Guernsey: Financial crime
25 February 2008
For those wishing to undertake some form of financial crime, the world must be feeling increasingly transparent. Jurisdictions worldwide are under pressure to implement legislative regimes designed to uncover and expose financial crime, meaning that the number of jurisdictions in which criminals can launder money without detection is decreasing rapidly.
Just ask the criminals responsible for the biggest heist in history - the infamous Kent security depot robbery. This netted £53m, which has reportedly been laundered in Northern Cyprus. If the gang wants to avoid detection, repatriating the estimated £30m that has been siphoned off to North Cyprus will prove extremely difficult, if not impossible. Unless, of course, these sums are repatriated in small amounts of less than £5,000, which would take a lifetime given the haul involved.
While no one would suggest that we have seen the end of financial crime, it is clear that legislators around the world are making it increasingly difficult for financial criminals to cover their tracks - particularly in highly regulated jurisdictions such as the UK and the Channel Islands.
Recent amendments and additions to Guernsey's financial crime and terrorist financing laws have increased the obligations on financial services businesses (FSBs) to combat the incidence of financial crime within Guernsey. But what are some of the key changes to the regime and how do they affect FSBs with operations on the island?
Criminal Justice Regulations
On 15 December 2007 the Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations 2007 came into force. Accompanying the regulations is a new 'Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing', containing rules and guidance that explain in greater detail how the Guernsey Financial Services Commission (GFSC) expects FSBs to observe and meet the regulations.
The new handbook replaces the old 'Rainbow Guide' and is described by the GFSC as "a statement of the standards expected by the commission of all [FSBs] to ensure Guernsey's compliance with the Financial Action Task Force on Money Laundering's 40 recommendations on money laundering and the special recommendations on terrorist financing".
Any person who contravenes the rules or regulations is guilty of an offence. On conviction any offender is liable to up to five years in prison, a fine, or both. The penalty on summary conviction is up to six months in prison or a fine.
The new rules and regulations require each business relationship/transaction to be assessed according to its risk profile. This regime promotes the prioritisation of effort and activity by reference to the likelihood of money laundering or terrorist financing taking place, bringing obvious cost savings. FSBs will now have to question their appetite for high-risk business in the light of the commercial cost associated with greater due diligence/vigilance.
FSBs must carry out a business risk assessment on any new business prior to the establishment of a business relationship. All existing business relationships must be risk-assessed as soon as is reasonably practicable.
Where the business relationship continues, the risk assessment must be reviewed regularly. The risk assessment is divided into two parts: the assessment of customer base and products and customer profiling.
The new handbook provides clear guidance on the type of indicators FSBs should consider when assessing the risk associated with each customer. For example, customers who have complex ownership structures for no apparent reason; that are politically exposed persons (PEPs); have business coming from, through or in some way connected with countries with known higher levels of corruption; or who make requests to adopt undue levels of security all indicate a high-risk customer. High-risk customers require increased due diligence and ongoing scrutiny of their activities.
When establishing business relationships, and in relation to existing business relationships, FSBs must ensure that all customers are identified and that identity is verified at appropriate times on a risk-sensitive basis.
Any person purporting to act on behalf of the customer must be identified and their authority to act verified. Beneficial owners and underlying principals are to be identified and their identity verified. Finally, FSBs are required to identify whether a beneficial owner is a PEP.
Identification and verification of identity must be carried out before establishing a business relationship, or as soon as is practicable thereafter, if the need to do so is essential so as not to interrupt the normal conduct of business.
The new handbook makes it explicit that company boards are responsible for oversight of compliance, understanding risks in the business and having appropriate expertise to deal with the risk and appointment of a money laundering officer. A board can outsource compliance duties within the business, but not responsibility.
On the same date that the regulations came into force, the Disclosure (Bailiwick of Guernsey) Law 2007 was enacted. This law complements the regulations and makes it an offence not to disclose a customer/transaction to the Guernsey Financial Intelligence Service if a "reasonable person" would have known or suspected that another person is engaged in money laundering. The reasonable person would be appropriately informed, capable, aware of the law and fair-minded. The old subjective test of whether the person (eg a money laundering reporting officer) knew or suspected money laundering has been discarded and replaced with an objective test.
It is therefore crucial that those responsible for making such disclosures within an organisation are extra vigilant if they are to avoid committing an offence. In short, all transactions that cause the slightest suspicion need to be made transparent. Laundering money in Guernsey (and the UK) is increasingly like walking in fresh snow. Even the most ingenious scheme leaves tracks that are at risk of being discovered.
Alison Ozanne is a partner and Doug Hayter is a senior associate at AO Hall