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£398,300.00 GFSC AML fines on TCSB and its directors/CO/MLROS [20 December 2021]

04/07/2022

On 20 December 2021, the Guernsey Financial Services Commission ("the Commission") decided

  1. To make a public statement under section 38 of the Enforcement Powers Law
  2. To impose x6 fines totalling [£398,300.00]
    • £140,000 under section 39 of the Enforcement Powers Law on the Licensee –
      1. Hansard Limited (the "Licensee" or the "Firm")
    • £56,700 = Mr Parr;
      1. Mr Parr has been a director of the Licensee since March 2006 and Managing Director since January 2015.
    • £56,700 = Mr Northmore;
      1. Mr Northmore has been a director of the Licensee since January 2009.
    • £56,700 = Mr Blows;
      1. Mr Blows has been a director of the Licensee since June 1992 and was the Managing Director until December 2014.
      2. Mr Blows is also the Licensee's largest ultimate beneficial owner having an interest in over 60% of the shares in the Licensee.
    • £44,100 = Mr Lloyd;
      1. Mr Lloyd has been the Money Laundering Reporting Officer ("MLRO") for the Licensee since April 2010 and a director since March 2013.
    • £44,100 = Ms Giovinazzi;
      1. Ms Giovinazzi was the Compliance Officer for the Licensee between October 2010 and May 2018 and a director between January 2014 and May 2018.
GFSC VIEW
  1. The Commission considered it reasonable and necessary to make these decisions, having concluded that the Licensee and the Directors had failed to ensure compliance with the regulatory requirements and the minimum criteria for licensing set out in Schedule 1 of the Fiduciaries Lawi].
  2. The findings, in this case, were severe and spanned a significant period, including after 13 November 2017, when The Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law, 2016 ("the FSC Amendment Law") came into force, which increased the maximum level of financial penalties.
  3. These are the first financial penalties imposed under the FSC Amendment Law, as a result, no direct comparisons can be made to previous cases with similar findings.
BACKGROUND
  1. The Licensee was established in Guernsey in August 1988 and undertook fiduciary activities under a full fiduciary licence.
  2. The Firm provides trust services, including formation and administration of trusts, advice on the formation and administration of trusts and the provision of trustees.
  3. The Firm also provides company administration services, including company and/or corporate administration, company formation, provision of directors and secretaries, nominee services, registered office and registered agent services and administration of pension schemes.
  4. The Licensee's own business risk assessment noted that it had a high-risk appetite and that the Licensee provided services to clients in a wide range of jurisdictions, including jurisdictions which are regarded as posing a higher risk of money laundering, terrorist financing and/or bribery and corruption.
  5. The business risk assessment also noted that the clients of the Licensee are involved in a wide range of activities, some of which pose an enhanced risk of money laundering, terrorist financing and/or bribery and corruption.
  6. The Commission's investigation into the Licensee commenced in 2019 following an on-site visit to the License in May 2019.  This was its first visit by the Commission since 2008.  At the time of the on-site visit, the Licensee had rated 75% of its clients as high-risk.
FINDINGS
  1. The Commission's investigation found that the Licensee had failed to monitor and manage the financial crime risks associated with its customers as required by the Regulations and the rules within the Handbook ("the Rules").  This was particularly concerning due to the Licensee's stated high-risk appetite and the large proportion of high-risk clients.
  2. In particular, the Commission found:
    • The Licensee failed to properly conduct and document relationship risk assessments prior to the establishment of a business relationship
    • The Regulations and the Rules require that in order for a financial services business to consider the extent of its potential exposure to the risk of money laundering and terrorist financing it must assess the risk of any proposed business relationship prior to the establishment of that relationship and there must be clear, documented evidence as to the basis on which the assessment is made.
    • There was no evidence of initial risk assessments on some of the files examined by the Commission.
Example 1
  1. Trust 1 was established in 2010 by Mr A, a high net worth individual from Country X, a high-risk country, with a joint licensee of the Firm as trustee.  However, the first risk assessment for Trust 1 in the file provided to the Commission was dated over a year after the trust was settled.
  2. During the course of the business relationship the Licensee identified that Mr A's father was a minister in the Government of Country X and that Mr A's father was reportedly corrupt and allegedly had links to Iran and the Iranian Revolutionary Guard.
  3. The Licensee failed to identify Mr A as a Politically Exposed Person ("PEP") until two years after the settling of Trust 1.  This was despite identifying material on the internet, which was attached to the first risk assessment on the file, that clearly identified Mr A as the son of an Oligarch and Government minister.
  4. Mr A was already an existing client of the Firm at the point Ms Giovinazzi joined the Firm and Mr Lloyd was appointed MLRO and subsequently a director.
  5. The Licensee failed to carry out sufficient Enhanced Due Diligence ("EDD")
  6. Regulation 5 and the relevant provisions of the Handbook detail the enhanced due diligence requirements required for high-risk customers and, in particular, the requirement to take reasonable measures to establish the source of any funds and of the wealth of the customer, beneficial owner and underlying principal.
  7. Regulation 7 requires that customer due diligence and EDD be carried out before or during the course of establishing a business relationship.
Example 2
  1. Prior to identifying Mr A as a PEP, notwithstanding that the relationship was rated as high risk due to the jurisdictional risk, the Licensee had limited information on file regarding Mr A's source of wealth.
  2. Following the identification of Mr A as a PEP, the Licensee wrote to Mr A's representatives asking for their understanding of Mr A's source of wealth.
  3. By requesting Mr A's representatives for their understanding of Mr A's source of wealth two years after the establishment of Trust 1 and a year after it had rated Mr A as high risk, it is apparent that reasonable measures to establish source of wealth before or during the establishment of the business relationship had not been undertaken.
Example 3
  1. Company 2 was incorporated in April 2017 and owned by Mrs B and Ms C, nationals of Country Y, a high-risk country, and residing in the United Kingdom.  Mrs B and Ms C, are mother and daughter respectively.
  2. Company 2 was set up to own two London properties.
  3. The Licensee obtained information on Mrs B and Ms C's source of wealth, which was corroborated by documents provided.  The Licensee was initially informed that the source of funds would be via finance being arranged by Mrs B and Ms C with further details to be provided.
  4. Joint licensees of the Firm, as the corporate directors of Company 2, agreed in April 2017 to proceed with the purchase of the properties.
  5. However, the Licensee had not yet fully established the source of funds for the purchase.  On enquiry with the lawyers acting in relation to the purchase, after the purchase had been completed, the Licensee discovered that the funding actually was provided by
    • Mr D, the husband and father of Mrs B and Ms C respectively, allegedly via a gift from him funded by the sale of a property in Country Y.
  6. The Licensee also identified internet articles linking Mr D to alleged fraud and corruption.
  7. There were a large number of red flags in the information received by the Licensee in relation to Mr D's source of funds that it failed to fully address, including:
    • The possibility that Mr D did not own the property in Country Y that was said to be his source of funds.  The sale agreement provided to the Licensee showed that Mr D was acting under a power of attorney for another national from Country Y in selling the property;
    • The funding provided to the lawyers acting for the purchase came from a number of different sources, not just direct from Mr D;
    • One source of funding was via a series of small payments to an alleged broker, which the Commission discovered had only existed for 18 months and was based in a small town in Scotland; and
    • The complex and unverified sources of funds in relation to this client were potential indicators of some form of illicit activity.
  8. The Licensee was therefore found to have failed to have taken reasonable measures to establish the source of funds for this significant property purchase and the significant risk compounded this breach that the source of funds was the proceeds of Mr D's alleged criminal conduct.
  9. As a result of the red flags identified it took appropriate steps and commenced the process necessary to terminate the relationship, with said process completed seven months prior to the Commission's visit.
The Licensee failed to monitor existing high-risk business relationships
  1. Regulation 11 details the requirements to perform ongoing and effective monitoring of existing business relationships, including scrutiny of any transactions or other activity.
  2. Regulation 5 also details that for high-risk clients there must be more frequent and more extensive monitoring.
  3. The Licensee had in place a process of monitoring and oversight meetings, which were held quarterly for PEP clients and six-monthly for other high-risk clients.
  4. These were in addition to regular full reviews and were part of the Licensee's more frequent and more extensive monitoring for high-risk clients.  It was apparent from the client files reviewed by the Commission that this enhanced monitoring process was ineffective at times.  The monitoring and oversight meetings on occasion failed to record transactions that occurred during the period under review.
Example 4
  1. In December 2016, the trustees of Trust 1 ratified a distribution of £9.5 million to Mr A that was actually made in October 2015.
  2. It was explained to the Commission that a company owned by Trust 1 (which in turn owned a property) was sold and the proceeds distributed to Mr A by the lawyers acting in the sale rather than to Trust 1.
  3. This significant distribution and the sale of an underlying asset of Trust 1 is not mentioned in the monitoring and oversight meetings for the periods including October 2015 or December 2016.
Example 5
  1. Limited Partnership 3 was ultimately owned by Mr E and his wife who are nationals of Country X.  The Licensee had identified potentially adverse media regarding Mr E.
  2. In February 2019, the General Partner agreed to Limited Partnership 3 redeeming its sole asset early.  There was no explanation in the minutes explaining the rationale for redeeming early.
  3. The monitoring and oversight meeting held in June 2019 covering the period from November 2018 summarised the activity of Limited Partnership 3 as investing in the asset that had been sold in February 2019.  There is no mention of the early redemption of Limited Partnership 3's sole asset.
  4. Ms Giovinazzi had no involvement in this set of events following her retirement in May 2018.
  5. The Licensee failed to adequately document the decision to exit a client
  6. The Licensee's written policy was for it to seek to terminate a client relationship where the client's conduct gave reasonable cause to believe or suspect involvement in illegal activities.  The Licensee had cause to believe or suspect
    • Mr A might be involved in illegal activities in 2013 and took appropriate steps but did not exit the relationship at that time.
    • The Licensee also advised the Commission that Mr A was a client.
  7. The Licensee commissioned an enhanced CDD report on Mr A from a third party in 2017, the results of which were discussed by the Licensee's board in August 2017. The third-party report identified adverse media related to Mr A, including
    • Mr A's father's alleged corruption and alleged links to the Iranian Revolutionary Guard,
    • Mr A's alleged involvement in an attempted contract murder and that
    • Mr A's wealth was likely to be linked to his father's corruption.
  8. The Licensee explained to the Commission that this third-party report resulted in a decision to exit the business relationship with Mr A.  However, the minutes of the August 2017 board meeting only noted that the allegations in the third-party report were not new to the Licensee and were circumstantial.  The board minutes did not note a decision to exit the relationship.
  9. Whilst the number of entities administered by the Licensee for Mr A has reduced since August 2017, Mr A remains a client of the Licensee today, 8 years after first indicating that they had suspicion of Mr A's involvement in illegal activities and over 4 years since the third-party report was considered by the board of the Licensee.
  10. This is despite their written policy of terminating a client relationship where the Licensee suspects involvement in illegal activities.
The Licensee failed to ensure effective review of compliance with the Regulations and Handbook
  1. Regulation 15 includes a requirement to establish and maintain an effective policy, for which responsibility must be taken by the board, for the review of its compliance with the requirements of the Regulations and such policy shall include provision as to the extent and frequency of such reviews.
  2. Rule 28 requires the board to ensure that the compliance review policy takes into account the business's size, nature and complexity and includes a requirement for sample testing of the effectiveness and adequacy of the policy, procedures and controls.
  3. At the time of the on-site visit, the new Compliance Officer had identified that the compliance monitoring programme required further development.  The new Compliance Officer had also reported to the Licensee's board that the compliance monitoring programme needed to include sample testing.
  4. The Licensee also explained that the previous Compliance Officer, Ms Giovinazzi, was historically part of the review and sign off process for client take on, file reviews, and other matters as well as the requirement for sign off by at least two other directors and these reviews were part of compliance monitoring.
  5. However, it is apparent from the Commission's findings from the client files reviewed that this process was not fully effective.
Mr Parr

The Commission's investigation identified that Mr Parr failed to demonstrate that he acted with competence, soundness of judgement and diligence.

For example, Mr Parr:

  1. Failed to identify Mr A as a PEP when signing off the risk assessment for Trust 1;
  2. Failed to ensure the decision to exit the relationship with Mr A was adequately documented;
  3. Failed to ensure the redemption of Limited Partnership 3's sole asset was recorded in the relevant monitoring and oversight meeting; and
  4. Did not ensure that the Licensee's procedures and controls were appropriate and effective with regard to the Licensee's high-risk appetite.

ALL DIERCTORS

  • The Commission's investigation identified that Mr Northmore failed to demonstrate that he acted with competence, soundness of judgement and diligence.
Mr Northmore

For example, Mr Northmore:

  1. Failed to identify Mr A as a PEP when signing off the risk assessment for Trust 1;
  2. Failed to query why it had taken over a year to ratify the £9.5 million distribution to Mr A and then failed to identify the distribution in the relevant Monitoring and Oversight meetings; and
  3. Did not ensure that the Licensee's procedures and controls were appropriate and effective with regard to the Licensee's high-risk appetite.
Mr Blows

For example, Mr Blows:

  1. Signed the trust deed for Trust 1 and client agreement with Mr A in 2010. There is no evidence available that a risk assessment was completed prior to these documents being signed.; and
  2. Did not ensure that the Licensee's procedures and controls were appropriate and effective with regard to the Licensee's high-risk appetite.
Mr Lloyd

For example, Mr Lloyd:

  1. Failed to query why it had taken over a year to ratify the £9.5 million distribution to Mr A and then failed to identify the distribution in the relevant Monitoring and Oversight meetings;
  2. Failed to ensure the decision to exit the relationship with Mr A was adequately documented; and
  3. Did not ensure that the Licensee's procedures and controls were appropriate and effective with regard to the Licensee's high-risk appetite.
Ms Giovinazzi

For Example, Ms Giovinazzi:

  1. Failed to identify Mr A as a PEP when signing off the risk assessment for Trust 1;
  2. Did not ensure that the Licensee's procedures and controls were appropriate and effective with regard to the Licensee's high-risk appetite; and
  3. Failed to ensure that the compliance monitoring programme was formally documented.
Aggravating factors 
  1. The Licensee's business was inherently high-risk with 75% of its clients rated high-risk.  There was adverse media on a number of the Licensee's clients, which significantly heightened the risk of the Licensee handling the proceeds of crime.
  2. The Licensee and the Directors' failed to ensure that it had adequate policies, procedures and controls in place, as required by regulation, resulting in the Licensee being vulnerable to being used to facilitate money laundering and terrorist financing.
  3. Errors were made at the time of take-on of business relationships, including not completing risk assessments and failing to undertake sufficient EDD on high-risk business relationships.

End

Source:-

NOTES

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2020 replaced The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2000 with effect from 1 November 2021

NOTES

The Financial Services Business (Enforcement Powers) (Bailiwick of Guernsey) Law, 2020 ("the Enforcement Powers Law")
The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2020 (the "Fiduciaries Law")
The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 ("the Regulations")
The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook")

Hansard Limited, (the "Licensee" or the "Firm")
Mr Andrew Neil Parr ("Mr Parr")
Mr Alan Peter Northmore ("Mr Northmore")
Mr Philip Clive Blows ("Mr Blows")
Mr David Samuel Lloyd ("Mr Lloyd")
Ms Lynn Giovinazzi (“Ms Giovinazzi”)
 (together "the Directors")

GUERNSEY