Bankers are popping the champagne following a High Court judge ruling it was lawful for Kiwibank to last year try to close the accounts of one of its remittance clients to reduce its exposure to money laundering risks.
The case, brought by E-Trans International Finance, sets a precedent for the way banks and money remitters operate in line with tough new rules under the Anti-Money Laundering/Countering Financing of Terrorism (AML/CFT) Act.
Justice Heath has essentially endorsed Kiwibank’s right to choose who it does business with, and decide whether or not it wants to invest in the systems necessary to monitor its remittance clients in line with the Act.
He’s discharged the interim injunction placed on Kiwibank in June last year, preventing it from closing E-Trans’ accounts.
E-Trans has been operating in New Zealand for 15 years; its focus almost exclusively on servicing customers in China, Hong Kong and Australia. It also has operations in Australia and Canada.
Justice Heath has made his call as remitters around the world accuse banks of crushing the US$600 billion industry by using a “blanket de-risking” policy to systematically get rid of them.
The Reserve Bank of New Zealand has flagged this as an issue, as a number of migrants - Pacific Islanders in particular - rely on remittance firms to send money back home.
The problem for banks is that it can be difficult for them to monitor exactly how much money is being sent between whom, when processing funds through remitters.
During the nine-day trial in February, E-Trans said that by 2014 Kiwibank was the “bank of choice” for remitters ditched by the other banks operating in New Zealand.
E-Trans accused Kiwibank of breaching: 1) its statutory duty owed to E-Trans under the AML/CFT Act, 2) the contract between the two parties, 3) the Commerce Act 1986 and 4) the Fair Trading Act 1986.
Yet Justice Heath has ruled all of E-Trans’ claims fail for the following reasons:
1) Kiwibank didn’t breach its statutory duty
Justice Heath says Kiwibank didn’t breach its statutory duty under the AML/CFT Act to supply E-Trans with banking services.
E-Trans argued Kiwibank had a legal obligation to put all the right systems in place to conduct the necessary due diligence on its customers. It said it couldn’t avoid fulfilling its obligations under the AML/CFT Act by simply refusing to do business with a class of customers.
However Justice Heath has ruled: “Although a particular class of customer might be adversely affected by a reporting entity’s decision not to do business with it, there is nothing in the legislation [AML Act] to suggest that such an entity should be entitled to bring a private claim, invoking statutory obligations.
“The public law purposes of the Anti-Money Laundering Act eliminate that possibility.”
This legality aside, Justice Heath acknowledges the headaches caused by the AML Act. He says it is “sound public policy” for the Government to crack down on the trade of dirty money, protect the ability of foreign workers to send funds to their homelands, and to promote competition in financial markets.
“The problem is that those laudable policy aims conflict. The co-existence of statutory provisions designed to promote each of those public policy goals seems to have brought about unintended consequences,” he says.
Justice Heath recognises requiring enterprises to act as reporting entities under the AML Act comes at the cost of reputational risk to financial institutions. Therefore he says it is “understandable” for banks to reduce their exposures to risks to avoid damaging their reputations.
He recognises the costs of complying with AML standards are high, and it’s likely banks would pass these down to their customers through higher fees for example.
Justice Heath adds: "The policy choices to be made are ones for Government. It is conceivable that they could be given effect through exemptions, guidance from a supervisor, some other existing statutory mechanism or a specific amendment to the Anti-Money Laundering Act."
2) Kiwibank didn’t breach the contract between the two parties
Justice Heath has upheld Kiwibank’s ability to terminate a customer’s contract without giving them a reason but providing 14 days’ notice, as outlined by the general terms and conditions of the contract that governs its relationship with E-Trans.
He’s turned down E-Trans’ argument that in terminating the contract, Kiwibank’s also bound by the New Zealand Bankers' Association’s Code, which obliges it to act “fairly and reasonably”.
The issue of whether the Code can be incorporated in the contract between a bank and customer has been contested in court cases involving Westpac and ANZ before.
Justice Heath concludes that for the Code to be adopted in the contract, someone from the bank with “actual or ostensible authority” would have had to endorse it.
“There is no evidence that the person from whom Mr Sun [E-Trans’ sole director and shareholder] obtained a copy of the 2007 version of the Code had actual authority to bind Kiwibank to a variation to its contract with E-Trans. Nor is there sufficient evidence that the person with whom he dealt had ostensible authority to do so,” Justice Heath says.
He says it’s “inherently implausible” Xiaohua Sun believed the “staff member at the counter” of the bank who gave him the Code, would’ve had the authority to bind Kiwibank to a variation of its contract with E-Trans.
3) Kiwibank didn’t behave anti-competitively
Justice Heath denies E-Trans’ claim Kiwibank behaved anti-competitively by attempting to close its account.
This is despite E-Trans arguing Kiwibank had ditched around 100 of it remittance clients [figure contested by Kiwibank] before it was E-Trans’ turn, and despite the fact remitters need bank accounts to operate.
Justice Heath says Kiwibank hadn’t “colluded in some way with other banks to eject money remitters from the relevant market, or abused market power”.
Yet his main point is that Kiwibank exercising its contractual right to terminate a contract doesn’t fall within the realm of the Commerce Act.
“A termination provision is not one that, of itself, has the purpose, or is generally likely to have the effect, of substantially lessening competition in a market,” he says.
He admits two or more terminations taken in aggregation may be anti-competitive, but “this would still require each clause to have an inherent anti-competitive effect”.
This technicality of the Commerce Act aside, he believes Kiwibank closing E-Trans’ account won’t substantially lessen competition.
He acknowledges banks’ moves to get rid of their remittance customers have “caused an appreciable decrease in the number of such entities”. Yet, “banks have the ability to fill the vacuum, at least in part, by offering money remittance services, most likely at a higher price”.
Furthermore, Justice Heath sides with Kiwibank’s lawyers in arguing Kiwibank only serviced around 30% of the money remitters in the market mid-last year.
4) Kiwibank hasn’t breached the Fair Trading Act
Justice Heath has ruled Kiwibank hasn’t breached the Fair Trading Act by giving what E-Trans says are false reasons for its decision to terminate its contract.
He says that even if Kiwibank was misleading, E-Trans’ accusation doesn’t stand under the Act.
“There is no causal link between what was said and any loss or damage suffered by E-Trans. Whatever reasons were given by Kiwibank for closing the account could not affect the legitimacy of its decision, provided it had not breached the contract or infringed some statutory obligation.”
For background and more on E-Trans’ side of the story, see this story and this one, written at the beginning and end of the trial.
Another one of Kiwibank's remittance clients, KlickEx, says it was last night re-issued a 14-day closure notice from Kiwibank. In April KlickEx issued High Court proceedings against Kiwibank, after the bank attempted to close its accounts. At the time, the Court issued Kiwibank with an injunction preventing it from closing the accounts pending the outcome of the E-Trans case.
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