AFP ordered to return money to innocent cuckoo smurfing victim under the Proceeds of Crime Act 2002

Justice Allanson in the Supreme Court of WA has delivered judgment in Commissioner AFP v Kalimuthu & Anor [2017] WASC 108. His Honour allowed in full an application to exclude the funds standing to the respondents’ Australian bank accounts. I argued the matter on behalf of the successful respondents, Mr Kalimuthu and his wife.

In earlier reasons ((Commissioner of the AFP v Kalimuthu (No 1) [2014] WASC 390.)) his Honour restrained (froze) those funds under s 19 of the Proceeds of Crime Act 2002 (Cth) (POCA). The accounts were frozen on the basis that a Federal Police officer suspected the funds in the accounts were proceeds of crime.

Although the final judgment on the exclusion application records the application as ‘turning on its own facts’, those facts are similar to several other cases currently listed around the country. The decision in Commissioner of the AFP v Kalimuthu answers several legal questions about s 330(4)(a) POCA. The answers are likely to become a precedent in other cases.

The best Australian judicial description of Cuckoo smurfing arguably remains that found in Majeed v The Queen [2013] VSCA 40 at [6] and following. I have written an explanation of cuckoo smurfing here.

Section 330(4)(a) is the primary protection given to innocent third parties (which includes victims of cuckoo smurfing) under the POCA. That much had previously been established in a case I argued in 2015. ((Commissioner of the AFP v Li & Global Forex (Perth) Pty Ltd (2015) 306 FLR 130; [2015] WASC 488 at [116(b)].))

In the last year or so, in a number of cases around the country, the AFP has been arguing that innocent victims of the money laundering methodology of cuckoo smurfing are not protected by s 330(4)(a) when funds are paid into their bank accounts in what is termed a ‘structured’ fashion. His Honour found that such people can be protected by section 330(4)(a).

Facts

1. At Penang, Malaysia, on several occasions Mr Kalimuthu paid cash Malaysian Ringgit banknotes to one Mr Zamri as part of an agreement that Mr Zamri would cause an equivalent amount of Australian Dollars to be deposited to accounts in Australia that Mr Kalimuthu (and his wife) had set up for that purpose. ((reasons at [40]))
2. Mr Kalimuthu used Mr Zamri (whose parents were licenced money changers) because he thought he would get a better exchange rate than he would if he was to use a bank. ((reasons at [36] and [124]))
3. Mr Kalimuthu believed he was sending money in a way that Malaysian law permitted. ((reasons at [133]))
4. Most of the funds were deposited to Australian accounts in cash, by unknown individuals in amounts less than $10,000. ((reasons at [14] to [26])) To the well informed observer (that is well informed about relevant Australian law) a strong suspicion arose of ‘structuring’ (or splitting up) the deposits to avoid the $10,000 cash reporting requirement imposed on Australian banks, contrary to s 142 of the AML/CTF Act. The label applied to this type of activity is “Cuckoo smurfing”, a term his Honour remarked as being “colourful if not particularly descriptive”. ((reasons at [71]))
5. Mr Kalimuthu was aware that a lot of payments were in amounts of less than $10,000. In fact that was all he recalled seeing. ((reasons at [41]))
6. Mr Kalimuthu made only basic inquiries about why the payments were being made in that way; but he received some reassurance from Mr Zamri. ((reasons at [51])). His failure to inquire was not indicative of willful blindness. ((reasons at [138]))
7. Mr Kalimuthu never withdrew any money from the Australian accounts. ((reasons at [18][23][26])) Each of the accounts was frozen by a Magistrate on an interim freezing order and then restrained under s 19 POCA. ((reasons at [87] and [5]))
8. Mr Kalimuthu was a Malaysian citizen who had always lived in Malaysia. ((reasons at [132])) Implicitly Mr Kalimuthu had limited awareness of Australian laws.

The following are the key passages of the judgment:

[105] The debt owed by the Bank to Mr Kalimuthu (in relation to each bank account) is a single obligation to pay the amount standing to the credit of that account from time to time. It is not a series of debts relating to each deposit credited to the account.

And turning to the key concepts in s 330(4)(a) POCA:

Acquisition of property at [114] and following. His Honour holds that Mr Kalimuthu acquired an interest in the Australian bank accounts.

Third party at [117] and following. His Honour holds that Mr Kalimuthu is a third party and describes his position as analogous to that of a seller of Malaysian ringgit who is to be paid by the deposit of a corresponding amount of Australian currency into his account in Australia. The existing contractual relationship with the bank does not alter that he is a third party acquiring property through that transaction.

Sufficient consideration at [122] and following.

Reasonable suspicion (and whether Mr Kalimuthu should have held such a suspicion) at [125] and following. His Honour deals with s 142 AMLCTF Act (AMLCTF Act) at [113] and [129] noting the importance of the offender’s “purpose” in avoiding the reporting requirement. It is difficult to infer that an average account holder, especially a foreign national, who knows little about financial regulation in Australia would hold a suspicion that an offence against the AMLCTF Act had been committed. His Honour says:

“It may not be necessary for Mr Kalimuthu to be aware of the terms of s 142. But he could not have a reasonable suspicion that his interest in his bank account was tainted unless he knew that the deposits were structured (that is, deposits of physical currency in amounts of less than $10,000) and there was some material sufficient to induce a suspicion that they were being done in that manner and form for the purpose of avoiding reporting requirements [found in s 43 AMLCTF Act].”

at [129]

At [125] His Honour applies the objective test (taking into account the respondent’s circumstances) referred to by the High Court in DPP v Le (Vic) to the reasonable suspicion test in s 330(4)(a). As his Honour noted “The question posed by the section is objective: would the circumstances arouse that reasonable suspicion in a person in the position of the respondents, knowing what they knew” (my emphasis).

In closing submissions I had argued that parts of the Commissioner’s approach to the evidence showed a subconscious bias against alternative remittance and amounted to “not looking beyond the white cliffs of Dover,” that is to say a very Anglo-centric approach. If the respondent is from a country where alternative remittance is common, if the respondent is a person who lacks experience with western banking, if the respondent has very little knowledge of the way things are done in Australia, these are all matters to be taken into account.

Subsequent events

The Commissioner of the AFP appealed Justice Allanson’s decision, arguing that his Honour erred in relation to three of the elements of s 330(4)(a). The Commissioner argued that Mr Kalimuthu was not a third party, that he did not pay sufficient consideration and that a reasonable person in his circumstances would have suspected that the property was tainted.

The appeal was heard in Perth on 9 February 2018 by the Court of Appeal (WA) and the decision published on 30 October 2018: Commissioner of the AFP v Kalimuthu [2018] WASCA 192. Between the hearing on 9 February, and the decision on 30 October, the NSW Court of Appeal published its decision in Lordianto [2018] NSWCA 199. Different appeal judges in WA expressed their disagreement with 2 aspects of the NSW Court of Appeal decision in Lordianto. The WA Court of Appeal nevertheless followed Lordianto and ruled in the Commissioner’s favour. Read why here.

Public Interest

Justice Allanson was not called upon to consider whether the AFPs actions were in the public interest.

However in Commissioner of the Australian Federal Police v Fernandez [2017] NSWSC 1197, Simpson J concluded:

“Forfeiture of the property of an innocent victim … does not in any way operate as deterrent to those who use the property of innocent victims to achieve their criminal ends. … [T]he public interest is not served by ordering forfeiture of the defendant’s interest in the property.”

At [92] to [94]