The High Court has today restored simplicity to a central provision in the Proceeds of Crime Act 2002 (Cth), elevating the importance of the facts, and reversing a technical approach that had taken hold in the Supreme Court of New South Wales.((The approach of the NSW Courts culminated in Lordianto v Commissioner of the Australian Federal Police [2018] NSWCA 199; 337 FLR 17; see also my commentary))
Today’s decision, Lordianto v Commissioner of the AFP; Kalimuthu v Commissioner of the AFP [2019] HCA 39, is the culmination of numerous cuckoo smurfing cases under the Proceeds of Crime Act 2002. I was trial counsel and junior counsel on appeal for Kalimuthu. Both appeals were dismissed. However, the decision is not a complete win for the Australian Federal Police (AFP).
Background
The following summary assumes knowledge of the background of the Lordianto and Kalimuthu cases. More detail is available in my earlier blog posts.
The operation of s330(4)(a)
The High Court has unanimously endorsed observations made many years ago in the WA Supreme Court ((Commissioner of the AFP v Li [2015] WASC 488; 306 FLR 130 at [116(b)].)) about the purpose and operation of s330(4)(a). Today the Court stated:
“In many cases, perhaps most, [s330(4)(a) of the Proceeds of Crime Act 2002 calls for] an inquiry very similar to the inquiry under the general law about whether a person is a bona fide purchaser for value without notice.”
Joint reasons at [63], Edelman J concurring at [120].
The Court also observed the need to construe s330(4)(a) whole, rather than approach issues it raises in isolation.((At [9] and [61].))
After discussing the judgment in legal terms, at the end of this blog post I suggest what it means for the innocent cuckoo smurfing victims who are being pursued by the Australian Federal Police.
Identifying the Property
The High Court made the important observation that before a Court applies the section to a particular case:
“Identifying the property sought to be excluded, and the property said to be acquired (as they may be different), is a critical initial step. It ensures that the property sought to be excluded is the subject of the restraining order and, where relevant, that it is proceeds, or an instrument, of an offence …
Significantly, it also ensures that the balance of the question under s 330(4)(a) is the right question: namely, did the applicant for the exclusion order acquire the relevant property for sufficient consideration without that applicant knowing, and in circumstances that would not arouse a reasonable suspicion, that that property was proceeds, or an instrument, of an offence? If the property is misdescribed, what an applicant needs to prove necessarily proceeds from the wrong starting point.”
At [68]
Temporal Disjunction
Their Honours were not persuaded by an AFP argument that s330(4)(a) required ‘temporal disjunction’ (as it was described by the Commissioner and some of the Courts below) between the commission of some criminal offence and the acquisition of property by the current owner / applicant for an exclusion order.((At [100].))
Third Party
The High Court agreed with the submission I argued in the Courts below that “a ‘third party’ is no more, and no less, than a person who meets the description of what follows in s 330(4)(a), in light of the scheme of the Act and, in particular, ss 329 and 330.”((At [64] and [94].))
Sufficient Consideration
The High Court also agreed with my argument that the question of sufficient consideration is “self-evidently not undertaken in some vacuum divorced from the circumstances in which the applicant acquired the property.”((at [71])) Their Honours undertook an analysis of how electronic banking (and banking in general) actually works.((At [74] to [83].)) This was a step that was overlooked in some of the decisions in the lower courts.
The High Court found that the appellants, with the exception of Kalimuthu’s wife, had provided sufficient consideration.
Suspicion
Critically the High Court agreed with the AFP that the test for suspicion is objective and that:
“… although knowledge may in some circumstances be relevant, that does not extend to subjective ignorance of the law. The purpose of the scheme of the POCA is to prevent criminals from enjoying the proceeds of crime. To find that ignorance of the law is a defence would subvert this purpose. It would allow anyone to deal with criminals and merely assert ignorance of the law.”
It was for this reason the appellants failed. The appellants (with the exception of Kalimuthu’s wife) knew about the deposit pattern, namely that their accounts were receiving a large number of small deposits, all under $10,000 and often many such deposits on multiple days.
Wider considerations
The Court observed that the AFP’s approach to s330(4)(a) would leave banks without a remedy if the AFP sought to freeze cash deposited with the bank.((At [104-5].))
That was clearly unpalatable to the Court. For good reason. The consequences of the approach taken to s330(4)(a) would have left many innocent people in many situations defenceless against claims brought by the AFP. For example, see paragraphs 20-24 of the submissions advanced by Lordianto (and adopted by Kalimuthu).
Cuckoo Smurfing
Today’s decision is the first time the High Court has used the term ‘cuckoo smurfing’ in a judgment. Cuckoo smurfing, cuckoo smurf and variants were used 16 times throughout the judgment including in the catch words. Read more about cuckoo smurfing as a money laundering methodology.
What does today’s decision mean for innocent cuckoo smurfing victims who are being pursued under the Proceeds of Crime Act?
Today’s decision leaves the door open to argue that an innocent victim did not have sufficient factual knowledge to raise a suspicion. If the Court accepted that argument the cuckoo smurfing victim would be protected by s330(4)(a). A victim who can demonstrate that s/he was ignorant of the deposit pattern may, in an appropriate case, succeed in an application for exclusion of restrained property.
It has to be acknowledged that in all likelihood a substantial number of innocent cuckoo smurfing victims will still fail.
The case law is likely to continue to develop.
Update 6 October 2020
The NSW Court of Appeal’s 2 October 2020 decision in Gwe v Australian Federal Police gives hope to innocent victims of cuckoo smurfing who have been pursued under the Proceeds of Crime Act. For more information, review my summary of the Court of Appeal’s decision.
Hi Edward,
Thanks for your very helpful discussion of this complex area of the law.
I wonder whether there isn’t too much emphasis on the so-called innocence of a person who, seeing an unexpected pattern of deposits in their account, which reasonably should arouse suspicion, does nothing about that. Isn’t such a person thereafter concealing the structuring, and so committing an offence of laundering, especially if the funds (chose in action, if you will) are then directed elsewhere by the account holder?
Your comment would be appreciated. I think this is the first time I have ever suggested “too much emphasis on innocence”!
Thanks for your query Don.
I don’t think there is too much emphasis on innocence. Fundamentally, a person who is not colloquially ‘innocent’ will never come near satisfying the test in s330(4)(a). As I have quoted the High Court has indicated the test closely resembles that of ‘bona fide purchaser for value without notice’. A person with a remotely guilty mind is not a bona fide purchaser.
To expand a little further, there has been no suggestion in any of the cuckoo smurfing cases that the respondent was not innocent. Rather the AFPs submission has been that their innocence is irrelevant. In terms of applying the test that is so. Whether it’s irrelevant as a matter of public policy is for others to judge.
I don’t agree with your suggestion that the account holders see an “unexpected pattern”. You might not expect it if you were in their shoes. But the simple reality is that alternative remittance is not the same as banking. Alternative remittance involves a contra of funds flowing in 2 different directions. If (quite absent cuckoo smurfing) I send $100k from country A to country B via alternative remittance, I am probably not going to receive a single credit to my account in country B of $100k. There might be other people sending $50k, $40k and $30k in the other direction. Mathematically, those 3 sums cannot make up $100k. So I might well receive credits to my account of $50k, $40k and $10k. The remaining $20k of the $30k that is going the other way will have to be set off against another transaction going the same way as mine. For a fuller explanation please see the heading “How does alternative remittance (hawala) work?” on my page: https://egreaves.com.au/cuckoo-smurfing/
You also say “Isn’t such a person thereafter concealing the structuring, and so committing an offence of laundering”. I would focus on “concealing” and say absolutely not. In short no one can conceal that which they are unaware of.
Lordianto and Kalimuthu did not fail because they knew what was happening was illegal. Nor did they fail because they turned a blind eye. That was advanced by the AFP in Lordianto’s case and rejected in the Courts below. They failed because on an objective standard a reasonable person would have had a suspicion (not of the technical offence of structuring, but a suspicion that something untoward was going on).
Thanks for the reply Edward.
Indeed, it is essential to the success of, and implicit in the name of, a “cuckoo” smurfing operation, that one recipient is innocent. Otherwise the whole thing would fail at the get-go. Innocent here just means unaware of the offending connected with the transactions. But awareness of multiple deposits can easily be classified in law as recklessness.
It seems that even people who are familiar with this sort of international transfer can find themselves looking at deposits in their accounts that should arouse suspicion (as in Lordianto at [27]-[28], [34], [37], [111]), even though from their own experience these transactions might seem routine. Is the “risk” of illegality ever-present, for the purposes of determining recklessness? Even the circumstances discussed at [114], where what might have been “cogent” for one person was not “cogent” according to the Court, suggest that the respondent must do more than simply ask “why all these small deposits?” It seems that just seeing the deposits is seeing the risk, and the rest is objective (the reasonableness of the suspicion), recklessness being the unreasonable taking of a known risk. Hopefully, a person would usually get an explanation that is cogent according to the law, but apparently not here.
For laundering, it seems that a person can conceal what they are reckless about. Under our (NZ) definition of “conceal”, conversion of property from one form to another is concealment, given the necessary recklessness, and the fact that the property is the proceeds of an offence.
Interesting, I think so, once one starts looking at this. But you will know much more about this that I do, especially of course from an Australian perspective, so my unease might be entirely beside the point.