02 Aug Qian Duo Duo Case highlights the need for appropriate AML/CFT support
A New Zealand High Court decision on the 27th of July 2018 has shed light on the AML/CFT compliance challenges faced by businesses. http://www.courtsofnz.govt.nz/cases/department-of-internal-affairs-v-qian-duoduo-limited
A key factor in the Court’s judgement is that “stock solutions” are simply not good enough, and that compliance with the AML/CFT Act requires a proper understanding of the reporting entity business, when developing appropriate compliance approaches and responses.
This re-enforces the DIA’s long held position that template AML/CFT Programme solutions, even if they are part of more broader solution, are not acceptable and reporting entities put in place an AML/CFT Programme that is appropriately tailored for their business.
The quality support required to tailor an AML/CFT Programme in the way identified in the Court judgement is in very short supply in New Zealand and is becoming less accessible to reporting entities. Faced with the increasing numbers of reporting entities demanding AML/CFT compliance support, some consultancy businesses are apparently adjusting their business models to focus purely technology solutions and/or only target the independent audit market of AML/CFT consultancy (which by definition excludes them from providing the much needed development and implementation support).
Initialism’s tried and tested AML/CFT solutions, include access expert support to reporting entities throughout the AML/CFT Programme development and implementation stages of a reporting entities effort to navigate the complexities of AML/CFT compliance and the AML/CFT Act as core elements of Initialism’s AML Connect, AML Complete and AML Consult.
The DIA initially brought the action against Qian Duo Duo alleging it had breached its compliance obligations under the Act by failing to undertake risk assessments, client due diligence checks, account monitoring requirements and keeping adequate records of transactions. Even though the DIA agreed that the breaches of the Act were not deliberate, and that Qian Duo Duo had endeavoured, albeit unsuccessfully, to comply with its obligations.
The DIA applied to the High Court for civil penalties, requesting an overall penalty of $2,496,000 (the maximum potential penalty for the breaches was $7 million.)
The Court ultimately imposed a reduced penalty of $356,000 – far less than DIA had sought, and much less than the only other case brought under the Act, involving Ping An Finance who were given a penalty of $5.3 million.
In reaching its determination, the Court made a number of observations that should be taken into consideration by businesses when addressing their compliance obligations under the Act:
- The Court accepted that QDD could not reasonably have been expected to comply with the requirements of the Act without the advice and support of external consultants, and Qian Duo Duo was entitled to seek and rely on the advice it received.
- The Court also noted that the complexity and ambiguity of the Act “did not and does not lend itself to stock solutions.”
- None of the consultants engaged to advise on AML/CFT compliance “appeared to have any real understanding of Qian Duo Duo’s business, how the business actually worked, how records were kept and, in particular, what this meant for Qian Duo Duo’s obligations within the AML framework.”
As a result, the Judge ruled that Qian Duo Duo was entitled to a substantial reduction in the civil penalty as a consequence of their failure to identify and correct Qian Duo Duo’s non-compliance with the Act.
Interestingly the court accepted that Qian Duo Duo’s mistaken belief that it was compliant with the Act was reinforced by DIA, which conducted a review and inspection in 2014.
The Court also agreed that Qian Duo Duo’s liability should be reduced due to the “latent ambiguity” in the Act, and the Act adopted very broad and counter-intuitive descriptions of some transactions and also created uncertainty as to who bears liability for conducting due diligence checks on clients in some circumstances.