On 11 September 2018, the NSW Court of Appeal published the long awaited decisions in Lordianto v Commissioner of the Australian Federal Police [2018] NSWCA 199 (Lordianto) and Commissioner of the Australian Federal Police v Fernandez [2018] NSWCA 198 (Fernandez).
The proceedings were not related, but raised common issues. They were both proceedings in which money remitters had been used for the purpose of remitting overseas funds into Australian bank accounts. In each case, the persons who ultimately had their property restrained whether victims of “cuckoo-smurfing”.
What is cuckoo-smurfing?
Cuckoo-smurfing is “another emerging form of money laundering”. The expression “cuckoo smurfing” originated in Europe because of similarities between this topology and the activities of the cuckoo bird, which lays its eggs in the nests of other species of birds which then unwittingly take care of the eggs believing them to be their own.
In Lordianto, it was described as follows (at [22]):
It is convenient at this point to describe the process or system known as “cuckoo smurfing”. Evidence of this process was given by a former officer of the Australian Federal Police, whose report, after redaction, was admitted into evidence without objection and treated by the primary judge, at [53]-[54], as factual evidence. The process involves the following steps:
“a. An international ‘Controller’ meets with an Australian crime syndicate head and agrees to launder a specific sum that is the proceeds of crime. The Controller receives a percentage of the criminal funds and is responsible for paying other money laundering syndicate members.
- The Controller instructs a complicit ‘Coordinator’, who is the proprietor of a money remittance business usually located in Singapore, Malaysia or Indonesia, to withhold customer remittances to Australia in an amount equalling the sum that the Controller has agreed to launder.
- The Coordinator instructs his employees, known as ‘Collectors’ in Australia to collect the criminal cash from the Australian syndicate. The Coordinator asks for the serial number of an Australian $5 note held by the Collector, and passes the number to the Controller.
- The Controller supplies the criminal syndicate head with the telephone number of the Collector and the serial number of the bank note held by him. The criminal syndicate head calls the Collector and arranges to meet to hand over the criminal cash.
- The meeting is conducted, the Collector provides the $5 note as identification and the criminal cash is handed to the Collector.
- The Collector confirms receipt of the criminal cash. The Coordinator provides the Collector with a list of bank account details and cash amounts originally obtained when customers requested the transfer of funds to Australia.
- The Collector attends a series of banks, making deposits of the criminal cash under the AUSTRAC reporting threshold (although this is not always the case) until all of the requested remittances have been satisfied.
Once the Coordinator has been informed that all of his customers’ remittances have been satisfied he can release the money originally supplied to him by the remitting customers to the criminal syndicate.”
In Commissioner of the AFP v Kalimuthu (No 3) [2017] WASC 108, Allanson J described cuckoo-smurfing as follows at [71]:
In short, it relies on identifying a person offshore who wishes to transfer funds to a bank account in Australia using a money remitter. The remitter withholds amounts corresponding to the amount of money he has been told is to be laundered in Australia. The customer’s bank account details are provided to people in Australia. A team of depositors in Australia deposits cash into the bank account, generally at a series of bank branches and below the threshold for reporting transactions involving physical currency. The account holder sees deposits that match the amounts they intended to remit. Because the amounts of each deposit are below the threshold, there is generally no record that could enable regulatory agencies to intervene.
The issue arising under the POCA
Where cuckoo smurfing occurs, the deposits into the Australian victims’ bank accounts are generally made in cash and commonly below the $10,000 reporting limit. Depositing funds in such manner with the intention to avoid the reporting obligations constitutes a contravention of section 142 of the Anti-Money Laundering and Counter-Terrorism Financing Act 2006 (Cth) (AML/CTF Act). That offence is commonly known as “structuring”.
Importantly, in neither Lordianto or Fernandez was it alleged that the persons who had received the structured funds had themselves been involved in money laundering.
Notwithstanding that fact, the Commissioner of the Australian Federal Police (Commissioner) restrained such funds for the purpose of subsequent forfeiture to the Commonwealth under the Proceeds of Crime Act 2002 (POCA).
The issues in Lordianto
The central issue in the appeal was whether, by operation of section 330(4)(a) of the POCA, the funds standing to the credit of the bank accounts had ceased to be “proceeds” or and “instrument” of crime. That required the applicants to show that the rights associated with the funds in the accounts (relevantly a chose in action) had been:
“… acquired by a third party (i.e. the exclusion applicant) for sufficient consideration … and in circumstances that would not arouse a reasonable suspicion, that the property was proceeds of an offence …”.
The issues were able to be broken down further as follows (at [25]):
- Whether each deposit into the appellants’ bank accounts constituted an acquisition of an “interest” in “property” by them within the meaning of the POCA: appeal grounds 1 and 2.
- Whether the appellants were a “third party” under the POCA, s 330(4)(a): appeal grounds 3, 4 and 5.
- Whether the appellants’ interests in their bank accounts were acquired for sufficient consideration for the purposes of s 330(4)(a): appeal ground 6.
- Whether the circumstances would have raised a reasonable suspicion on the part of the appellants that the property was proceeds of an offence or an instrument of an offence for the purposes of s 330(4)(a): appeal grounds 7 and 8.
Below follows an edited version of the resolution of these issues, as described in the headnote to Lordianto.
Interest in property
Per Beazley P and Payne JA; McColl JA agreeing: The appellants possessed “property” within the meaning of the POCA, namely a chose in action in respect of each of their bank accounts enforceable against the Commonwealth Bank constituted by the right to compel the bank upon demand to pay an amount equivalent to the amount standing to the credit of each of their accounts.
The appellants’ right to demand payment was an “interest” in relation to the property. Accordingly, the appellants acquired an “interest” in “property” each time a deposit was made into their bank accounts: [47]-[82].
Third party
Per Beazley P and Payne JA; McColl JA dissenting: A “third party” is a person who, at the time of the criminal conduct, is wholly removed from the property constituting the proceeds of an offence. The person must acquire the property after it becomes proceeds of an offence. Accordingly, the appellants were not a “third party”: [89]-[117].
Per McColl JA: Any construction of s 330(4)(a) of the POCA must be consistent with the language and purpose of all the provisions of the POCA, and reflect the hierarchy of the provisions to give each provision the meaning which best gives effect to its purpose and language while maintaining the unity of the statutory scheme: [210].
The clear intent of s 330(3) of the POCA is that property remains characterised as the proceeds or an instrument of an offence, notwithstanding that it has been dealt with in a manner contemplated by s 330 whether once, or on repeated occasions. There is never a temporal disjunction which can disassociate a subsequent purchaser or acquirer from a transaction which constitutes an element of an offence: [217], [220].
Subsection 330(4) has the effect that the characterisation as the proceeds or an instrument of an offence (s 330(3)) ensures property the subject of a s 330(3) transaction retains, “ceases” if any sub-paragraph of s 330(4) applies: [222].
When the holder of a bank account into which funds which are the proceeds of an offence are credited cannot be said to be a “party” to the s 330(3) transaction in the sense of being intentionally complicit in the laundering activity, or stands at arms’ length to the transaction, that person is a “third party” for the purposes of s 330(4): [227].
Sufficient consideration
Per Beazley P and Payne JA; McColl JA agreeing: The appellants did not acquire their interests in the bank accounts for sufficient consideration, as they did not provide consideration to the persons who made the deposits into their Commonwealth Bank accounts, who the appellants did not know and had no connection with, contractual or otherwise: [133]-[140].
Reasonable grounds to suspect
Per Beazley P and Payne JA; McColl JA agreeing: The conduct identified by the known circumstances would have aroused a reasonable suspicion on the part of the appellants, who were financially sophisticated international investors, that their interests in the bank accounts were proceeds of an offence. The appellants need not have known that the conduct constituted an offence: [154]-[163].
Consequences of Lordianto
Having regard to the decision in Lordianto, absent a successful appeal in the High Court, innocent victims of cuckoo-smurfing will not be able to succeed to obtain exclusion orders. This is one of the clearest examples of legislation creating an enormous gap between a legal position and a moral and just position. It is almost inconceivable that Parliament contemplated these consequences when it enacted the relevant provisions of the POCA. It also raises serious questions as to whether the Commissioner should proceed to obtain restraining orders in circumstances where innocent victims of money laundering offences will see their property forfeited.
In Commissioner of the Australian Federal Police v Tjongosutiono [2018] NSWSC 48, N Adams J, in another cuckoo-smurfing case, observed that a victim’s “grievance is against the person who took his money and unwittingly involved him in a money laundering operation.” Having regard to the decision in Lordianto, it may well be that the only avenue available to a victim of cuckoo-smurfing is to pursue remedies in the foreign country against the relevant money remitter. Although that may be hypothetically possible, it is highly likely that any such remitter will go “underground” and that any proceedings will be fruitless.
The upshot is that innocent people have lost, and will continue to lose, millions of dollars, all of which will ultimately end up with the Commonwealth. It is likely that decisions such as Lordianto will, over time, stem the flow of funds through money remitters aligned with criminal syndicates. It is, however, unfortunate that the manner by which this is sought to be achieved is by depriving innocent victims of their funds. The analogy with people smugglers looms large. A hard stance by the Commonwealth against innocent refugees is hoped to stem the tide of people smuggling.
The WA Court of Appeal has reserved its decision in another cuckoo-smurfing matter: AFP v Kalimuthu (No 3) [2017] WASC 108. In that case, the innocent victim succeeded but the Commissioner appealed. It is likely that the issue will soon be considered by the High Court.
