6 November 2006
3 July 2014
24 February 2014
2 July 2014
M&A Weekly Update: fraud, bribery and money laundering sentencing guidelines; limited liability partners as workers; and more
2 June 2014
11 December 2013
The first prosecution for a breach of Jersey's money laundering regulations was always going to gain a certain notoriety. It is in that context that the prosecution of a trust company and one of its former directors, for failing to comply with the requirements of the Money Laundering (Jersey) Order, establishes a worrying precedent for the trust industry, but one that the authorities may yet come to regret.
A Jersey-based trust and a former director were charged under Article 37(4) of the Proceeds of Crime (Jersey) Law in that they failed to comply with the requirements of Article 2(1) (a) of the order.
The Crown's case was that a business relationship with a Mr Stevens was formed without maintaining procedures in relation to identification under Article 5 of the order in respect of the identity of a Mr Lee.
The Crown opened its case saying that a single breach of the trust company's procedures, namely the one failure to identify Lee, constituted a criminal offence under the order. The Crown allegation was a very narrow one.
The evidence that was not relied upon by the Crown is as important as that which was. It was not part of the Crown's case that the trust company did not have identity procedures in place. Nor was it part of the Crown's case that the failure to follow the identity procedures in the case of Lee was part of a wider systemic failing at the trust company. The Crown did not allege that the trust company and/or the former director had acted intentionally, nor that any money laundering had in fact taken place.
At the close of the prosecution case, the defence made a submission of no case to answer. Essentially the contention was that the offence with which the defendants had been charged was not proven because the Crown had not shown that the trust company did not maintain procedures. The Crown had merely shown that the trust company had breached a procedure on a single occasion and that this was not an offence.
Essentially, the defence case was that the offence with which the trust company and former director were charged anticipated a systemic failure by a business to properly maintain procedures consistent with the order.
The judge ruled against the submission, saying: "This leads me to suppose - and I have had regard to the definition in the Oxford English Dictionary… - that maintenance must be kept up and prescribed, and in my view maintenance is an absolute duty; and one breach, if it is more than a mere oversight, is in my view sufficient for the purposes of a criminal trial."
Both defendants at that stage changed their pleas to guilty.
Both the trust company and former director appealed. The gist of the submission was that no offence was proved against the appellants because the offence lies in the failure to establish and routinely follow procedures, not the infringement of such procedures once established.
By way of analogy, the appellants submitted, for example, that a firm may generally maintain good standards despite the fact that one person on one day may fall below them. If the Crown's contention was correct, the firm's standards would count for nothing.
The Attorney-General's response was that 'maintain' means to 'keep up' in the same way that in common usage a boxer who drops his gloves and allows in a knockout blow is said to have failed to maintain his guard.
The Court of Appeal favoured the Attorney-General's interpretation, saying: "In our judgment the word 'maintained' in Article 37 of the law and its cognates require the procedures to be kept up in proper working order."
The case was thereby lost by the appellants. The trust company was fined a total of £65,000 and the former director £35,000.
In sentencing, the Attorney-General said: "These fines could be more substantial and that in the next prosecution - if there was to be one - he would be moving for more substantial fines and a custodial sentence for the individual."
The decision has, for understandable reasons, reverberated through the offices of every financial services business in Jersey and further afield.
The first reason the decision came as a shock concerns the role of the compliance function, or more specifically the money laundering compliance function within any financial services business. Among the many established duties of a compliance function is the duty to monitor.
In short, this entails real time and reactive risk-based monitoring of an organisation's compliance with the internal controls and procedures created to assist it to comply with its legal and regulatory obligations.
Rolling out a procedure and praying every member of staff will follow it is not an advisable course of action. Instead, every licensed business must monitor its operational compliance with those procedures with a view to taking whatever action is necessary to improve performance or to adapt and strengthen procedures to changing risks and emerging threats.
Monitoring is the essence of good compliance practice, which in turn is the lynchpin of effective corporate governance.
Support for this view is to be found in the Jersey Anti-Money Laundering Guidance Notes, which state: "As good practice, financial services businesses are recommended to make arrangements to verify, on a regular basis, compliance with policies, procedures and controls relating to money laundering activities, in order to satisfy management that the requirement in the order to maintain such procedures has been discharged."
This suggests that a regular system of checking and supervision is necessary to satisfy the requirement to maintain procedures. The Guidance Notes do not suggest that a single breach of these procedures will be sufficient to demonstrate that there has been a failure to maintain procedures. If the Guidance Notes had intended to suggest this, why would the arrangements of checking and supervision be necessary on a 'regular basis'?The judge at first instance dealt with this point by saying: "Of course the Guidance Notes refer to a regular basis for certifying compliance and other procedures, but that is a general guide in my view to maintain good discipline."
continued #+ continuedHowever, if the obligation to maintain procedures is an absolute one, as the Court of Appeal maintains, what precisely is the point of compliance monitoring? It cannot be the intention of a compliance monitoring regime to simply identify breaches that by definition constitute criminal offences.
If that is the point of compliance monitoring, how keen are licensed financial services businesses going to be to share the results of their monitoring and testing programmes with regulators?The Guidance Notes are issued by the Jersey Financial Services Commission, the very same body that referred the breach to the Attorney-General initially. The notes are designed to 'guide' financial services businesses on the practical meaning of the legal obligations imposed upon them under the Proceeds of Crime (Jersey) Law and the order.
Nowhere within the notes does it state the obligation within the Money Laundering Order to maintain procedures is an absolute one. Given the purpose of the notes, it is surprising the opportunity was not taken by the regulator to spell out the meaning of the requirements of the order. The best that can be said is that the Guidance Notes have been since 1999, and remain deficient, in meeting their stated purpose.
It is to be assumed that in 1999, when the order and the Guidance Notes were crafted, the authorities did not contemplate the interpretation of Article 2 of the order in the form that they advanced in 2006. Stephen Platt is the group managing partner of BakerPlatt