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AML is an area of close regulatory focus [Comsure Revisits a Jersey Prosecution for a Reason Why]

18/05/2022

It is clear that ensuring compliance with AML requirements remains an area of close regulatory focus and the following criminal case is a reason why [proof of concept]

PROOF OF CONCEPT

The Royal Court [FEB 2021] imposed a hefty £550,000 fine on a firm (1) for failing to ensure that, in practice, its anti-money laundering (AML) policies and procedures were being applied effectively and consistently

  • This Trust company's £550,000 fine demonstrates importance of effective and consistent AML procedures

There are a number of points to take away from this judgment – the following x3 are crucial:-

  1. It is crucial that firms ensure that their policies and procedures are effective in practice (not just on paper) and that they identify and assess AML risk objectively.
  2. The Royal Court was not deterred from imposing a fine by the fact that the failings related to only one client structure.
  3. Firms must ensure that their AML controls are being applied effectively across their entire business – for, as this judgment shows, the cost of failing to do so can be high.

The prosecution was also on the heels of

  • The Jersey Prosecution in the 2020 Abu Dhabi case,(2) and
  • The UK Financial Conduct Authority [FCA] announced on 16 March 2021 that it is prosecuting a UK bank [NAT WEST] for alleged AML failings,(3)
  • AND subsequent fine £264.8 million for anti-money laundering failures - National Westminster Bank Plc (NatWest) was fined £264,772,619.95 following convictions for three offences of failing to comply with money laundering regulations.[4]

Facts

  1. In April 2010 LGL Trustees Ltd, a Jersey-based trust company, was approached to establish and administer a Jersey limited partnership for the Angolan state.
  2. The limited partnership was to be managed by Quantum Global, a Swiss-based investment business 95% owned by Mr B. Mr B had strong political connections with the son of the then-Angolan president.
  3. LGL established the partnership and incorporated two Jersey companies to act as limited and general partner. The former (owned by the National Bank of Angola (NBA)) held 98% of the partnership's equity, and the latter (owned by Quantum Global) held the rest.
  4. LGL rated the business as 'very high risk'.
  5. It was told that the source of funds was $1.6 billion transferred from the Angolan Federal Reserve to an account with HSBC for real estate investment purposes. LGL obtained a signed letter from the NBA's governor confirming this and verified that the money held with HSBC belonged to NBA.
  6. The Royal Court noted that the fees payable to the general partner were "colossal", but that it was unclear what the general partner was doing for these fees (others down the chain were managing the real estate).
  7. The court noted that "obvious questions" arose around the level of these fees, the lack of transparency in the structure and how the risk of kick-backs could be disregarded, and that "[i]f these questions had been considered and satisfactory answers required before proceeding, it is probable that LGL would not have taken on this business at all".
  8. During a meeting in September 2010 to discuss what was needed for consent to be given to establish the above structure, the Jersey Financial Services Commission (JFSC) noted that LGL would need to consider further the alleged connection between Mr B and the Angolan president's son. LGL provided various reassurances to the JFSC. Consent was subsequently given to incorporate the companies.

The Royal Court noted that there were subsequently a number of "red flags":

  1. LGL learned in May 2011 that HSBC was concerned about Mr B's involvement, given a press article noting a history of corruption among Quantum structures' management and the risk of "skimming" of funds due to Mr B's connection with the president's son.
  2. HSBC declined to open a bank account for the partnership. No account having been opened elsewhere by August 2011, LGL's compliance officer recommended terminating the relationship – but was overridden.
  3. In June 2011 an LGL director visited Mr B and was seemingly satisfied with his denial of the allegations about him in the press. LGL did not inform the JFSC of either the skimming allegations or HSBC's concerns, nor did it file a suspicious activity report.
  4. On 19 December 2012 LGL's compliance officer circulated a press article stating that Mr B had been convicted in Switzerland in July 2011 of "repeated qualified criminal mismanagement". LGL raised the conviction with Quantum Global, which minimised its significance; no explanation was given for its non-disclosure. LGL made no further enquiries (e.g., seeking a copy of the judgment), nor did it update the JFSC.
  5. In 2013 LGL submitted applications to the JFSC to establish a further structure involving Mr B. The JFSC raised concerns as to fees and (having become aware of his conviction) Mr B's involvement. LGL defended these points, but apologised to the JFSC for not disclosing the conviction after obtaining a copy of the Swiss judgment. However, LGL nonetheless persisted with the application.
  6. In 2014 LGL became aware of JFSC concerns arising out of HSBC's refusal to take instructions from Quantum Global. In January 2016 JFSC Supervision visited LGL and identified a lack of customer due diligence for members of the board of NBA. Shortly afterwards, LGL began making plans to remove the structure from Jersey.

Charges

  1. The charges concerned breaches by LGL of Article 11 of the Money Laundering (Jersey) Order (MLO) 2008 (failure to maintain appropriate and consistent AML policies and procedures) and Articles 3 and 13 of the MLO 2008 (failure to apply identification measures).
  2. LGL pled guilty, but challenged the proposed fine.
  3. It contended that the prosecution's starting point of £1.2 million was disproportionate and that it should be £1 million (before reductions for mitigation).

Decision

The Royal Court emphasised that:

  • [a]t the heart of anti-money laundering regulation is the requirement that financial services businesses must have in place, and must follow, effective procedures to ensure that they avoid being mixed up in money laundering. (Emphasis added.)

While the court accepted that the failings "were not systemic", it noted that

  • "[d]ue diligence is an ongoing process" and so the failings were not "one-off" (even if relating to just one structure).

The Royal Court

  1. The Royal Court made clear that there was "no suggestion" that any of the funds provided by Angola were of suspicious origin or that the investments into which the funds had been placed were themselves suspicious.
  2. The money laundering risk "related to the possibility of corrupt misuse of funds diverted from the Jersey investment structure that LGL was administering".
  3. The Royal Court took note of LGL's failure to respond to red flags and expressed the view that the directors seemed "determined to continue with the business".
  4. It noted the risk of "corrupt diversion" was clear but not addressed, with LGL's minuted description of such payments representing possible "leakage" (with which LGL seemed comfortable) being "close to an acceptance as to what might occur with these very substantial fees after they were paid".

The fine

  1. In setting the starting point for the fine, the Royal Court made clear that it must "bring home the importance of complying with the requirements of the MLO 2008 both to the directors and the shareholders of LGL", and that its focus was therefore on the "conduct, not on the size [or means] of the company". As LGL's misconduct was more serious than that in Abu Dhabi, the court set a starting point of £1.2 million (as against £800,000 for that bank).
  2. The Royal Court reduced the fine by one-third as LGL's early guilty plea "was of value" and reduced it further to reflect LGL's "complete" cooperation and to ensure that LGL would not breach its prescribed adjusted net liquid assets ratio. Interestingly, the court also reduced the fine to account for the "injustice" of current directors and shareholders bearing the full burden of the actions of past directors and shareholders.
  3. Ultimately, the Royal Court imposed a fine of £550,000(5) and ordered that LGL contribute £50,000 to the prosecution's costs.

Comment

There are a number of points to take away from this judgment.

First, it is crucial that firms ensure that their policies and procedures are effective in practice (not just on paper) and that they identify and assess AML risk objectively.

Second, the Royal Court reduced the fine substantially to allow for LGL's guilty plea and for its cooperation. This illustrates the benefits in recognising shortcomings and cooperating with the authorities.

Third, the Royal Court was not deterred from imposing a fine by the fact that the failings related to only one client structure. Firms must therefore ensure that their AML controls are being applied effectively across their entire business – for, as this judgment shows, the cost of failing to do so can be high.

Endnotes

(1) See here https://www.jerseylaw.je/judgments/unreported/Pages/%5B2021%5DJRC058.aspx  and here. https://www.jerseylaw.je/judgments/unreported/Pages/%5B2021%5DJRC053.aspx

(2) Further information is available here. https://www.ogier.com/publications/jersey-royal-court-imposes-fine-for-inadequate-aml-policies-and-procedures

(3) Further information is available here. https://www.fca.org.uk/news/press-releases/fca-starts-criminal-proceedings-against-natwest-plc

(4 )     https://www.fca.org.uk/news/press-releases/natwest-fined-264.8million-anti-money-laundering-failures#:~:text=National%20Westminster%20Bank%20Plc%20(NatWest,comply%20with%20money%20laundering%20regulations.

(4) The fine was levelled for the first count (concerning Article 11 of the MLO 2008), with no separate fine imposed for the second count (concerning Articles 3 and 13 of the MLO 2008).

Source

https://www.lexology.com/commentary/litigation/jersey/ogier/trust-companys-550000-fine-demonstrates-importance-of-effective-and-consistent-aml-procedures

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