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 
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
Facts of the 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 decision
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 relationship
The High Court provided the
following guidance regarding termination of a business relationship:
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.
Termination is prospective, and does not require past
transactions to be unwound.
Once termination is required, the reporting entity can no
longer carry out transactions for the customer and cannot continue charging the
The customer is entitled to have their funds returned,
consistent with their enforceable accrued rights to the funds in their account.
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.
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.
The requirement to repay is subject to any restraining or
forfeiture orders that may be issued by law enforcement.
The reporting entity cannot be liable to the customer for
breach of contract for terminating the relationship (see s 9(2) of the
What does this mean?
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
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 your AML/CFT obligations or compliance programme, please get in
touch with the contacts listed or your usual Bell Gully adviser.
This publication is necessarily brief and general in nature. You should seek professional advice before taking any action in relation to the matters dealt with in this publication.