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20 August 2018
The Financial Intelligence Service's (FIS's) recent refusal to consent to a proposed transaction under Guernsey's anti-money laundering reporting regime has resulted in the Royal Court deciding its first private law action between the person claiming the asset and the financial institution holding it.
In 2012 the Guernsey Court of Appeal indicated in Garnet(1) that the appropriate remedy for an asset owner being denied access to their funds following a suspicious activity report was to bring proceedings against the entity holding the funds. The court considered that this route was preferable to judicial review proceedings against the FIS as it would allow the court to fully explore the evidence with the assistance of the fund owner and fund holder, thereby enabling the funds' status to be determined. It was therefore a matter of time before such a private law action was brought before the Royal Court.
The deputy bailiff's recently released decision in Liang v RBC Trustees (Guernsey) Limited(2) clarifies the legal framework for determining the source of funds, which will be highly relevant to all regulated entities in Guernsey.
Hazel Liang was the beneficiary of the Lavender (2009) Trust, of which RBC Trustees (Guernsey) Limited was the trustee. Liang wished to have the trust terminated. However, due to the effect of the legislative regime against money laundering in Guernsey, RBC's position was that it was unable to comply with her request.
RBC made a suspicious activity report to the FIS in 2011 as a result of open source information relating to Liang's husband, Songxiao Li. Li was a wanted person in Hong Kong, suspected of conspiring to make various fraudulent property transactions to the benefit of Neo-China Land Group (Holdings) Limited (NCG). RBC suspected that the funds from which the trust was settled derived from the sale of Li's shares in NCG.
Although Liang requested that the trust be terminated in April 2013, the FIS refused to provide RBC with consent to do so. Despite its requests for Liang to fully explain the source of funds and provide independent reports on the provenance of the funds, RBC's suspicions were not allayed by the extra information provided.
Liang's position was that RBC's suspicion was unreasonable and unjustified. As such, she brought a private law action in the Royal Court against RBC, seeking a declaration that the assets in the trust belonged to her (and not her husband, from whom she is now formally separated). RBC maintained a neutral position in relation to the provenance of the funds.
As a result of the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law 1999 ('Proceeds of Crime Law'), Guernsey has wide-ranging, all-crime prohibitions on laundering the proceeds of crime. In particular, Section 39 contains the offence of assisting another person to retain the proceeds of crime. A defence to this offence is available if suspicion is reported to the police and consent obtained for the act concerned.
As intended by the legislature, this regime provides a strong incentive for any suspicions to be reported to the FIS and means that financial institutions are understandably reluctant to go ahead with proposed transactions in the absence of police consent. However, unlike the United Kingdom, Guernsey's legislation does not provide a statutory moratorium where deemed consent to the transaction is provided where the relevant authorities do not respond within seven working days. This lack of a moratorium can often lead to assets being left in limbo for years with the asset owner unable to satisfy the financial institution that the funds are not tainted.
The Royal Court has previously acknowledged in Jakob International Inc v HSBC Private Bank (CI) Ltd(3) that a person seeking access to funds without FIS consent can obtain relief from the Royal Court by:
The Royal Court made clear that the burden fell on the funds' custodian – in this case, RBC – to establish on the balance of probability that, at the time of the hearing, there were still relevant facts on which to base the suspicion about the source of funds in the trust. A valid suspicion requires more than general mistrust – that is, the custodian must think that there are relevant facts which lead to a more than fanciful possibility that the asset holder was, or had been, engaged in or had benefited from criminal conduct. Notably, the suspicion does not have to be clear or even based on reasonable grounds.
In this case, the deputy bailiff held that RBC was entirely justified in its suspicions that Li had been the originator of the funds in the trust, and insufficient explanation had been given to dispel that belief. It was found that Liang had been unwilling to supply information demonstrating a suitable audit trail which would fully address RBC's enquiries and had not cooperated sufficiently to allay RBC's suspicions.
Source of funds
The court held that it would be inappropriate to require a financial institution to prove that the funds were tainted in a situation where it did not have full details of the sources and was unable to compel the required explanations. Once a custodian has established that it has the necessary suspicion, it is incumbent on the asset owner to establish on the balance of probability that the suspicion is unfounded.
Liang would have been able to discharge the burden on her if she could show that she independently owned the property used to fund the trust's assets and that it was in fact her property that had been used for this purpose. However, the court found that there had been insufficient clarity as to Liang's personal wealth generation. While the court allowed amounts introduced to the trust which Liang was able to trace back to her own personal wealth, it found that:
The court was therefore not persuaded that it should treat the assets of the trust as belonging to Liang and denied her the declaration which she sought.
In reaching its decision, the Royal Court tried to create a workable balance between the conflicting interests of the custodian and the beneficiary. From the custodian's point of view, it must establish that it is justified in its suspicions that the funds are tainted by proceeds of crime and it still has those suspicions at the date of the hearing. However, the court has helpfully clarified that it can maintain a neutral position in relation to the question of the source of the funds while the asset owner attempts to show on the balance of probability that the funds are not tainted.
This decision also highlights the rights of the asset owner. The court must have the ability to make an order for payment if the asset owner can show that the funds are not proceeds of crime. It would be unacceptable to have an indefinite informal freeze of the funds without judicial supervision. The court would have been willing to make the declaration which Liang sought if it had not found her reluctant to divulge information in circumstances where the court considered the paperwork capable of being produced.
While the court attempted to strike the right balance, the position remains somewhat unsatisfactory from the perspective of both custodian and beneficiary. Liang has not been accused of criminal conduct; she remains caught by association with a husband from whom she is formally separated. The deputy bailiff was concerned that there may be future cases involving an innocent victim by association forced to prove source of funds without access to all of the material available to a law enforcement agency.
Further, the present balance does not provide complete protection for the custodian; only a police officer may give consent under the Proceeds of Crime Law. The law officers have not clarified whether a bank complying with a civil court order to pay out funds may still be prosecuted if the funds later turn out to be proceeds of crime. While the deputy bailiff's judgment stressed the need for the prosecuting authorities to use common sense and reality, until the law officers and states of Guernsey further consider the difficulties arising from the present reporting regime, there are likely to be many more such cases brought before the Royal Court.
For further information on this topic please contact Mathew Newman or Sandie Lyne at Ogier by telephone (+44 1481 721672) or email (email@example.com or firstname.lastname@example.org). The Ogier website can be accessed at www.ogier.com.
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