Banking Code: E-Trans International v. Kiwibank

The Bankers Association’s Banking Code, touted as minimum standards for trading banks, proved to be no more than public relations fluff when a Kiwibank customer challenged the closure of its account.

Trading banks nationally have been closing accounts of customers providing international money transfer services.  Banks argue these customers leave them open to liability for money laundering.  E-Trans International challenged Kiwibank’s actions in closing its operating account.  Through a Kiwibank clearing account, E-Trans provides international money transfers for clients primarily in China and Hong Kong.

Mr Xiaohua Sun of E-Trans told the High Court he went to a Kiwibank branch in 2007 when ASB intended to close his E-Trans clearing account.  A staff member at the counter gave him a copy of the Banking Conduct Code, telling him Kiwibank complies.  Under the Code, banks are obliged to “act fairly and reasonably … in a consistent and ethical way”.  Kiwibank said the rules in the Code do not overide express terms of customer contracts: E-Trans contract with Kiwibank allowed the bank to close accounts on 14 days notice without giving a reason.  The High Court ruled the Banking Code was not part of E-Trans contract with Kiwibank.  Counter staff did not have authority to overide the express terms of Kiwibank’s contracts with customers.  

E-Trans International v. Kiwibank – High Court (19.05.16)

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Money-laundering: E-Trans International v. Kiwibank

Trading banks can clear the field of low-cost competitors providing international money transfers following a High Court ruling.  Banks argue they are at risk under money-laundering legislation when businesses provide foreign exchange transfers through their clearing system.

One unintended consequence of anti-terrorism and anti-corruption legislation enacted in many countries has been major financial institutions strangling competitors.  The retail market for international money transfers requires access to trading banks’ international network.

The High Court was told more than $470 million is transferred from New Zealand to the Pacific Islands each year.  Typical bank charges to Samoa would incur costs of 17.5 per cent; as against 7.3 per cent for a retail non-bank remitter.

Auckland-based E-Trans International Finance challenged Kiwibank’s actions in closing its business account used to clear foreign transfers.  Ninety percent of E-Trans’ business is through China and Hong Kong.  E-Trans turned to Kiwibank in early 2014 after being refused access to ANZ’s, ASB’s and Westpac’s services.

Both US Treasury and NZ Reserve Bank have issued public statements critical of financial institutions terminating accounts of money remitters on grounds of potential liability for participation in money-laundering.  Both central banks said this policy runs counter to the intent of money laundering legislation; it is better to keep retail operators within the banking system where they can be better monitored.

E-Trans argued Kiwibank was in breach of the Commerce Act by closing its account.  It lessened competition in the market for international remittances.  The High Court ruled there was no breach of the Act.  Kiwibank is not a dominant player in the market for financial services.  While trading banks appear to be adopting a common policy of refusing to host retail money remitters, E-Trans did not argue that the banks were colluding to block it.  Even if it were proved that the action of banks generally was lessening price competition by reducing the number of retail money remitters, E-Trans’ complaint was with Kiwibank – itself not a dominant player in the market.

The High Court said there is a policy conflict between government initiatives to curb money-laundering and financial institutions concern about reputational risk.  Bank brands are sullied and there is potential for fines following undetected money-laundering by customers.

Kiwibank could close E-Trans account on fourteen days notice, the High Court ruled.  

E-Trans International v. Kiwibank – High Court (19.05.16)

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Oil: re JFP (NZ) International

Liquidated on the assumption it had no assets, a Texan-owned company was resuscitated by the High Court so beneficiaries of the late owner’s estate could recover over $10 million in royalties flowing from the Kupe gas field in Taranaki.

JFP (NZ) International Ltd was put into liquidation in 2011 sixteen years after the death of its owner, Texan Marvin Lee Smith.  The company provided off-shore drilling services for the oil industry and held a part interest in Origin Energy’s Kupe drilling prospect.  At the time of liquidation, JFP had accumulated tax losses of $7.6 million.  It had no liabilities other than loans from its parent company.  The court was told JFP was put into liquidation one year after a new gas stream was commissioned in the Kupe field.  Executors of Mr Smith’s estate were then not aware of any royalties payable by Origin Energy.

The High Court restored JFP (NZ) to the company register and cancelled the earlier liquidation.  The company is required to pay companies office fees for the intervening years and to obtain an IRD number.

Re JFP (NZ) International – High Court (19.05.16)

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Financial services: FMA v. Vivier

Businesses providing financial services without a local client base could still use New Zealand registration as a “flag of convenience” but only under strict circumstances, the Court of Appeal ruled.

The court upheld a Financial Markets Authority decision to remove Vivier & Co Ltd from the register of financial service providers.  Vivier created a false and misleading appearance of the extent to which it was regulated by New Zealand law, the court ruled.  This damaged the integrity and reputation of New Zealand’s financial markets.

The Financial Markets Authority investigated Vivier after receiving an anonymous tipoff that the company had been accused in the Irish media of tax fraud and money laundering.  A visit to Vivier’s Auckland office identified one bored employee performing only minor administrative duties.  Vivier had no New Zealand clients.  Most clients appeared to be resident in Europe, primarily Spain.  Vivier’s website highlighted its New Zealand registration as a financial service provider, displayed the Financial Markets Authority’s logo and implied, incorrectly, that the Authority supervised its activities.  The Financial Services Providers (Registration and Dispute Resolution) Act does not regulate market activity.  Other financial regulation applies only to financial providers with New Zealand clients.  The court was told Vivier had five directors (two resident in Ireland, one in Italy and two in New Zealand) with a single New Zealand-based shareholder. 

Amending 2014 legislation deals with “flag of convenience” registration by financial providers based in New Zealand but not providing financial services within New Zealand.  To avoid de-registration, these businesses would need to make a special case to the Authority, said the court.  Those with only off-shore clients need to prove they are complying with the rules applicable to these off-shore markets and they are not to advertise themselves as being supervised by any New Zealand regulatory authority.   

Financial Markets Authority v. Vivier – Court of Appeal (13.05.16)

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Insurance: Gidden v. IAG

Dismissed by insurer IAG as being merely an unenforceable “agreement to agree”, the High Court enforced a mediated agreement over a Christchurch earthquake payout as a binding contract to pay the cost of a rebuild, not a repair.  Francis and Barbara Gidden were awarded damages of $707,610 plus $37,400 interest for late payment.

Frustrated with IAG vacillating for four years whether to repair or to rebuild their damaged Wainoni Road home, the Giddens upped the ante, planning to sue.  IAG responded with a letter apologising for the “misunderstandings” which had arisen, managing to misspell their name in the process.  A meeting was held in October 2014 between the Giddens and representatives of IAG with a facilitator present to assist.  IAG’s representatives confirmed thay had authority to reach a binding agreement.  Discussions resulted in a signed memorandum.  Tellingly, this memorandum stated the principal issue to be resolved was a proposal “to rebuild” the Wainoni Road home.  The rest of the memorandum set out a timetable for settling on a rebuild figure.  The IAG policy, issued on its behalf by State Insurance, gave the Giddens a number of options.  They opted to take a cash payout and to manage any rebuild themselves.

The court was told IAG subsequently withdrew offers of a cash payout, stating it had decided to repair the damage instead.  IAG representatives at the October 2014 meeting said the insurer’s Cash Settlement Panel had ruled against a cash payout because increased building costs now resulted in a rebuild estimate at double the estimated cost of repair.

Associate judge Osborne ruled IAG was committed to paying the cost of a rebuild.  The October 2014 agreement gave IAG no right of veto should rebuild costs increase or should its Cash Settlement Panel take a different view.  The whole purpose of the October 2014 mediated agreement was to bring to an end IAG’s unacceptable delay, he said.

Gidden v. IAG – High Court (11.05.16)

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