The following is an edited version of an article written by Sanela Osmanovic, Senior Associate, which was originally published in the Australian Superannuation Law Bulletin in May 2024. In Braz v Host-Plus Pty Ltd [2023] FCA 1454, the Federal Court considered the unfortunate circumstances of a scammer who swindled over $170,000 out of a member’s superannuation account. On 27 June 2024, the ABC reported further details in relation to Mr Braz’s case and this article has been updated to reflect that additional information.[1]
Caution should be exercised when considering how to adopt the outcome from this decision as the Federal Court remitted the matter to AFCA to reconsider and AFCA’s subsequent re-determination is not publicly available.
Both AFCA and the trustee filed a submitting notice and did not participate in the Federal Court proceedings so only Mr Braz and his representatives appeared at the hearing. This results in Braz missing the ‘trustee perspective’ to a degree and raises practical questions about how to best apply the outcomes from the case.
Background to the proceedings
Mr Braz wanted to set up an SMSF but did not realise he had engaged a con artist to assist him. The con artist had made a website which was very similar to an existing and legitimate accounting firm.
Mr Braz completed the required form and provided it and a copy of his passport to the scam company on 1 July 2020. The scammer used that information to request a rollover out of Intrust Super[2] and into a new SMSF’s bank account – which turned out to be the scammer’s own account. The scammer had set up a legitimate SMSF, it was just the bank account details which were fraudulent. The rollover was processed once the trustee had checked the information provided. Mr Braz was not aware this rollover application was made on his behalf.
At the time the rollover was processed, neither Mr Braz nor the trustee were aware they were dealing with a scammer. By the time of AFCA’s determination, all parties were aware of the fraud. ASIC has since obtained injunctions and wind-up orders against the scam company and its sole director.[3]
Steps taken by trustee
The SMSF verification check undertaken by the trustee sought to comply with regulation 6.33E of the Superannuation Industry (Supervision) Regulations 1994 (Cth) (SIS Regulations) which states (my underlined emphasis added in sub-regulation (1)):
(1) This regulation applies to the trustee of a regulated superannuation fund…(the transferring fund) if the transferring fund receives a request under regulation 6.33 to rollover or transfer the whole or a part of a member’s withdrawal benefit from the transferring fund to a self managed superannuation fund (the receiving fund).
(2) The trustee of the transferring fund must:
(a) use an electronic service provided by the Australian government to verify:
[(i) – (v) list various pieces of information such as the ABN of the SMSF]; and
(b) use an electronic service provided by the Commissioner of Taxation to validate that the member is a member of the receiving fund.
(3) – (5) [Not relevant].
The trustee received a copy of a bank statement containing the account number and BSB for the rollover to go into. It was later revealed this bank statement was fraudulent, however AFCA considered there was nothing obvious in the bank statement which indicated it was fraudulent. A copy of Mr Braz’s passport was also provided to the trustee. The certification stamp on the copy of the passport was fraudulent but AFCA considered the way it was applied was not ‘enough to raise suspicion’ by the trustee.
AFCA considered the trustee complied with all the verification checks required under law to give effect to this rollover. AFCA determined that the law did not require the trustee to call a member to obtain verbal confirmation before processing a rollover.
Mr Braz appealed AFCA’s determination to the Federal Court.
Federal Court review of AFCA determination
Justice Thomas remitted the matter back to AFCA. His Honour determined that Mr Braz’s first question of law identified an error of law and that was sufficient to require the matter to be reconsidered by AFCA. His Honour did not consider any other questions of law put forward by Mr Braz as he did not think it was necessary.[4]
Mr Braz’s relevant question of law was whether AFCA ‘erred in law in its interpretation and purported application of reg 6.33 and further, in doing so, incorrectly applied reg 6.33’.[5] Regulation 6.33(1) of the SIS Regulations states ‘[a] member of a regulated superannuation fund…(the transferring fund) may request, in writing, that the whole or a part of the member’s withdrawal benefit in the transferring fund be rolled over or transferred to any of the following (the receiving fund)…’.
Justice Thomas identified the error made by AFCA was that it failed to consider the effect of this regulation and whether Mr Braz ‘made a request in writing as contemplated under reg 6.33(1)’ and whether Mr Braz ‘ever provided consent to such a rollover’.[6]
His Honour found that AFCA should have considered the absence of consent from Mr Braz. Agreeing with Mr Braz, his Honour considered that the application of regulation 6.33E (relating to verification procedures) was not enlivened because regulation 6.33 was a precondition to the operation of regulation 6.33E and it had not been satisfied.[7]
Reference was also made to regulation 6.28 of the SIS Regulations which states that a member’s benefits ‘must not be rolled over from the fund unless… [amongst other things,] the member has given to the trustee the member’s consent to the rollover’.[8]
Where to after Braz?
Trustees may be wondering whether this introduces heightened obligations for processing rollovers. The answer is no, not yet.
Mr Braz argued that the SIS Regulations must be applied strictly: ‘if the member does not give consent, the rollover cannot happen’[9] and ‘acting as a prudent trustee, contact should have been made with [him] to confirm the request’.[10] The law however does not require trustees to call members before completing rollovers. In fact the law requires rollovers to be processed quickly within three business days. It would be unreasonable to call members before processing every rollover given the large numbers of members and the numerous rollover applications received every day. The ATO has also set up the electronic verification system so that funds can process rollovers quickly.
AFCA noted that Mr Braz had armed the scammer with his confidential information which was used to carry out the fraudulent rollover (in this way, Mr Braz himself ‘compromised the security of his account’).[11] This also meant there was no way for the trustee to detect the forged documents as ‘they were used alongside information provided by [Mr Braz]’.[12] This is similar to the facts which arose in Asgard Capital Management Ltd v Maher [2003] FCAFC 156 however Asgard was not considered in Braz.
In Asgard, the relevant member signed a blank benefit withdrawal form and provided it to his financial adviser. The financial adviser used this form to withdraw the member’s benefit and dishonestly keep for himself. The key issue the Court considered is how to interpret the reference to cashing a benefit ‘in favour of’ a member in regulation 6.22 of the SIS Regulations. The Court found that regulation 6.22 permits a trustee to pay a benefit to a third party at the direction of a member, and the trustee will discharge its liability to the member in doing so. Because of this, the member’s act of signing a blank withdrawal form was treated as a direction to the trustee to pay a benefit and the trustee was entitled to give effect to this direction.
Can this same conclusion apply in Braz? Is signing a blank withdrawal form which a third party dishonestly uses, analogous with giving a scammer your confidential information to set up an SMSF? The trustee in Asgard was found not to have breached its duty of care to the member because a member can deal with their benefits as they choose, and the trustee must give effect to the member’s directions. Is a trustee required to look out for every member when giving effect to a rollover in case the member has accidentally engaged a scammer’s services? Can it also be argued that the test in Asgard takes priority because in that case money was withdrawn out of the superannuation system – in Braz it was just a rollover within the superannuation system?
It seems that AFCA may have turned its mind to the principles in Asgard as part of its re-determination of this complaint. The ABC has reported that in the re-determination, AFCA relied on the concept of ‘apparent consent…[which] meant the super fund trustee could rely on the assumption [Mr Braz] had signed the rollover request, even though he hadn’t and didn’t consent to it’.[13]
This case demonstrates the problems that can arise when only one perspective is presented to the Court in circumstances where submitting notices are filed by all other respondents.
Want Superannuation & Financial Services updates delivered straight to your inbox? Click here to subscribe.
[1] The ABC article can be accessed here: https://www.abc.net.au/news/2024-06-27/superannuation-scam-hostplus-fraud-afca-court-cryptocurrency/103962762
[2] In late 2021, members of Intrust Super were transferred into the Hostplus Superannuation Fund as part of a successor fund transfer. The relevant trustee, Host-Plus Pty Ltd, took carriage of any complaints or litigated claims that were not finalised prior to the transfer date. This is explained in the significant event notice issued on 16 September 2021 by IS Industry Fund Pty Ltd, available at this link: https://hostplus.com.au/content/dam/hostplus-program/site/resources/sens/intrust/Intrust-and-Hostplus-Merger-SEN-Accum.pdf.coredownload.pdf
[3] See for example ASIC’s media releases available at these links: https://asic.gov.au/about-asic/news-centre/find-a-media-release/2020-releases/20-187mr-asic-obtains-interim-injunctions-against-larry-dawson-and-pw-kitt-co-pty-ltd/ and https://asic.gov.au/about-asic/news-centre/find-a-media-release/2021-releases/21-070mr-asic-takes-action-to-wind-up-sa-services-pw-pty-ltd-and-orphans-asia-pty-ltd-following-scam-investigation/.
[4] Braz v Host-Plus Pty Ltd [2023] FCA 1454 at [138].
[5] Ibid at [118].
[6] Ibid at [136].
[7] Ibid at [123].
[8] Although not referred to in the judgment, ‘consent’ is defined in regulation 6.27B to mean written consent or other form of consent determined by APRA (it is the ‘Regulator’ for the purposes of Division 6.4 of the SIS Regulations).
[9] Ibid at [52]
[10] Ibid at [65].
[11] Ibid at [78].
[12] Ibid at [83].
[13] Above, n 1. The ABC also reports that Mr Braz has been ‘awarded 30 per cent of what he lost, about $54,000’ as part of the AFCA re-determination on the basis that AFCA ‘found the super fund had missed red flags and should have contacted him to check the rollover before going ahead…[but AFCA] still decided he should bear the brunt of the loss because he provided key information which allowed the fraud to occur and should have known the returns the scammers were offering were too good to be true’.
