The Ink Patch Money Transfer Limited v Reserve Bank of New Zealand
[2023] NZCA 587
•22 November 2023 at 2.30 pm
| IN THE COURT OF APPEAL OF NEW ZEALAND I TE KŌTI PĪRA O AOTEAROA |
| CA340/2022 [2023] NZCA 587 |
| BETWEEN | THE INK PATCH MONEY TRANSFER LIMITED AND SAMOA MONEY TRANSFER LIMITED |
| AND | RESERVE BANK OF NEW ZEALAND |
| Hearing: | 13 September 2023 |
Court: | Miller, Goddard and Wylie JJ |
Counsel: | M T Lennard and M A Keil for Appellants |
Judgment: | 22 November 2023 at 2.30 pm |
JUDGMENT OF THE COURT
AThe appeal is dismissed.
BThe appellants must pay costs for a standard appeal on a band A basis with disbursements as fixed by the Registrar.
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REASONS OF THE COURT
(Given by Miller J)
Introduction
The appellants are money remitters. They provide cross-border remittance services. The flow is mostly one-way, from New Zealand to the Pacific Islands. Remitters are often small firms but collectively they handle a lot of money. According to the appellants, remittances account for about 20 per cent of the gross domestic product of Samoa.
To carry out its business on a cost-effective basis a money remitter needs an account with a registered New Zealand trading bank. But some banks have been closing accounts used for remittances and refusing to do business with money remitters. This practice is known as de-risking. The appellants say the banks are engaging in blanket de-risking, meaning they are refusing as a matter of policy to deal with money remitters.
The banks are motivated by the costs and risks of compliance with their obligations under legislation designed to prevent money laundering and financing of terrorism. That legislation is the Anti-Money Laundering and Countering Financing of Terrorism Act 2019 (the AML/CFT Act). Speaking generally, it requires that financial institutions know who their customers are and monitor customer transactions for suspicious activity.
Money remitters are also subject to the AML/CFT Act, which classifies both remitters and banks as reporting entities,[1] and they must therefore meet the same compliance requirements. The appellants say that the banks can rely on AML/CFT compliance by money remitters and need not look through their bank accounts to assess AML/CFT risks posed by the remitters’ customers.
[1]Anti-Money Laundering and Countering Financing of Terrorism Act 2019 (AML/CFT Act), s 5(1) definition of “reporting entity”.
The Reserve Bank of New Zealand | Te Pūtea Matua (RBNZ) is New Zealand’s central bank, with responsibility for monetary policy, issuing currency, protecting and promoting financial stability, and the prudential supervision of registered banks.[2] It is also the AML/CFT supervisor for trading banks.[3] The AML/CFT supervisor for money remitters is Te Tari Taiwhenua | the Department of Internal Affairs.[4]
[2]Reserve Bank of New Zealand Act 2021, ss 9, 10 and 116.
[3]AML/CFT Act, s 130(1)(a).
[4]Section 130(1)(d).
The Minister of Justice has issued a class exemptions notice, the Anti‑Money Laundering and Countering Financing of Terrorism (Class Exemptions) Notice 2018. The Class Exemptions Notice relieves banks of certain obligations under the AML/CFT Act for customers who are money remitters.[5] In the past, banks have taken the view that this exemption does not go far enough to eliminate any obligation on their part to inquire into the person on whose behalf a transaction is completed by a money remitter. In the acronym-rich world of AML/CFT compliance, such persons are called POWBATICs.
[5]AML/CFT Act, s 157; and Anti‑Money Laundering and Countering Financing of Terrorism (Class Exemptions) Notice 2018 (Class Exemptions Notice), s 157 and sch pt 6.
RBNZ accepts that money remitters perform a valuable function and it agrees that blanket de-risking is not justified. It is concerned that de-risking could result in the withdrawal of banking services in some places, as an unintended consequence of New Zealand meeting its international obligations to combat money-laundering and terrorism financing. Officials have been making attempts to address challenges facing money remitters servicing the Pacific Islands through an initiative called the Pacific Remittances Project.
But RBNZ does not accept that de-risking is in fact universal among trading banks. It says that banks are assessing for themselves the AML/CFT risk that any given remitter presents, as the legislation requires. RBNZ says that it has provided as much guidance as is reasonable and proper and the law requires no more of it.
In this application for judicial review the appellants seek declarations which are tantamount to orders that RBNZ either direct trading banks to supply them with accounts or supply them with such accounts itself. It also asks for declarations that RBNZ has not taken steps which might encourage the banks to stop unjustified de‑risking. Chief among these is a failure to correct what they say is a misapprehension held by the banks about the effect of the Class Exemptions notice.
In the judgment under appeal, which was delivered on 8 June 2022, Gendall J accepted RBNZ’s defence that legislation either does not permit or does not require it to do these things.[6]
[6]The Ink Patch Money Transfer Ltd v Reserve Bank of New Zealand [2022] NZHC 1340 [judgment under appeal] at [99], [118]–[119], [122]–[123], [131]–[133] and [136].
On 31 July 2023, amendment regulations, the Anti-Money Laundering and Countering Financing of Terrorism (Definitions) Amendment Regulations (No 2) 2023 (the 2023 Regulations), pt 1, came into force under the AML/CFT Act. They should reduce the burden on banks to conduct due diligence on the customers of money remitters. RBNZ evidently has not yet given any guidance about the 2023 Regulations and we do not know what effect they will have on the behaviour of banks.
We have formed the view that in light of the 2023 Regulations the forward‑looking relief sought is now either moot or premature. We can express our reasons briefly.
The legislation
We confine ourselves to the immediately relevant provisions of the relevant instruments.
The AML/CFT Act
Section 11 requires that a reporting entity conduct customer due diligence on, among others, any beneficial owner of its customer. “Beneficial owner” means the individual who:[7]
(a)has effective control of a customer or person on whose behalf a transaction is conducted; or
(b)owns a prescribed threshold of the customer or person on whose behalf a transaction is conducted
It will be seen that the definition refers to POWBATICs.
[7]AML/CFT Act, s 5(1) definition of “beneficial owner”.
Under ss 56–58, a reporting entity must operate a compliance programme which meets certain minimum requirements. These include adequate and effective processes for: customer due diligence, reporting suspicious activities and prescribed transactions, and keeping written findings about business relationships and transactions from or in countries that lack sufficient AML/CFT systems. Before conducting customer due diligence or establishing an AML/CFT compliance programme, a reporting entity must first undertake an assessment of the risks that it may reasonably expect to face in the course of its business.[8] Reporting entities must also arrange independent audits of their risk assessment and compliance programmes.[9]
[8]Section 58(1).
[9]Sections 59 and 59B.
When developing programmes, reporting entities must have regard to any applicable guidance material produced by AML/CFT supervisors, in this case RBNZ.[10] There is no obligation to give guidance, but the supervisor must prepare a code of practice if so directed by the Minister.[11] (It does not appear that the Minister has done so.) The functions of supervisors are set out in s 131. Generally, they take the form of monitoring what reporting entities do and providing reporting entities with guidance to assist them to comply with their obligations under the Act and its regulations. To these ends, supervisors have powers to inspect reporting entities’ information, to conduct on-site inspections and to issue guidance by, among other things, producing guidelines and providing feedback on reporting entities’ compliance.[12]
[10]Section 57(2).
[11]Section 63.
[12]Section 132.
Under s 157 the Minister may grant exemptions, which have the status of secondary legislation.[13]
The Class Exemptions Notice
[13]Section 157(4).
The relevant exemption took effect on 30 June 2023.[14] It applies to reporting entities whose customers are specified managing intermediaries (SMIs).[15] Money remitters are SMIs.[16] The Class Exemptions Notice states that the Minister exempts relevant reporting entities (here, the banks) from carrying out the following requirements in respect of customers who are SMIs:[17]
(a)the requirement to conduct customer due diligence, under section 11(1)(b) of the [AML/CFT Act], on any beneficial owner of a customer:
(b)the requirement, in any circumstances where the reporting entity is required to conduct enhanced customer due diligence, to carry out the identification and verification requirements under sections 23 and 24(1) of the [AML/CFT Act] on any beneficial owner of the customer:
(c)the requirement to conduct enhanced customer due diligence, under sections 23 to 25 of the [AML/CFT Act], in circumstances where—
(i)the customer is a trust; and
(ii)the reporting entity is only required to conduct enhanced customer due diligence because section 22(1)(a)(i) or (b)(i) of the [AML/CFT Act] applies.
[14]Class Exemptions Notice, sch pt 6 cl 6.
[15]Schedule pt 6 cl 1.
[16]Schedule pt 6 cl 2 definition of “specified managing intermediary”.
[17]Schedule pt 6 cl 1.
The exemption is subject to certain conditions:[18]
[18]Schedule pt 6 cl 4.
4In respect of an SMI customer, this exemption is made subject to the following conditions:
(a)clause 1(a) and (b) may not be relied on in respect of an SMI customer that has effective control, or owns more than 25%, of the specified managing intermediary; and
(b)the reporting entity must conduct enhanced due diligence on an SMI customer in accordance with section 22A(2) of the [AML/CFT Act] if the SMI customer conducts a transaction to which section 22A of the [AML/CFT Act] applies; and
(c) the reporting entity—
(i)must obtain written confirmation, signed by a senior manager of the specified managing intermediary, to the effect that the specified managing intermediary—
(A)has an AML/CFT programme (or foreign equivalent); and
(B)has its principal place of business in a jurisdiction with sufficient AML/CFT systems and measures in place; and
(C) is supervised for AML/CFT purposes; and
(D)is conducting customer due diligence in accordance with the [AML/CFT Act] (or its foreign equivalent); but
(ii)is not required to verify a written confirmation obtained under subparagraph (i) unless there are reasonable grounds for the reporting entity to doubt the adequacy or veracity of the written confirmation; and
(d)the reporting entity must comply with any request from its AML/CFT supervisor for the name of 1 or more SMI customers in respect of which the exemption is relied on.
It will be seen that under cl 4 the exemption does not apply where the SMI customer has effective control, or owns more than 25 per cent of, the SMI.
Clause 5 explains that the exemption aims to prevent duplication of customer due diligence by both a reporting entity (here, the bank) and the SMI:[19]
5This exemption has been granted because the requirement for a reporting entity to conduct customer due diligence on all beneficial owners of a specified managing intermediary or on all SMI customers—
(a)may lead to duplication of customer due diligence obligations; and
(b)has associated costs, may give rise to privacy concerns, and may deter international investment; and
(c)is out of proportion to the risk of money laundering and terrorism financing posed.
[19]Schedule pt 6 cl 5.
Banks are not obliged to make use of the exemption.[20]
The 2023 Regulations
[20]Judgment under appeal, above n 6, at [99].
The Regulations were made under ss 5, 153 and 154 of the AML/CFT Act. Regulation 5AA states that for the purposes of the definition of beneficial owner in s 5(1) of the Act, “beneficial owner”:
(a)includes a person with ultimate ownership or control of the customer, whether directly or indirectly;
(b)includes a person on whose behalf the transaction is conducted that is a customer of a customer, but only if the person meets the requirement set out in paragraph (a).
It will be seen that this amendment excludes POWBATICs from the definition of beneficial owner unless they possess ultimate ownership of the reporting entity’s customer (here, the money remitter).
It is common ground that the 2023 Regulations clarify the meaning of beneficial owner to exclude a POWBATIC unless that person owns or controls the money remitter. It follows that the definition of beneficial owner does not require that a bank conduct customer due diligence on the customers of its money remitter customers. This makes redundant the argument that was made before Gendall J, to the effect that banks were mistakenly interpreting the previous beneficial owner definition to include POWBATICs.
Banks’ compliance obligations with respect to money remitters
Notwithstanding the 2023 Regulations, and contrary to the tenor of the submissions of Mr Lennard for the appellants, banks cannot ignore the activities of money remitter customers when it comes to their own AML/CFT compliance.
As with any other reporting entity, banks must assess the risk posed by their customers under s 59 of the AML/CFT Act and develop AML/CFT programmes which include adequate and effective procedures for reporting suspicious activities under s 58. Money remitters handle other people’s money and remit money offshore, sometimes to jurisdictions which lack adequate compliance systems. For these reasons they pose, as a class, a degree of risk that their customers will use their services for money‑laundering. Banks must develop their programmes accordingly. The onus is on them to do so, taking into account any guidance offered by RBNZ.
The Class Exemptions Notice and 2023 Regulations do not eliminate banks’ obligations to conduct what the AML/CFT Act describes as simplified customer due diligence on money remitters who qualify as SMIs.[21] They must conduct customer due diligence on any customer of an SMI who has ultimate control of the remitter.[22] Under s 22 and s 22A the AML/CFT Act they must also conduct enhanced due diligence of an SMI in certain circumstances.
No reviewable error by RBNZ
[21]AML/CFT Act, ss 10 and 18–21.
[22]Sections 11(1)(b) and 5(1) definition of “beneficial owner”; and Class Exemption Notice, sch pt 6 cl 3(a).
The appellants must point to an error that sounds in judicial review. The argument is that RBNZ has made errors in the guidance it has given or, more ambitiously, that it ought to be required to give better guidance.
Mr Lennard drew our attention to trading bank behaviour which was said to evidence de-risking and unnecessary duplication of money remitters’ own AML/CFT compliance. He instanced a letter from ANZ Bank to a money remitter in which ANZ declined to offer an account because the remitter’s approach to AML/CFT risk management did not meet ANZ’s risk appetite. The letter was sent on 5 December 2018, long before the 2023 Regulations. ANZ recommended that the customer take a number of steps that might persuade ANZ to change its stance; they included changing the customer’s compliance programme and operating procedures, providing evidence that the systems operate effectively, showing that transactions are not aggregated for monitoring purposes, and showing that customer due diligence was being performed at an individual customer level. ANZ later finally refused to offer accounts, stating that it was not satisfied the remitter could meet all of these recommendations.
In our view this evidence does not show that ANZ was engaging in blanket de‑risking. Nor does it show that ANZ was duplicating the customer’s compliance systems. It is consistent with ANZ taking steps to ensure that it met its own compliance obligations.
There is evidence of other trading banks closing money remitters’ accounts for reasons which were not clearly articulated but appear to be something to do with the way in which the accounts were operated. The evidence suggests that occasionally remitters have used personal or general business accounts for remittances without first telling the bank concerned. There is evidence from one witness, Lars Cronin, deposing that two banks told him they do not offer accounts to money remitters as a matter of policy and evidence from another, Uddhav Kirtikar, who runs a compliance business servicing money remitters, that in his experience trading banks do apply a blanket policy of refusing to deal with them.
RBNZ cautioned banks against blanket de-risking, issuing a public statement on 28 January 2015 in which it stated that it wished to ensure bank’s AML/CFT obligations did not result in money remitters being denied access to banking services without good reason.[23] Rather, decisions should be made on a case-by-case basis. There is evidence that it has been Government policy that banks should continue to provide banking services to facilitate Pacific remittances.[24] Consistent with that policy, the exemption for SMIs presumably was designed to mitigate the risk that banks providing services to money remitters would run afoul of the AML/CFT Act.
[23]Reserve Bank of New Zealand | Te Pūtea Matua “Statement about banks closing accounts of money remitters” (media release, 28 January 2015).
[24]Such as that contained in the evidence of Damian Henry, the acting manager of AML/CFT supervision at the Reserve Bank.
Asked to identify an error in what RBNZ has done, Mr Lennard pointed to the affidavit of Damian Henry, the acting manager for AML/CFT compliance at RBNZ. Mr Henry stated that the AML/CFT Act sets minimum requirements and banks may add their own due diligence requirements according to their appetite for risk. It will be apparent that we see no error in this.
Mr Lennard also pointed to a 2017 sector risk assessment by RBNZ in which money remitters were said to be wrongly classified as high risk. The document does not appear to us to make that claim, though it identifies international payments and “Money Service Businesses” as a source of AML/CFT risk. It then goes on to discuss the categories of money service businesses and notes that some types are “lower risk provided that they are properly regulated”. The document also refers RBNZ’s 2015 statement about money remitters. Counsel also cited a table of “key high risk factors” in a 2019 sector risk assessment by Internal Affairs in which money remitters were included “as a typology and not as an indication of the industry as a whole”. On our reading of that document as a whole — and noting that it was not published by RBNZ — the point made was that the money remittance sector is diverse, ranging from large firms to underground providers that are not registered as such, and the risk they present varies.
Mr Henry deposed that RBNZ does regard the inherent risk of money remittances as high. But inherent risk is defined as the risk before any controls have been put in place. Residual risk is the risk after controls have been put in place. It can vary according to a range of factors, including the size and nature of remittances, remitters’ knowledge of their customers and recipients, delivery channels and the geographic destination of funds. RBNZ has not stated that remitters generally pose a high residual risk. Its stance rather is that risk must be assessed on a case‑by‑case basis.
The appellants say their residual risk is low. They operate their own compliance programmes and say the banks are either refusing to deal with them as a matter of policy or superimposing their own compliance regimes. They say RBNZ ought do more to disabuse the banks of the need to do these things.
We observe that the appellants seek to change trading banks’ behaviour but the banks are not parties to this proceeding and there is no evidence from them. On the evidence we have it has not been shown that they are engaging in blanket de-risking, still less that they are doing so because they have collectively misinterpreted RBNZ’s guidance and relied on it to treat all money remitters as high-risk customers.
Decision
We are not persuaded that RBNZ has made any error in its interpretation of the legislation or its understanding of its powers. We have explained that ss 56–58 of the AML/CFT Act set general minimum requirements and leave it to reporting entities to develop compliance programmes which meet their own appetite for risk. It is not the case that money remitters’ own AML/CFT obligations effectively eliminate risk for trading banks. Supervisors are not obliged to produce guidelines. The appellants have not shown that the guidance RBNZ has elected to give was wrong.
The 2023 Regulations have also changed the position significantly by clarifying the “beneficial owner” definition. So far as the claim concerns past conduct by RBNZ it now appears to be largely moot, and so far as it seeks guidance for the future it is premature because it does not rest on anything done by RBNZ since the 2023 Regulations came into force.
We have not gone into the judgment under appeal because the ground has shifted significantly since it was delivered. We record that our findings do accord generally with those of Gendall J at [98]–[99] and [107]–[118] of his judgment.
The appeal is dismissed.
The appellants must pay costs for a standard appeal on a band A basis with disbursements as fixed by the Registrar.
Solicitors:
Great Wall Lawyers, Auckland for Appellants
Crown Law Office, Wellington for Respondent
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