A three-year investigation by Jersey’s Financial Services Commission (JFSC) into the involvement of Jersey financial institutions with the former President of Nigeria, General Sani Abacha, and his associates has shown the importance of undertaking ‘know-your-client’ (KYC) requirements and remaining vigilant of ‘politically exposed persons’ (PEPs).
The investigation concluded that no assets in Jersey belonged to Abacha, but that nine Jersey financial institutions held assets belonging to Nigerian PEPs. Almost all of the assets in question have been repatriated.
No doubt the financial institutions concerned have learnt valuable lessons from this reminder that stringent KYC requirements minimise exposure to reputational risk. Such requirements do not simply entail obtaining copies of passports and utility bills, but must enable the institution to understand the economic basis of its relationship with the client. Many institutions in Jersey are currently conducting extensive retrospective KYC procedures where a relationship predates the 1 July 1999 introduction of anti-money laundering legislation. Institutions should prioritise this task with reference to those countries most vulnerable to corruption.
The investigation followed the conclusion of similar investigations undertaken in a number of jurisdictions, including Switzerland and the UK. After investigating 19 banks, the Swiss Federal Banking Commission’s (SFBC) report of 4 September 2000 placed the banks’ compliance with due diligence requirements into three categories: banks which complied fully, banks with shortcomings and banks with serious omissions. Action taken by the SFBC ranged from issuing formal letters (drawing attention to shortcomings in the banks’ due diligence obligations) to issuing proceedings against senior banking personnel.
In the UK, the Financial Services Authority concluded its investigation on 8 March 2001. Twenty-three banks were found to have accounts linked to Abacha and his close associates. Also, 15 banks were found to have “significant control weaknesses”, including inadequate senior management oversight of account opening processes for customers who could be classified as higher risk, and inadequate understanding of the source of the customers’ wealth. An immediate remedial action programme was implemented in respect of seven banks.
Through its dialogue with the Swiss regulator and the gateway between it and the Joint Financial Crimes Unit (JFCU), the Jersey regulator was aware that a small number of financial institutions were potentially holding funds associated with Abacha when it commenced its investigations in December 2000. The JFCU is the body in Jersey that receives suspicious transaction reports from financial institutions, under the provisions of the Proceeds of Crime (Jersey) Law 1999, which created new ‘money laundering’ offences. They include:
- Assisting another to retain the benefit of criminal conduct (Article 32).
- Acquisition, possession or use of the proceeds of criminal conduct (Article 33).
- Concealing or transferring the proceeds of criminal conduct (Article 34).
While the statute does not place financial institutions under a strict obligation to report suspicions, reporting them does afford a defence to the above offences.
‘Criminal conduct’ is defined as conduct that constitutes an offence which carries a potential prison sentence of one year or more, or would constitute such an offence if that conduct had occurred on the island. Bribery, prevalent in Nigeria during Abacha’s presidency, is an offence in Jersey. However, a draft statute is currently in circulation, which in its present form would abolish the customary law and would provide the island with up-to-date anti-bribery and corruption legislation encompassing both the private and public sectors.
The JFSC’s investigation encompassed banks and Jersey trust companies. At the start of the investigation, trust companies were not subject to regulation by the JFSC; that position changed on 2 February 2001, when all trust companies were required to submit an application for registration under the Financial Services (Jersey) Law 1998.
While conducting its investigation into the Abacha millions, the JFSC used legislative powers to require financial institutions to appoint nominated accountants to conduct a detailed report on the adequacy of their KYC standards and of their systems and controls in place for forestalling and preventing money laundering generally. In certain cases, financial institutions underwent a further review. Jersey legislation permits the JFSC to appoint an inspector (in this case a Jersey lawyer) to investigate and report to the JFSC on, inter alia, “the nature, conduct or state of the registered person’s business or any particular aspect of it”.
Subordinate legislation outlines the five key mandatory requirements for Jersey financial institutions to have in place with a view to preventing or forestalling money laundering. They are:
- Internal controls and communication of policies.
- Identification procedures.
- Record-keeping procedures.
- Education and training procedures, including recognition of suspicious transactions.
- Reporting procedures.
The Anti-Money Laundering Guidance Notes for Jersey’s finance sector are updated regularly by the JFSC. The guidance notes do not have force of law in Jersey, but adherence to them provides financial institutions with comfort in the event of a subsequent money laundering investigation. In September 2001, the JFSC issued a policy statement in relation to the risks associated with PEPs, who include “senior political figures and their immediate family, and close associates”. Clearly, Abacha fell into this category. The policy statement contains the following guidance: “All financial services businesses should assess which countries, with which they have financial relationships, are most vulnerable to corruption… Where financial services businesses do have business in countries subject to corruption, they should establish who are the senior political figures in that country and should seek to determine whether or not their customer has any connections with such individuals.”
In particular, detailed due diligence should include: “Close scrutiny of complex structures… Every effort to establish the source of wealth (including the economic activity that created the wealth) as well as the source of funds involved in the relationship… The development of a profile of expected activity on the business relationship so as to provide a basis for future monitoring… A review at senior management or board level of the decision to commence the business relationship and regular review, on at least an annual basis, of the development of the relationship… Close scrutiny of any unusual features, such as very large transactions, the use of government or central bank accounts.”
The JFSC has confirmed that “three of the institutions had complied with their obligations and their controls were adequate. In the case of the other six institutions, various shortcomings in controls were identified, including instances where the systems of controls in place were not consistently enforced or were overridden. In such cases, the reports identified improvements that should be made. The institutions have since implemented these improvements and these are in the process of being verified by the commission.”
The press statement issued by the JFSC concludes: “The main lesson from this investigation is the need for financial institutions to have a proper concern for PEPs and reputational risk generally… and in particular to keep KYC information up-to-date and to monitor transactions against those expected for the client and against the sensitive activities policy published by the Commission.”
Beverley Lacey is a partner at Mourant du Feu & Jeune