News

Guernsey (GFSC) strike again in 2020 - Louvre and its controllers fined again

20/02/2020

The GFSC have struck again (Feb 2000) and fined louvre and its directors again.  Over 4 years Louvre and its directors have suffered 385K in fines

The Feb 2020 fine (see below) follows

On 17 February 2020, the Guernsey Financial Services Commission (“the Commission”) decided:

  • under section 11D of the Financial Services Commission Law To impose a financial penalty of
    • £77,000 on the Licensee;
    • £52,500   on Mr Gilligan;
    • £31,500   on Mr Tracy;
    • £28,000   on Mr Baudains;
    • £14,000  on Mr Lane;
      • £203K TOTAL
    • To make orders under the Regulatory Laws prohibiting

2020 BACKGROUND

  1. In 2000, the Licensee was established in Guernsey and holds licenses for Category 1 and Category 2 controlled investments prescribed under the POI Law; and undertakes fiduciary activities under a full fiduciary license.
  2. The Licensee’s primary regulated activity is the establishment and administration of investment funds.  The Licensee would, as part of their administration services provide, on occasions, directors of the Licensee to sit on the boards of specific Funds / Companies or their Investment Advisers.
  3. Mr Gilligan has been a director of the Licensee since August 2008 and Managing Director since January 2011.
  4. Mr Tracy was a director and the compliance officer of the Licensee between August 2003 and December 2016.
  5. Mr Baudains has been a director of the Licensee since July 2000.
  6. Mr Lane has been a director of the Licensee since October 2011 and was the MLRO between February 2012 and March 2017.
  7. The Commission’s investigation into the Licensee commenced in 2017; and as part of this investigation, Oben Regulatory Limited was appointed as inspectors.

X8 FINDINGS

The Commission’s investigation found:

  1. FINDING NO1
    1. THE LICENSEE FAILED TO ADMINISTER CERTAIN FUNDS IN ACCORDANCE WITH THE PRINCIPAL DOCUMENTS AND INFORMATION PARTICULARS
  2. FINDING NO2
    1. THE LICENSEE FAILED TO ABIDE, AT TIMES, WITH CONTRACTUAL AND LEGAL OBLIGATIONS
  3. FINDING NO3
    1. THE LICENSEE FAILED TO ADEQUATELY IDENTIFY AND MANAGE CONFLICTS OF INTERESTS
  4. FINDING NO4
    1. THE LICENSEE FAILED TO OBTAIN ADEQUATE CLIENT DUE DILIGENCE AND ENHANCED DUE DILIGENCE IN RELATION TO ITS BOOK OF BUSINESS
  5. FINDING NO5
    1. THE LICENSEE FAILED, AT TIMES, TO EFFECTIVELY MONITOR BUSINESS RELATIONSHIPS AND TRANSACTIONS
  6. FINDING NO6
    1. THE LICENSEE FAILED, AT TIMES, TO ENSURE PROPER BOOKS AND RECORDS WERE KEPT AND THAT THESE WERE READILY RETRIEVABLE
  7. FINDING NO7
    1. THE LICENSEE FAILED, AT TIMES, TO EXERCISE EFFECTIVE POLICIES, PROCEDURES AND CONTROLS FOR FORESTALLING, PREVENTING AND DETECTING MONEY LAUNDERING AND TERRORIST FINANCING
  8. FINDING NO8
    1. THE DIRECTORS FAILED, AT TIMES, TO ADHERE TO A DIRECTOR’S FIDUCIARY DUTY TO ACT IN THE BEST INTEREST OF A COMPANY

Details of findings

FINDING NO1

THE LICENSEE FAILED TO ADMINISTER CERTAIN FUNDS IN ACCORDANCE WITH THE PRINCIPAL DOCUMENTS AND INFORMATION PARTICULARS

  1. The Licensee administered a Registered Collective Investment Scheme, involving assets (natural resources) that were not familiar to them, and which were located outside of the Bailiwick (“Scheme A”).
  2. The Commission expects a Licensee performing the function of designated administrator to operate such a scheme in accordance with The Registered Collective Investment Scheme Rules 2008, 2015 and 2018 (the “RCIS Rules”).
  3. Rule 3.01(1) of the RCIS Rules requires a designated administrator to administer the scheme in accordance with the Principal Documents and the most recently published Information Particulars.
  4. On a wider basis, the Commission expects a Licensee to understand and comply with its contractual and other legal obligations, as required under Principle 6 of the Code of Corporate Governance; and the Directors to operate in accordance with all relevant legislation, as required under Principle 2.1 of the Code of Corporate Governance.

Example 1

  1. Mr Gilligan and Mr Tracy were directors on the board of Scheme A. Mr Gilligan was appointed on 7 October 2010 and Mr Tracy on 22 May 2013.
  2. The Commission expected that these appointments should have enabled the Licensee to gain a greater oversight of the scheme it was administering.
  3. However, the Commission noted during its investigation that neither the Licensee, nor Mr Gilligan, nor Mr Tracy were able to demonstrate:
    • Satisfactory documentary proof of ownership for the assets of the scheme;
    • The exact location of all of these assets; or
    • Satisfactory documentary proof of the exact number of assets acquired.
  4. The Commission determined that the information gaps mentioned above resulted from the fact that reports from the investment adviser were predominantly verbal and often lacking in granular detail; and as such, the flow of information necessary to properly administer the scheme was insufficient.
  5. Therefore, the Licensee was unable to consistently value the assets in accordance with the Principal Documents and Information Particulars.

Example 2

  1. The Licensee also administered an Authorised Collective Investment Scheme, of which one of its cells held assets that were not familiar to them (“Scheme B”).
  2. These assets were natural resources of high-value, the specialist trade in which requires careful scrutiny, in particular, regarding the provenance of assets.
  3. Mr Gilligan was a director of the investment manager of Scheme B from 4 March 2014 to 5 January 2017 (inclusive), and Mr Tracy and Mr Baudains were directors on the board of Scheme B, in Mr Tracy's case from 14 March 2014 to 19 October 2016 (inclusive); and in Mr Baudains' case from 14 March 2014 to 14 December 2016 (inclusive).
  4. The Commission’s investigation identified serious compliance failings in respect of Scheme B, and these are described in more detail below.
  5. However, in the context of acting in accordance with Principal Documents, the Commission noted that despite the requirement for enhanced vigilance to be undertaken in this case, neither the Licensee, nor the appointed Directors were ever able to fully establish the provenance of these high-value assets.
  6. The inability to satisfy the provenance of the assets constituted a breach of the Principal Documents.

FINDING NO2

THE LICENSEE FAILED TO ABIDE, AT TIMES, WITH CONTRACTUAL AND LEGAL OBLIGATIONS

  1. The Commission expects Licensees to abide by Principle 6 of the Code of Corporate Governance, which requires a Licensee to
    • (i) understand and comply with its contractual and other legal obligations; and
    • (ii) keep and preserve appropriate records, including accounting records.

Example 1

  1. The Licensee administered two companies (“Company C” and “Company D”) whose purpose was to generate income through the acquisition of natural products in a number of foreign countries for onward sale, funded by the issue of loan notes listed on a recognised stock exchange.
  2. Mr Gilligan and Mr Tracy were appointed to the board of directors of both Company C and Company D in January 2013.
  3. The Licensee was obligated under an administration agreement to oversee the payment of funds raised through the issuance of loan notes, via Companies C and D, to specified overseas companies, who would then acquire assets on their (Company C and Company D) behalf.
  4. However, the Licensee on three occasions authorised the payments of funds to an overseas company, which had no contractual obligations with either Company C or Company D.  This contravened the Licensee’s contractual and legal obligations.
  5. The Licensee was obligated under an administration agreement, and in accordance with Principle 6, to keep adequate books and records to account for the purchase of assets.
  6. However, the Commission’s investigation identified that the Licensee failed to obtain adequate documentation (i.e. invoices) to confirm the purchase of any assets.

FINDING NO3

THE LICENSEE FAILED TO ADEQUATELY IDENTIFY AND MANAGE CONFLICTS OF INTERESTS

  1. The Licensees (Conduct of Business) Rules 2009, 2014, 2015 and 2016 (the “COB Rules”) apply to investment Licensees conducting, amongst other roles, administration.
  2. Rule 11.1.1 of the COB Rules requires a Licensee to establish, implement and maintain an effective conflicts of interest policy.
  3. Principle 3.3 of the Code of Corporate Governance stipulates that: “Any transactions between the company and it is Board members should take place at arms’ length or be disclosed in detail at a Board meeting before the Board considers the transaction.”

Example 1

  1. The Licensee had properly recorded that a number of directors (including those of the Licensee) of Scheme A sat on either the board of the scheme, the board of the Investment Adviser or the board of a further specialist Investment Adviser, specific to the asset class in question.
  2. The Licensee had properly recorded that one overseas director (“Person A”) sat on the boards of Scheme A, the Investment Adviser and a further specialist Investment Adviser.
  3. The Licensee was also aware, and had recorded, that Person A sat on the board of his own non-local holding company, designed to hold the assets in question.
  4. The Commission’s investigation determined that whilst the Licensee did have a conflicts of interest policy, it was not effective, as it failed to introduce measures to counter, the influence Person A’s multiple linked directorships provided him.
  5. The investigation noted that on one occasion Person A sold to the Scheme his own assets (purchased previously by Person A using his own separate company), without an independent valuation and without the prior formal approval of the board of Scheme A.
  6. These assets would form the majority of the assets purchased by the scheme.
  7. As detailed earlier, due to issues with the documentary proof of ownerships, these assets have not, to date, been sold.

Example 2

  1. The Commission identified that a number directors (including those of the Licensee) sat on the boards of Company C and Company D.
  2. The Commission noted that one overseas director (Person A from Scheme A), sat on the boards of Company C, Company D, but also on the board of the investment adviser to Company D.
  3. The Commission was not satisfied during its investigation that the Licensee fully understood the extent of these conflicts; and whilst some measures were in place to try and mitigate Person A’s multiple conflicts, the Commission determined these to be ineffective.
  4. The Commission noted that Person A was directly involved in the purchase of assets, but provided only verbal reports regarding these purchases, and not the sufficient documentary proof of purchase the Commission would have expected.

FINDING NO4

THE LICENSEE FAILED TO OBTAIN ADEQUATE CLIENT DUE DILIGENCE AND ENHANCED DUE DILIGENCE IN RELATION TO ITS BOOK OF BUSINESS

  1. All Licensees have to abide by The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations (the “Regulations”) and the accompanying Handbook.
  2. Regulation 4 relates to Customer Due Diligence.  This stipulates what CDD measures should be applied, when they should be applied and to whom they should be applied.
  3. Regulation 5 relates to Enhanced Due Diligence.  This stipulates what enhanced EDD measures should be undertaken in respect of business relationships and occasional transactions, which are identified as high risk.  These measures include carrying out more frequent and more extensive ongoing monitoring.
  4. Regulation 15 relates to ensuring compliance with the Regulations.  This stipulates that a firm must establish such other policies, procedures and controls as may be appropriate and effective for the purpose of forestalling, preventing and detecting money laundering and terrorist financing; and that the board must take responsibility for reviewing this compliance.
  5. Principle 3 of the CSP Code stipulates that a fiduciary licensee must comply with the Regulations.

Example 1

  1. As detailed above, the Licensee administered a scheme referred to as Scheme B; Mr Gilligan was a director of the investment manager of Scheme B, and Mr Tracy and Mr Baudains were directors on the board of Scheme B.
  2. The assets of one of the cells of Scheme B included natural resources of high-value, requiring specialist expertise in the trade of these assets.
  3. These assets were acquired for the scheme by a person (“Person B”) described as an expert dealer in relation to this asset class.  It was known by the Licensee, and the relevant directors, that Person B had acquired the assets from his own company, and was therefore buying and selling his own assets.
  4. The Commission noted that concerns were raised with Mr Gilligan and Mr Tracy from the outset regarding the unusually cyclical nature of the transaction; the lack of documentary detail regarding Person B’s professional background in this specialist trade area; and the lack of a satisfactory rationale regarding the provenance of the assets.
  5. Regulation 4(3)(b) states that: “any person purporting to act on behalf of the customer shall be identified and his identity and his authority to so act shall be verified.”
  6. The Commission’s investigation determined that the Licensee, and the relevant directors, did identify Person B and did instruct further open source research to be conducted.  However, crucial red flags regarding Person B were either missed or not properly recognised.  These included:
    1. Person B was not the same person as the person open source research had been conducted on; and
    2. No documentary proof was obtained to verify Person B’s expertise in the specialist trade area.

Example 2

  1. The Licensee, as part of its own initiative to improve its procedures regarding client due diligence, identified in March 2018 that it held incomplete client due diligence for approximately 64% of its investors at that time.

FINDING NO5

THE LICENSEE FAILED, AT TIMES, TO EFFECTIVELY MONITOR BUSINESS RELATIONSHIPS AND TRANSACTIONS

  1. Regulation 11 relates to the ongoing monitoring of customers.  This stipulates that identification data for high-risk relationships or customers should be reviewed on an ongoing basis; and scrutiny should be made of transactions, in particular those that appear unusual.

Example 1

  1. The Licensee failed to monitor Scheme A effectively as they were, at times:
    1. Unaware when assets had been purchased;
    2. Did not obtain satisfactory evidence of the purchase of all assets; and
    3. Placed an over reliance on verbal reporting from non-locally based board directors.

Example 2

  1. The Licensee failed to monitor Company C and Company D effectively as they:
    1. Released funds to an overseas company which was not listed as a counter-party on any agreement;
    2. Failed to obtain any invoices for the purchase of assets; and
    3. Placed an over reliance on verbal reporting from non-locally based board directors.

Example 3

  1. The Licensee failed to monitor Scheme B effectively as they:
    1. Did not adequately document the rationale for an unusual transaction involving assets with high-risk characteristics being bought and sold from the same person; and
    2. Did not adequately determine the provenance of the assets mentioned above.
  2. The Commission noted that whilst the Licensee did engage a third party compliance consultant to review the transaction, they failed to act on a number of recommendations they made regarding further due diligence that should have been obtained.

FINDING NO6

THE LICENSEE FAILED, AT TIMES, TO ENSURE PROPER BOOKS AND RECORDS WERE KEPT AND THAT THESE WERE READILY RETRIEVABLE

  1. Regulation 14 stipulates that a financial service business must keep a transaction document and any due diligence information.
  2. Principles 3 and 6 of the CSP Code stipulate that a Licensee should keep appropriate records and comply with the Regulations and the Rules.
  3. Principle 9 of the Principles stipulates that a financial institution should organise and control its internal affairs in a responsible manner, keeping proper records.

Example 1  

  1. The Licensee failed to obtain satisfactory ownership records in relation to Scheme A; and failed to obtain satisfactory purchase records in relation to Company C and Company D.

FINDING NO7

THE LICENSEE FAILED, AT TIMES, TO EXERCISE EFFECTIVE POLICIES, PROCEDURES AND CONTROLS FOR FORESTALLING, PREVENTING AND DETECTING MONEY LAUNDERING AND TERRORIST FINANCING

  1. Regulation 15 relates to ensuring compliance with the Regulations.  This stipulates that a firm must establish such other policies, procedures and controls as may be appropriate and effective for the purpose of forestalling, preventing and detecting money laundering and terrorist financing; and that the board must take responsibility for reviewing this compliance.
  2. Principle 3 of the CSP Code stipulates that a fiduciary licensee must comply with the Regulations.

Example 1

  1. The Licensee engaged a third party compliance consultant on 13 May 2016 to review their policies, procedures and controls.  The resulting compliance report identified that the Licensee had a number of areas, which were considered by the consultant to be inadequate.  These included inadequate procedures relating to: relationship risk assessments, enhanced due diligence and periodic risk reviews.
  2. These failings were considered by the Commission to have weakened the Licensee’s ability to combat fully the risk of money laundering and terrorist financing.

FINDING NO8

THE DIRECTORS FAILED, AT TIMES, TO ADHERE TO A DIRECTOR’S FIDUCIARY DUTY TO ACT IN THE BEST INTEREST OF A COMPANY

  1. In accordance with common law practice and Principle 3.4 of the Code of Corporate Governance, directors have a fiduciary duty to act in the best interest of a company.

Example 1

  1. Mr Gilligan and Mr Tracy were found not to have acted in the best interest of Scheme A, as they failed to ensure that the purchase of assets from Person A was conducted on an arm’s length basis; and they placed too great a reliance on verbal information supplied to them, rather than obtaining satisfactory documentary proof that the scheme was operating as expected.
  2. Mr Gilligan and Mr Tracy were found not to have acted in the best interest of Company C and Company D, as they failed to obtain adequate documentary proof that assets purchased were made at fair market prices, based on independent evaluations.

Mr Gilligan

  1. Mr Gilligan, as well as being a director of the Licensee, was a director, at various times, on the boards of Scheme A, Company C and Company D, as well as various other entities connected to these schemes / companies.
  2. Mr Gilligan was therefore well placed to benefit from first-hand access, not only to information necessary for the running of these entities, but also from contact with the other directors of these entities.
  3. The Commission’s investigation identified that Mr Gilligan failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.
  4. For example, Mr Gilligan:
    1. Failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence;
    2. Did not ensure that assets purchased in relation to Scheme A had satisfactory proof of ownership;
    3. Did not properly manage, on an ongoing basis, the numerous conflicts surrounding Person A and the actual impact this had on the scheme: i.e.  regarding the purchase of assets from Person A without an independent valuation;
    4. Did not sufficiently challenge the preference for verbal reporting regarding Scheme A and Company C and Company D;
    5. Permitted monies linked to Company C and Company D to be transferred to a company with no contractual links;
    6. Permitted purchases of assets in relation to Company C and Company D without obtaining sufficient proof, such as invoices; and
    7. Did not properly address the concerns that arose out of the purchase of high risk assets in relation to Scheme B and failed to ensure that common-sense due diligence checks were conducted.

Mr Tracy

  1. Mr Tracy, as well as being a director of the Licensee, was a director, at various times, on the boards of Scheme A, Scheme B, Company C and Company D, as well as various other entities connected to these schemes / companies.
  2. Mr Tracy was therefore well placed to benefit from first-hand access, not only to information necessary for the running of these entities, but also from contact with the other directors of these entities.
  3. The Commission’s investigation identified that Mr Tracy failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.
  4. For example, Mr Tracy:
    1. Failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence;
    2. Did not ensure that assets purchased in relation to Scheme A had satisfactory proof of  ownership;
    3. Did not properly manage, on an ongoing basis, the numerous conflicts surrounding Person A and the actual impact this had on the scheme: i.e.  regarding the purchase of assets from Person A without an independent valuation;
    4. Did not sufficiently challenge the preference for verbal reporting regarding Scheme A and Company C and Company D;
    5. Did not sufficiently address concerns regarding the lack of sufficient proof of purchases, (such as invoices), of assets in relation to Company C and Company D; and
    6. Did not properly address the concerns that arose out of the purchase of high risk assets in relation to Scheme B and failed to ensure that common-sense due diligence checks were conducted.

Mr Baudains

  1. Mr Baudains, as well as being a director of the Licensee, was a director, at various times, on the boards of Scheme B.
  2. Mr Baudains was therefore well placed to benefit from first-hand access, not only to information necessary for the running of the scheme, but also from contact with the other directors of these entities.
  3. The Commission’s investigation identified that Mr Baudains failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.
  4. For example, Mr Baudains:
    1. Failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence; and
    2. Did not properly address the concerns that arose out of the purchase of high risk assets in relation to Scheme B and failed to ensure that common-sense due diligence checks were conducted.

Mr Lane

  1. Mr Lane was a director of the Licensee, but did not sit on the boards of the entities investigated by the Commission.  This position is reflected in the level of financial penalty imposed.
  2. The Commission’s investigation identified that Mr Lane failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.
  3. The Commission found that Mr Lane failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence.

Aggravating factors

  1. The contraventions and non-fulfilments of the Licensee and the Directors in this case are serious as they have had a detrimental effect on certain clients and those invested in these clients, and have exposed the Firm and the Bailiwick to a significant risk of reputational damage.
  2. Under its administration, the board requested the suspension of Scheme A, which became effective in March 2014 and Company C and Company D were placed into voluntary liquidation in February 2017.
  3. The Licensee and the Directors’ failure to ensure that it had adequate policies, procedures and controls in place, as required by regulation, resulting in the Firm being vulnerable to the threat of money laundering and terrorist financing.

Mitigating factors

  1. The Licensee initiated a comprehensive review of all of its procedures, before the Commission's investigation commenced.  This identified the need to undertake an extensive remediation programme, requiring the significant input of the Licensee and the directors.
  2. This remediation was determined by the Licensee to have been completed in 2019, and an independent assurance evaluation has confirmed this to the satisfaction of the Commission. A review by the Commission of the Licensee's board and committee minutes from October 2016 to June 2019 has also shown a marked improvement in the way that risks to the business are detailed and mitigated.
  3. It is accepted that the majority of the conduct described in this statement predates the Licensee's self-imposed remediation programme and is regarded as historic.
  4. At all times the Licensee and the Directors co-operated fully with the Commission and the inspectors.  The Licensee and the Directors agreed to settle at an early stage of the process and this has been taken into account by applying a discount in setting the financial penalties and prohibitions.

Laws

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (“the Financial Services Commission Law”);

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”);

The Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the “POI Law”);

The Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (the “IMII Law”);

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking Law”) and

The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Business Law”) (together “the Regulatory Laws”).

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended (“the Regulations”);

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (“the Handbook”);

The Principles of Conduct of Finance Business (the “Principles”);

The Licensees (Conduct of Business) Rules 2009, 2014, 2015 and 2016 (the “COB Rules”);

The Registered Collective Investment Scheme Rules 2008, 2015 and 2018 (the “RCIS Rules”);

The Principles of the Code of Corporate Governance 2011, 2014 and 2016 (the “Code of Corporate Governance”);

The Code of Practice – Corporate Service Providers 2009 (the “CSP Code”); and

The Code of Practice – Company Directors 2009 (the “Directors Code”) (together “the Regulatory Requirements”).