Trial and error

Has the UK been initiating a ‘cold war’ against the Cayman Islands over the Eurobank debacle? Neil Timms investigates

It has been described as more Austin Powers than James Bond, but if there was an element of farce in the collapse of the Eurobank prosecution in the Cayman Islands, the facts were sufficiently lurid that they could have John Grisham reaching for his keyboard.

In the fallout, the director of the Financial Reporting Unit (FRU) fled after the discovery that he destroyed evidence on the instructions of MI6. The Legislative Assembly voted unanimously that it had no confidence in the Attorney-General and ministers refused to sit with him in cabinet. He resigned after a stand-off. Relations between the Caymans and the UK stalled, with the leader of the Caymans government claiming that the UK was conducting a “cold war” against the islands.

The case began in 1999 when Eurobank was placed under regulatory control and shortly afterwards was put into court-supervised voluntary liquidation. The Crown launched a prosecution of senior officers and employees for money laundering and sought to prove a systemic agreement to launder within the bank rather than separate agreements with individual customers. The prosecution sought to identify as many accounts as possible, a tactic many regarded as overambitious. As it turned out, as the number of ‘tainted’ accounts was whittled down, the prosecution became increasingly precarious.

After some six months the trial collapsed. The Crown had offered no evidence prior to a ruling on an application for stay, on grounds of abuse of process and unfair manipulation of the prosecuting function.

The trial judge made several devastating findings. The defence had discovered an undisclosed relationship between the director of the FRU and an informant, and that the latter’s true status had been deliberately suppressed. In addition, the FRU director had covertly passed information to MI6 without copies being kept in the Caymans. The Attorney-General, English prosecuting counsel and MI6 had agreed that this information would not include references to the agency.

The trial judge ruled that this agreement committed the prosecution to a misleading course of action and involved alteration of relevant and disclosable evidence. The FRU director not only deliberately concealed
the informant and MI6 relationships, but
also destroyed relevant evidence on the instructions from his MI6 controller.

The facts were scandalous and the recriminations prolonged, but this has overshadowed the fact that the bank’s collapse also raised a number of interesting legal issues relating to the interpretation of the Caymans’ anti-money laundering legislation and the relationship between liquidators and prosecuting authorities.

The Attorney-General’s constitutional
right to prosecute without restriction

After the order for supervised winding-up, the bank was charged with money laundering and, in November 2000, a restraint order was made under the Proceeds of Criminal Conduct Law (PCCL). This is the principal Caymans anti-money laundering statute and is modelled on UK legislation. The PCCL order prohibited the bank from dealing with funds in a number of accounts, but was principally directed to an account containing more than $8m (£4.7m), which was part of the proceeds of a credit card fraud.

The principal fraudster had been convicted by a federal court in California, which had appointed a receiver, recognised by the Cayman court, who asserted both a moral and a legal claim to the assets on behalf of the victims of the fraud. Section 101 of the Cayman Companies Law provides that when an order has been made for winding-up, no proceedings may be commenced or proceeded with against the company except by leave of the court. The liquidators sought a ruling on whether the Attorney-General required leave from the court to institute criminal proceedings against the bank and, if so, upon what terms. The Chief Justice granted leave subject to cost-efficient restrictions being imposed on the prosecution.

On appeal, the Attorney-General unsuccessfully argued that Section 101 did not apply to supervised voluntary liquidations or to criminal proceedings. The Court of Appeal drew an analogy with similar legislation construed in English case law. The court then reviewed the relationship between the winding-up legislation and Section 16(A) of the Cayman Constitution, which empowers the Attorney-General to undertake prosecutions and provides that in the exercise of such powers they shall not be subject to the direction or control of any other person of authority. The Court of Appeal decided that Section 101 was subordinate to Section 16(A). It construed the latter to include control by the courts on the ordinary and natural meaning of its wording and because otherwise legislators could fetter the Attorney-General’s discretion. Consequently, the appeal was allowed.

The special regime under the Proceeds of Criminal Conduct Law relating to restraint orders made in respect of the property of a company in winding-up
The November 2000 restraint order postdated the winding-up. Section 17(2) of the PCCL provides that in such circumstances restraint order powers shall not be exercised in relation to realisable property held by a company in liquidation, so as to inhibit the liquidator from distributing property to creditors or to prevent the payment of winding-up expenses. The Chief Justice discharged the restraint order, identifying a conflict between the terms of the order and the statutory regime covering companies in liquidation.

The Crown contended on appeal for a “purposive” construction of Section 17(2) on the basis that the draftsman could not have intended leaving a loophole in the scheme of the PCCL whereby assets identified as money laundering proceeds could be returned by liquidators to criminals under the guise of “creditors”. The statutory regime was closely modelled on that of the UK, but the Court of Appeal was unable to find any English or Commonwealth authority to assist.

The court decided that a person who could successfully bring a legal claim against another is a creditor in law. It reconciled the restraint order with the statutory regime on the basis that a restraint order could not inhibit dividend payments to lawful creditors if proofs were properly accepted, but could restrain payment out of suspected illicit funds, which could never be the subject matter of a judgment against the bank. A claim based upon or involving crime could, it held, never give rise to a judgment against an alleged debtor.

The reasoning of the Court of Appeal has not been universally acclaimed. One thing is clear: for prosecutors and liquidators, life will be easier if the restraint order is made before the winding-up.

What constitutes the proceeds
of criminal conduct?

The court delineated what constitutes the “proceeds of criminal conduct” for the purposes of a money laundering crime by applying US case law. It concluded that “proceeds of crime” connotes a causal link between the committing of an offence and the property said to be its proceeds. The commission of the predicate offence must predate and contribute in some material way to the acquisition of the property said to be its proceeds.

The debacle of the Eurobank trial certainly generated delicious Schadenfreude in the Caymans’ offshore rivals, but it also clarified some important issues. Important lessons were relearnt: prosecutors must not confuse ends and means; zeal in fighting money laundering must be tempered with fairness; and the importance of an independent judiciary willing and able to uphold the rule of law.
Neil Timms is a partner in Maples and Calder’s litigation department