A conversation with a leading anti-money laundering expert

A conversation with a leading anti-money laundering expert

Interview with a Leading AML Expert

Disclaimer: The views expressed in this article are general responses to interview questions and do not relate to any client or case represented by Gary Hughes. Every case is unique, and you should seek legal advice tailored to your particular circumstances. This article was originally written in English, with the Chinese translation provided by Christina Wang. If there are any discrepancies between the Chinese and English texts, the English version prevails.

{ad}

Introducing our expert:

Expert profile:

Gary Hughes is a senior lawyer with more than twenty years' experience in legal representation and strategic risk management. He specialises in helping clients resolve issues or investigations involving government regulators or agencies. He has extensive experience dealing with the Commerce Commission (ComCom), the Financial Markets Authority (FMA) and the Department of Internal Affairs (DIA), alongside in-depth expertise in contract, finance and insurance law. Gary is also an expert in anti-money laundering litigation. His website is: www.law-strategy.nz。

CW: Since the Anti-Money Laundering and Countering Financing of Terrorism Act (the AML/CFT Act) came into force, there have been several court cases, including Ping An Finance, Qian Duo Duo and Jin Yuan Finance. These companies share a common feature: they are all Chinese-owned money remitters whose customers are also predominantly Chinese. Do you think regulators have singled out Chinese-owned financial businesses for particularly strict scrutiny?

GH: New Zealand has three anti-money laundering supervisors covering different business categories, and each operates somewhat differently, which makes the situation rather complicated. The Reserve Bank of New Zealand rarely takes enforcement action through the courts and has not specifically targeted Chinese banks operating here. The Department of Internal Affairs supervises finance companies, money remitters and payment companies. Money remitters, which are assessed as presenting a high money laundering risk, are a major supervisory priority. Some Chinese-owned money remitters lack good compliance practices, making them more likely to be regarded by the DIA as particularly high-risk businesses.

Like the other two AML supervisors, the DIA wants to establish a tough international reputation to prevent New Zealand being seen as soft on money laundering. To achieve this, it appears to have targeted small businesses from the outset. Small businesses with limited resources are less likely to hire specialist lawyers to mount a full defence, so targeting them is a relatively easy way to establish early case-law precedents. This allows regulators to make an example of them as a warning to others, while laying the groundwork for progressively higher penalties in subsequent cases.

CW: To your knowledge, have any proceedings been brought against financial businesses that are not Chinese-owned?

GH: There have been quite a few investigations and warnings, but as far as I know, no proceedings have been brought yet. Of course, that may not remain the case for long.

CW: What typical features of Chinese-owned companies' business practices make them more likely to receive regulatory warnings or face proceedings?

GH: Any business owner or employee whose first language is not English faces a potential disadvantage. Language barriers can cause problems when trying to understand the law, communicate with regulators or seek professional legal advice. If you do not fully understand something, I recommend using an interpreter.

CW: What advice would you give on changing poor business practices and compliance culture?

GH: I have noticed that some business transactions rooted in Chinese cultural practices often lack documentation of the transaction details. Some companies see nothing unusual in keeping transaction records only in WeChat, Skype or Alipay. Worse still, some records exist only in managers' memories. New Zealand's AML/CFT Act, however, requires accurate reporting and record-keeping for every transaction. Without this, regulators cannot determine whether a company is compliant. Relevant court judgments also show that a company facing proceedings will struggle to prove compliance if it has not retained transaction records, making a finding of non-compliance highly likely.

I therefore advise Chinese-owned companies to take compliance requirements seriously, including basic transaction record-keeping. Recording absolutely everything may seem excessive, but at a minimum you should document the relevant transaction details in files that can be readily stored. If you do not record and file the information when the transaction takes place, you will find it difficult later to demonstrate to the regulator that you carried out compliance checks.

Another potential issue is how suspicious transactions are handled. If you have reasonable grounds to suspect that a transaction is connected with crime, you have a duty as a reporting entity under the AML/CFT Act to report it to the Police. However, I have noticed that some companies do not always investigate such transactions in detail or report them promptly—the Act requires reporting within three working days. Further investigation may, on the other hand, lead you to conclude that the transaction is not suspicious. The key point remains that you must retain a written record of the investigation and the decision-making process explaining why you reached that conclusion. Otherwise, when a regulator reviews your business, all it will see is a suspicious transaction and the fact that you did not submit a suspicious transaction report. How will you prove that you identified and investigated the transaction, and explain your reasons for concluding that it was not suspicious?

 

CW: If a regulator has already issued a warning to a company, what should it generally do to avoid further warnings or proceedings?

HG: First, develop a remediation plan based on a thorough understanding of all the regulator's requirements. You must then put that plan into practice and follow it through. The plan must both correct existing problems and prevent similar problems from arising in future. 

For example, if a DIA report identifies incomplete customer due diligence information for certain customers when their accounts were opened, you must first obtain the missing information. You should then review their other records, or similar records for all customers—even those not mentioned in the DIA report—to see whether the same problems exist. Finally, you should amend your account-opening process to ensure the same mistakes do not recur with new customers.

When responding to a DIA on-site inspection, letter or warning, you need to act promptly and comprehensively. Unnecessary delays will only attract further regulatory attention and may even lead to proceedings. 

Jin Yuan Finance, for example, first received a formal public warning letter. A warning letter means the DIA will certainly carry out another on-site inspection. When the DIA inspected Jin Yuan Finance again, however, the earlier non-compliance remained and its internal procedures had still not been corrected, so the DIA brought proceedings. The judge imposed a fine of four million New Zealand dollars plus legal costs, and disqualified the business owner from running companies or providing financial services. Had Jin Yuan Finance taken the warning letter seriously from the outset and implemented prompt, comprehensive remedial action, the consequences might not have been so severe. 

CW: If proceedings are brought against a company, what should it prioritise? How can it effectively limit the damage? 

GH: There are usually warning signs before proceedings are brought, such as an investigation or a formal notice requiring access to the company's historical records. At that point, the company should immediately seek help from an AML specialist. Early professional involvement may help it find alternative solutions and avoid proceedings. As a barrister, my work requires me to appear in court from time to time. I know that court proceedings are expensive, place enormous stress on defendants and prevent businesses from focusing fully on their operations. The lawyer a company chooses should therefore pursue every avenue that could resolve the investigation, avoid proceedings and prevent negative publicity.

If you have already been served with court proceedings, you need to engage an experienced lawyer immediately. Regulators are highly skilled at using procedural law to their advantage, and litigation involves deadlines that you must observe under procedural rules. Remember, though, that not every case has to go through a full trial. An out-of-court settlement may be an option. Settling out of court does not mean showing weakness or losing face.

CW: Without breaching legal professional privilege, could you share some key lessons from your experience representing clients as a defence lawyer?

GH: My work involves dealing with a variety of regulators, covering everything from finance and privacy to building inspections. Over time, I have found the same problems across different fields: Chinese-owned businesses seem unsure how to deal with regulators, or their understanding of and assumptions about government agencies do not apply in New Zealand.

My advice is this. First, as in everyday work and life, the first impression a company gives a regulator is very important. Regulators are interested in its compliance, its attitude towards compliance, and clear documentation or procedures. They do not care whether its managers know important people, how elegant your business card is or how expensive your lawyer is. This is a cultural misunderstanding I have observed among some migrants.

Second, address any problems identified by the regulator as quickly as possible, without delay. You must correct them promptly and, where necessary, engage an expert to design your entire compliance process. AML and related laws and regulations are very complex. Your company must give the regulator confidence: are you genuinely serious about meeting the compliance requirements? If you ignore or delay addressing these issues—or, worse, they are still occurring when the regulator returns—the outlook is poor. In particular, do not try to conceal mistakes or alter old records. Such behaviour will inevitably create further legal problems.

I understand why clients are reluctant to pay for a lawyer unless they have no other choice. But if you are on the verge of facing proceedings brought by a government agency, the earlier a specialist lawyer becomes involved, the more effective they can be. In the long run, this can save you time and money and considerably reduce your stress and anxiety.

 

About the interviewer and translator:

Christina Wang

LLM, CAMS-Audit, CCRP

Chief Compliance Officer, Collinson & Co

Christina Wang has worked in compliance in New Zealand's financial sector since 2012. She is a Certified Anti-Money Laundering Specialist (CAMS), a Certified Anti-Money Laundering Audit Specialist (CAMS-Audit) and a GRC Institute Certified Compliance and Risk Professional (CCRP). Her white paper, 'How New Zealand Small and Medium-sized Enterprises Can Balance AML Compliance with Business Objectives', was published by the Association of Certified Anti-Money Laundering Specialists (ACAMS). She holds a Master of Laws from the University of Auckland and is qualified to practise law in both New Zealand and China.