15.04.2021

How to break up with a suspected money launderer: High Court Guidance

The High Court has provided guidance on how to end a business relationship with a suspected money launderer.

Ending a business relationship with a suspected money launderer does not excuse a reporting entity from an obligation to repay its debt to its customer. A reporting entity which suspects that its customer is a money launderer must stop acting for that customer and return the customer’s funds. This is what the NZHC has held in Arjang v NF Global Limited.

The key issue of the case related to whether customers of NF Global Limited (NF Global) had the ability to call for repayment of their debts by NF Global and were creditors notwithstanding that NF Global suspected they were money launderers.

The Court held that NF Global must repay its debts to its customers, notwithstanding NF Global’s money laundering concerns and its requirement to terminate its business relationships with those customers pursuant to section 37(1)(b) of the Anti-Money Laundering and Counter Financing Terrorism Act 2009 (Act).

Facts

NF Global offered an online payment platform where customers lodged funds with it to make international transfers.  This made NF Global a reporting entity. Accordingly, it was required to comply with the obligations under the Act, which include completing customer due diligence (CDD) checks.  This involves the reporting entity being satisfied that a customer is who they claim to be, and in some instances, where the customer’s funds come from.

Customers lodged funds on NF Global’s platform and subsequently asked for their money back. NF Global refused to pay.  The customer then served a statutory demand and brought a proceeding to liquidate NF Global on the ground that it could not repay their debts.

NF Global’s defence for non-repayment was that it could not discharge its CDD obligations in respect of the customers in accordance with the Act.  It claimed that as NF Global was required to terminate its relationship with those customers in this circumstance, the customers could not call on NF Global for the repayment of their debt.

High Court Guidance 

The Court rejected NF Global’s claims and provided guidance on what NF Global should have done when it was unable to conduct CDD on its customers in accordance with the Act.

  • Under section 37(1)(b) of the Act, NF Global was required to terminate its business relationship with the customers. This meant NF Global could no longer carry out transactions for those customers or continue charging them fees.
  • Past transactions were not required to be undone.
  • In the absence of a contractual provision allowing NF Global to keep the money on termination of the business relationship under section 37 of the Act or any restraining or forfeiture orders, NF Global was required to return all of the customer’s funds on termination of the business relationship. Even if not all funds were suspect, NF Global was not permitted to retain any of the customer’s funds.
  • NF Global was required to return the funds to the customer, not to the source, unless the customer directed the funds to be repaid to the source. As an extra layer of precaution, NF Global could have asked the customer to designate a NZ bank account or a solicitor’s trust account as the destination account for the returned funds.

The Court also provided that where NF Global terminated its business relationship with a customer pursuant to section 37 of the Act, it could not be liable for breach of contract for terminating that relationship under section 9(2) of the Act.

Key takeaways

Where a reporting entity is unable to conduct CDD on a customer in accordance with the Act, it must terminate the business relationship.  This means the reporting entity must not provide its services to the customer anymore (e.g. provision of credit, remittance of funds).  They must also stop charging fees (e.g. lending fees, account fees) to the customer.

Generally, a customer is entitled to have the funds returned to it on termination of the business relationship with a reporting entity, notwithstanding a reporting entity’s money laundering concerns in respect of the customer.The requirement to repay is subject to any contractual right to the contrary and any restraining or forfeiture orders.

If you would like any assistance or advice regarding your obligations under the Anti-Money Laundering and Counter Financing Terrorism Act 2009, including how to conduct customer due diligence, preparing a risk assessment and programme for your business, please get in touch with Sarah Gibbs or Christine Leung of our Business Advice Team or your usual contact at Hesketh Henry.

 

Disclaimer:  The information contained in this article is current at the date of publishing and is of a general nature.  It should be used as a guide only and not as a substitute for obtaining legal advice.  Specific legal advice should be sought where required.

 

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Kerry
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