RBNZ and TSB in the High Court seeking confirmation TSB has breached the AML/CFT Act, and thus how much it should cough up in penalties

The Reserve Bank (RBNZ) and TSB are in the High Court today (Thursday) seeking confirmation TSB has breached the Anti-Money Laundering and Countering Financing of Terrorism (AML/CFT) Act, and thus how much it should cough up in penalties.

In May the RBNZ confirmed it was taking a bank to court for the first time, filing a statement of claim against TSB for "acknowledged breaches" of the AML/CFT Act. The RBNZ isn't, however, alleging TSB has been involved in actual money laundering or the financing of terrorism. 

An agreed statement of facts struck by the RBNZ and TSB says that while the two have reached agreement, they acknowledge it's ultimately for the Court to decide whether TSB has committed any civil liability act, and if so the size of any pecuniary penalty it should be ordered to pay.

The AML/CFT Act sets out civil penalties of up to $200,000 in the case of an individual, and $2 million in the case of a body corporate. 

The RBNZ's statement of claim sets out it's applying to the Court for a pecuniary penalty payable to the Crown, with the RBNZ seeking penalties relating to four categories of apparent non-compliance by TSB:

• the absence of adequate and effective procedures, policies and controls for monitoring and managing compliance with its AML/CFT programme;
• the failure to review and maintain its AML/CFT programme;
• the failure to conduct a risk assessment in respect of its realty operations (TSB Real Estate);
• the failure to have regard to certain countries (Botswana, Ghana, Serbia, Sri Lanka and Trinidad and Tobago) it deals with when reviewing its 2017 AML/CFT risk assessment.

TSB has been a reporting entity under the AML/CFT Act since it came into force on June 30, 2013. In 2016 TSB received a formal warning from the RBNZ for failure to review and update its risk assessment under section 59 of the AML/CFT Act. Then in 2019 the RBNZ identified that TSB continued to show inadequate and ineffective compliance with its AML/CFT obligations. Subsequently TSB said it was "actively remediating" problems with its programme to comply with the AML/CFT Act identified by the RBNZ, but acknowledged legal proceedings were possible and it had made a provision to cover a potential liability.

TSB’s remediation and agreed action plans in response to a 2017 assurance report stated that each of the areas of non-compliance and other areas for improvements would be addressed by specified dates. However, at the time of a 2019 RBNZ on-site inspection, TSB had failed to meet its own target dates for ensuring the compliance of seven specific policies that formed part of its AML/CFT programme with the bank between four and 22 months overdue.

In late 2017 and early 2018 TSB's long serving CEO Kevin Murphy and deputy CEO Charles Duke who was also responsible for internal audits, both left the bank. Current CEO Donna Cooper joined in July 2018.

According to the agreed statement of facts, TSB interpreted comments in an RBNZ report following an on-site visit in 2017 as an indication it was in full compliance with Section 57 (1) of the AML/CFT Act. The RBNZ accepts TSB’s interpretation was not reached in bad faith.

"Following receipt of the 2017 RBNZ on-site report, TSB, including senior management and the Board, believed that the RBNZ considered TSB’s AML/CFT programme to be compliant. From February 2018, management reported to the Board and board committees on the basis that TSB was compliant, including in respect of the requirement to have documented assurance measures," the agreed statement of facts says.

Real estate business made TSB unique

The RBNZ and TSB note that because it owned TSB Real Estate, TSB was unique under the AML/CFT Act in being both a registered bank and what's described as a designated non-financial business or profession. Through ownership of the realty business TSB was required, from the start of 2019, to undertake a full assessment of the risk of money laundering and the financing of terrorism expected via its realty operations.

Although TSB's risk assessment and AML/CFT programme for its banking operations referred to the activities of TSB Real Estate, it had not conducted a specific risk assessment of its realty operations by July 31, 2018, seven months after the AML/CFT Act was extended to the real estate sector. 

"TSB’s failure to complete a risk assessment in respect of its realty operations was attributable to a lack of prioritisation by its risk team. TSB’s risk team had been aware as far back as 2016 that a full risk assessment would need to occur in respect of its realty operations," the agreed statement of facts says.

"The level of [AML/CFT] risk arising in the real estate sector is significant."

Although the Department of Internal Affairs is AML/CFT Act supervisor for real estate agents, in December 2018 the RBNZ told TSB that it would be TSB's AML/CFT supervisor for all of the products and services provided by TSB, including real estate agency work. TSB sold TSB Real Estate to Bayleys Taranaki last October.

According to the agreed statement of facts, from October 2017 TSB conducted inwards or outwards transactions with people in Botswana, Ghana, Serbia, Sri Lanka, and Trinidad and Tobago. However, documents intended by TSB to contain its risk assessment didn't refer to any of these countries. This, the RBNZ says in its statement of claim means TSB hadn't adequately designed and implemented all controls required to identify potential money laundering or financing of terrorism activities occurring within the bank's operations.

"The root cause of the failure to include the countries was the fact that TSB staff did not conduct comprehensive or sufficient quarterly reviews, in accordance with its AML/CFT programme, of a countries list that supported the risk assessment process," the agreed statement of facts says.

"TSB's Board, committees and senior management were not aware that the countries had not been included within the analysis underpinning the risk assessment. Engagement at senior management and governance level on this issue was at a sufficiently high level that awareness of the specific requirements in relation to high risk countries was unlikely. TSB’s records do not indicate any knowledge of this issue."

The agreed statement of facts note that TSB's compliance team undertook an on-boarding review of 52 trust customer files in May 2018. This found just 23% of files showed compliance with all customer due diligence requirements, 52% of files showed compliance with some customer due diligence requirements, and 25% of files showed compliance with few or no customer due diligence requirements.

A follow-up conducted by an external firm in April 2019 showed between 83% and 87% of customer files sampled complied with customer due diligence requirements.

Meanwhile, a branch audit undertaken by TSB in July 2019 identified ongoing deficiencies in customer on-boarding, and that target sample reviews by the branch manager had not been completed. An end of month summary by TSB's bank and compliance support team to the end of July 2019, based on quality assurance samples from each branch, showed significant numbers of customer on-boarding errors discovered in sample checks, including one month in which overall on-boarding accuracy across TSB was determined to be only 86%, and three branches with average on-boarding accuracy of between 70% and 80% for April to July 2019.

In its statement of claim the RBNZ also raises concerns about TSB staff training for AML/CFT risks. 

The agreed statement of facts says TSB has fully co-operated with the RBNZ from the outset, including during its investigation and in relation to court proceedings.  TSB’s AML/CFT programme will be assessed further by the RBNZ during its next on-site inspection.