2018 Litigation Forecast - Financial Services Summary
Ponzi schemes, Bribery and Corruption, and International Sanctions
2017 saw the Serious Fraud Office (SFO) continue to focus on Ponzi schemes, with several successful prosecutions. We expect to see Ponzi schemes remain targets in 2018, with any enforcement action being well-publicised.
Given the importance of preserving New Zealand’s trading reputation, corruption cases also continued to be targets for the SFO during 2017, even when payments were relatively low-level. Expect that to continue in 2018: bribery and corruption remain “priority cases” for the SFO, as confirmed by SFO Director Julie Read, and General Counsel Paul O’Neil, when they spoke at the firm in mid-2017. Also expect enforcement agencies to go after the proceeds of crime following corruption convictions.
New Zealand businesses will also need to be increasingly alert to the need to comply with international sanctions, as illustrated by the Pacific Aerospace Limited case in which a New Zealand aircraft manufacturer pleaded guilty in October 2017 to breaches of UN Sanctions and the New Zealand Customs and Excise Act for the indirect export of aircraft parts to North Korea (via China). Compliance with international sanctions against rogue states is being actively monitored by both the international community and New Zealand.
New Zealand is known for corruption free business practices and the SFO will continue to act in cases like this to maintain that reputation.
Market manipulation, insider trading and disciplinary proceedings before the New Zealand Markets Disciplinary Tribunal (NZMDT)
2017 was an active year for the Financial Markets Authority (FMA) in litigation matters. Two significant “firsts” were the civil proceedings in Financial Markets Authority v Warminger, marking the first extensive judicial analysis of market manipulation in New Zealand, and the first successful criminal prosecution of insider trading in New Zealand, involving a former employee at EROAD, Jeffery Honey.
We expect this level of activity to continue in 2018. The areas of strategic interest to the FMA for enforcement include continued scrutiny of secondary markets, where we expect to see FMA take a hard line when misconduct is identified. A tough approach can also be expected on any identified instances of insider trading. Promoting compliance with the Code of Professional Conduct for Authorised Financial Advisors is another area of interest for the FMA’s enforcement team.
Outside of the courts, we anticipate increased willingness on the part of NZX in 2018 to refer market participants for disciplinary proceedings before its internal New Zealand Markets Disciplinary Tribunal (NZMDT). This follows encouragement by the FMA to make greater use of this process for other than clear and minor misconduct. In view of this, management and boards ought to be vigilant with their companies’ obligations under the listing rules.
The sharing of information and co-ordination of law enforcement action across borders by regulators and enforcement agencies also continues.
Anti-Money Laundering and Countering Financing of Terrorism – no more excuses
The Anti-Money Laundering and Countering Financing of Terrorism Act 2009 (AML/CFT Act) has now been in force for over four years. After a period of leniency while entities have acclimatised to the new regime, there are clear signs that the Department of Internal Affairs (DIA) will tolerate no excuses for non-compliance going forward. The DIA has already had a successful prosecution under the AML/CFT Act in the Ping An case in which the Court ordered payment of a pecuniary penalty of $5.3 million. Our view is that 2018 will mark the beginning of a more litigious period against non-compliant reporting entities.
In a signal of what is to come, on 13 December 2017, the DIA filed its third civil proceeding under the AML/CFT Act against a money remitter, Jin Yuan Finance Limited. The proceedings were brought not because there is any evidence of money-laundering or the financing of terrorism, but because the DIA alleges that Jin Yuan failed to meet AML/CFT Act requirements such as customer due diligence, account monitoring, record keeping and reporting suspicious transactions. This prosecution follows on from a formal warning, and shows that the DIA will closely monitor entities who have been warned and will prosecute if remedial action is not taken.
The FMA and the Reserve Bank also have responsibility for enforcing the AML/CFT Act in relation to certain sectors and are actively monitoring those sectors. These regulators are considering a range of regulatory responses, from litigation to formal warnings against reporting entities who are still non-compliant. For instance, in a formal notice issued for one entity in November 2017, the FMA required a series of remedial steps to be taken after an inspection showed a lack of adequate risk assessment or AML/CFT compliance programmes. The FMA signalled that if these steps were not taken, it would consider further regulatory responses including civil action potentially resulting in penalties of up to $2 million per offence.
In its Annual Report for 2017, the FMA referred to the following problematic issues in AML/CFT which we consider may be a focus for enforcement action in the future:
- failure to file suspicious transaction reports;
- poor governance and management oversight in relation to AML/CFT;
- lack of staff training in detecting and preventing AML/CFT activities; and
- poor due diligence on high risk customers.
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