular words of s 143, the meaning was nonetheless clear and the RBNZ’s position was clearly and fairly put to CBLI.
[609] I do not consider the RBNZ’s stated ground for the direction amounts to a statement by the RBNZ that it believed either s 143(1)(a) (solvency margins) or s 143(1)(b) (conducting business in a prudent manner) applied. Instead, the RBNZ’s stated concern about equitable treatment between policyholders and creditors were concerns about potential outcomes in the event of a liquidation of CBLI. However, the RBNZ’s concerns or beliefs about such matters do not empower it to issue directions under s 143.
[610] In this regard the maintenance of solvency margins by a licensed insurer for the purposes of s 143(1)(a) (or otherwise) is separate and distinct from its overall “solvency” as that would be assessed for any company under the Companies Act 1993. A licensed insurer whose solvency margin has fallen below the required level might still have a positive balance sheet and be able to pay its debts as they fall due.
[611] Mr Cole’s evidence was that the RBNZ was concerned that if the independent report showed a substantial level of under reserving, the CBL Group might not be able to raise sufficient capital to meet its obligations in full, with the result that Alpha would benefit to the detriment of other policyholders.
[612] Mr Barber shared these concerns. However, the RBNZ was still waiting to receive the outcome of the independent investigation and pending that had not reached a view. As the RBNZ (once again) recorded in the covering letter, it wanted to know the outcome of the independent investigation before determining whether to direct
CBLI to prepare a recovery plan. Mr Barber’s evidence was that at this time there was a chance the independent investigator would conclude that CBLI’s financial position was sound. But there was also a chance they would conclude CBLI was under reserved. In the context of such uncertainty, Mr Barber was concerned that a significant payment to one creditor or reinsured cedant could be “totally unjust” and detrimental to other creditors and policyholders.
[613] Mr Bascand agreed that the RBNZ’s concern arose out of a possibility that CBLI would be placed in liquidation. In January 2018, the RBNZ had instructed solicitors to prepare a liquidation application. File notes show that the independent investigators were expecting to receive those draft documents on 9 February 2018. However, Mr Fiennes explained this was arranged only to ensure the RBNZ could move quickly if it needed to. Mr Bascand confirmed that no decision had been made to apply to have liquidators appointed to CBLI. The RBNZ were awaiting the outcome of the independent investigator’s report, the outcome of which was at that stage unknown.
[614] In any event, I do not consider that the RBNZ’s statement about the potential unfairness of outcomes between creditors in the event of a hypothetical liquidation of CBLI states grounds for making the direction as set out in s 143(1)(a) or (b).
[615] Although it is not explicitly set out in IPSA, I am also satisfied that Parliament must have intended that a failure to comply with the mandatory requirements of s 147(1) would render such directions invalid. Where a power is exercised in breach of the mandatory statutory requirements that come with the exercise of that power, the focus is on the consequences of non-compliance and whether Parliament intended the outcome of non-compliance to be total invalidity.141 Here, s 143 provides the RBNZ with the power in certain circumstances to issue licensed insurers with wide ranging directions, including to cease carrying on its business,142 and to direct that certain personnel cease to take part in a licensed insurer’s business.143 The mandatory
141 R v Soneji [2005] UKHL 49, [2006] 1 AC 340 at [14]–[15] and [23], Wang v Commissioner of Inland Revenue [1994] 1 WLR 1286 (PC) at 1296 and, in New Zealand, New Zealand Institute of Agriculture Science Inc v Ellesmere County [1976] 1 NZLR 630 (CA) at 636 per Cooke J and Smith v Attorney-General [2017] NZHC 136, [2017] NZAR 331 at [73].
142 Insurance (Prudential Supervision) Act, s 144(1)(d).
143 Insurance (Prudential Supervision) Act, s 144(1)(f).
obligation to state the grounds on which the direction is given enables the licensed insurer to understand the rationale for the RBNZ’s direction, to take steps to improve their position, or to challenge the direction. In these circumstances, I am satisfied that a failure to state the grounds on which a direction is given renders that direction invalid.
[616]For these reasons I consider the RBNZ’s stated ground for issuing the direction
– to prevent the potential inequitable treatment of creditors and policyholders – is not one of the cognisable grounds for which a direction may be issued under s 143(1), and that the RBNZ’s failure to state grounds under s 143(1) renders it invalid. Ultimately, of course, the Court is assessing the validity of the fourth direction in the context of a significant criminal charge. In that context, I am not satisfied that a s 143 direction can amount to a “requirement” for the purposes of s 220 in circumstances where the RBNZ has not strictly complied with the mandatory statutory requirements placed upon it.
Questions 3 to 6 (inclusive) of the agreed Question Trail
[617] On 15 February 2018, at 4:55 pm Mr Parrott emailed Mr Barber a letter requesting the RBNZ to reconsider its decision to prohibit the payment to Alpha and so that CBLI could proceed with the prepayment of the claims reserves.
[618] Mr Harris explained that Alpha’s decision to cease underwriting for EISL and SFS would have a prejudicial impact on CBLI’s policy holders and other stakeholders and undermine the capital raise, making it impossible to raise new capital and restore solvency capital. However, CBLI believed there was still a small window to prevent this from happening if it could complete the Alpha transaction in accordance with the LSA. CBLI implored the RBNZ to urgently reconsider its decision.
[619] At 7:21 am on 16 February 2018 Mr Harris emailed Mr Fiennes (and others) providing further information in support of his request that the RBNZ reconsider. Mr Fiennes forwarded this to Mr Bascand in an email:
The starting position is of course we are in a holding pattern; and the draft report is due today. And we need to play this fairly with due consideration.
[620] At 1:48 pm Mr Parrott left a voice message with Mr Barber asking for a further telephone call and consultation that afternoon.
[621] It was in this context that at 3:40 pm Mr Harris attempted to authorise Mr Mulholland to make the payment. Mr Mulholland was away. At 3:42 pm Mr Harris sent the email to Mr Ray instructing him to make the payment, which he did.
[622] At 4:08 pm Mr Ray confirmed to Messrs Harris and Mulholland that the payment had been made.
[623] At 5:02 pm Mr Fiennes advised Mr Harris that the RBNZ did not agree to the payment at this time and that the RBNZ would not be in a position to review the request until after it had received the investigators report which it was expecting to receive at some point that day.
Subsequent events
[624] The next day, Saturday 17 February 2018, Mr Harris advised the CBLI board that he had asked the RBNZ to reconsider its position on the Alpha payment, but it had not done so. Mr Harris did not tell the CBLI board at that stage he had directed Mr Ray to make the payment anyway.
[625]At 1:48 pm, Mr Harris emailed Messrs Mulholland and Ray:
Please keep the payment to Alpha in total confidence – including from Michael [that being Mr Parrott] or anyone else. If people don’t know then they can’t say if asked by others. At least through Monday or so anyway until Alpha categorically have the funds.
[626] On Monday 19 February 2018 Mr Harris informed the CBLI board that he had made the payment.
[627] On the morning of 21 February 2018, the RBNZ issued CBLI and CBLC with a notice under s 121 of IPSA requiring it to provide information in respect of any payment or transfer of assets made on or after 1 February 2018 for NZD 1 million or more. The RBNZ wished to know the date, amount, and currency of the payment and the party to whom the payment was made. It also requested a brief explanation of the
reasons for the payment. The RBNZ appears to have issued that notice after it received something of a tip off in the form of an email from DFSA inquiring whether the 12 February 2018 direction prohibiting the €25m payment to Alpha was still in place.
[628] Mr Parrott provided the RBNZ with the information it had requested later that day. It was in this way the RBNZ learned that CBLI had made the €25m payment despite the RBNZ having issued the direction prohibiting it from doing so. It was also through this that the RBNZ also learned of the payments to TexCaz on 14 and 15 February 2018.
[629] At 6:00 pm on 21 February 2018, Messrs Fiennes and Wood spoke with Sir John Wells. Sir John confirmed that Mr Harris made the payment of his own volition and it had come as a surprise. Mr Fiennes’ notes of the call record that he noted that breaching a regulatory direction from the RBNZ would have far-reaching consequences, with implications for the company and the directors. He explained that this episode had undermined the RBNZ’s faith in CBLI. The notes record that Sir John stated that he wished to retain an open dialogue, and that he personally was unaware of the payment and that the board was not involved in it. Mr Fiennes explained that, given the RBNZ’s faith in CBLI’s compliance had been undermined, it would be issuing a new direction to put a stop on any payments greater than
$100,000 without the RBNZ’s prior consent, and would direct CBLI to stop writing new business.
[630] On 22 February 2018, Sir John Wells wrote to Mr Spencer who was then acting governor of the RBNZ. The letter followed an urgent board meeting of CBLC. Sir John advised that the board of CBLC retained full confidence in Mr Harris, and understood his rationale for making the payment, but that Sir John had made his “expectation of full compliance with RBNZ directions very clear”. He confirmed that “the board is conscious of the seriousness of the events and we are all committed to full compliance with RBNZ directions going forward”.
Analysis
[631]In light of that evidence, I am satisfied beyond reasonable doubt that:
(a)Mr Harris intentionally dealt with CBLI’s property when he authorised and instructed Mr Ray to make the payment; and
(b)when Mr Harris authorised the payment, he knew of the fourth direction and intended to act other than in accordance with it.
[632] Accordingly, were it not for the fact that I have found that the fourth direction was not a requirement for the purposes of s 220, I would have found Mr Harris guilty of charge 1. Because I have not, it follows that Mr Harris is not guilty of this charge.
Robinson J
ANNEX 1: ACRONYMS AND ABBREVIATIONS USED IN JUDGMENT
€12,500,000 €12.5m Alpha Insurance A/S Alpha Audit and Financial Risk Committee AFRC CBL Corporation Ltd CBLC CBL Insurance Europe DAC CBLIE CBL Insurance Ltd CBLI Central Bank of Samoa CBS Danish Financial Services Authority DFSA Elite Insurance Elite European Insurance Services Ltd EISL Federal Pacific Group (Singapore) Pte Ltd FPGS Financial Markets Authority FMA Gibraltar Financial Services Commission Gibraltar FSC Instrument to Receive Term Deposit Instrument to Receive Insurance (Prudential) Supervision Act 2010 IPSA National Bank of Samoa NBoS New Zealand Stock Exchange NZX Reserve Bank of New Zealand RBNZ Schuster Betham Annandale SBA Securities and Financial Solutions SFS Serious Fraud Office SFO TexCaz Transborder Insurance Intermediaries TexCaz United Speciality Insurance Company United Specialty
3
4
1