AML - Kicking off clients without tipping off clients
Financial institutions and other reporting entities put in huge amounts of effort to develop and maintain AML/CFT compliance programmes, identity verification and KYC processes, and transaction monitoring and exception reporting systems. Ensuring that these aspects of up-front compliance and detection are done well is the cornerstone of AML compliance, and is essential to meet the statutory obligations and avoid problems with regulators.
But even assuming all those aspects of the AML/CFT programme work as intended, there will still be very difficult decisions to be made occasionally about particular customers or transactions, including whether to kick them off the firm’s books altogether. Getting those calls wrong can undo all the previous good compliance work. Unfortunately, in this area the law is considerably less prescriptive or helpful.
Wittingly or unwittingly tipping off the customer
Much rests on the shoulders of compliance or legal staff to make the right decision when assessing any given case, be it to report a specific transaction, decline to process an instruction/request, freeze an account or indeed end the client relationship altogether.
One of the most challenging aspects for staff trying to make those difficult judgement calls is the need to avoid falling foul of the ‘tipping off’ or non-disclosure rules. This is particularly when trying to end a customer relationship, freeze or limit facilities, or decline or delay transactional requests. It can be especially acute when there is not quite enough detail or information to reach the threshold of suspicion for purposes of making a Suspicious Transaction Report (“STR”).
New Zealand law, like almost all these types of provisions in various nations, traces its origins to the FATF 40 Recommendations and, in particular, Recommendation 14: [1]
"Financial institutions, their directors, officers and employees should be:
- Protected by legal provisions from criminal and civil liability for breach of any restriction on disclosure of information imposed by contract or by any legislative, regulatory or administrative provision, if they report their suspicion in good faith to the FIU, even if they did not know precisely what the underlying criminal activity was, and regardless of whether illegal activity actually occurred.
- Prohibited by law from disclosing the fact that a suspicious transaction report (STR) or related information is being reported to the FIU."
Dual regime in place during the transition to the new AML/CFT regime
New Zealand’s Anti-Money Laundering & Countering Financing of Terrorism Act (“AML/CFT Act”) was passed into law back in October 2009. After an extended consultation and policy development period, important Regulations just released in July 2011 now confirm the implementation date for obligations under the AML/CFT Act will be for tranche one businesses: 30 June 2013.
On one view this may seem a leisurely timeframe, but, unlike Australia, there is no proposal for an initial 'enforcement holiday' or assisted compliance period. In the meantime, the requirements of the existing Financial Transactions Reporting Act 1996 (“FTR Act”) continue to govern New Zealand business in their reporting obligations, protections and immunities.
This comparison table summarises the tipping-off provisions from New Zealand’s two key statutes:
| New Zealand law current: Financial Transactions Reporting Act 1996 | New Zealand law in force from 30 June 2013: Anti-Money Laundering and Countering Financing of Terrorism Act 2009 |
| Duty not to tip off (section 20): A financial institution making or contemplting making a STR must not disclose the making or existence of the report to anyone except: - the Police - an officer, employee, or agent of the financial institution - a lawyer advising on the matter - the Reserve Bank These exceptions only exist for certain specific functions - e.g. employees of the financial institution are only exempt if the disclosure is for a purpose connected with that person's duties; disclosure to a laywer is exempt only for the purpose of obtaining legal advice. Offence of tipping off (section 22): A knowing breach of s20 is an offence with a maximum penalty of 6 months imprisonment or $5,000 fine for individuals, or a fine up to $20,000 for bodies corporate. Contravention of s20 in more deliberate circumstances is more serious and has a maximum penalty of up to 2 years in prison. - if there is a disclosure for the purpose of obtaining a advantage or pecuniary gain (directly or indirectly) or with intent to prejudice an investigation of a money laundering offence. - if there is a disclosure by the employees or agents of the reporting institution having become aware of the STR and knowing they were not authorised to disclose it, and disclose it for the purpose of obtaining advantage or pecuniary gain, or prejudicing an investigation into a money laundering offence. |
Duty (section 46): A reporting entity must not disclose certain information to anyone except: - the Police - the entity's AML / CFT superviser (Securities Commission, Reserve Bank, Internal Affairs) - an officer or employee of the reporting entity for any purpose connected with their duties - a lawyer advising on the matter - members of a designated business group to decide whether to make a STR. The information that must not be disclosed is: - any STR - any information that will be reaonable likely to identify a person who had handled a transaction over which an STR was mde, or has prepared a STR, or has made a STR - any information that will be reasonably likely to disclose the existence of a STR. The exceptions are similar to the FTR Act provisions, with some differences. Notably, disclose to an "agent" of the financial institution will not longer be covered; but disclosure within a business gorup, as many leading financial institutions are part of, will be covered. Offence (section 94): The equivalent of the two more serious offences from the FTR Act remains, where there is disclose to obtain an advantage or pecuniary gain, or to prejudice a money laundering investigation. Penalties (section 100): A reporting entity or person who commits an offence is liable, on conviction, to: (a) in the case of an individual, either or both of: up to 2 years imprisonment, or a fine of up to $300,000; and (b) in the case of a body corporate, a fine of up to $5 million. |
These sections deal with what is commonly referred to as tipping off. Disclosure of information is closely controlled to avoid a situation arising where an institution or employee alerts the customer, suspected money launderer or any unauthorised person of the existence of an STR, the information in the report, or that an STR is under consideration.
The AML/CFT Act criminal offences relate to the more serious situation of tipping off to gain some sort of advantage, pecuniary or otherwise, or to prejudice a money laundering investigation. This is punishable by 2 years imprisonment or substantial fines.
The offences may be committed by employees as well as the institutions themselves. While unlikely that a mainstream financial institution would be silly enough to knowingly act 'in cahoots' with a customer in this way, a risk does remain wherever relatively junior staff or tellers (whose salary level may leave incentive towards temptations of corrupt offers from customers) are in the front line of transactions. Either way, the reputational damage and PR fallout would affect the employer/bank too.
Leaving aside intentional disclosure, there appears to be a slight legislative gap around inadvertent or negligent disclosure. The “knowingly” disclosing offence from the FTR Act is not directly carried over into the new legislation, although it could be dealt with under s96 of the AML/CFT Act for obstruction of any investigation relating to a STR without lawful justification or excuse. In practice, serious or gross negligence even without deliberate intent would attract unwelcome attention from the Police or regulator.
Both the FTR Act and AML/CFT Act prevent the disclosure of any information in connection with, or in the course of, court proceedings - unless the court considers that the interests of justice require disclosure.
Comparison with Australia
Section 123 of the Australian AML & CTF Act 2006 is a singular provision that provides both the duty not to disclose and an offence and penalty if the duty is breached.
The s123 duty not to disclose covers information has been communicated to AUSTRAC under a suspicious matter reporting obligation, or the fact that a suspicion has been formed, or any other information from which a person could reasonably infer that a suspicion had been formed. If a reporting entity has been required to give information to authorities, it must not disclose that it was so required, or that the information was given.
The inclusion of any information from which somebody could infer that a suspicion had been formed appears to be potentially significantly wider than the language used in New Zealand.
A number of exceptions apply – such as where the disclosure is to lawyers, accountants, or a person specified in the AML/CTF Rules, or where the disclosure is to try to dissuade a customer from committing a specified offence. These and other exceptions explicitly put the evidential burden on the defendant to prove these exceptions apply.
Areas of particular interest
The legislation really gives no guidance to a reporting entity on how to manage tricky situations, and since each example will heavily depend on its own facts, generalisations are dangerous. The unspoken policy of an AML regime is to make a range of financial reporting entities the unpaid eyes and ears of the regulator, to identify and detect money laundering activity, and bear the costs of doing so. Part and parcel of this policy is that responsibility for making the tough calls resides with the reporting entity.
This is of course especially so where the facts do not yet give sufficient suspicion to make an STR to the Police. FATF Interpretative Notes to Recommendation 14 recognise there is sometimes risk a customer could be unintentionally tipped off during the due diligence process, and that entities should be sensitive to that risk. But even after a STR is made, although the NZ Police FIU will give some practical guidance (and in exceptional cases, directions to act or not to act in a particular way) the critical decisions on customer relationships or activities remain with the reporting entity.
Very few New Zealand cases have discussed the rules around tipping off or disclosure. A useful summary of how the Courts perceive the overall structure of the obligations in the FTR Act was set out by the Court of Appeal in 1999: [2]
The true position is:
- the Act imposes obligations on banks and other financial institutions to report certain suspicious transactions
- it does not purport to limit other obligations or powers under the general law which the institutions may have to report or inform
- in particular it says nothing about any powers which they may have under the law to disclose iniquity
- it does not regulate, except in one particular aspect, the giving of evidence about suspicious transactions
- it is about the obligations of institutions towards the State through the police rather than about the rights of their customers to confidentiality or privacy.
The exception for "one particular aspect" was of course reference to non-disclosure and tipping off. The question arose in that case in an odd way, where the people on trial for money laundering sought to oppose evidence led by the prosecutor from the former bank officer who had handled their banking transactions and raised the alarm. The bank clerk had spoken to her assistant manager, and to her husband who, as it happened, was a police officer. Consequently, a letter was written to the Bank’s lawyer and the bank clerk reported to Police and liaised with them from then on, including filing STRs.
The accused said that to give such evidence would breach the non-disclosure rules. The Court of Appeal easily dismissed that argument as "misconceived". The Court said the tipping off rules are not directed to the stage of the process involving gathering evidence for court use, but to the earlier stage of alerting the Police (and possibly agencies in other countries) to suspicious circumstances which might require investigation and evidence-gathering.
Even if the bank owed duties of confidence to its customer, the Police as a third party owe no such duty and can seek information from a bank. In any event the bank was completely within its rights (and obligations) to respond to Police enquiries and, even under previous common law rules, would have been protected in doing so.
In some circumstances, the reality is that simply freezing an account or stopping a transaction is likely to alert a sophisticated customer to the prospect that a STR has been made or is under consideration. An interesting example is provided by Swiss law, which makes it mandatory to freeze funds that are subject to a STR (other countries, such as the UK, have a notification and consent procedure for blocking transactions). FATF in its 2005 Mutual Evaluation of Switzerland [3] commented adversely on this, as Chaikin explains: [4]
In the FATF view, the automatic freezing requirement may alert a customer of the existence of a suspicious report. The customer could then take additional steps to hide illicit monies which were not caught by the initial freeze. Thus, the FATF suggested that the Swiss authorities consider de-linking the freezing and suspicious transaction requirements. Although there is some merit in the FATF suggestion, it may be noted that the freezing/ tipping off dilemma is not unique to the Swiss STR system: it is likely that any freezing of an account will lead sophisticated criminals and money launderers to believe that they are under investigation
In New Zealand there have been recent examples of areas where ML risks are considered particularly high, and mainstream banking institutions have moved to remove customers, or cease providing services to a particular segment of the market.
Company Service Providers who set up shelf companies or incorporate other business structures, frequently for offshore interests or shell trading platforms, have come heavily under the spotlight. The case of SP Trading, which was reportedly linked with arms trading and a labyrinth of foreign businesses using New Zealand incorporated companies, attracted international media attention and highlighted the ML risks. In the aftermath of that, many reporting entities ceased doing business with those firms, the government moved to tighten up company incorporation requirements, and many such providers simply closed down.
The recently released July 2011 AML/CFT Regulations have fully closed the circle in relation to trust and company service providers, by bringing them directly into tranche one of the regime. If trust or company services are the only or principal part of their business, they are reporting entities who must comply with the AML/CFT Act.
The second challenging area is small money remittance or wire transfer businesses (a common problem around the world). They frequently serve immigrant communities in repatriating money to and from the country of origin. Some mainstream banks have stopped providing services to such businesses, leaving them to seek alternative foreign exchange providers or to go underground. Some transmitters are probably not compliant, but a number are trying to run legitimate businesses. While from a bank’s perspective, everyone in that line of business may pose an unacceptable ML risk, it does raise a conundrum for bigger picture policy: is the ML risk more manageable with these types of financial providers kicked out of mainstream systems, or if they are allowed to stay within the fold under close supervision?
Finally, the high degree of suspicion that New Zealand courts decided was necessary before refusing to carry out a customer’s orders, in the Westpac v MAP Associates case [5] is causing some consternation. That was not a tipping off case, but one where an entity could have been criticised or sued if it proceeded with a transaction in dubious circumstances.
The case has been appealed to the Supreme Court, and judgment is currently reserved and pending.
A version of this article appeared in the Anti Money Laundering Magazine August 2011. To view a printable version of this article, click here.
- FATF 40 Recommendations (as at October 2003) reprinted 2010,
see www.fatf-gafi.org/recommendations. - R v Harris, NZCA [2000] 2 NZLR 524 per Keith J at para [5].
- FATF (2005), Third Mutual Evaluation Report on Anti- Money Laundering and Combating the Financing of Terrorism: Summary Switzerland.
- "How effective are suspicious transaction reporting systems?", David Chaikin, Journal of Money Laundering Control, Vol 12 No 2, 2009, pg 238.
- See AML Magazine December 2010, page 24.
Kicking off clients without tipping off clients - the New Zealand position — A version of this article appeared in Australia's Anti-Money Laundering Magazine - August 2011
byA specialist litigation firm