Power with responsibility

Three recent cases highlight the importance of maintaining fairness when regulating offshore financial services, says David O’Mahony

One of the most controversial parts of the climate for those conducting offshore financial services business, particularly for the smaller operator, is the power of the local regulators and the manner in which they carry out their functions. Three recent cases – one in the Privy Council on appeal from the Bahamas and two in the Jersey Court of Appeal – have looked at the powers of a regulator and, in two cases, the extent of the regulator’s obligation to act with procedural fairness.

Suisse Security Bank & Trust v Francis (2006)
The issues in this case arose at the end of a long battle between the Central Bank of the Bahamas and Suisse Security Bank & Trust (SSBT) over, among other things, the bank’s ratio of capital to deposits. During this battle, the Central Bank became aware of litigation in two US courts involving SSBT, which, if successful, would have substantially reduced the bank’s capital. SSBT assured the Central Bank that any losses suffered in the first piece of litigation would be underwritten by the bank’s principal shareholder and that it had adequate insurance against any losses it would suffer in the second one.

The Central Bank sought proper evidence of both matters. No proper evidence was forthcoming and so, on 5 March 2001, the Central Bank exercised its powers under Sections 14(1) and (2) of the Bank & Trust Companies Regulation Act initially to suspend and then, on 2 April 2001, to revoke SSBT’s licence. The decision was taken on the grounds that SSBT was carrying on its business in a manner detrimental to the public interest and to the interests of depositors and other creditors. The Central Bank also appointed a receiver.

Under Sections 14(1) and (2), before revoking a licence, the governor of the Central Bank must give the licensee notice of his intention to do so and an opportunity to submit written objections. By contrast, the act provides that the governor can suspend a licence “forthwith”. The relevant grounds of appeal were:
#that the governor was required to act with procedural fairness in relation to the suspension as well as the revocation; and
# that the governor failed to act with procedural fairness in relation to the revocation because he relied on grounds additional to those he had foreshadowed in his notice.

Both grounds were rejected by the Privy Council.

The court’s decision
In the end, the court held that:
# following its decision in Century National Bank v Davies (1998), that there was no duty to act with procedural fairness at the suspension stage. It referred to the statutory language “forthwith” and said that given the prerequisites to exercising the power at all, the governor must be able to act quickly. It added that to require notice would be bound to lead to arguments and delay and would give the bank’s management the opportunity to act to the bank’s detriment;
# that not every procedural defect in a notice under the act would invalidate that notice;
# the notice to revoke, to enable meaningful objection by the licensee, must inform the licensee, “even if only in broad terms”, of the gist of the considerations leading the governor to the view that such action should be taken; and
# as the original grounds were sufficient to justify the revocation, the fact that there were additional grounds by the time the decision to revoke was taken did not invalidate the decision.

Anchor Trust Company v Jersey Financial Services Commission (2006)
This case in the Jersey Royal Court and Court of Appeal was an appeal under Article 11(3) of the Financial Services (Jersey) Law 1998 against a refusal of a licence to conduct trust business.

The appeal (which failed) was wide-ranging (the judgment at first instance covered 85 pages) and covered most aspects of the process adopted by the Financial Services Commission, including the actions of the inspector appointed to examine the business. The case provides a useful guide to the way a court will approach the issues. The court held that the court’s function in appeals from the refusal of a licence were:
# to look at the correctness and fairness of the procedure in order to decide whether the proceedings of the decision maker were in general sufficient and satisfactory; and
# to examine the merits of the decision, on the basis that an appeal should be allowed if the decision of the Commission was wrong “to such an extent that the Jurats would categorise as unreasonable”. The court said that it was not necessary for the appellant to go so far as to establish Wednesbury unreasonableness.

Bell & Ors v Attorney-General (2006)
This case arose out of an inspection by the Jersey Financial Services Commission (JFSC) of Anchor Trust in 2004. The JFSC appears to have been so concerned about the compliance by Anchor Trust, with anti-money laundering procedures, in relation to a specific client that it referred the case to the Attorney-General for prosecution under Article 37(4): Proceeds of Crime (Jersey) 1999 (failing to comply with a requirement in the Money Laundering (Jersey) Order 1999).

The order is in similar terms to regulations in many offshore jurisdictions and requires a financial services provider to have proper client continued #+ continued identification, record keeping and internal reporting procedures.

The case is important because the Court of Appeal’s decision is contrary to what most in the industry and the professions regard as the scope and effect of the legislation.

The appellant argued that the offence could only be committed if the defendant did not have the procedures required by the order.

The Court of Appeal rejected this argument and said that a single failure to apply the procedures in a particular case was a criminal offence, and would be punished accordingly.

Current regulatory climate
These three cases give some sense of the current climate of regulation in the offshore financial services industry. The decision of the Privy Council in Suisse Security Bank & Trust and the Jersey Court of Appeal in Anchor Trust show regulators exercising their powers in the public interest.

They both show that a court will ordinarily require that the regulator act fairly to those adversely affected by its decisions, but also that the nature of some statutory decisions is such that any obligation to act with procedural fairness would defeat the purpose of the power being granted in the first place.

The decision of the Jersey Court of Appeal in Bell will be seen as a real extension of the powers of the authorities to enforce anti-money laundering procedures. n
David O’Mahony is a barrister at Seven Bedford Row