THE INK PATCH MONEY TRANSFER LIMITED AND SAMOA MONEY TRANSFER LIMITED v RESERVE BANK OF NEW ZEALAND [2023] NZCA 587

THE INK PATCH MONEY TRANSFER LIMITED AND SAMOA MONEY TRANSFER LIMITED vRESERVE BANK OF NEW ZEALAND [2023] NZCA 587 [22 November 2023]IN THE COURT OF APPEAL OF NEW ZEALANDI TE KŌTI PĪRA O AOTEAROACA340/2022[2023] NZCA 587BETWEEN THE INK PATCH MONEY TRANSFERLIMITED AND SAMOA MONEYTRANSFER LIMITEDAppellantsAND RESERVE BANK OF NEW ZEALANDRespondentHearing: 13 September 2023Court: Miller, Goddard and Wylie JJCounsel: M T Lennard and M A Keil for AppellantsH W Ebersohn and E J Cameron for RespondentJudgment: 22 November 2023 at 2.30 pmJUDGMENT OF THE COURTA The appeal is dismissed.B The appellants must pay costs for a standard appeal on a band A basis withdisbursements as fixed by the Registrar.____________________________________________________________________REASONS OF THE COURT(Given by Miller J)Introduction[1] The appellants are money remitters. They provide cross-border remittanceservices. 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. Accordingto the appellants, remittances account for about 20 per cent of the gross domesticproduct of Samoa.[2] To carry out its business on a cost-effective basis a money remitter needs anaccount with a registered New Zealand trading bank. But some banks have beenclosing accounts used for remittances and refusing to do business with moneyremitters. This practice is known as de-risking. The appellants say the banks areengaging in blanket de-risking, meaning they are refusing as a matter of policy to dealwith money remitters.[3] The banks are motivated by the costs and risks of compliance with theirobligations under legislation designed to prevent money laundering and financing ofterrorism. That legislation is the Anti-Money Laundering and Countering Financingof Terrorism Act 2019 (the AML/CFT Act). Speaking generally, it requires thatfinancial institutions know who their customers are and monitor customer transactionsfor suspicious activity.[4] Money remitters are also subject to the AML/CFT Act, which classifies bothremitters and banks as reporting entities,1 and they must therefore meet the samecompliance requirements. The appellants say that the banks can rely on AML/CFTcompliance by money remitters and need not look through their bank accounts toassess AML/CFT risks posed by the remitters' customers.[5] The Reserve Bank of New Zealand | Te Pūtea Matua (RBNZ) is New Zealand'scentral bank, with responsibility for monetary policy, issuing currency, protecting andpromoting financial stability, and the prudential supervision of registered banks.2 It isalso the AML/CFT supervisor for trading banks.3 The AML/CFT supervisor formoney remitters is Te Tari Taiwhenua | the Department of Internal Affairs.41 Anti-Money Laundering and Countering Financing of Terrorism Act 2019 (AML/CFT Act), s 5(1)definition of "reporting entity".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).[6] The Minister of Justice has issued a class exemptions notice, the Anti-MoneyLaundering and Countering Financing of Terrorism (Class Exemptions) Notice 2018.The Class Exemptions Notice relieves banks of certain obligations under theAML/CFT Act for customers who are money remitters.5 In the past, banks have takenthe view that this exemption does not go far enough to eliminate any obligation ontheir part to inquire into the person on whose behalf a transaction is completed by amoney remitter. In the acronym-rich world of AML/CFT compliance, such personsare called POWBATICs.[7] RBNZ accepts that money remitters perform a valuable function and it agreesthat blanket de-risking is not justified. It is concerned that de-risking could result inthe withdrawal of banking services in some places, as an unintended consequence ofNew Zealand meeting its international obligations to combat money-laundering andterrorism financing. Officials have been making attempts to address challenges facingmoney remitters servicing the Pacific Islands through an initiative called thePacific Remittances Project.[8] But RBNZ does not accept that de-risking is in fact universal among tradingbanks. It says that banks are assessing for themselves the AML/CFT risk that anygiven remitter presents, as the legislation requires. RBNZ says that it has provided asmuch guidance as is reasonable and proper and the law requires no more of it.[9] In this application for judicial review the appellants seek declarations whichare tantamount to orders that RBNZ either direct trading banks to supply them withaccounts or supply them with such accounts itself. It also asks for declarations thatRBNZ has not taken steps which might encourage the banks to stop unjustifiedde-risking. Chief among these is a failure to correct what they say is amisapprehension held by the banks about the effect of the Class Exemptions notice.5 AML/CFT Act, s 157; and Anti-Money Laundering and Countering Financing of Terrorism (ClassExemptions) Notice 2018 (Class Exemptions Notice), s 157 and sch pt 6.[10] In the judgment under appeal, which was delivered on 8 June 2022, Gendall Jaccepted RBNZ's defence that legislation either does not permit or does not require itto do these things.6[11] On 31 July 2023, amendment regulations, the Anti-Money Laundering andCountering 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 ofmoney remitters. RBNZ evidently has not yet given any guidance about the 2023Regulations and we do not know what effect they will have on the behaviour of banks.[12] We have formed the view that in light of the 2023 Regulations theforward-looking relief sought is now either moot or premature. We can express ourreasons briefly.The legislation[13] We confine ourselves to the immediately relevant provisions of the relevantinstruments.The AML/CFT Act[14] Section 11 requires that a reporting entity conduct customer due diligence on,among others, any beneficial owner of its customer. "Beneficial owner" means theindividual who:7(a) has effective control of a customer or person on whose behalf atransaction is conducted; or(b) owns a prescribed threshold of the customer or person on whosebehalf a transaction is conductedIt will be seen that the definition refers to POWBATICs.6 The Ink Patch Money Transfer Ltd v Reserve Bank of New Zealand [2022] NZHC 1340 [judgmentunder appeal] at [99], [118]–[119], [122]–[123], [131]–[133] and [136].7 AML/CFT Act, s 5(1) definition of "beneficial owner".[15] Under ss 56–58, a reporting entity must operate a compliance programmewhich meets certain minimum requirements. These include adequate and effectiveprocesses for: customer due diligence, reporting suspicious activities and prescribedtransactions, and keeping written findings about business relationships andtransactions from or in countries that lack sufficient AML/CFT systems.Before conducting customer due diligence or establishing an AML/CFT complianceprogramme, a reporting entity must first undertake an assessment of the risks that itmay reasonably expect to face in the course of its business.8 Reporting entities mustalso arrange independent audits of their risk assessment and compliance programmes.9[16] When developing programmes, reporting entities must have regard to anyapplicable guidance material produced by AML/CFT supervisors, in this caseRBNZ.10 There is no obligation to give guidance, but the supervisor must prepare acode of practice if so directed by the Minister.11 (It does not appear that the Ministerhas done so.) The functions of supervisors are set out in s 131. Generally, they takethe form of monitoring what reporting entities do and providing reporting entities withguidance to assist them to comply with their obligations under the Act and itsregulations. To these ends, supervisors have powers to inspect reporting entities'information, to conduct on-site inspections and to issue guidance by, among otherthings, producing guidelines and providing feedback on reporting entities'compliance.12[17] Under s 157 the Minister may grant exemptions, which have the status ofsecondary legislation.13The Class Exemptions Notice[18] The relevant exemption took effect on 30 June 2023.14 It applies to reportingentities whose customers are specified managing intermediaries (SMIs).158 Section 58(1).9 Sections 59 and 59B.10 Section 57(2).11 Section 63.12 Section 132.13 Section 157(4).14 Class Exemptions Notice, sch pt 6 cl 6.15 Schedule pt 6 cl 1.Money remitters are SMIs.16 The Class Exemptions Notice states that the Ministerexempts relevant reporting entities (here, the banks) from carrying out the followingrequirements in respect of customers who are SMIs:17(a) the requirement to conduct customer due diligence, under section11(1)(b) of the [AML/CFT Act], on any beneficial owner of acustomer:(b) the requirement, in any circumstances where the reporting entity isrequired to conduct enhanced customer due diligence, to carry out theidentification and verification requirements under sections 23 and24(1) of the [AML/CFT Act] on any beneficial owner of the customer:(c) the requirement to conduct enhanced customer due diligence, undersections 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 enhancedcustomer due diligence because section 22(1)(a)(i) or (b)(i) ofthe [AML/CFT Act] applies.[19] The exemption is subject to certain conditions:184 In respect of an SMI customer, this exemption is made subject to thefollowing conditions:(a) clause 1(a) and (b) may not be relied on in respect of an SMIcustomer that has effective control, or owns more than 25%,of the specified managing intermediary; and(b) the reporting entity must conduct enhanced due diligence onan SMI customer in accordance with section 22A(2) of the[AML/CFT Act] if the SMI customer conducts a transactionto which section 22A of the [AML/CFT Act] applies; and(c) the reporting entity—(i) must obtain written confirmation, signed by a seniormanager of the specified managing intermediary, tothe effect that the specified managing intermediary—(A) has an AML/CFT programme (or foreignequivalent); and(B) has its principal place of business in ajurisdiction with sufficient AML/CFTsystems and measures in place; and16 Schedule pt 6 cl 2 definition of "specified managing intermediary".17 Schedule pt 6 cl 1.18 Schedule pt 6 cl 4.(C) is supervised for AML/CFT purposes; and(D) is conducting customer due diligence inaccordance with the [AML/CFT Act] (or itsforeign equivalent); but(ii) is not required to verify a written confirmationobtained under subparagraph (i) unless there arereasonable grounds for the reporting entity to doubtthe adequacy or veracity of the written confirmation;and(d) the reporting entity must comply with any request from itsAML/CFT supervisor for the name of 1 or more SMIcustomers 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 customerhas effective control, or owns more than 25 per cent of, the SMI.[20] Clause 5 explains that the exemption aims to prevent duplication of customerdue diligence by both a reporting entity (here, the bank) and the SMI:195 This exemption has been granted because the requirement for areporting entity to conduct customer due diligence on all beneficialowners of a specified managing intermediary or on all SMIcustomers—(a) may lead to duplication of customer due diligenceobligations; and(b) has associated costs, may give rise to privacy concerns, andmay deter international investment; and(c) is out of proportion to the risk of money laundering andterrorism financing posed.[21] Banks are not obliged to make use of the exemption.20The 2023 Regulations[22] 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 s5(1) of the Act, "beneficial owner":19 Schedule pt 6 cl 5.20 Judgment under appeal, above n 6, at [99].(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 isa customer of a customer, but only if the person meets the requirementset out in paragraph (a).It will be seen that this amendment excludes POWBATICs from the definition ofbeneficial owner unless they possess ultimate ownership of the reporting entity'scustomer (here, the money remitter).[23] It is common ground that the 2023 Regulations clarify the meaning ofbeneficial owner to exclude a POWBATIC unless that person owns or controls themoney remitter. It follows that the definition of beneficial owner does not require thata bank conduct customer due diligence on the customers of its money remittercustomers. This makes redundant the argument that was made before Gendall J, tothe effect that banks were mistakenly interpreting the previous beneficial ownerdefinition to include POWBATICs.Banks' compliance obligations with respect to money remitters[24] Notwithstanding the 2023 Regulations, and contrary to the tenor of thesubmissions of Mr Lennard for the appellants, banks cannot ignore the activities ofmoney remitter customers when it comes to their own AML/CFT compliance.[25] As with any other reporting entity, banks must assess the risk posed by theircustomers under s 59 of the AML/CFT Act and develop AML/CFT programmes whichinclude adequate and effective procedures for reporting suspicious activities unders 58. Money remitters handle other people's money and remit money offshore,sometimes to jurisdictions which lack adequate compliance systems. For thesereasons they pose, as a class, a degree of risk that their customers will use their servicesfor money-laundering. Banks must develop their programmes accordingly. The onusis on them to do so, taking into account any guidance offered by RBNZ.[26] The Class Exemptions Notice and 2023 Regulations do not eliminate banks'obligations to conduct what the AML/CFT Act describes as simplified customer duediligence on money remitters who qualify as SMIs.21 They must conduct customerdue diligence on any customer of an SMI who has ultimate control of the remitter.22Under s 22 and s 22A the AML/CFT Act they must also conduct enhanced duediligence of an SMI in certain circumstances.No reviewable error by RBNZ[27] 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, moreambitiously, that it ought to be required to give better guidance.[28] Mr Lennard drew our attention to trading bank behaviour which was said toevidence de-risking and unnecessary duplication of money remitters' own AML/CFTcompliance. He instanced a letter from ANZ Bank to a money remitter in which ANZdeclined to offer an account because the remitter's approach to AML/CFT riskmanagement did not meet ANZ's risk appetite. The letter was sent on 5 December2018, long before the 2023 Regulations. ANZ recommended that the customer take anumber of steps that might persuade ANZ to change its stance; they included changingthe customer's compliance programme and operating procedures, providing evidencethat the systems operate effectively, showing that transactions are not aggregated formonitoring purposes, and showing that customer due diligence was being performedat an individual customer level. ANZ later finally refused to offer accounts, statingthat it was not satisfied the remitter could meet all of these recommendations.[29] In our view this evidence does not show that ANZ was engaging in blanketde-risking. Nor does it show that ANZ was duplicating the customer's compliancesystems. It is consistent with ANZ taking steps to ensure that it met its owncompliance obligations.[30] There is evidence of other trading banks closing money remitters' accounts forreasons which were not clearly articulated but appear to be something to do with theway in which the accounts were operated. The evidence suggests that occasionally21 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 6cl 3(a).remitters have used personal or general business accounts for remittances without firsttelling the bank concerned. There is evidence from one witness, Lars Cronin, deposingthat two banks told him they do not offer accounts to money remitters as a matter ofpolicy and evidence from another, Uddhav Kirtikar, who runs a compliance businessservicing money remitters, that in his experience trading banks do apply a blanketpolicy of refusing to deal with them.[31] RBNZ cautioned banks against blanket de-risking, issuing a public statementon 28 January 2015 in which it stated that it wished to ensure bank's AML/CFTobligations did not result in money remitters being denied access to banking serviceswithout 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 toprovide banking services to facilitate Pacific remittances.24 Consistent with thatpolicy, the exemption for SMIs presumably was designed to mitigate the risk thatbanks providing services to money remitters would run afoul of the AML/CFT Act.[32] Asked to identify an error in what RBNZ has done, Mr Lennard pointed to theaffidavit 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 mayadd their own due diligence requirements according to their appetite for risk. It willbe apparent that we see no error in this.[33] Mr Lennard also pointed to a 2017 sector risk assessment by RBNZ in whichmoney remitters were said to be wrongly classified as high risk. The document doesnot 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 discussthe categories of money service businesses and notes that some types are "lower riskprovided that they are properly regulated". The document also refers RBNZ's 2015statement 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 wereincluded "as a typology and not as an indication of the industry as a whole". On our23 Reserve Bank of New Zealand | Te Pūtea Matua "Statement about banks closing accounts ofmoney remitters" (media release, 28 January 2015).24 Such as that contained in the evidence of Damian Henry, the acting manager of AML/CFTsupervision at the Reserve Bank.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 largefirms to underground providers that are not registered as such, and the risk they presentvaries.[34] Mr Henry deposed that RBNZ does regard the inherent risk of moneyremittances as high. But inherent risk is defined as the risk before any controls havebeen put in place. Residual risk is the risk after controls have been put in place. It canvary according to a range of factors, including the size and nature of remittances,remitters' knowledge of their customers and recipients, delivery channels and thegeographic destination of funds. RBNZ has not stated that remitters generally pose ahigh residual risk. Its stance rather is that risk must be assessed on a case-by-casebasis.[35] The appellants say their residual risk is low. They operate their owncompliance programmes and say the banks are either refusing to deal with them as amatter of policy or superimposing their own compliance regimes. They say RBNZought do more to disabuse the banks of the need to do these things.[36] We observe that the appellants seek to change trading banks' behaviour but thebanks are not parties to this proceeding and there is no evidence from them. On theevidence 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'sguidance and relied on it to treat all money remitters as high-risk customers.Decision[37] We are not persuaded that RBNZ has made any error in its interpretation of thelegislation or its understanding of its powers. We have explained that ss 56–58 of theAML/CFT Act set general minimum requirements and leave it to reporting entities todevelop compliance programmes which meet their own appetite for risk. It is not thecase that money remitters' own AML/CFT obligations effectively eliminate risk fortrading banks. Supervisors are not obliged to produce guidelines. The appellants havenot shown that the guidance RBNZ has elected to give was wrong.[38] The 2023 Regulations have also changed the position significantly byclarifying the "beneficial owner" definition. So far as the claim concerns past conductby RBNZ it now appears to be largely moot, and so far as it seeks guidance for thefuture it is premature because it does not rest on anything done by RBNZ since the2023 Regulations came into force.[39] We have not gone into the judgment under appeal because the ground hasshifted significantly since it was delivered. We record that our findings do accordgenerally with those of Gendall J at [98]–[99] and [107]–[118] of his judgment.[40] The appeal is dismissed.[41] The appellants must pay costs for a standard appeal on a band A basis withdisbursements as fixed by the Registrar.Solicitors:Great Wall Lawyers, Auckland for AppellantsCrown Law Office, Wellington for Respondent