Terminating a business relationship under the AML/CFT Act: practical guidance from the High Court

​A recent High Court judgment has provided guidance on the requirements of terminating a business relationship when an AML/CFT reporting entity is required to do so under the AML/CFT Act. 

The judgment, Arjang v NF Global Limited [2021] NZHC 395, is likely to be of considerable practical assistance to any reporting entity in New Zealand or overseas that has to terminate a business relationship under the AML/CFT Act or equivalent legislation.

The Court has said that termination of a business relationship means that a reporting entity cannot continue to carry out transactions or other services for the customer, or charge them fees. However, past transactions do not need to be unwound. The customer retains their enforceable rights to any funds in their account, and the reporting entity must return those funds to the customer (or a source that they nominate).

Facts of th​​e case

NF Global runs an online payment platform. Its customers lodge funds with the platform to transfer them internationally. Four customers – Michael Arjang, LD Drago, Sky Capital Management, and Eleanora Sport – had deposited money with NF Global totalling approximately NZ$16.8 million. All had made demands for the funds to be repaid. One of the creditors, Mr Arjang, brought proceedings to have NF Global put into liquidation.

NF Global denied that it was insolvent. It also argued that Mr Arjang and LD Drago were not creditors but suspected money launderers. With respect to Mr Arjang, its suspicion was based on its inability to verify the sources of Mr Arjang’s funds. Mr Arjang’s explanation for sizeable deposits – that he was engaged as a broker receiving minimum commissions of 35 per cent – did not stack up with information provided when his account was initially opened. Further, the company paying him, Richfield Capital, was linked to “24option”, a trading platform under investigation by law enforcement agencies around the world. NF Global also suspected that LD Drago was not a telecommunications company as claimed and was concerned that LD Drago wanted to transfer its funds to a pooled account that hid the actual beneficiary.

The High Court decis​​​ion

The High Court held that all four customers were creditors of NF Global and, notwithstanding its genuine concerns that Mr Arjang and LD Drago were money laundering, that NF Global was required to return their money to them.

Associate Judge Bell said that while there was suspicion on the part of NF Global, prompting the making of suspicious activity reports, there was no evidence of actual money laundering by Mr Arjang or LD Drago. Suspicion of money laundering did not give NF Global reason to withhold repayment of customer funds. It had attempted, but failed to gain comfort from further due diligence. In such circumstances, under s 37(1)(b) of the AML/CFT Act, NF Global was required to terminate the business relationship and return funds held on account to its customers.

Guidance on terminating a business relations​​​hip

The High Court provided the following guidance regarding termination of a business relationship:

1. The customer remains a customer until termination of the relationship is complete. They retain the right to see that the termination is carried out correctly.

2. Termination is prospective, and does not require past transactions to be unwound.

3. Once termination is required, the reporting entity can no longer carry out transactions for the customer and cannot continue charging the customer fees.

4. The customer is entitled to have their funds returned, consistent with their enforceable accrued rights to the funds in their account.

5. The reporting entity should return the funds to the customer, not to the source of funds, unless the customer directs the funds to be paid to the source.

6. Not all of the funds in the customer’s account may be suspect. However, on termination, the reporting entity is not allowed to keep any of the customer’s funds.

7. The requirement to repay is subject to any restraining or forfeiture orders that may be issued by law enforcement.

8. The reporting entity cannot be liable to the customer for breach of contract for terminating the relationship (see s 9(2) of the AML/CFT Act.)

What does this m​​​ean?

This judgment represents the first occasion on which the New Zealand Court has spelled out the practical elements of terminating a business relationship for the purposes of the AML/CFT Act.

The decision is likely to be relevant beyond New Zealand to anyone operating under AML/CFT legislation in other comparable common law jurisdictions. Terminating a business relationship for AML reasons (for example, where customers do not comply with requests for customer due diligence or provide inadequate explanations for the source of funds or wealth) has received scant attention from courts and regulators to date globally. This judgment provides an authoritative reference point to guide termination decisions under the AML/CFT Act. An institution that takes steps to terminate a business relationship in reliance on this judgment will be difficult to criticise (by a regulator or another third party). Reporting entities should welcome this clarity.

If you have any questions about this case, or would like assistance with yo​​ur AML/CFT obligations or compliance programme, please get in touch with the contacts listed or your usual Bell Gully ​adviser.