Lordianto v Commissioner AFP: Cuckoo Smurfing victim loses appeal under the Proceeds of Crime Act 2002

On 11 September 2018, the New South Wales Court of Appeal published decisions on 2 appeals, heard together under the Proceeds of Crime Act 2002 (Cth):

Lordianto v Commissioner of the Australian Federal Police [2018] NSWCA 199; and

Commissioner of the Australian Federal Police v Fernandez [2018] NSWCA 198.

The AFP was successful in each case.

Mr Lordianto and his wife, and likewise Mr Fernandez (who is unrelated to Lordianto) used alternative remittance to remit (transfer) considerable sums into Australia. They were victims of cuckoo smurfing. Click for more information about cuckoo smurfing and alternative remittance. In a nutshell, their remittances were (unknown to them) hijacked by criminal money laundering syndicates who swapped their money for tainted funds.

I argue there is little difference (in policy) between their situation and the situation of a person who withdraws cash from a smart ATM that happens to have been previously deposited into that same smart ATM by a drug dealer. However that has not been the finding of the NSW Court of Appeal in these cases.

Lordianto in particular has consequences for another 15-21 (or possibly more now) cases around the country that are lined up behind it. ((See the interlocutory decision in Lordianto [2017] NSWSC 551 at [6]-[8].)) The AFP has been unable to say how much is restrained across all the cases. My guestimate is that it is between $50m – $100m. It is only likely to grow.

Procedural Background

Fernandez’s and Lordianto’s cases were each heard by Simpson J (in separate hearings in the NSW Supreme Court). Her Honour published her reasons in both cases on the same day. I have previously written about her Honour’s decisions here.

Fernandez ran a relatively simple argument before Simpson J. It resulted in her Honour finding that money in Fernandez’s Australian bank account was an instrument of the money launderer’s criminal activity, but not proceeds of that activity. That finding opened up the public interest discretion in s 49(4) of the Proceeds of Crime Act 2002 which her Honour then exercised in Fernandez’s favour.

Lordianto ran a more complicated argument before Simpson J. They applied for exclusion of the restrained bank accounts under sections 29/31 of the Proceeds of Crime Act 2002. Their application relied heavily on the interpretation of s 330(4)(a) that I ran, and which Allanson J in the Supreme Court of Western Australia upheld, in Commissioner of the AFP v Kalimuthu [No 3] [2017] WASC 108. Unlike Allanson J in Kalimuthu’s case, Simpson J rejected that argument. Hence Lordianto’s appeal.

Overview of the Lordianto and Fernandez appellate decisions

The focus of the NSW Court of Appeal’s unanimous decision in Fernandez is upon the question of whether Mr Fernandez “acquired” a new property interest (a right or power) as a result of additional funds being deposited to his account. The Court found that he did. As Mr Fernandez had acquired a new interest as a result of the structured (cuckoo-smurfed) deposits, and having regard to the breadth of the concept of “derived” as used in the Proceeds of Crime Act ((See Commissioner of the AFP v Hart [2018] HCA 1, particularly Gordon J.)) the Court found that Mr Fernandez’s interest in his bank account was derived from the unlawful activity of the launderers. Accordingly his bank accounts were also “proceeds of crime” and there was no public interest discretion available to exercise.

The Court went on ((At [86].)) to say that if they were wrong about the existence of the discretion, Fernandez bore the onus of persuading the Court to exercise it. In my view that was unremarkable. Finally the Court indicated ((At [87].)) that had a discretion existed it would not have exercised it in Mr Fernandez’s favour. The Court indicated its agreement with some earlier appellate remarks; again from a case I was involved in Courtenay Investments Ltd v Director of Public Prosecutions (Cth) [2012] WASCA 121, where Buss JA (McLure P and Mazza JA agreeing) held at [115] that “the concept of ‘public interest’ … is sufficiently broad to include, as factors requiring consideration, any relevant prejudice or hardship”. There was no analysis of why that principle would not have assisted Mr Fernandez (presumably because it was purely an academic point).

Lordianto is more likely to have wide ranging consequences. It focuses attention upon the elements of s 330(4)(a), a key definitions section in the Act designed to create a carve out from forfeiture for innocent purchasers of tainted property. Lordianto argued that the money paid to their bank accounts was, to quote s 330(4)(a) of the Proceeds of Crime Act 2002:

“… acquired by [them as] a third party for sufficient consideration … and in circumstances that would not arouse a reasonable suspicion, that the property was proceeds [or an instrument] of an offence …”

And accordingly the money paid into their accounts ceased to be tainted (in their hands).

In order to win, Lordianto needed to persuade the Court of Appeal that they satisfied each of the concepts emphasised above. The Court found they failed on each concept.

Third party

President Beazley and Justice Payne held that Lordianto was not a third party. This meant the Commissioner of the AFP won without having to go any further.

The majority accepted that third party was a difficult concept to give meaning to.

At [101] the majority said “we consider … a “third party” is a person not a party to the transaction by which the property became proceeds of an offence or an instrument of an offence.”

My concern with the majority’s approach is that they have not given sufficient attention to the consequences – in terms of how it will affect people – even in very different situations to cuckoo-smurfing. I suggest that on the law as pronounced by the majority, no innocent person can ever be a third party in relation to tainted funds paid into their bank account. This is because there will always be a further money laundering offence committed by the drug-dealer or whatever who makes the payment to the innocent person – which on the approach taken by the majority means the innocent person is not a third party (because they were a party to a transaction that formed part of a relevant offence). I argue that cannot have been Parliament’s intention. This is essentially why Justice McColl dissented (and concluded that Lordianto was a third party). I prefer McColl JA’s analysis.

I also consider that the majority failed to have regard to the history of the Proceeds of Crime Act on this point. ((Which the majority set out quite comprehensively at [90]ff.)) Importantly in my view:

• The words third party were first used by the Australian Law Reform Commission to describe a person who was not the offender, who could apply for relief against forfeiture under the Proceeds of Crime Act 1987.
• The 1987 Act was replaced by the current Act.
• The revised explanatory memorandum to the Bill that became the current Act said: “The Bill replicates the safeguards for innocent third parties, dependants and people with an interest in property which exist in the current legislation” ((Quoted at [92] of Lordianto with full references.))
• Thus I consider it is palpably clear that when Parliament used “third party” in s 330(4)(a) without defining the term, it must have been using the term in the manner used by the Law Reform Commission. And it did not intend to introduce an additional hurdle.

Sufficient consideration

The words “sufficient consideration” are defined in s 338 of the Act as follows: an acquisition or disposal of property is for sufficient consideration if it is for a consideration that is sufficient and that reflects the value of the property, having regard solely to commercial considerations. ((the definition is quoted in Lordianto at [26].))

All 3 judges said that Lordianto did not give sufficient consideration for the deposits made to their accounts. I believe this is the result of the way Lordianto’s case was presented at first instance before Simpson J. Lordianto’s formal grounds (broadly equivalent to pleadings and required by s 31(4) of the Act) contended that Lordianto:

entered into agreements with [money changers] in Jakarta, Indonesia … to pay amounts in Indonesian rupiah in order to purchase at agreed exchange rates, amounts in Australian dollars to be deposited by the [money changers] into Australian bank accounts. ((Reasons at [36(ii)].))

This would have given Lordianto an interest in the Australian cash before it was deposited into Lordianto’s Australian bank accounts in an illegal fashion. I can see why that would trouble a Court.

I am not aware of other cases before the Courts being particularized in that way. I think it should be avoided.

Reasonable suspicion

I say the correct approach to reasonable suspicion in these cases is (if third party and sufficient consideration can be satisfied):

• Was the restrained property acquired by the respondents [this is the first part of s 330(4)(a)],
• such that a reasonable person in their circumstances and knowing what they knew [see DPP (Vic) v Le ((It is necessary to consider both the Victorian Court of Appeal decision and the High Court decision. Each is cited in Lordianto at [154]))],
• would have had a factual basis for forming a positive feeling of actual apprehension [see George v Rockett ((Reported at (1990) 170 CLR 104 at 115)) and Queensland Bacon v Rees ((Reported at (1966) 115 CLR 266 at 303 (Kitto J).))],
• that either:
  the property acquired was wholly or partly derived or realised, whether directly or indirectly, from the commission of … [statutory definition of proceeds]; or
  the property acquired was used in, intended to be used in, or in connection with, the commission of …[statutory definition of instrument]
• an offence against s 142 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (AMLCTF Act) that had as constituent elements:
  2 or more non-reportable transactions as defined [ie cash deposits under $10,000], and
  critically, the sole or dominant purpose (of an unknown person engaging in the transactions) of ensuring or attempting to ensure that the transactions would not give rise to a threshold transaction (as defined) [s142 AMLCTF Act].

Although the majority quoted DPP(Vic) v Le on the nuanced objective nature of the test (ie objective but having regard to the actual knowledge and personal circumstances of the person concerned) they did not recite any of the well-known passages about the meaning of suspicion (Queensland Bacon etc). Nor did they weave what lies at the heart of s 142 AMLCTF into the test.

Rather the Court of Appeal placed considerable focus on the fact that “ignorance of the law is no excuse” ((At [156][157].)). I agree that ignorance of the offence created by s 142 AMLCTF Act would be no excuse. But that, with respect to the Court of Appeal is not to the point. Unless a person knows that cash deposits over $10,000 are treated differently by banks to cash deposits under $10,000 it is impossible to entertain a suspicion that some unknown person acted with the “the sole or dominant purpose” of circumventing the relevant banking regulations.

In short I consider there are weaknesses in the Court of Appeal’s approach to reasonable suspicion.

Perhaps most importantly for the 20 or so similar cases already before the Courts around Australia ((See the interlocutory decision in Lordianto [2017] NSWSC 551 at [6]-[8].)), and for other future cases, the approach of the NSW Court of Appeal was factually heavy (in a manner open to be distinguished on the facts), see in particular at [162-3]:

[162] Her Honour found Ms Koernia’s evidence in relation to her knowledge about the threshold reporting requirements in Indonesia to be unconvincing. We agree with that conclusion. The appellants were financially sophisticated and used to transferring large sums of money across national borders, as well as dealing with currency controls and a myriad of national disclosure requirements. Financially sophisticated international investors may be taken to know that many national requirements are related, broadly speaking, to the detection and prevention of money laundering. The appellants dealt regularly with some of the largest and most sophisticated financial institutions in Asia. The appellants’ evidence was that Ms Koernia was responsible for these transactions and that she chose to use Indonesian money changers to transfer the $4,500,000 to Australia because they offered a better rate than all of the most sophisticated financial institutions in Asia.

[163] It would have been obvious to a reasonable person in the position of the appellants that for the Indonesian money changers to have offered a better rate than all of the most sophisticated financial institutions in Asia, Australian regulatory requirements (including anti-money laundering laws), which all create costs, may have been circumvented … it is clear that the appellants failed to discharge their onus of proof on this issue.

What to do if you act for a cuckoo smurfing victim?

The takeaway message for those advising individuals involved in litigation against the AFP in similar cases appears to be:

1. Whilst the majority’s approach to third party remains the law, it would appear almost impossible for any cuckoo smurfing victim to succeed. If McColl JA’s approach finds favour, then,

2. Be very careful how you particularise agreements between clients and money-changers.

3. Carefully articulate submissions in relation to suspicion and seek to distinguish your case from the facts in Lordianto.

Lordianto has since filed an application for special leave to appeal to the High Court of Australia. Others with cuckoo smurfing cases still in the trial Courts may wish to consider applying to adjourn their cases pending the determination of that application.

On 30 October 2018 the WA Court of Appeal published its reasons in a case of mine: Commissioner of the AFP v Kalimuthu [2018] WASCA 192. Different judges expressed their disagreement with different 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.

Edit: Special leave to appeal to the High Court has been granted for both Lordianto and Kalimuthu. Click for more information.

The above does not constitute legal advice and does not take account of particular circumstances.