Public Statements

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”)[1]

The Beneficial Ownership of Legal Persons (Guernsey) Law, 2017 (the “Beneficial Ownership Law”)

Schedule 3 to Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 (“Schedule 3”)[2]

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

Code of Practice – Corporate Service Providers (“the CSP Code”)

The Finance Sector Code of Corporate Governance

The Principles of Conduct of Finance Business

Zedra Trust Company (Guernsey) Limited (the “Licensee” or the “Firm”)

Mr Colin Andrew Borman (“Mr Borman”)

On 7 October 2024, the Guernsey Financial Services Commission (“the Commission”) decided:

1. To impose a financial penalty of £90,000 on the Licensee under section 39 of the Enforcement Powers Law;
2. To impose a financial penalty of £15,000 on Mr Borman under section 39 of the Enforcement Powers Law;
3. To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Borman from the position of controller, director, money laundering reporting officer and money laundering compliance officer a period of two years;
4. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in 3(1)(g) of the Fiduciaries Law in respect of Mr Borman for a period of two years; and
5. To make this public statement under section 38 of the Enforcement Powers Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee and Mr Borman had failed to ensure compliance with the regulatory requirements and failed to meet the Minimum Criteria for Licensing pursuant to Schedule 1 of the Fiduciaries Law. 

The findings in this case related to one client file involving a Guernsey investment holding company (“Client A”) and were serious in nature but not systemic and were caused by multiple human failures. The investigation into the Licensee and Mr Borman focussed on the activity of the Firm in relation to this Client.  The investigation examined the period 1 January 2020 to 31 December 2021.

Background

The Licensee is a subsidiary of the Zedra Group, who acquired the business from a previous Guernsey licensed entity at the end of 2015. The Firm is licensed to conduct regulated activities under the Fiduciaries Law.  

Mr Borman was an executive director from 17 March 2014 until he resigned from the board on 7 May 2021. Mr Borman was the head of the Licensee’s Private Client team and he continued to be employed by the Firm until 3 December 2021.

The Commission’s investigation into the Licensee and Mr Borman commenced in 2022 following a full risk assessment on-site visit to the Licensee by the Financial Crime Division in December 2021.  The Firm had previously been subject to a full risk assessment with an onsite visit by the Investment, Fiduciary and Pension Division in July 2019 which had resulted in the Firm undertaking a Risk Mitigation Programme (“RMP”).  The findings made during the December 2021 onsite visit by the Commission raised significant concerns regarding the Firm’s policies, procedures and controls, particularly in respect of the onboarding and subsequent administration of Client A and Mr Borman’s role in this.

Client A

The stated purpose of Client A was making purchases from a U.K. property development group which had become distressed following the arrest of its company director, (“Mr X”).  Mr X had been arrested on suspicion of conspiracy to defraud, bribery and corruption.  The arrest had caused investor and funder concern.

An individual (“Mr Y”) sought to establish Client A for what was said to be his own benefit. Mr Y was a professional, working in a reputable legal practice known to the Licensee. He explained that his practice included providing services to the U.K. property development group. He approached the Licensee (specifically Mr Borman) to establish Client A.

The Licensee and Mr Borman failed to identify, manage and mitigate the evident risk that Mr X was potentially the beneficial owner of Client A and attempting to disguise that beneficial ownership and could potentially be using or intending to use Client A to mislead investors and possibly to launder the proceeds of crime.

Once Client A had been established, the Licensee and Mr Borman failed to identify the red flags in the Client relationship, even when attempts were made by Client A to transact business outside its stated initial purpose.  For example, a proposal was made that Client A should make a loan to Mr X which would be funded by Mr Y. Mr Borman also failed to identify the red flags in relation to an unusual transfer of ownership of Client A from Mr Y to his long-standing friend (“Mr Z”), who was stated to have a significant financial connection with Mr X, in 2021.

The investigation also revealed the Licensee’s procedures and controls in relation to Client A had not been followed properly at key stages. The investigation also highlighted that the concerns and advice from the Firm’s own compliance staff were not always appropriately considered.

Findings

The Commission’s investigation found that the Licensee, in part due to the conduct of Mr Borman, had failed to identify, monitor and manage the financial crime risks associated with Client A as required by Schedule 3 and the Rules within the Handbook (the “Rules”).

In particular, the Commission found:

The Licensee failed to carry out effective risk assessments regarding Client A

Paragraph 3(5) of Schedule 3 requires a financial services business to take into account its risk appetite and risk factors relating to the type of customer (and the beneficial owners of the customer), country or geographic area, and product, service, transaction and delivery channel that are relevant to the business relationship or occasional transaction in question.  It also requires a financial services business to understand that such risk factors, and any other risk factors, either singly or in combination, may increase or decrease the potential risk posed by the business relationship or occasional transaction.

The Firm’s New Business Form, including an AML Risk Scorecard, was not completed correctly and as a consequence did not result in an effective risk rating process on this occasion, nor did other parts of the process.  

Mr Borman failed to ensure complete and accurate information was provided on the new business forms for both Mr Y and Mr Z and himself treated each of the cases inappropriately as standard risk.  Mr Borman failed, for example, to acknowledge Client A’s link to the construction industry, which, according to the Firm’s policies should have been one of the additional indicators leading to an increased risk rating.  Mr Borman also failed to correctly disclose the ongoing status of the criminal investigation into Mr X on Client A’s new business form.

Furthermore, there were weaknesses in the Licensee’s onboarding procedures and controls; there was insufficient and ineffective scrutiny of Client A’s information. Although the on-boarding of Client A was considered by members of the Reputational Risk Committee, the compliance department did not have to see all documents provided to the Reputational Risk Committee. None of Mr Borman, the Reputational Risk Committee or the independent reviewers of the New Business Form (who were some of the Licensee’s directors and senior managers), reacted to a document which contrasted sharply with the basis on which the business was proposed. The independent reviewers signed off on Client A’s new business form despite there being several obvious errors.  Client A was incorrectly risk rated. 

The Licensee and Mr Borman failed to understand the ownership and control structure of a customer

Paragraph 4(1) and 4(3)(c) of Schedule 3 require a financial services business to identify the beneficial owner and take reasonable measures to verify such identity.  This shall include measures to understand the ownership and control structure of the customer. Paragraph 22(2) of Schedule 3 defines beneficial ownership. Paragraph 4(3)(c) requires a firm to understand both the ownership and control of the client and apply the three-step test.  In failing to take reasonable measures to understand the ownership and control structure the Firm failed to correctly identify the beneficial ownership of Client A as required by Section 9 of the Beneficial Ownership Law.  Moreover, Section 12 of the Beneficial Ownership Law requires firms to notify the Registrar of changes.

The Licensee and Mr Borman failed to understand the ownership and control structure and failed, until a very late stage, to identify Mr X as the potential beneficial owner of Client A and the potential risks to which this exposed the Firm given Mr X’s ongoing criminal investigation.   Key employees of the Licensee had concerns regarding Mr X’s beneficial ownership status before the business relationship had been established; however, initially Mr Borman and thereafter certain members of the then management team failed to react appropriately to these concerns.

Mr Borman failed to scrutinise properly the unusual transfer of ownership from Mr Y to Mr Z of Client A in 2021.  Neither he, nor the signatories approving the transfer, explored the rationale for the transfer and the potential red flags, including Mr X’s control over Client A, that it exhibited.  

This is particularly important when considering that Mr Z’s source of funds ultimately derived from Mr X, and the manner in which Mr Z came to receive those funds. Mr Z had purportedly provided consultancy services to Mr X and his organisation. The remuneration was paid not in money but in other assets, the disposal proceeds of which were to be used to fund the purchase by Client A of a company from Mr X.  

In the cases of both Mr Y and Mr Z, Mr Borman and the Licensee failed to identify the potential control Mr X had over Client A.  As a result of these failings, the Registrar of Beneficial Ownership was given incorrect information on the beneficial ownership of Client A (the information was later corrected).

The Licensee failed to collect sufficient client due diligence and apply enhanced measures

By failing to carry out an effective risk assessment and consider all of the risk factors affecting the risk rating of Client A, Mr Borman, and the Licensee, failed to take reasonable measures to establish and understand the source of any funds and wealth of the customer as required by Paragraph 5(3)(a)(iii) of Schedule 3.

Paragraph 5(2)(a) of Schedule 3 requires a financial services business to carry out enhanced measures in relation to business relationships and occasional transactions, whether otherwise high risk or not, which involve or are in relation to a customer who is not a resident in the Bailiwick.  The Licensee’s policies, procedures and controls required the Firm to establish and understand the source of any funds provided to Client A, where, as seen in this case, the funds derived from a non-resident of the Bailiwick of Guernsey. 

The Licensee, essentially due to the poor conduct of Mr Borman, failed to fully carry out enhanced measures on Mr Z.  Specifically, the Licensee failed to corroborate the basis of his source of funds.  The Firm did not obtain a copy of Mr Z’s consultancy agreement for services he purportedly provided to Mr X.  This was critical as Mr Z’s source of funds to be used by Client A apparently derived from Mr X.

Despite the risks of the share purchase agreement being a circular transaction and the financial crime red flags attached, Mr Borman and the Firm failed to identify, manage and mitigate the risks of potential money laundering presented by this transaction.

The Licensee failed to keep proper accounts and records

Paragraph 5(2)(d) of Schedule 1 of the Fiduciaries Law stipulates that a licensee will not be regarded as conducting business in a prudent manner unless the licensee maintains adequate records and systems of control of their business and records.

Principle 6 of the CSP Code and Principle 9 of the Principles of Conduct of Finance Business require firms to keep and preserve appropriate records including records of material communications with Clients, Client companies and others and of proceedings at company meetings.

These principles were not properly observed.

Discussions and decisions about Client A were frequently not recorded by the Licensee and Mr Borman, and on material occasions not by others.  

Prior to being onboarded, Client A was reviewed by a Reputational Risk Committee. The Reputational Risk Committee was a Group initiative for the purpose of managing perceived and/or actual reputational risk. Despite its key role in allowing the take-on procedure of Client A to proceed, the Licensee’s internal procedures did not require the taking of minutes of meetings of the Committee. The Commission found no records or minutes of the meeting of the Reputational Risk Committee that met to discuss the reputational risk posed by Client A.  

Ineffective board of directors and systems of controls

Paragraph 2 and 15(1)(b) of Schedule 3 requires a licensee to have in place effective policies, procedures and controls to identify, assess, mitigate, manage and review and monitor risks and establish such other policies, procedures and controls as appropriate and effective for the purposes of forestalling, preventing and detecting money laundering and terrorist financing.

The investigation into the Licensee and Mr Borman regarding Client A revealed that a section of the then management team, at board level, was not sufficiently alert or astute to deal in the particular matter with material showing serious reputational risk. In relation to Client A, there were issues around clear and transparent communications between the Firm’s compliance function and its administrative function. As results, (1) those in the compliance function did not see at the material time the document which contrasted sharply with the basis on which the business was proposed (2) concerns from compliance staff in April 2021 were not communicated to the appropriate individual or acted upon effectively until far too late.

While, in terms of documentation, the Firm’s systems were adequate, and training was delivered by competent personnel to Mr Borman and his team, in practice human error made them ineffective; the risk management of Client A was not effective.

Timing of identification and verification

Paragraph 7(1) of Schedule 3 requires firms to carry out identification and verification of the identity of any person or legal arrangement before or during the course of establishing a business relationship or before carrying out an occasional transaction.

The Licensee, due to Mr Borman’s actions, signed and began to action the share purchase agreement for the U.K. property development group (including receiving funds into its client account) despite not having sufficient identification and verification on Mr Z, who had also not signed a letter of engagement with the Licensee.

The Licensee received a payment of large sums from Mr Z on two occasions, both prior to the completion of enhanced measures on Mr Z.  The funds had been returned to Mr Z when they were first received on the understanding that the Firm was still to complete the identification and verification process.  However, Mr Borman failed to ensure that adequate due diligence had been obtained from Mr Z before the funds were again remitted to the Firm.

Mr Borman

The Commission’s investigation identified that Mr Borman failed to fulfil the fit and proper requirements set out in Schedule 1 of the Fiduciaries Law, as he failed to demonstrate that he acted with competence, soundness of judgement and diligence.

For example, Mr Borman:

• failed to ensure adequate and accurate information was completed on the new business forms for Mr Y and Mr Z;
• failed to identify, manage and mitigate financial crime risks and take appropriate action in accordance with the Firm’s procedures;
• failed to ensure enhanced measures were completed on a non-resident of the Bailiwick of Guernsey, in accordance with the Firm’s procedures;
• failed to appropriately consider and understand the ownership and control structure of the customer; and
• failed to prevent the Bailiwick of Guernsey from potentially being used to disguise the beneficial ownership of assets from an individual arrested and under investigation for bribery, corruption and fraud and money laundering, and thereby being exposed to the risk of reputational damage.

Aggravating Factors

Following the Commission’s Full Risk Assessment of the Licensee in July 2019, the Firm undertook a RMP to address the identified deficiencies. Despite confirming to the Commission that the RMP had been satisfactorily completed in January 2020, the Licensee was found to have similar failings when the on-site team reviewed the file for Client A during the December 2021 visit. Some of the deficiencies had not been effectively resolved and these contributed to the Licensee’s breaches regarding Client A.

The Licensee’s own compliance staff issued repeated warnings in reports to the board of directors and made specific reference to Mr Borman and Client A.  The Licensee failed to consider the concerns from compliance staff appropriately and implement any effective change.

Errors were made at the time of take-on of Client A and throughout the business relationship, including not completing appropriate risk assessments and failing to undertake sufficient enhanced measures on Mr Z.

The Licensee also failed to bring this matter to the attention of the Commission prior to the conclusion of an external investigation undertaken by the Licensee, in November 2021.

Mitigating Factors

The Licensee identified the issues in relation to Client A, and in mid-2021 it engaged a firm of advocates to conduct an investigation into the incorporation and administration of Client A. This culminated in recommendations being made for improvements in certain areas of the Licensee’s systems and controls.  

The Licensee co-operated fully with the Commission throughout the investigation and provided it with a copy of its internal investigation report during the on-site visit.

Following the on-site visit, the Licensee completed a second RMP which involved improvements to policies, procedures and controls being made. Additionally, the Licensee has made changes to the composition of its senior management team/Board, additional training has been provided to all staff and has taken steps to improve its governance and compliance framework and its onboarding procedure.

Mr Borman co-operated fully with the Commission throughout the investigation. The effect of the prohibition order was a material factor in determining the level of penalty.

End

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”)^[i]

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

Schedule 3 to the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 (“Schedule 3”)^[ii]

The Handbook on Countering Financial Crime and Terrorist Financing (the “Handbook”)

The Finance Sector Code of Corporate Governance (the “Code of Corporate Governance”)

Equiom (Guernsey) Limited (the “Licensee” or the “Firm”)

On 19 July 2024, the Guernsey Financial Services Commission (“the Commission”) decided:

1. To impose a financial penalty of £455,000 on the Licensee under section 39 of the Enforcement Powers Law; and

2. To make this public statement under section 38 of the Enforcement Powers Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee had failed to ensure compliance with the regulatory requirements and failed to meet the Minimum Criteria for Licensing pursuant to Schedule 1 of the Fiduciaries Law.

Background

The Licensee was established in Guernsey in August 1976 and undertakes fiduciary activities under a full fiduciary licence issued in November 2001.

In May 2019, the Licensee’s ultimate parent company was acquired by a private equity investor, which remained in place until August 2022, until it was then acquired by its current majority shareholder.

In January 2020, another licensed fiduciary (“Fiduciary A”) amalgamated with the Licensee, although for a number of years prior to that date the two licensees were sister companies and had common staff and procedures.

The Licensee is a large business with a high-risk appetite and a significant number of high-risk relationships. As at 30 June 2021, approximately 68% of its business relationships were high-risk. A significant number of clients were from, or linked to, jurisdictions which are regarded as posing a higher risk of money laundering, terrorist financing and/or bribery and corruption. A number of clients were allegedly involved in criminal activity according to media reports.

The Commission visited the Licensee in 2017 (“the 2017 Visit”) and identified a number of issues, including:

• That the composition of the board of the Licensee was not appropriate, in particular due to the number of recent resignations of executive directors, the geographical separation of further executive directors and that no Guernsey based director was responsible for compliance and risk;
• The number of ongoing financial crime related projects, including a project to review all customer due diligence (“the CDD Project”), a project to clear a backlog of overdue periodic reviews and resulting action points and a project to review the Licensee’s policies, procedures and controls; and
• Contraventions of the Regulations and Handbook in the client files reviewed. These related to a lack of regular relationship risk assessment reviews, lack of appropriate CDD, lack of reasonable measures to establish source of wealth and source of funds and lack of ongoing and effective monitoring.

The Licensee was required to complete a remediation programme following the 2017 Visit.

The Commission visited the Licensee again in 2021 (“the 2021 Visit”) and identified similar issues to those identified at the 2017 Visit. In particular, the Commission identified:

• An inappropriate board composition and an under-resourced board. At the time of the 2021 Visit, there was only one executive director based in Guernsey. The Commission also noted that there had been seven resignations from the board and only one appointment over the last two calendar years;
• A backlog of periodic risk reviews and action points; and
• Deficiencies in the client files reviewed, including in relation to initial and periodic risk assessments, enhanced customer due diligence (“ECDD”) and monitoring of transactions and activity.

The Commission’s investigation began following the 2021 Visit.

Findings

The Commission’s investigation found that the board of the Licensee was ineffective in the period 1 January 2018 to 7 September 2023 (“the Relevant Period”), being at times under-resourced and that the Licensee did not have an adequate number of staff with the skills, knowledge and experience to fulfil the Licensee’s duties. However, during the latter stages of the Relevant Period and subsequently, steps have been taken to improve the board effectiveness. The board has also been relatively stable in the last 12 months.

The ineffective board and the lack of adequate staff resulted in the Licensee failing to monitor and manage the financial crime risks associated with its customers as required by Schedule 3 and the rules within the Handbook (“the Rules”). This was particularly concerning due to the size of the Licensee’s business and the large proportion of high-risk clients.

Following a number of acquisitions, with little apparent attention paid to synergies or post-acquisition integration, and the takeover of the ultimate parent company by the then private equity investor, cost cutting measures, including redundancies, were imposed on the Licensee through 2018 and 2019 when it was already under-resourced and the Licensee was under pressure to upstream funds. This resulted in the ultimate parent company and its private equity investor in place at the time appearing to the Commission to be more interested in its own financial position than with the Licensee’s compliance with the Bailiwick’s regulatory framework.

In particular, the Commission found:

The Licensee failed to have an effective board responsible for governance

The Minimum Criteria for Licensing requires a licensee to have an appropriate number of executive and non-executive directors having regard to the nature and scale of its operations.

The Minimum Criteria for Licensing also requires a licensee to have at least two individuals resident in the Bailiwick effectively directing the business.

The Code of Corporate Governance requires a licensee to have an effective board responsible for governance.

In the Relevant Period, twenty directors were appointed to the board and twenty directors resigned, a significant turnover of directors in a five-year period for a large firm with a high-risk book of business. The frequent changes in the board of the Licensee highlights that the composition of the board was not appropriate to the circumstances of the company and the nature and scale of its operations.

The significant turnover of directors resulted in the Licensee not being headed by an effective board. In particular, the constant changing of directors meant no director could take ownership and ensure that the remediation following the 2017 and 2021 Visits was completed satisfactorily.

For a period of eight months between October 2021 and June 2022, the Licensee only had one Guernsey based director.

As noted below, the Licensee had a significant turnover of staff and a lack of sufficient staff resources. However, the Licensee board was ineffective in resolving this serious issue during the Relevant Period. The Commission noted that any new staff, including replacements for leaving staff, had to be approved by the Licensee parent company. Approval was often delayed and at times refused resulting in the Licensee not being in a position to resolve staffing issues.

In addition, despite the Licensee being aware of staffing issues, a number of staff were made redundant in 2019. The redundancies were imposed by the parent company and the Licensee board were ineffective in preventing the redundancies.

The board of the Licensee are responsible for the proper running of the company, not the shareholders.

The Licensee failed to have staff of adequate number, skills, knowledge and experience

The Minimum Criteria for Licensing requires a licensee to conduct its business in a prudent manner. This includes a licensee having staff of adequate number, skills, knowledge and experience to undertake and fulfil the duties of a licensee.

In the Relevant Period, the Licensee had a significant turnover of staff, including a turnover of 50% or more in each of two consecutive years.

The Licensee board was often informed of and discussed a lack of staff resources in the Relevant Period. At the same time, the Licensee board was also informed of and discussed backlogs of periodic reviews and relationship risk assessment reviews, which were essential given the high-risk nature of the Licensee’s business. The backlogs, which were never rectified in the Relevant Period, demonstrated that the Licensee did not have staff of adequate number, skills, knowledge and experience to fulfil its duties.

The redundancies made in 2019 had the obvious effect of making the staff resourcing issues worse. Requests by the Licensee board for additional staff after the redundancies were at times refused by the parent company.

The Licensee failed to have effective policies, procedures and controls

Schedule 3 requires firms to have in place effective policies, procedures and controls to identify, assess, mitigate, manage and review and monitor its money laundering and terrorist financing risks.

Schedule 3 also requires firms to establish and maintain an effective policy, for which responsibility is taken by the board, for the review of its compliance with the requirements of Schedule 3 and the Handbook and such policy shall include provision as to the extent and frequency of such reviews.

In addition, following the introduction of Schedule 3 and the new Handbook in March 2019, firms were required to review and revise their policies, procedures and controls to comply with Schedule 3 and the new Handbook by 30 September 2020.

Prior to the Commission’s visit in 2021, the Licensee informed the Commission that it had not updated its policies, procedures and controls in line with the new Handbook.

The Commission’s review of a number of client files demonstrated that the Licensee’s policies, procedures and controls were not always effective. These are highlighted in the client examples below.

The fact that issues, for example, the backlog of relationship risk assessments and periodic reviews, were never remediated during the Relevant Period despite being raised with the board on a number of occasions, demonstrates that the Licensee’s policy of reviewing its compliance with Schedule 3 and the Handbook was not effective.

The Licensee failed to regularly review relationship risk assessments

Paragraph 3(4)(b) of Schedule 3 requires firms to regularly review relationship risk assessments so as to keep them up to date and where changes are required, to make those changes.

The Licensee’s policies, procedures and controls require high-risk clients to be reviewed annually, standard risk every two years and low risk every three years.

Reports to the Licensee board often referred to a backlog of relationship risk reviews, in particular from 2020 onwards following the redundancies in 2019. For example, there were 216 reviews outstanding in January 2020 and 596 outstanding in quarter 3 of 2021. The backlog of relationship risk assessments was evident in the client files reviewed by the Commission.

For the purposes of this public statement, the Commission provide examples of three such relationships only to depict the types of failings that were systemic within the Licensee.

Example 1

Client 1 is a high-risk individual from a Central American country who was once the subject of open-source information that alleged he was involved in drug trafficking and laundering the proceeds. In addition, Client 1 had received a significant financial penalty from another financial services regulator in the past in relation to providing misleading information regarding his acquisition of a bank. Fiduciary A [which subsequently amalgamated with the Licensee] was aware of these issues when it took on Client 1.

Client 1 settled a trust in 1998. Fiduciary A provided administration services to the trust from 2007 and the Licensee provided administration services from January 2020 following the amalgamation of the Licensee and Fiduciary A.

During the course of the relationship with Client 1, there were a number of potential red flags, including a number of enquiries from law enforcement authorities either directly with the Licensee or in relation to Client 1’s other business interests, which the Licensee became aware of.

Despite the adverse media and continuing interest of law enforcement in Client 1, the Licensee’s records show that as at 30 March 2022 the last relationship risk assessment had been carried out on Client 1 in July 2019. As a high-risk relationship it should have been reviewed at least twice during that period according to the Licensee’s procedures.

The failure to conduct a review of this high-risk client for three years, represented a serious failing by the Licensee and also demonstrated the ineffectiveness of its policies, procedures and controls.

The trust ceased to be a client of the Licensee in December 2022.

Example 2

Client 2 is a high-risk Russian client and a politically exposed person (“PEP”) who has subsequently been arrested for embezzlement.

Client 2 settled a trust in April 2002. The Licensee has been trustee since the formation of the trust.

A relationship risk assessment that should have been conducted in January 2020 was not actually started until January 2021 and was not signed off until October 2021, nearly two years late. The relationship risk assessment notes that the reason for the delay was lockdown and workload pressures, corroborating the reports to the board that backlogs in reviews were, at least in part, due to resources.

The previous relationship risk assessment was from February 2019 and was in the form of a risk scoring sheet. However, there is no reference to a risk scoring sheet in the Licensee’s procedures at that time, which required the completion of a detailed risk assessment form. The fact that a different risk assessment form was being used to that in the procedures demonstrates the ineffectiveness of the Licensee’s policies, procedures and controls.

Example 3

Client 3 is a Russian national employed by a private equity group owned by another Russian client (“Client 4”). Client 3 was rated as high-risk by the Licensee.

Client 3 owned a company (“Company A”), to which Fiduciary A provided administration services and corporate directors from 2012. The Licensee continued to provide administration services and corporate directors following the amalgamation of the Licensee and Fiduciary A in January 2020.

Company A acted as a guarantor for a loan obtained by Client 3 in relation to a separate property transaction.

According to the Licensee’s relationship risk assessment, the source of funds and source of wealth in Company A was Client 3’s employment with the private equity group and consultancy agreements with other companies owned by Client 4.

However, documents on the file show that the Licensee was aware that the source of the funds within Company A was actually Client 4 and not Client 3.

In April 2022 Client 4 was added to the European Union and United Kingdom lists of sanctioned individuals following the invasion of Ukraine.

The funds in Company A were subsequently used to repay the loan obtained by Client 3 for the separate property transaction. This resulted in Client 4’s funds being used to purchase Client 3’s property.

Paragraph 3(5)(a) of Schedule 3 requires a firm to take into account risk factors relating to the product, service, transaction and delivery channel. In addition, Rule 80 of Chapter 3 of the Handbook requires licensees to also consider the purpose and intended nature of the business relationship and the type, volume and regularity of activity expected. The Licensee failed to consider in its risk assessments the risk that Client 3 was being used as a nominee for Client 4 or that this was a method of disguising the transfer of value from Client 4 to Client 3.

Company A ceased to be a client of the Licensee in November 2023.

The Licensee failed to undertake reasonable measures to establish source of funds and source of wealth

Paragraph 5(1) of Schedule 3 requires firms to undertake ECDD for high-risk customers. This includes undertaking reasonable measures to establish the source of funds and source of wealth of the customer.

The Licensee’s policies, procedures and controls require that the source of funds and source of wealth be established. The policies, procedures and controls also state that it would not be a reasonable measure to accept a client’s responses to source of wealth and source of funds questions at face value. The policies, procedures and controls give some examples of acceptable verification of source of wealth.

The Licensee’s policies, procedures and controls also make clear that the CDD and ECDD requirements apply to existing customers and that any deficiencies identified during reviews should be remediated within a reasonable time frame.

Following the release of the Commission’s Thematic Report on Source of Funds and Source of Wealth in the Private Wealth Management Sector in July 2020, the Licensee commenced a project to review all high-risk clients to ensure the source of wealth and source of funds information held met the requirements of Schedule 3 and the Handbook. This included producing a summary memorandum for the file and sourcing information from archived files, open-source resources and obtaining further documentary evidence from the clients or their advisers (“the Source of Funds and Source of Wealth Project”). The Source of Funds and Source of Wealth Project was undertaken as part of the Licensee’s review of clients required by Rule 27 of Chapter 17 of the Handbook following the introduction of Schedule 3 and the new Handbook in 2019. This required all clients to be reviewed by 31 December 2021, with paragraph 26 of the Handbook giving guidance that high-risk clients should be reviewed by 30 June 2021. The Licensee confirmed to the Commission in July 2021 that all high-risk clients had been reviewed and memorandums produced.

Therefore, by July 2021, all high-risk client files should have contained evidence that reasonable measures to establish source of funds and source of wealth had been undertaken.

A number of files reviewed by the Commission showed that reasonable measures had not been undertaken to establish source of wealth or source of funds despite the project undertaken. This demonstrates that the Licensee’s policies, procedures and controls in relation to source of funds and source of wealth were ineffective.

Example 4

As noted above, Client 1 was a high-risk client from a Central American country, who had, at one stage, been suspected of laundering money for drug cartels.

The memorandum for Client 1, produced in June 2021 as part of the Source of Funds and Source of Wealth Project, stated that it was not always possible to obtain documentary evidence for all of the source of funds and source of wealth due to the length of time the structure had been in existence. The memorandum also noted that the Licensee would not now be in a position to request further documentation on the original source of wealth and source of funds to the level required by Schedule 3 and the Handbook due to the length of time the trust had been in existence.

The memorandum in relation to Client 1 is an admission that it had not undertaken reasonable measures to establish source of funds and source of wealth and it had no intention of doing so, despite its own policies, procedures and controls and Rule 28 of Chapter 17 of the Handbook. This demonstrates the ineffectiveness of the Licensees’ policies, procedures and controls.

The memorandum concludes, “There has been much adverse publicity against [Client 1] claiming that he deals in drugs and launders money. However, there has been no evidence to support these allegations. Much of the money added to the structure has been since the sale of [the bank owned by Client 1]. We do not suspect that the funds in the structure have originated from illegal activities.”

Given the Licensee’s knowledge of the allegations of money laundering and the admission that it had not undertaken reasonable measures to establish source of funds and source of wealth, it is difficult to see how the Licensee came to the conclusion that there was no suspicion that the funds originated from illegal activities.

Example 5

Client 5 is a Russian businessman and was formerly a senior manager in a large company. Client 5 settled a trust in 2009. Fiduciary A acted as trustee from the formation of the trust and the Licensee continued as the trustee following the amalgamation of Fiduciary A with the Licensee in January 2020.

Client 5 has been rated as high-risk by the Licensee since take on, which means the Licensee was always required to undertake ECDD including taking reasonable measures to establish source of wealth and source of funds.

The only information the Licensee held in relation to the source of wealth and source of funds of Client 5 was a letter from Client 5 himself and a third-party due diligence report.

The memorandum produced as a result of the Source of Funds and Source of Wealth Project in January 2021 also only refers to the letter from Client 5 and the third-party due diligence report and did not evidence any attempts to obtain further source of wealth information by the Licensee. In addition, the memorandum evidences that the Licensee was not fully aware of the source of approximately US$48 million paid into the aforementioned trust. For example, funds were received from an unknown account in 2010 and the Licensee had requested the name of the account holder from Client 5 in 2021, to which no further information had been provided.

The Licensee accepted Client 5’s letter as evidence of source of wealth despite its policies, procedures and controls stating that this is not acceptable. The policies, procedures and controls required source of funds and source of wealth information to be verified, that any deficiencies identified had to be remedied within a reasonable time and applied to existing customers.

The Source of Funds and Source of Wealth Project should also have identified the reliance on Client 5 to provide his [Client 5’s] source of wealth. This was not identified until a Risk Committee meeting in November 2021 when Client 5 was discussed, as adverse media had been discovered. The adverse media stated that Client 5 was suspected of embezzling significant funds from another state-owned company.

Despite the Risk Committee raising concerns with the source of wealth and source of funds, the Licensee decided to retain Client 5 as a client.

The trust ceased to be a client of the Licensee in November 2023.

The Licensee failed to effectively monitor transactions and activity

Paragraph 11(1) requires firms to perform ongoing and effective monitoring of any business relationship, including scrutinising transactions or other activity to ensure the transactions are consistent with the firm’s knowledge of the customer.

As part of the Licensee’s monitoring policies, procedures and controls, periodic reviews were undertaken on a risk basis. High-risk clients were to be reviewed annually, standard risk every two years and low risk every three years.

As with the relationship risk assessment reviews, reports to the Licensee board often referred to a backlog of periodic reviews, in particular from 2020 onwards following the redundancies in 2019.

Example 6

Despite the previously mentioned Client 1 being rated high-risk and the Licensee being aware that Client 1 had in the past been suspected of laundering the proceeds of crime, the only periodic review on the file following the amalgamation of Fiduciary A with the Licensee was dated March 2022. The periodic review was unsigned when the Licensee’s stated procedure was for periodic reviews to be signed off by senior management.

The Licensee also used various forms to review transactions at the time they occurred, such as asset purchases or sales. For example, the previously mentioned trust settled by Client 1 acquired a car for almost €3 million in August 2019, which was recorded on an Asset Purchase or Sales Form. However, in an email from January 2020 in relation to how to account for the purchase of the car, it was explained that the car had been transferred from the trust to another of Client 1’s trusts and then used to part repay a loan to a company owned by that other trust. These relevant further details were not documented on the Asset Purchase or Sales Form which demonstrates that this monitoring tool was ineffective.

Example 7

A periodic review of Client 2 [the high-risk Russian client and PEP] was completed in February 2019. The next review was not completed until October 2021, nearly two years after it was due according to the Licensee’s policies, procedures and controls, despite Client 2 being rated high-risk.

The trust, settled by Client 2, owned a company (“Company B”). Company B made a number of loans to other parties, including parties also owned by Client 2 or related persons. As part of the CDD Project, the Licensee attempted to obtain further details of the loan counterparties. However, the representatives of Client 2 noted that a number of the counterparties had been put into liquidation or struck off a number of years previously or had not been dealt with for a number of years. Company B itself was struck off in November 2019, leaving the trust with no assets.

The fact that the Licensee was unaware that some of the counterparties to loans made were in liquidation or that there had not been contact for a number of years clearly shows that the Licensee was not monitoring the transactions and activity of Company B and Client 2’s trust .

The lack of monitoring of the loans made by Company B was a serious failing given the writing off of loans is a known potential red flag for money laundering. Given Client 2’s subsequent arrest for embezzlement, this could have given rise to the Licensee being used to facilitate the laundering of the proceeds of crime.

Aggravating Factors

The Licensee had a large book of business and a high-risk appetite with a significant number of high-risk clients, including a number of clients suspected of being involved in criminality.

The issues identified following the 2021 Visit and in the investigation were repeats of the issues identified following the 2017 Visit, despite the remediation undertaken by the Licensee.

With such a high-volume, high-risk book of business, the Licensee required an effective board and sufficient staff resources appropriate to the circumstances of the company and the size, nature and complexity of its business. It did not have this during the Relevant Period, which contributed significantly to the backlog of relationship risk assessments and periodic reviews. The ultimate parent company and its private equity investor in place at the time appeared to be more interested in its own financial position and the upstreaming of funds than the Licensee’s compliance with the Bailiwick’s regulatory framework. Given the significant number of high-risk clients, this exposed the Licensee to the real risk of being used in the laundering of criminal proceeds or the financing of terrorism and posed a risk to the reputation of the Bailiwick as in international finance centre.

The Commission was not informed of the serious staff resourcing issues. Given the seriousness of the issues, the Commission would have expected to have been informed of the issues together with a plan to mitigate the risks.

During the Relevant Period (1 January 2018 to 7 September 2023), twenty directors resigned, and twenty directors were appointed. No directors have served for the entirety of the Relevant Period. This was predominantly due to the environment that the 2019 Private Equity investor shareholder created, including a failure to adequately integrate recently acquired different businesses with different cultures.

Mitigating Factors

The Licensee identified some of the issues and informed the Commission prior to the 2021 Visit. In particular, the Licensee informed the Commission of the failure to update policies, procedures and controls following the introduction of Schedule 3 and the revised Handbook, the failure to review regularly review relationship risk assessments, and the failure to be effectively directed by two individuals resident in the Bailiwick.

The Licensee took steps to remedy the issues following both the 2017 Visit and the 2021 Visit, including hiring third parties to review or assist with their remediation. However, the repeat issues identified following the 2021 Visit demonstrate that the remediation was not effective following the 2017 Visit.

The remediation following the 2021 Visit is ongoing.  The Licensee has taken substantial steps and invested significant resources attempting to remediate the failings identified in this public statement. The Licensee appointed a third party, at the Commission’s direction, to provide leadership, project management and assurance of the remediation.

The remediation includes exiting a large number of clients, including those examples referred to above.

Steps have been taken to improve the board effectiveness under a new leadership team, and a new majority shareholder all of whom came in after the 2021 Visit. The board has also been relatively stable in the last 12 months. In addition, staff turnover has reduced over the last 12 months. Contractors have also been brought in to assist with remediation and the exiting of business.

At all times, the Licensee has cooperated fully with the Commission and agreed to settle at an early stage of the process and this has been taken into account by applying a 30% discount in setting the financial penalty. 

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”)[1]

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

Schedule 3 to Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 (“Schedule 3”)[2]

The Handbook on Countering Financial Crime and Terrorist Financing (the “Handbook”) The Principles of Conduct of Finance Business (the “Principles of Conduct”)

Trident Trust Company (Guernsey) Limited (the “Licensee” or the “Firm”)

and

Mr Mark Wilson Le Tissier (“Mr Le Tissier”)

Mr Ryan Daniel Dekker (“Mr Dekker”)

Mrs Boonyasinee (“Kwan”) Queripel (“Mrs Queripel”)

On 19 June 2024, the Guernsey Financial Services Commission (“the Commission”) decided:

1. To impose a financial penalty of £266,000 on the Licensee under section 39 of the Enforcement Powers Law;
2. To impose a financial penalty of £63,000 on Mr Le Tissier under section 39 of the Enforcement Powers Law;
3. To impose a financial penalty of £63,000 on Mr Dekker under section 39 of the Enforcement Powers Law;
4. To impose a financial penalty of £39,900 on Mrs Queripel under section 39 of the Enforcement Powers Law;
5. To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Le Tissier from holding a supervised role for a period of 2 years 10 months;
6. To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Dekker from holding a supervised role for a period of 2 years 10 months;
7. To make an order under section 33 of the Enforcement Powers Law prohibiting Mrs Queripel from holding a supervised role for a period of 1 year 9 months;
8. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in 3(1)(g) of the Fiduciaries Law in respect of Mr Le Tissier for a period of 2 years 10 months;
9. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in 3(1)(g) of the Fiduciaries Law in respect of Mr Dekker for a period of 2 years 10 months;
10. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in 3(1)(g) of the Fiduciaries Law in respect of Mrs Queripel for a period of 1 year 9 months; and
11. To make this public statement under section 38 of the Enforcement Powers Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee, Mr Le Tissier, Mr Dekker and Mrs Queripel had failed to ensure compliance with the regulatory requirements; and failed to meet the Minimum Criteria for Licensing (the “MCL”), pursuant to Schedule 1 of the Fiduciaries Law.  The findings in this case were serious and spanned a significant period, including after 13 November 2017 when The Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law, 2016 came into force, which increased the maximum level of financial penalties.

Since 2021 the Licensee has undertaken a significant programme of remediation. The Commission is satisfied that the Licensee can continue to operate under its full fiduciary licence.

Background

The Firm was established in Guernsey in May 1989 and undertakes fiduciary activities under a full fiduciary licence.

The Licensee provides the full range of corporate and fiduciary services, including the formation, management and administration of trusts and companies. This includes the provision of directors, company secretaries, registered office and resident agency services (“RORA”).

Mr Le Tissier was the Managing Director of the Firm from 17 December 1999 to 31 March 2015 and European Managing Director from 1 April 2015 to May 2023.

Mr Dekker was a Director of the Firm from 23 August 2011 to 29 July 2022 and Managing Director from 1 January 2020 to 29 July 2022.

Mrs Queripel was the Compliance Officer at the Firm from 16 July 2015 to 30 March 2019, its Money Laundering Reporting Officer (“MLRO”) and Money Laundering Compliance Officer (“MLCO”) from 31 March 2019 to 1 June 2021.

The Commission’s investigation began following an on-site visit to the Licensee in March 2020 which identified multiple breaches of the regulatory requirements in a high proportion of the client files reviewed; including 10 high risk business relationships which had deficiencies associated to either the source of funds, source of wealth, or both. This was despite a previous undertaking by the Firm that it would review all its high-risk relationships during 2019, and where any deficiencies were identified in respect of the source of funds and source of wealth, those deficiencies would be remediated.

Findings

The Licensee established three Incorporated Cell Companies which in turn established 140 incorporated cells (“ICs”) to provide crew, management and payroll services on behalf of yacht management companies managing motor vessels (including superyachts) owned by ultra-high net worth individuals (the “UBOs”), including Politically Exposed Persons (“PEPs”) from high risk jurisdictions.

When considering its exposure to AML/CFT risks, the Licensee did not take into account the risks presented by the UBOs themselves and only considered the yacht management companies that were acting on the UBO’s behalf.

From at least August 2019, the Licensee understood that the Bailiwick of Guernsey’s AML/CFT regulatory framework should be applied both prospectively and retrospectively to the private yacht marine business from inception of each of the client relationships, however continued a narrative to the Commission during 2020 that this line of business was non-regulated and failed to take immediate action to remediate those business relationships whilst continuing to receive funds into the structures from unknown and therefore unverified sources. Between 1 January 2019 and 4 June 2021, one structure alone received approximately £178 million via a yacht management company without the Firm establishing the provenance of the funds.

The Firm also arranged for funds due to each of the ICs it administered, to be transferred to a third- party bank account (the yacht management company account) and not to the IC’s own bank account. This was despite a commercial contract requiring the payment be paid direct to the IC bank account. The investigation found that this payment process unintentionally disguised the true provenance of the funds deriving from the UBOs of the motor vessels.

At least 17 ICs within one structure received funds via the yacht management company from UBOs linked with allegations of money laundering, corruption, insider trading, bribery, forgery and ties to organised crime. This meant that the Licensee was running a high risk of being potentially concerned in dealing with the proceeds of crime, thereby putting the Bailiwick at risk of reputational damage as an international finance centre.

Examples of the business relationships: -

Business relationship 1

The Firm established an IC to provide crew to work upon a superyacht which it had assessed as low risk. The IC administered by the Firm received funds into its Guernsey bank account via the yacht management company on a monthly basis so that it could honour its payroll commitments. The IC issued invoices to the underlying special purpose vehicle owning the yacht (the “SPV”) and requested the funds be paid to the bank account of the yacht management company (effectively a third party in the transaction). The funds were then transferred to the bank account of the IC in Guernsey to meet its payroll commitments. This potentially obfuscated the identity of the UBO to the bank in Guernsey. The UBO was later found to be linked to lucrative deals in Country B involving land, oil, diamonds and telecoms and was under criminal investigation for corruption and was alleged to have exploited Country B.

The IC administered by the Firm received significant sums into its bank accounts via the yacht management company and without establishing the provenance of the funds.

Business relationship 2

The UBO of another IC established and administered by the Firm in exactly the same way as described in example 1 received approximately 300,000 euros per month, via the yacht management company, into its Guernsey bank account so that it could honour its payroll commitments to the crew. As above the IC issued invoices to the SPV and requested the funds be paid to the bank account of the yacht management company which then transferred the funds to the bank account of the IC. The UBO was later found to be linked to an investigation into suspected fraud, bribery and corruption and was alleged to have paid bribes to secure mining operations (a high-risk sector) in Country A (a country presenting a higher risk of money laundering, terrorist financing and/or proliferation of financing). The UBO also had close ties to a former PEP who was implicated in a money laundering investigation in a European country.

Business relationship 3

Another IC administered by the Firm received approximately 100,000 euros per month into its Guernsey bank account on a monthly basis (via the yacht management company) so that it could honour its payroll commitments. The IC issued invoices to the SPV and whilst on this occasion it requested the funds be paid to its own bank account, the funds were actually paid to the account of the yacht management company before being transferred to the IC account. The UBO was later found to be an entrepreneur in Country C linked to the property sector and had links to allegations of tax evasion and extortion.

In particular the Commission found:

The Licensee failed to document a suitable and sufficient business risk assessment (“BRA”)

Licensees are required under the Regulations, Schedule 3 and the rules in the Handbook, to carry out and document a suitable and sufficient money laundering business risk assessment which is specific to the specified business and to keep it up to date.

The Firm failed to include the risk factors associated with the business relationships with the private yacht marine business into its BRA and subsequently failed to make changes to its BRA once it had identified this deficiency.

If the Firm had factored these risks into its BRA, it would have identified that the Firm’s overall exposure to high-risk clients was outside its own risk appetite.

The Licensee failed to regularly review its risk assessments

The Regulations, Schedule 3 and the rules in the Handbook 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 regularly review such a risk assessment so as to keep it up to date.

The Licensee failed to regularly review its relationship risk assessments for the private yacht marine business and failed to ensure that all the relevant risk factors were considered before making a determination on the level of risk, including the origin of the funds deriving from the UBOs of the motor vessels.

Failure to carry out customer due diligence

The customer due diligence requirements in the Regulations, Schedule 3 and the Handbook specify that firms must make a determination as to whether the customer is acting on behalf of another person and if the customer is so acting, take reasonable measures to identify that other person and obtain sufficient identification data to verify the identity of that person. In addition, there is a requirement to determine whether the beneficial owner is a PEP and to understand the purpose and intended nature of each business relationship.

The Licensee failed to fully understand the purpose and intended nature of the relationships associated with the private yacht marine business and failed to determine, in accordance with the requirements, that the yacht management company was acting on behalf of the UBOs of the motor vessels. As a consequence, the Firm failed to identify and verify the identity of the UBOs of the ICs (a number of which were discovered to be PEPs) between 2011 and 2019. After October 2019 Trident had still failed to obtain any information on 37 UBOs who remained unidentified.

The Licensee failed to take reasonable measures to establish the source of funds (“SOF”) and source of wealth (“SOW”) of its high risk business relationships

The Regulations, Schedule 3 and the rules in the Handbook detail the enhanced customer due diligence (“ECDD”) 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.

The Licensee failed to take reasonable measures to establish the SOF and SOW of its high-risk business relationships once it had identified a majority of the UBOs of the motor vessels in October 2019.

The Licensee failed to perform ongoing and effective monitoring of its business relationships

The Regulations and Schedule 3 detail the requirements to perform ongoing and effective monitoring of existing business relationships, including scrutiny of any transactions or other activity. Regulation 5 also details that for high-risk clients there must be more frequent and more extensive monitoring.

The Licensee failed to perform ongoing and effective monitoring of its business relationships associated with the private yacht marine business, in particular scrutiny of any adverse media, transactions or other activity and consider the possibility for legal persons and legal arrangements to be used as vehicles for money laundering and terrorist financing.

As a result of failing to identify the UBOs of the motor vessels for a period of 8 years, the Licensee had also failed to carry out more frequent extensive monitoring on these high-risk business relationships.

The Licensee failed to ensure it established and maintained effective procedures and controls to forestall, prevent and detect money laundering and terrorist financing; and as necessary to report suspicion

The Regulations and Schedule 3 stipulate that licensees must ensure compliance with the requirements to make disclosures under Part 1 of the Disclosure (Bailiwick of Guernsey) Law 2007 and sections 15 and 15A of the Terrorism and Crime (Bailiwick of Guernsey) Law 2002.

The Licensee failed to apply its policies, procedures and controls to the private yacht marine business in order to make disclosures to the Guernsey Financial Intelligence Unit (the “FIU”).

As a consequence of failing to identify a majority of the UBOs, the Firm could not identify whether it was in receipt of the proceeds of crime to enable it to make disclosures to the FIU between 2011 and 2019, some 8 years after the structure was established.

The Licensee failed to apply its sanctions policies, procedures and controls effectively. 

Rule 12.9.23 of the Handbook requires a firm to have in place appropriate and effective policies, procedures, and controls to identify, in a timely manner, whether a prospective or existing customer, or any beneficial owner, key principal or other connected party, is the subject of a sanction issued by the UN, the EU or the States of Guernsey’s Policy and Resources Committee.

Rule 12.9.28 of the Handbook requires a firm to have in place a system and/or control to detect and block transactions connected with those natural persons, legal persons and legal arrangements designated by the Bailiwicks sanctions regime.

Rule 12.11.34 of the Handbook states that a firm must ensure that its compliance monitoring arrangements include an assessment of the effectiveness of the firm’s sanctions controls and their compliance with the Bailiwick’s sanctions regime.

As the Licensee had failed to identify the UBOs of the motor vessels, it was unable to identify and report any sanctioned individual associated with the private yacht marine business, which included ultra-high net worth individuals, including PEPs from high risk jurisdictions. This meant that the Firm’s sanctions controls were not appropriate or effective and did not comply with the sanctions regime in the Bailiwick.

The Licensee failed to keep a signed written record of the terms of agreement with its client

Principle 5 of the Code of Practice – Corporate Services Providers, 2009 requires a firm to discuss terms of business with each prospective client and keep written record of the terms of the agreement with each client, including evidence of the client’s agreement to those terms.

The Licensee failed to keep a signed written record of the terms of an agreement with a significant client that evidenced the client’s agreement to those terms.

Mr Le Tissier

The Commission’s investigation identified that Mr Le Tissier failed to fulfil the fit and proper requirements of the MCL.

Mr Le Tissier was the former Managing Director and European Managing Director of the Firm and had extensive experience of the regulatory framework and fiduciary business. He understood that the Firm was undertaking regulated activities and had been involved in the operations of the private yacht marine business, but failed to ensure the Firm applied the regulatory framework to the private yacht marine business, resulting in systemic breaches of the Regulations, the requirements under Schedule 3 and the Handbook.

Mr Le Tissier made material changes to minutes for a board meeting that discussed the serious deficiencies involving the private yacht marine business. This was after the Firm had been informed that it was being referred to the Enforcement Division and could have inadvertently misrepresented the actual discussions that took place during that meeting, if they had not been discovered at a later date.

This demonstrated a serious lack of competence, soundness of judgement and diligence.

Mr Dekker

The Commission’s investigation identified that Mr Dekker failed to fulfil the fit and proper requirements of the MCL.

Mr Dekker was the former Managing Director of the Firm from 2020 and had extensive experience of the regulatory framework and fiduciary business. He understood that the Firm was undertaking regulated activities and had been involved in the operations of the private yacht marine business, but failed to ensure the Firm applied the regulatory framework to the private yacht marine business, resulting in systemic breaches of the Regulations, the requirements under Schedule 3 and the Handbook.

Mr Dekker also failed to inform the Commission of the significant deficiencies in relation to the private yacht marine business and continued a narrative during 2020 that the business was non- regulated. He also failed to ensure that an accurate client list was provided to the Commission prior to the Commission’s onsite visit that failed to include the ICs, which could have prevented the Commission from reviewing those files, and concealed the significant AML/CFT deficiencies, if it had not been subsequently identified by the Commission.

This demonstrated a serious lack of competence, soundness of judgement and diligence.

Mrs Queripel

The Commission’s investigation identified that Mrs Queripel failed to fulfil the fit and proper requirements of the MCL.

Mrs Queripel was the former MLRO and MLCO of the Licensee and had extensive experience within the financial services sector, but failed to ensure that the Firm was applying its policies, procedures and controls to the private yacht marine business. Mrs Queripel failed to ensure the Firm identified all the UBOs of the superyachts.

Mrs Queripel was instrumental to the Firm’s failing to provide an accurate client list to the Commission prior to the Commission’s onsite visit. This could have prevented the Commission from reviewing those files and concealed the significant AML/CFT deficiencies if it had not been subsequently identified by the Commission.

The Commission found that she demonstrated a lack of understanding of the regulatory framework which resulted in systemic breaches of the Regulations, the requirements under Schedule 3 and the Handbook.

This demonstrated a serious lack of competence, soundness of judgement and diligence.

Aggravating Factors

Licensees are required to notify the Commission of any material failure to comply with the provisions of Schedule 3, the Handbook, any Enactments, or any serious breaches of the licensee’s policies, procedures or controls. The Firm failed to do this.

The Firm identified in 2019 that there were serious deficiencies in its AML/CFT policies, procedures and controls in relation to the private yacht marine book of business. The Firm failed to notify the Commission of the significant issues.

Mr Le Tissier, Mr Dekker and Mrs Queripel made a series of bad decisions in 2020 that could have concealed the significant AML/CFT deficiencies from the Commission prior to and during its on-site visit had the Commission not subsequently identified those deficiencies later. The Commission therefore found that each individual had failed to meet the fit and proper criteria in the MCL which individuals are required to meet to hold a supervised role.

Another serious issue identified by the Commission was that the Firm had inadvertently provided inaccurate and potentially misleading information to its bankers as to the true SOF of some of its clients, as it had incorrectly told its bankers that the SOF came from the yacht management companies rather than from the UBOs. This could have exposed the bank to the same unmitigated money laundering/terrorist financing risks which the Firm faced and potentially prevented the bank’s own internal controls from forestalling, preventing and detecting money laundering and terrorist financing.

Obliged entities, such as financial services businesses play a central role as gatekeepers in the Bailiwicks anti-money laundering and countering the financing of terrorism framework, so when one obliged entity (the Licensee) provides another obliged entity (a bank) with incomplete or obscured information, it is a matter that the Commission takes seriously.

The Firm also failed to take immediate action to remediate the private yacht marine business whilst it continued to provide services to the ICs.

Mitigating Factors

The Licensee, Mr Le Tissier and Mr Dekker have co-operated with the Commission since the investigation began at the end of 2020.

An extensive remediation programme has been implemented by the Licensee from 2021 to 2023. The Licensee has taken substantial steps and invested significant resources to remediate the failings identified in this public statement.

The Licensee, Mr Le Tissier, Mr Dekker and Mrs Queripel agreed to settle at an early stage of the process and this has been taken into account by applying a discount in relation to the sanctions.

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”)[1]

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 (“the Regulations”)[2]

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

The Code of Practice – Company Directors (“the Company Director Code”)

Ms Ginette Louise Blondel (“Ms Blondel”)

On 1 March 2024 the Guernsey Financial Services Commission (“the Commission”) decided:

1. To impose a financial penalty of £210,000 on Ms Blondel under section 39(1) of the Enforcement Powers Law;

2. To make a Prohibition Order under section 33(1) of the Enforcement Powers Law prohibiting Ms Blondel from holding the position of controller, director, partner, manager, money laundering reporting officer and money laundering compliance officer for a period of 9 years and 1 month;

3. Pursuant to section 32 of the Enforcement Powers Law to disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Ms Blondel for a period of 9 years and 1 month; and

4. To make this public statement under section 38(1) of the Enforcement Powers Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Ms Blondel breached the Fiduciaries Law by carrying out regulated activities without a licence and failed to fulfil the minimum criteria for licensing as set out in Schedule 1 to the Fiduciaries Law.

BACKGROUND

Ms Blondel, a Guernsey resident, holds an MSc in Corporate Governance and is an Associate of The Chartered Governance Institute. She worked in regulated financial services for fiduciary licensees in Guernsey from July 2000 until January 2013, her last such employment was between 2010 and January 2013.

Upon leaving regulated financial services, Ms Blondel commenced employment with Client 1 (which included related family structures) as his son’s Personal Assistant.  Client 1 had been a client of her previous employer. Client 1 was a high-risk client, due to being classified as a Politically Exposed Person (“PEP”), an alleged war criminal and kleptocrat; and who, from 2012, was under investigation for money laundering. Her employment as a consultant to Client 1 was subsequently confirmed by way of an agreement between Ms Blondel and a company ultimately owned by Client 1, dated 21 March 2014 (with a commencement date of 5 February 2013).  The agreement made no mention of a Personal Assistant role but provided that she would advise and assist Client 1 with its business and administration, including its financial activities.

Ms Blondel was introduced to Client 2’s family office at the end of 2014 and she started working for them informally in February 2015. Client 2, which had business relationships with licensees in Guernsey was also a high-risk client, consisting of a PEP family with alleged links to corrupt business practices.

The Commission first became aware, from open-source information, in mid-2021 that Ms Blondel may have been undertaking regulated activities without the requisite licence.

FINDINGS

The Commission commenced an  investigation (the “Investigation”) in September 2021. As a result of the Investigation the Commission identified:

Material Contraventions of the Fiduciaries Law

Section 1 of the Fiduciaries Law prohibits regulated activity from being carried out without the required licence being granted by the Commission. Section 2 of the Fiduciaries Law defines regulated activities.  Section 59(3) of the Fiduciaries Law states that a person is deemed to be carrying on activity “by way of business” where they receive any income, fee, emolument or other consideration in money or money’s worth for doing so.  Ms Blondel was found to have carried out the following activities, by way of business, without a licence:

• the management and administration of trusts, and the provision of advice in relation to the management and administration of trusts including being willing to act as protector for trusts (section 2(1)(a) of the Fiduciaries Law); and

• the management and administration of companies and the provision of advice in relation to the management and administration of companies, and acting as company secretary and director of companies (section 2(1)(b) of the Fiduciaries Law).

Ms Blondel would not have been permitted to undertake the activities of trust and corporate administration, even if she had held a personal fiduciary licence, which she did not, as such activities can only be carried out by a Bailiwick body (not an individual) holding a fiduciary licence.  

Breaches of the Regulations and the Handbook

Despite holding Customer Due Diligence and a certain amount of Enhanced Customer Due Diligence information on her clients, Ms Blondel did not have any Anti-Money Laundering/Countering the Financing of Terrorism policies, procedures or controls in place, as are required under the Regulations and the Handbook, when undertaking regulated activities.

As a consequence, there was no formal risk assessment of either of the two high-risk clients, demonstrating that the risks associated with the relationship had been identified and relevant measures implemented to mitigate the risks identified such as taking reasonable measures to establish their source of wealth.

Ms Blondel did not have the required policies, procedures and controls in place to manage or mitigate the risk of providing services to these high-risk clients (including PEPs). She did not have measures in place to establish the source of funds and source of wealth of the clients or to review their activities, or monitor their transactions, which Ms Blondel was closely involved in. Such measures are required of licensed financial services businesses which are subject to supervision by the Commission. Ms Blondel was therefore in breach of Regulations 3, 5, 11 and 15 of the Regulations and the associated Rules within the Handbook.

Failure to comply with the Company Director Code

In failing to ensure that she, and the companies of which she was a director, complied with the Regulations and the Handbook, Ms Blondel was also in breach of Principle 7 of the Company Director Code.

Carrying out of regulated activity

Client 1

Client 1 had been a major client of Ms Blondel’s when she was employed as a Trust Manager at a previous Guernsey licensed fiduciary, where she stated she spent 99% of her full-time role working on Client 1 and all the related client trust and company structures.

Following her resignation in 2013, Client 1’s trust and company structures began migration to a Corporate Service Provider outside of the Bailiwick in mid-2014. Ms Blondel commenced employment directly for Client 1 in February 2013.

Client 1 was a PEP from a high-risk jurisdiction and an alleged war criminal and kleptocrat who, since 2012, Ms Blondel had known was under investigation for money laundering. In addition, there were several credible adverse media articles on Client 1, which Ms Blondel was fully aware of.

Appointment to Director positions for companies owned by Client 1

As part of her employment for Client 1, Ms Blondel accepted her first 2 directorships for client entities in May 2013, only 3 months after her employment commenced. Subsequently Ms Blondel went on to hold a total of 11 directorships for this client with the maximum number at any one point in time amounting to 8 for this client, which constitutes a breach of Section 1 of the Fiduciaries Law.

The Commission considers the provision of client directorships as evidence that her employment went far beyond that of a Personal Assistant, with the holding of such roles constituting an integral part of the services provided for her clients.

During the course of the Investigation the Commission identified numerous examples where Ms Blondel not only carried out trust and company administration but also, by way of her intimate knowledge of Client 1, provided advice to other service providers in relation to Client 1’s business.  The Commission consider these activities to have amounted to regulated activity as defined in the Fiduciaries Law. These examples are in addition to the directorships she provided to client entities, and are detailed below:

• Provision of advice in relation to the transfer of Client 1 entities from a Guernsey regulated licensee to the new financial services provider;

• Assisting new trustees in monitoring the payments on one of the companies in the structure which she would later become director of;

• Advising the new trustees on how to manage loan positions between Client 1 family structures;

• Giving instructions to a senior trust administrator, an employee of the new trustee, and providing draft wording for them to send to the previous trustees; and

• Planning and advising on the closure of trusts.

The use of Ms Blondel’s personal bank account to facilitate payments on behalf of Client 1

During the course of the Investigation the Commission identified that Ms Blondel received an amount of €1m into her personal bank account on 23 October 2015 as advance fees in respect of a proposed Guernsey Trust company that Ms Blondel and another person were planning to establish. These funds were provided through a company owned by Client 1 following the sale of an asset belonging to the family structure.

Although the proposed venture did not proceed, Ms Blondel did not return these funds to the Client. Instead, Ms Blondel used the funds to make in excess of 150 payments to multiple third parties, on behalf of Client 1. The Commission considers these payments led to  a very real risk that Ms Blondel may have been used to launder the proceeds of crime, a risk which Ms Blondel has consistently failed to recognise.

Ms Blondel worked for Client 1 for a period of 7 years from 2013 to March 2020. In June 2020, Client 1 was convicted of money laundering and aggravated tax fraud in a European court and sentenced to 4 years in prison. Ms Blondel, and Guernsey as a jurisdiction, were named in a media article reporting this conviction, and therefore the reputation of the Bailiwick as an international financial centre has been materially damaged. Client 1 is currently subject to an international arrest warrant, which was issued in August 2022, in connection with alleged war crimes.

Client 2

Client 2’s family office was introduced to Ms Blondel in late 2014.

Client 2 comprised a PEP family from a high-risk Central Asian jurisdiction. Media sources from at least 2010 allege that the PEP family were involved in a monopolistic business empire, had close ties with the ruling family of the said jurisdiction; and had been allegedly involved in corrupt practices.

Ms Blondel was therefore aware of the very high-risk nature of this client family, and the risks she was taking on in providing services to them. Ms Blondel had been providing services independently to Client 1 for approximately 2 years at the time she took on the additional roles and responsibilities of Client 2.

Ms Blondel commenced her role with Client 2 in February 2015,  which included  providing directorships to 7 non-Guernsey companies and undertaking the associated company management and administration, by way of business. By August 2015 she was providing these services to 12 companies on behalf of Client 2. At the time Ms Blondel took on the last of these 12 directorships for Client 2 she was already holding 5 directorships for Client 1, meaning she simultaneously held a total of 17 directorships.

After resigning from the 12 directorships in February 2016, Ms Blondel entered into a Consultancy Agreement with the family office of Client 2 in September 2016. Under this Consultancy Agreement Ms Blondel provided services to the family office. The Agreement noted the consultancy services as being “Any and all such services as directed by the Directors of the Company; The Consultant shall conduct the Services in accordance with specifications set by the Company”. Under this agreement Ms Blondel continued to provide company administration services by, inter alia, managing property assets and reporting to the owners. This arrangement was in place until January 2018.

The family office of Client 2 subsequently moved to an alternative jurisdiction due to adverse media surrounding the family.  At that point, Ms Blondel entered into a new Consulting Agreement with a different company (still owned by the family office) in the new jurisdiction and continued to provide company administration services, including providing a directorship of a European company in which Client 2 had an ownership interest.

In October 2018, Ms Blondel took on two Company Secretarial positions for some non- Guernsey registered entities related to Client 2 and continued these positions until June 2021. Acting as Company Secretary is a regulated activity under the Fiduciaries Law; and the Commission viewed this as a further example of Ms Blondel assuming positions without complying with the legal and regulatory requirements.

The Commission’s Investigation found that Ms Blondel carried out regulated activities by way of business to Client 1 under the job title of a Personal Assistant to Client 1’s son; and as a Consultant to Client 2’s family office.

The Commission views carrying out regulated activity without a licence as a serious matter.  Ms Blondel’s actions demonstrate that, despite her extensive trust and company administration experience, she was not aware of her legal and regulatory obligations and demonstrated a lack of soundness of judgement allowing significant breaches to occur.

Aggravating Factors

Ms Blondel has consistently failed to understand the gravity and consequences of her actions.

Ms Blondel continued to provide services (for which she was remunerated until March 2020) for Client 1 and their family when she knew that Client 1, was under investigation for money laundering and was an alleged war criminal and kleptocrat.

Ms Blondel was aware of the regulated fiduciary regime. She also received legal advice which advised on several aspects of regulated activities. Despite this, she materially contravened the requirements of the Fiduciaries Law.

Given the high-risk nature of the clients she serviced, in particular in relation to Client 1 (who was ultimately convicted of organised money laundering of state funds of a high-risk country and aggravated tax fraud), Ms Blondel caused, (due to a media article naming Guernsey), reputational damage the Bailiwick as an International Finance Centre.

Ms Blondel failed to spontaneously disclose serious matters to the Commission, such as the conviction of Client 1.

Furthermore, the subsequent money laundering conviction of Client 1, demonstrates the serious risk caused by an individual providing services to such high-risk clients, including the provision of directorships, outside of the regulated environment and control frameworks that licensed fiduciaries are necessitated to employ.

Mitigating Factors

Ms Blondel brought to the Commission’s attention early on that she had contravened the Fiduciaries Law with her appointment to 12 companies for 12 months between February 2015 and February 2016, and apologised for this contravention.

Ms Blondel has cooperated with the Commission’s Investigation and has provided a considerable amount of information and documents to the Commission when requested to do so.

Ms Blondel 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 penalty and the duration of Ms Blondel’s prohibition.

End

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”)[1]

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

Schedule 3 to Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 (“Schedule 3”)[2]

The Handbook on Countering Financial Crime and Terrorist Financing (the “Handbook”)

The Finance Sector Code of Corporate Governance (the “Code of Corporate Governance”)

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

Fides Corporate Services Limited (the “Licensee” or the “Firm”)

and

Mr David Charles Housley Whitworth (“Mr Whitworth”)

Mr Paul Conway (“Mr Conway”)

Mr Stuart Turner (“Mr Turner”)

(together “the Directors”)

On 28 February 2024, the Guernsey Financial Services Commission (“the Commission”) decided:

1. To impose a financial penalty of £140,000 on the Licensee under section 39 of the Enforcement Powers Law;
2. To impose a financial penalty of £70,000 on Mr Whitworth under section 39 of the Enforcement Powers Law;
3. To impose a financial penalty of £35,000 on Mr Conway under section 39 of the Enforcement Powers Law;
4. To impose a financial penalty of £21,000 on Mr Turner under section 39 of the Enforcement Powers Law;
5. To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Whitworth from holding a supervised role for a period of 3 years and 6 months;
6. To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Conway from holding a supervised role for a period of 2 years and 10 months;
7. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in 3(1)(g) of the Fiduciaries Law in respect of Mr Whitworth for a period of 3 years and 6 months;
8. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in 3(1)(g) of the Fiduciaries Law in respect of Mr Conway for a period of 3 years and 6 months; and
9. To make this public statement under section 38 of the Enforcement Powers Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee, Mr Whitworth, Mr Conway and Mr Turner had failed to ensure compliance with the regulatory requirements; and failed to meet the Minimum Criteria for Licensing pursuant to Schedule 1 of the Fiduciaries Law (the “MCL”). 

The findings in this case were serious and spanned a significant period, including after 13 November 2017 when The Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law, 2016 came into force, which increased the maximum level of financial penalties.

Background

The Firm was established in Guernsey in August 2009 and undertakes fiduciary activities under a full fiduciary licence. 

The Licensee provides the full range of trust and company services, including formation and administration of trusts, advice on formation and administration of trusts and the provision of trustees. The Licensee 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.

Mr Whitworth has been a Shareholder Controller of the Licensee since it was incorporated in August 2009.  He was a Director of the Firm from August 2009 to December 2019 and was the Compliance Officer from October 2009 to January 2019.

Mr Conway was a Director and the Nominated Officer of the Firm from October 2015 to March 2023.

Mr Turner was a Senior Manager at the Firm from March 2018.  He has been a Director of the Firm and its Compliance Officer since January 2019.  Mr Turner has also been the Money Laundering Compliance Officer (“MLCO”) at the Firm since March 2019 and its Money Laundering Reporting Officer (“MLRO”) since March 2020.

The Commission’s investigation began following an on-site visit to the Licensee in July 2021 which identified breaches of the regulatory requirements in 70% of the client files reviewed.  This was despite a remediation programme having been purportedly completed by the Licensee following a previous Commission visit in 2017.  An inspector was appointed under section 8 of the Enforcement Powers Law as part of the investigation (the “Inspector”).

Findings

The Inspector identified breaches in all of the client files it reviewed, as well as in the corporate governance of the Firm.  In particular, the investigation found:

The Licensee failed to carry out and regularly review relationship risk assessments

The Regulations, Schedule 3 and the rules in the Handbook 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 regularly review such a risk assessment so as to keep it up to date.

The Inspector found that half of the files reviewed were inappropriately risk assessed at take-on.

Client 1

In the case of Client 1, shortly after it agreed to provide director, administrator, registered office, registered agent and company secretary services to the company, the Licensee became aware that the ultimate beneficial owner (“UBO”) intended to issue bearer shares through the company.  The Licensee failed to evidence that it had taken this high-risk indicator into account when conducting its risk assessment, in breach of the Rules in the Handbook.

Client 2

The Licensee failed to correctly risk assess Client 2, rating it from low risk to medium risk from 2012 to 2020, despite the UBO having adverse media relating to bribery and corruption, religious friction, its use of offshore accounts as well as court cases related to acquisitions of properties and political unrest.

Client 3

Client 3 was appropriately rated high-risk by the Licensee due to the UBO’s links to the oil and gas industry as well as to certain high-risk jurisdictions and government officials, however, several high-risk factors present in the relationship were not fully considered by the Firm and therefore measures to mitigate them were inadequate.  This unlisted technology company, which the Licensee provided registered office and registered agent services to, was valued at $6-10 billion in 2020 and $225 billion in 2021.  The Firm failed to risk assess the validity of the valuations provided to them by the UBO, despite being aware that shareholders had specifically raised their concerns about the validity of such high valuations with him.

The Licensee failed to identify the customer and understand the ownership and control structure of a customer

Deficiencies in the customer due diligence (“CDD”) held by the Firm were found in all of the files reviewed by the Inspector, in breach of the Regulations/Schedule 3 and the Handbook, including incomplete identification and verification of the customer and underlying principals and inadequate certification of verification documents.

In addition, in three of the client files, the Firm did not have adequate information on the underlying beneficial ownership. 

Trust 1

In the case of Trust 1, the Licensee acted as Trustee and also provided registered office and registered agent and company secretarial services to the underlying companies owned by the Trust.  The Inspector found no evidence that appropriate verification of identity documentation had been obtained by the Firm on the client or its underlying UBOs until four years after the start of the relationship.

The Regulations and Schedule 3 require a financial services business to make a determination as to whether the customer, beneficial owner and any underlying principal is a politically exposed person (“PEP”).  Despite holding the evidence on file, from the outset of the relationship, which indicated that the underlying client was a PEP, the Licensee incorrectly risk rated the relationship as ‘normal risk’ and failed to identify the existence of a PEP in Trust 1 for the first five years of the relationship. 

The Licensee failed to comply with the Rules in the Handbook relating to Introducer Relationships

The Handbook requires a financial services business, when establishing an introducer relationship, to satisfy itself that the introducer has appropriate risk-grading procedures in place to differentiate between the CDD requirements for high and low risk relationships and conducts appropriate and effective CDD procedures in respect of its customers, including enhanced CDD measures for PEP and other high-risk relationships.

Financial services businesses are also required to have a programme of testing to ensure that introducers are able to fulfil the requirement that certified copies or originals of the identification data will be provided upon request and without delay.

Client 1

The Firm relied on an introducer relationship in the case of Client 1.  Client 1, a Guernsey company incorporated in 2006, became a client of the Licensee in 2011.  It was wholly owned by a regulated UK entity to hold shares, warrants and other investments on behalf of the group.  The assets were funded by loans from the group’s clients.

In May 2012, the Licensee was informed by the group that funds loaned to Client 1 had been transferred through a complex structure and that the bearer notes from Client 1 had been issued to two companies in another jurisdiction.  These companies were owned by two other companies incorporated in a third jurisdiction, which in turn were owned through two foundations in a fourth jurisdiction.  The Licensee relied upon an introducer certificate provided by the group detailing the identity of the UBOs and Mr Whitworth visited the group office to view the CDD they held on file for the two individuals, which he deemed to be appropriate.

The Commission noted open-source adverse media which linked the individual who ultimately funded Client 1 with the Mafia, as well as highlighting links to allegations of money laundering from as early as July 2011. There was no evidence that the Licensee had considered this, or later such reports which were published in 2015 and 2016.  The adverse media was not noted by the Firm until a risk review in 2017 but there was no evidence that it was referred to the MLRO, although the relationship risk rating was increased to high at that point due to other factors such as country risk, bearer notes and other information which had been available to the Firm for the duration of the relationship.

A review of the relationship and the introducer’s files in 2018 revealed that the introducer had not appropriately risk assessed the client as high risk and held no corroborating documents relating to the source of funds or source of wealth for the underlying clients who had funded Client 1.    

No evidence was seen to demonstrate that the Firm had complied with the requirements of the Regulations and Handbook with regard to Introducer relationships.

The Licensee failed to carry out Enhanced Customer Due Diligence (“ECDD”) and Enhanced Measures

The Regulations, Schedule 3 and the relevant provisions of the Handbook detail the ECDD requirements required for high-risk customers and, in particular, the requirement to take reasonable measures to establish the source of any funds (“SOF”) and of the source of wealth (“SOW”) of the customer, beneficial owner and underlying principal.

Schedule 3 requires firms to carry out enhanced measures on customers who were not resident in the Bailiwick (whether assessed as high risk or otherwise).  The Handbook provides guidance on what type of action may be taken by firms to comply with this requirement.   

The Handbook requires ECDD to be carried out where the customer has issued, or has the potential to issue, bearer shares.

In four of the cases where the Inspector found the risk of the relationship had been incorrectly assessed as standard or medium, no ECDD had been carried out and the SOF and SOW of the customer had not been established.  In the case of Trust 1, the PEP status was not recognised until five years after the relationship commenced, however, ECDD was not then conducted on the customer when the risk rating was increased to high.

In the files reviewed for Client 3 and two related foundations, which were rated by the Licensee as high-risk at the outset of each of the relationships in 2020, no evidence was found to demonstrate that the Licensee had established the SOF and SOW.

The Inspector found no evidence of enhanced measures being carried out in any of the applicable files reviewed.

In the case of Client 1, the Firm was aware at the outset of the relationship that the intention was for the customer to issue bearer shares.  This was not considered in the original risk assessment and no ECDD was conducted then, or later on in the relationship when the Firm issued bearer notes on behalf of the customer.

The Licensee failed to Monitor Activity and Transactions

Firms are required to perform ongoing and effective monitoring of existing business relationships, including scrutiny of any transactions or other activity. For high-risk clients there must be more frequent and more extensive monitoring.

The Inspector found that the Firm’s monitoring policies and procedures were not effective in four of the files reviewed. Reviews were not consistently carried out in accordance with procedures and no evidence was seen of the adequacy of the reviews.  In the case of Client 2, the client’s due diligence was still deficient nine years into the relationship.

The Licensee failed to ensure it had appropriate and effective AML/CFT procedures and failed to review its compliance with the Regulations/Schedule 3

The Regulations and Schedule 3 require firms to ensure that their policies, procedures and controls on forestalling, preventing and detecting money laundering and terrorist financing are appropriate and effective, having regard to the assessed risk.  There is also a requirement to establish and maintain an effective policy, for which responsibility must be taken by the board, for the review of its compliance and such policy shall include provision as to the extent and frequency of such reviews. The Handbook requires the board to ensure that the compliance review policy takes into account the size, nature and complexity of the business and includes a requirement for sample testing of the effectiveness and adequacy of the policy, procedures and controls.

Despite being aware of deficiencies in the AML/CFT policies and procedures of the Firm and confirming to the Commission in 2017 that these were being remediated, the board of the Licensee failed to bring the Firm into compliance with the Regulations and implement effective and appropriate AML/CFT controls.  The Inspector found that that the Firm took a tick-box approach to reviewing compliance and its compliance monitoring programme was therefore ineffective.  Insufficient attention was paid by the board to reviewing the effectiveness of compliance, as demonstrated by the lack of record of discussion in board meeting minutes and the failure to address deficiencies raised or to put in place a plan to remedy them.

The Licensee’s Board of Directors and systems of control were ineffective

In accordance with the Code of Corporate Governance and the Principles of Conduct, directors have responsibility for supervising the affairs of the business and must operate in accordance with all the relevant legislation.

The board should provide suitable oversight of risk management and maintain a sound system of risk measurement and control and firms must organise and control their internal affairs in a responsible manner, ensuring that it has well-defined compliance procedures.

Financial institutions should deal with the Commission in an open and cooperative manner and keep the Commission promptly informed of anything concerning the financial institution which might reasonably be expected to be disclosed to it in accordance with the Principles of Conduct.

The numerous examples of non-compliance with applicable laws, regulations, rules, codes and principles evidenced by the Commission above, demonstrate that the board of the Licensee failed to effectively direct and supervise the affairs of the business.  Information provided to the board by third party compliance consultants, as well as its own compliance staff and internal consultants was not adequately considered and acted upon to ensure that the Firm’s failings were remediated and recurrence prevented.  Rather than inform the Commission that remediation had not been satisfactorily completed, the Firm gave assurances that all risk mitigation programme (“RMP”) points had been met. 

Despite having engaged a consultant to carry out a gap analysis of its corporate governance, the Firm was unable to demonstrate to the Inspector that it had produced a meaningful plan of action to address the short comings.

The Firm, Mr Conway and Mr Turner failed to avoid, manage or minimise conflicts of interest

The Code of Corporate Governance states that boards should establish, implement and maintain an effective conflicts of interest policy and that directors have a duty to avoid, manage or minimise conflicts of interest and should, wherever possible, arrange their personal and business affairs so as to avoid direct or indirect conflicts of interest. In addition, directors have a duty to act in the best interests of the company.

The Principles of Conduct also require a financial services business to either avoid any conflict of interest or ensure fair treatment to all its customers by disclosure, internal rules of confidentiality, declining to act or otherwise.

Despite having a conflicts of interest policy which included a conflicts’ register, the board of the Licensee failed to maintain an effective conflicts of interest policy. 

Client 3

In lieu of payment of fees, the Firm accepted shares in Client 3 and Mr Turner, Mr Conway and several other members of staff also received shares from Client 3 as a reward for services.  The purported value of the shares gifted to Mr Turner and Mr Conway and others as at March 2021 was USD315 million each. The UBO of Client 3 had the right to unilaterally remove shares from shareholders at any time, thus potentially giving the UBO the ability to exercise control over the Firm.

Although the gifts of shares were recorded on the Firm’s conflicts of interest register, no attempt by Mr Turner, Mr Conway or the Firm to avoid or minimise the direct conflict of interest posed by accepting shares in Client 3 was evidenced and no effective management of the conflict was found to be in place.

The Directors failed to act in the best interests of the company

The extent of the breaches identified on the client files and the Firm’s failure to complete the requirements of the RMP following the 2017 on-site visit evidence that the Directors have failed to fulfil their fiduciary duties to act in the best interests of the company in accordance with the Code of Corporate Governance.

Mr Whitworth

The Commission’s investigation identified that Mr Whitworth failed to fulfil the fit and proper requirements of the MCL as he demonstrated a lack of competence, sound judgement and diligence by allowing clients to be incorrectly risk-rated, accepting and relying on inadequate due diligence from clients and introducers and failing to address deficiencies identified at the Firm he managed, whilst providing unsubstantiated assurances to the Commission.

Mr Conway

The Commission’s investigation identified that Mr Conway failed to fulfil the fit and proper requirements of the MCL as he demonstrated a lack of competence, sound judgement and diligence by failing to ensure that remediation action was completed and was effective, prior to confirming to the Commission that it was.  Mr Conway also allowed clients to be incorrectly risk assessed without adequate measures taken to address the risk they posed and failed to avoid, manage or minimise a direct conflict of interest.

Mr Turner

The Commission’s investigation identified that Mr Turner failed to fulfil the fit and proper requirements of the MCL as he demonstrated a lack of competence, experience, sound judgement and diligence by failing to ensure that compliance standards at the Firm had improved as a result of the remediation action purportedly undertaken prior to his employment and his acceptance of the MLCO/MLRO role in particular.  Mr Turner also failed to avoid, manage or minimise a direct conflict of interest.

Aggravating Factors

The findings in this case were serious and systemic and persisted despite reassurances made to the Commission that remediation was being undertaken following the on-site visit to the Firm in 2017.

The Firm and Mr Turner fail to recognise the severity of the risk presented by the conflict of interest with Client 3.

Mitigating Factors

Mr Turner joined the board of the Licensee in 2019, after the purported completion of the remediation programme.  Furthermore, Mr Turner has cooperated fully with the Commission and has been instrumental in attempting to resolve certain issues arising during the course of the investigation.

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 the duration of the Prohibitions.

End

The Financial Services Business (Enforcement Powers) (Bailiwick of Guernsey) Law, 2020 (“the Enforcement Powers Law”)

The Protection of Investors (Bailiwick of Guernsey) Law, 2020 (“the 2020 POI Law”)

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

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2020 (“the Fiduciaries Law”)

Mr Iskandar Karam (“Mr Karam”)

Also known as:

Mr Alexander Karam; and

Mr Alexander Kaymen

On 23 January 2024 the Guernsey Financial Services Commission (“the Commission”) decided:

1. To impose a financial penalty of £10,000 on Mr Karam under section 39 of the Enforcement Powers Law;

2. To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Karam from any function for a period of two years;

3. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Karam for a period of two years; and

4. To make this public statement under section 38 of the Enforcement Powers Law.

BACKGROUND

Mr Karam was the controller of an investment manager licensed under the 1987 POI Law and was a director of a collective investment scheme authorised under the 1987 POI Law.  As such, Mr Karam was required to complete a Personal Questionnaire form.  Mr Karam submitted his Personal Questionnaire on 20 February 2018 in connection with the application for licensing of the investment manager and for the authorisation of the collective investment scheme.

Pursuant to section 38(2) of the 1987 POI Law, a person who in connection with an application for a licence, or in connection with an application for a licence, or in connection for an authorisation, or registration of a collective investment scheme, furnishes information, or recklessly makes a statement which he knows is false or misleading in a material particular, or recklessly furnishes information, or makes a statement which is false or misleading in a material particular is guilty of an offence.

FINDINGS

The Commission’s investigation (“the Investigation”) commenced in June 2020 following the investment manager and collective investment scheme being placed into Administration Management. 

The Investigation found that Mr Karam had deliberately or recklessly made a number of false and/or misleading statements in his Personal Questionnaire submitted in connection with an application for a licence and for the authorisation of a collective investment scheme.  As a result, the Commission found that Mr Karam had materially contravened the requirements of the 1987 POI Law and did not meet the fit and proper requirements set out in the Minimum Criteria for Licensing contained in Schedule 4 to the 2020 POI Law.

Mr Karam’s Employment History

Mr Karam stated on his Personal Questionnaire that he had been employed as a “Board Member” of Company A since March 2002.  However, the Commission’s research showed that Company A was only incorporated in March 2012, some ten years after Mr Karam stated that he commenced employment with Company A.  The Commission’s research also showed that Mr Karam was not appointed as a director of Company A until March 2019, some seventeen years after the date shown on his Personal Questionnaire.

At the time of the incorporation of Company A, Mr Karam’s wife was the sole director and Mr Karam was named as the contact for any queries on the application for incorporation.  Therefore, Mr Karam must have known that the date given on his Personal Questionnaire for his employment as a “Board Member” of Company A was false or misleading. Further, it was conceded in oral representations that there was never a Board of Directors for Company A or any related company and that the term ‘Board’ was used a shorthand to describe advisors to the business over the period of its operation.

Mr Karam subsequently explained in oral representations that Company A was branded as Company B, which acted as a sole trader, prior to 2008 when Company B was formed.  Records for Company B show that Mr Karam was never a director of Company B.  Mr Karam also subsequently explained in oral representations that the business had existed in various forms over the period and eventually became Company A.

Records for other companies related to Company B show that Mr Karam changed his name from Alexander Karam to Alexander Kaymen in 2005.  Whilst Mr Karam noted on his Personal Questionnaire that he was known as Alexander Karam, he failed to note that he was also known as Alexander Kaymen.

Mr Karam’s Job Description

Mr Karam stated on his Personal Questionnaire that his role of “Board Member” of Company A included responsibility for personnel, remuneration, communication between global offices and financial modelling.  However, internet research did not find any substantial details for Company A.

The accounts for Company A for the year ending 30 March 2018 did not demonstrate that Company A was a large company that would require Mr Karam to be responsible for such issues as personnel, remuneration, communication between global offices or financial modelling.  Indeed, the accounts showed that the average number of employees during the year to 30 March 2018 and the year to 30 March 2017 was one. 

Mr Karam’s description of his role as a “Board Member” of Company A from 2002 to 2018 was false and was misleading.

Mr Karam’s Other Relevant Experience

In relation to other relevant experience, Mr Karam stated on his Personal Questionnaire that he was a member of the Advisory Committee for a Chamber of Commerce, endorsed by the UK Government.

The Commission’s research showed that the Chamber of Commerce noted on Mr Karam’s Personal Questionnaire was, in fact, a company owned by Mr Karam’s wife.  Mr Karam’s wife was also the only director of the Chamber of Commerce. 

In an email between advisers and copied to Mr Karam six months after the submission of his Personal Questionnaire, the Chamber of Commerce was described as being inactive since incorporation, that there were no patrons, chairman or advisory board and no income was received through membership fees or from any other sources since incorporation.  Mr Karam did not correct his advisers in writing. 

It was conceded that the Chamber of Commerce did not itself receive official endorsement from the UK Government, Mr Karam relied upon a memorandum of understanding between an organisation of which the Chamber of Commerce was itself a member, and the UK Government.

Mr Karam conceded that there was no Advisory Committee and that the expression was used as shorthand in relation to his advisory role to the Chamber of Commerce.

This was a further false and/or misleading statement by Mr Karam.

Aggravating Factors

The Commission relies on licensees and prescribed persons to conduct themselves in a manner that is open and honest.  The Commission does not have the resources to verify all of the information that is provided to it and nor should it have to.  Therefore, the provision of false and/or misleading information to the Commission is treated as an extremely serious matter.

The Personal Questionnaire is one of the primary tools for the Commission to gather information to assess whether a person is fit and proper to hold a prescribed position in relation to an application for a licence.  The provision of false and/or misleading information in a Personal Questionnaire undermines the application process.

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

The Regulation of Fiduciaries, Administration Business 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 Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Business Law”)

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking 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 Code of Practice – Corporate Service Providers (the “CSP Code”)

The Code of Practice – Trust Service Providers (the “TSP Code”)

The Code of Practice – Company Directors (the “Directors Code”) (together “the Fiduciaries Law Codes”)

The Code of Practice – Finance Sector Code of Corporate Governance – (the “Code of Corporate Governance”)

Chamberlain Heritage Services Limited (“CHSL”)

Mr Christopher Henry Shaw (“Mr Shaw”)

Mr John Adam Robilliard (“Mr Robilliard”)

Mr Bruce David McNaught (“Mr McNaught”)

On 23 March 2021, the Guernsey Financial Services Commission (the “Commission”) decided:

• To impose a financial penalty of £100,000 under section 11D of the Financial Services Commission Law on Mr Shaw;
• To make orders under section 17A of the Fiduciaries Law, Section 34E of the POI Law, Section 28A of the Insurance Business Law, Section 18A of the IMII Law and section 17A of the Banking Law, prohibiting Mr Shaw from holding the position of director, controller, partner, or manager for a period of 10 years;
• To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Shaw for a period of 10 years;
• To impose a financial penalty of £40,000 under section 11D of the Financial Services Commission Law on Mr Robilliard;
• To make orders under section 17A of the Fiduciaries Law, Section 34E of the POI Law, Section 28A of the Insurance Business Law, Section 18A of the IMII Law and section 17A of the Banking Law, prohibiting Mr Robilliard from holding the position of director, controller, partner, or manager for a period of 6 years;
• To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Robilliard for a period of 6 years;
• To impose a financial penalty of £15,000 under section 11D of the Financial Services Commission Law on Mr McNaught; and
• To issue this public statement under section 11C of the Financial Services Commission Law.

No prohibition orders were made in respect of Mr McNaught due to the fact he was prohibited under each of the Regulatory Laws from holding the position of director, controller, partner or manager until 8  June 2022 and the exemption set out in section 3(1)(g) of the Fiduciaries Law was also disapplied in respect of Mr McNaught until that date.

But for the fact that CHSL: (i) has been under new ownership since 30 November 2017; (ii) surrendered its licence in October 2019; and (iii) is currently in liquidation; the Commission would, if the circumstances had been different, have imposed a financial penalty of £100,000 on CHSL under section 11D of the Financial Services Commission Law.

The publication of this public statement was delayed in order to allow certain parties to complete the statutory appeal process.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that CHSL, Mr Shaw, Mr Robilliard and Mr McNaught failed to fulfil the minimum criteria for licensing as set out in Schedule 1 to the Fiduciaries Law (and also Schedule 4 to the POI Law, Schedule 4 to the IMII Law, Schedule 3 to the Banking Supervision Law, and Schedule 7 to the Insurance Business Law, which set out the minimum criteria under these Laws).

Background

CHSL is a Guernsey company, incorporated on 26 September 1997. Mr Shaw was the founder, majority shareholder and Managing Director from inception until 30 November 2017. Mr Robilliard was an executive director of CHSL from 22 February 2016 to 16 November 2017. Mr McNaught was an executive director from 4 May 2010 to 7 April 2016, MLRO from 20 December 2001 to 1 January 2007 & 14 November 2014 to 7 April 2016. In addition, Mr McNaught was a controller from 10 December 2013 to 7 April 2016.

CHSL was licensed under the Fiduciaries Law on 4 July 2002 and its primary activities were the management and administration of trusts and companies, provision of individual or corporate directors, provision of individual or corporate secretaries, registered office services and nominee services.

CHSL was acquired by another trust company licensed by the Commission on 30 November 2017. Mr Shaw remained with the new owners as a non-executive director until 22 March 2018.

Following the acquisition of the business of CHSL, the Commission became aware of matters relating to a number of client files which appeared to suggest breaches of the laws, regulations, rules, codes and principles governing the business had occurred.

As a result of the subsequent investigation the Commission identified serious failings in six client relationships which fell into the following categories:

Breaches of the Regulations and the Rules in the Handbook

• The Licensee had not properly conducted a relationship risk assessment taking into account relevant high-risk factors, and had not regularly reviewed this assessment;
• The Licensee had failed to carry out customer due diligence and enhanced customer due diligence in relation to a high-risk customer, operating in a high-risk jurisdiction, including failure to establish the source of wealth and source of funds;
• The Licensee failed to conduct ongoing monitoring of an existing relationship;
• The Licensee failed to comply fully with Instruction 6 of 2009; and
• The Licensee failed to ensure proper books and records were kept.

Failure to comply with the Principles, the Fiduciaries Law Codes and the Code of Corporate Governance

• The Licensee failed to act and conduct its business with integrity;
• The Licensee failed to act in the beneficiaries’ best interests;
• The Licensee failed to obtain client agreements;
• Mr Shaw and Mr McNaught failed to treat the company as a separate legal entity from its shareholders; and
• The Directors failed to take collective responsibility for directing and supervising the affairs of the business.

Findings

Failure to carry out Customer Due Diligence and Enhanced Customer Due Diligence, failure to comply with Instruction 6 of 2009 and failure to ensure proper books and records were kept.

Client A was a high-risk client of CHSL’s since 1998 and was jointly owned by two nationals from a high-risk country. The purpose of the client’s company was to receive royalty payments from that high-risk country via an intermediate European company. The royalty payments purportedly related to the manufacture and sale of cosmetic retail products. The sole asset of the company was a c. $7.m cash deposit (as at May 2018) which was held in an account in Guernsey. Mr Shaw was a director of Client A along with Mr McNaught and latterly Mr Robilliard.

The point of contact for the client was via a person purportedly acting on behalf of the beneficial owners of the client structure. No due diligence was ever conducted on this person and CHSL relied upon a handwritten note from 1997 which was obtained by the previous administrator as authorisation to accept instructions from this individual. This was a breach of Regulation 4(3)(b) of the Regulations which requires that any person purporting to act on behalf of the customer shall be identified and his identity and his authority to act shall be verified.

Not only was communication with this client conducted with an individual where due diligence had not been undertaken, it was also conducted via personal Hotmail accounts of Mr Shaw.

In utilising non-CHSL email accounts as a sole means of written communication, the complete electronic record of emails exchanged has been lost to CHSL. This is a breach of Regulation 14(4)(a) which provides that documents must be readily retrievable.

The source of wealth and source of funds information on Client A was inadequate, consisting of documents that were poorly translated, and in some cases undated, expired and unsigned. There was no documentary evidence to support the provenance of incoming funds, in particular no active agreement supporting the payment of royalties.

This was a breach of Regulation 5 requiring enhanced due diligence (including obtaining source of wealth and source of funds information) to be conducted for high-risk business. This, together with the breach of Regulation 4(3)(b) demonstrate that the licensee failed to comply with Instruction 6, 2009 which required licensees to review policies, procedures and controls in place in respect of existing customers to ensure that the requirements of regulations 4 and 8 of the Regulations and each of the rules in Chapter 8 of the Handbook were met.

Issues with enhanced due diligence were noted on periodic reviews for the client conducted in 2015, 2016 and 2017. One periodic review also detailed that the fees for the client fell outside the standard parameters of the Firm, and could be considered abnormal for a client with virtually no activities. The Commission noted during its investigation that Mr Shaw, Mr McNaught and a fellow director had personally signed off periodic reviews.

The true ownership of the company was not clearly understood by CHSL. Reference was made to the joint shareholders holding the shares in their capacity as directors of an underlying foundation in the high-risk jurisdiction in which they resided, however, no evidence linking the foundation to Client A was obtained to corroborate this and no due diligence was undertaken on the foundation.

In February 2018, Mr Shaw received a request (which he communicated to another director) to change the ownership of Client A. The request was for one of the equal joint owners to transfer their entire shareholding to the other shareholder. Despite the company holding cash deposits of c.$7m at the time, Mr Shaw instructed a fellow director to arrange for the share transfer without documenting any rationale for the request.

The approach adopted of obtaining signed stock transfer documentation without any clear or coherent explanation for a significant change to the shareholding in Client A demonstrates a lack of prudence, integrity and professional skill, particularly where the client is high-risk and there is a lack of visibility around the source of wealth and source of funds.

Failure to conduct business with integrity.

Client C was a simple cash holding company, with corporate records clearly indicating that ownership lay with an individual resident in a Commonwealth country, whose father (resident in the UK) had also been involved in setting up the company and had provided the funds held in it. Due diligence was conducted on the beneficial owner at the time of take on by CHSL and certified documents verifying her identity were held on file.

Mr McNaught was the relationship manager for Client C until his departure after which time, Mr Shaw reviewed the file and noted that there may be tax implications for the beneficial owner in her country of residence. At this time CHSL held the shares in Client C on behalf of the beneficial owner.

Mr Shaw then embarked on a course of action whereby he portrayed a false scenario to professional tax advisors and accountants in the UK and the aforementioned Commonwealth country who he had engaged to assist with a proposed transfer of ownership. In each case, he provided the professional advisors with information which he knew was false and wholly contradicted the facts held in Client Cs file: namely that the father was in fact the owner of Client C, and was looking to gift it to the documented owner, his daughter. Evidence showed that Mr Shaw knew the true position which was that the documented owner was the daughter and there was therefore no basis for the father to be gifting his daughter her own company, other than to avoid tax.

The Commission found that Mr Shaw demonstrated a lack of probity and soundness of judgement in providing misleading information to professional advisers.

The Commission is extremely concerned by Mr Shaw’s behaviour with regards to Client C, which caused CHSL to fail to conduct business with integrity as required by Principle 1 of the Principles and Principle 2 of the CSP Code.

Client D consisted of two property-owning entities which were established for the trading of UK property assets. Mr Robilliard introduced this client to CHSL and was the relationship manager during his time at the company.

During a property transaction, the son of the documented beneficial owner of client D (and the main point of contact for this client) requested that ownership of the two property owning entities should be “cloaked” and someone else put forward to “front” the companies, i.e. deliberately disguise the true ownership of Client D.

Despite Mr Robilliard being aware of the seriousness of what Client D was requesting, in July 2017 he proposed a solution, that the company be beneficially owned by someone else. He then facilitated a change in ownership to an associate of the real beneficial owner and recorded this individual as the new beneficial owner, without any commercial rationale for the change. He also provided specific advice on how the new “owner” should respond to a due diligence request from CHSL about the source of funds to be used. His advice encouraged the supply of inadequate information. The former owner injected funds to facilitate the property acquisitions and continued to instruct CHSL on matters relating to the companies.

Mr Robilliard’s actions demonstrate a lack of prudence, integrity, diligence, competence and soundness of judgement, and a lack of knowledge and understanding of the legal and professional obligations of his position as a director of the Firm.

Understanding the beneficial ownership of a company – which includes both the natural person/s that directly or indirectly own the company and those who exert effective control over that company through other means, is a key aspect of the Bailiwick’s AML/CFT framework. In this instance other financial and professional firms servicing those transactions, who are also obligated to undertake CDD, were being deliberately misled about the company’s beneficial ownership.

Mr Robilliard’s behaviour as regards Client D caused CHSL to fail to conduct business with integrity as required by Principle 1 of the Principles and Principle 2 of the CSP Code.

Failure to act in the best interests of beneficiaries

Principle 4 of the TSP Code states that Trust Service Providers (“TSPs”) should treat the interests of beneficiaries as paramount, subject to their legal obligations to other persons or bodies. In particular, TSPs should agree a clear fee structure in advance of taking an appointment and charge fees in accordance with that and in a fair and transparent manner.

As part of its investigation the Commission reviewed five Trust structures relating to one family (“the Family Trusts”). In 2012, the family requested that the Family Trusts be closed down.

Mr Shaw was the relationship manager for these clients and worked on the closure of the Family Trusts, along with Mr McNaught and another fellow director. The work included the taking of closure fees amounting to approximately £290,000. The Commission was concerned to note that the closure fee consisted of a portion of monies already held by CHSL in relation to the Family Trusts, but which was transferred to a bank account that did not appear on CHSL’s audited financial statements. This bank account was referred to at times as “the slush fund” by Mr Shaw. This should have put Mr McNaught on alert and caused him to challenge Mr Shaw.

The Commission identified that the level of fees charged in relation to the closure of the Family Trusts was based on a calculation of 3 years’ future fees, with no satisfactory explanation as to why they were calculated in this way. In addition, despite the fees being taken in August 2012, it was not until December 2012 that the deeds of appointment, indemnity and termination were fully executed. The Firm thus acted without prudence or integrity.

In explaining to the clients the level of fees charged, Mr Shaw and a fellow director referred in correspondence to a requirement of the Commission for insurance cover to be in place. This false representation was used to justify the high level of fees charged by CHSL. Mr Shaw claimed this was a negotiating tactic. The Commission found his conduct in making false and misleading references to insurance costs in relation to excessive fees charged for the closure of these trusts falls far short of what is required to be considered a fit and proper person.

Client B, another Trust which was also under the management of Mr Shaw was prematurely charged a closure fee in a way that was neither fair nor transparent. During the restructuring process, CHSL did not manage the trust assets professionally and responsibly as there was no documentary evidence to show that Client B was informed that a £60,000 closure fee had been taken, nor that an invoice had been issued. The closure fee was once again placed in the account that did not appear on the CHSL audited financial statements, and was referred to by Mr Shaw as the “slush fund”. This behaviour demonstrates a lack of integrity contributing to the failure of the Firm to meet the minimum criteria for licensing.

As detailed in the TSP Code, TSPs should provide promptly to clients information to which they are entitled about a trust, which would include the taking of closure fees.

Failure to ensure that signed client agreements were held

Principle 5 of the CSP Code states that a written record of the terms of the business relationship must be kept, including evidence of the client’s agreement to those terms.

Client A (a high-risk client) had been a client of CHSL since 1998, however Mr Shaw continually failed to ensure that a signed client agreement was obtained. Mr Shaw was directly aware of this failing having signed off periodic reviews for the client where the absence of a signed client agreement was raised.

Client C was taken on by CHSL in 2012 and initially Mr McNaught and latterly Mr Shaw (who had direct knowledge of this client) failed to ensure that a signed client agreement was obtained.  A completed client agreement obtained at the outset would have confirmed the ownership position and could have prevented the ownership issues that subsequently arose.

Failure by Mr Shaw and Mr McNaught to treat CHSL as a separate legal entity from its shareholders.

Principle 3 of the Directors Code states that directors must treat the company as a separate legal entity from its shareholders, directors and others and avoid conflicts of interest with it or deal with them in accordance with the company’s articles of association.

In relation to the closing fees paid by the Family Trusts, the Commission was concerned by the manner in which the final closing fees were accounted for, and ultimately distributed. The Commission noted that 11.5% was recorded as income by CHSL and properly accounted for, however a total of 88.5% was distributed directly to Mr Shaw, without being recorded as CHSL income or accounted for accordingly.

A series of payments were made from the “slush fund” to Mr Shaw, or for his benefit in May 2013, December 2013 and a final payment in April 2014. On each occasion a fellow director countersigned the bank instructions with Mr Shaw. Whilst this unusual treatment of fees was taking place, Mr McNaught was a director and signed the CHSL audited accounts during the relevant periods.

The payment in April 2014 would have represented approximately 26% of CHSL’s annual turnover yet Mr McNaught, a 24% controller in CHSL at this point, failed to query these payments with Mr Shaw.

Mr Shaw and Mr McNaught were unable to evidence why the fees were split between Mr Shaw and CHSL in the way that they were. As a result, Mr Shaw & Mr McNaught failed to treat CHSL as a separate legal entity from its shareholders and demonstrated a lack of integrity, competence and knowledge and understanding of the legal and professional obligations to be undertaken.

Failure to adequately conduct ongoing and effective monitoring of an existing relationship and a failure to conduct business with integrity.

Client E was established with a view to acquiring specialised investment properties for a small group of investors. Later in the client lifecycle Client E changed from a limited company to a protected cell company.

When this client was first introduced to Mr Robilliard, the proposed beneficial owner had several credible adverse media alerts. These included convictions in absentia for fraud and being sentenced to 15 years’ imprisonment. Shortly thereafter, the same client structure was submitted to Mr Robilliard, this time with a different beneficial owner and CHSL on-boarded the client.

The risk rating assigned to the client was standard. Within months of the client relationship being established it became apparent that the original proposed beneficial owner was connected to the structure. A fee relating to the company was paid to CHSL by him. He was clearly an associate of the individual purported to be the beneficial owner and was involved in his business. The association between the two individuals was further evidenced later in the relationship when Mr Robilliard was asked to assist with documentary matters that would enable a bank account for a connected entity to be opened, whereby both individuals would be signatories. Mr Robilliard either failed to recognise these connections, chose to ignore them or failed to adequately address them. This is a failure to comply with Regulation 3 of the Regulations which provides that risk assessments must be changed where required.

In addition to the concerns with ownership, the Commission noted that the introducer of this business had no formal arrangement with CHSL to act in such a capacity. Subsequent to the introduction it was apparent that Mr Robilliard allowed this individual to be the main point of contact for the majority of matters, despite the fact that he was not a shareholder, director or holder of any other official role with Client E or any of the entities connected to Client E. In addition, Mr Robilliard did not hold any authority from the beneficial owner to allow this individual to deal with Mr Robilliard, and a number of other professionals related to Client E.

One of the connected entities to Client E was a Guernsey registered company, originally held out as the sponsor to Client E and detailed as a boutique alternative investment firm based in the heart of Central London. The registered address was a residential one in Guernsey and the sole director and resident agent was the brother of the introducer of Client E to CHSL. The entity had been incorporated by CHSL (Mr McNaught) approximately a year before Client E was taken on.

During the lifecycle of Client E, this entity’s role and activity changed from that outlined above to that of a potential substantial investor in Client E, a majority shareholder in the investment manager and the holder of a bank account where the originally proposed and actual beneficial owners of Client E would have been signatories. Again, Mr Robilliard failed to identify the shifting nature of integral parts of Client E and caused CHSL to breach Regulation 11 in regard to performing ongoing and effective monitoring of its business relationships; as well as Regulation 3 in relation to the risk assessment. Given the information held by the Firm, Mr Robilliard should have taken steps to fully understand and document the ownership and ongoing role of the entity in relation to Client E but failed to do so. This complex structure required careful ongoing and effective review and there is no evidence that this was carried out. The on-boarding and subsequent management of Client E was chaotic, reactionary and lacking competence, experience and soundness of judgement.

The Commission concluded that Mr Robilliard either knowingly or recklessly failed to investigate the true extent of the involvement of key individuals in these structures. He should have realised that there was a real risk of reputational damage to the Bailiwick given the proven link between them and the possible cloaking of the true beneficial owner and his substitution. Overall, the actions of Mr Robilliard demonstrate a lack of integrity and soundness of judgement and a lack of competence in his failure to recognise the obvious red flags in relation to this client. His failure to understand the structure he was managing demonstrates a lack of knowledge of his legal and professional obligations.

Aggravating Factors

The contraventions and non-fulfilments of Mr Shaw appear deliberate. Mr Shaw initiated the majority of actions in relation to Client C, Client B and the Family Trusts and the latter two apparently for his own gain.

With regard to the Family Trusts, that conduct is aggravated by the reference to an insurance requirement of the Commission to justify and explain the level of fees being charged to the client.

In assessing Mr Robilliard’s conduct, the Commission has considered it an aggravating factor that in respect of Client D, Mr Robilliard suggested the change in ownership of a company so that the real owners cannot be identified by counterparties in property transactions. A similar course of action was followed in respect of Client E.  

Mitigating Factors

The individuals detailed in this statement no longer have a role in the Firm, and the new owners have remediated the book of business, and surrendered the licence of the Firm.

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

The Regulation of Fiduciaries, Administration Business 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 Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Business Law”)

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking 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 Code of Practice – Finance Sector Code of Corporate Governance – (the “Code of Corporate Governance”)

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

The Code of Practice – Trust Service Providers (the “TSP Code”)

The Code of Practice – Company Directors (the “Directors Code”)

Chamberlain Heritage Services Limited (“CHSL”)

Deborah Anne Ellis (“Mrs Ellis”)

On 20 August 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To impose a financial penalty of £14,000 under section 11D of the Financial Services Commission Law on Mrs Ellis;
2. To make orders under section 17A of the Fiduciaries Law, Section 34E of the POI Law, Section 28A of the Insurance Business Law, Section 18A of the IMII Law and section 17A of the Banking Law, prohibiting Mrs Ellis from holding the position of director, controller, partner or manager for a period of 1 year and 5 months.
3. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mrs Ellis for a period of 1 year and 5 months.
4. To issue a public statement under section 11C of the Financial Services Commission Law.

The publication of this public statement was delayed in order to allow other parties to complete the statutory appeal process.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Mrs Ellis failed to fulfil the minimum criteria for licensing under Schedule 1 to the Fiduciaries Law (and also was not a fit and proper person in terms of Schedule 4 to the POI Law, Schedule 4 to the IMII Law, Schedule 3 to the Banking Supervision Law, and Schedule 7 to the Insurance Business Law, which set out the minimum criteria under these Laws).

Background

Mrs Ellis was a Director of CHSL (an entity licensed to conduct regulated activity under the Fiduciaries  Law) from 1 April 2011 to 18 March 2018.  She was also the Compliance Officer and Deputy Money Laundering Reporting Officer between 21 October 2014 to 19 March 2018.

The primary activities of CHSL were the management and administration of trusts and companies, provision of individual or corporate directors, provision of individual or corporate secretaries, registered office services and nominee services.

Findings

During the period between April 2011 to March 2018:

Mrs Ellis failed to ensure that adequate enhanced due diligence was obtained for a high risk client, and failed to ensure that this client was subject to ongoing and effective monitoring.

Regulation 5 of the Regulations states that where a financial services business is required to carry out customer due diligence, it must also carry out enhanced due diligence in relation to a business relationship or occasional transaction which has been assessed as a high-risk relationship.

Regulation 11 of the Regulations stipulates that a finance services business shall perform ongoing and effective monitoring of any existing business relationships.

For example, Client A was a high-risk client and had been with CHSL since 1998. The purpose of the client’s company was to receive royalty payments from retail products sold in a high-risk country.

The Commission noted during its investigation that Mrs Ellis had personally signed off periodic reviews for this client in 2015, 2016 and 2017; however, the following issues were identified by the Commission:

• The source of wealth and source of funds information was inadequate, consisting of documents that were poorly translated, and in some cases undated, expired and unsigned;
• There was no documentary evidence to support the provenance of incoming funds;
• One periodic review detailed that the fees for the client fell outside the standard parameters of the Firm, and could be considered abnormal for a client with virtually no activities; and
• The sole point of contact for the client was via a person purportedly acting on behalf of the beneficial owners of the client structure.  No due diligence was ever conducted on this person. 

Mrs Ellis did not always act in the best interests of beneficiaries.

Principle 4 of the TSP Code states that Trust Service Providers (“TSPs”) should treat the interests of beneficiaries as paramount, subject to their legal obligations to other persons or bodies. In particular, TSPs should agree a clear fee structure in advance of taking an appointment and charge fees in accordance with that, and in a fair and transparent manner.

As part of its investigation the Commission looked at five Trust structures relating to one family (“the Family Trusts”). In 2012, the family requested that the Family Trusts be closed down.

The Commission noted during its investigation that Mrs Ellis worked extensively on the closure of the Family Trusts including the taking of closure fees amounting to approximately £287,000. The Commission was concerned to note that the closure fee consisted of a portion of monies already held by CHSL in relation to the Family Trusts, but which was transferred to a bank account that did not appear on CHSL’s audited financial statements.  This bank account was referred to at times as “the slush fund” by a fellow director.

The Commission was concerned when it identified that the level of fees charged in relation to the closure of the Family Trusts was based on a calculation of 3 years’ future fees, with no satisfactory explanation as to why they were calculated in this way.

In relation to the explanation given to the family regarding the level of fees charged, the Commission noted that Mrs Ellis referred in correspondence to the prior correspondence of a fellow director's, that contained a false reference to the Commission’s requirement for insurance cover to be in place, as justification for the level of fees charged.  Mrs Ellis claimed that she did not recall any specific insurance requirement in respect of the Family Trust assets, and that she had made this reference to her fellow director's prior correspondence on the instructions given to her by the director. The Commission was concerned at the lack of diligence, challenge and soundness of judgement demonstrated by Mrs Ellis in acting on this instruction.

In 2017 Mrs Ellis was involved with another trust client, Client B, where a £60,000 closing fee was taken. There was no documentary evidence to show that Client B was informed that the fee had been taken, nor that an invoice had been issued.

As detailed in the TSP Code, TSPs should provide promptly to clients information to which they are entitled about a trust, which would include the taking of closure fees.

Mrs Ellis failed to ensure that signed client agreements were held for all clients.

Principle 5 of the CSP Code states that a written record of the terms of the business relationship must be kept, including evidence of the client’s agreement to those terms.

For example, Client A (high risk client) had been with CHSL since 1998, however Mrs Ellis continually failed to ensure that a signed client agreement was obtained.  Mrs Ellis was directly aware of this failing having signed off periodic reviews for the client where the absence of a signed client agreement was raised. The lack of a signed agreement for a high risk client that had been with CHSL for some 19 years further demonstrated a lack of competence, and knowledge and understanding of the legal and professional obligations to be undertaken by Mrs Ellis.

A separate client, Client C was taken on by CHSL in 2012, and again Mrs Ellis (who had direct knowledge of this client) failed to ensure that a signed client agreement was obtained. A completed client agreement obtained at the outset would have confirmed the ownership position and could have prevented the ownership issues that subsequently arose.

Mrs Ellis failed to treat CHSL as a separate legal entity from its shareholders.

Principle 3 of the Directors Code states that directors must treat the company as a separate legal entity from its shareholders, directors and others and avoid conflicts of interest with it or deal with them in accordance with the company’s articles of association.

In relation to the activity already detailed regarding the Family Trusts, the Commission was concerned by the manner in which the final closing fees were accounted for, and ultimately distributed.  The Commission noted that 11.5% was recorded as income by CHSL and properly accounted for, however a total of 88.5% was distributed directly to the majority shareholder of CHSL, without being recorded as CHSL income or accounted for accordingly.

A series of payments were made to the majority shareholder, or for their benefit in May 2013, December 2013 and a final payment in April 2014. On each occasion Mrs Ellis countersigned the bank instructions with the majority shareholder.

The payment in April 2014 would have represented approximately 26% of CHSL’s annual turnover and the Commission was concerned at Mrs Ellis’s lack of challenge to the majority shareholder in relation to these payments.

Mrs Ellis was unable to evidence why the fees were split between the majority shareholder and CHSL in the way that they were. As a result Mrs Ellis failed to treat CHSL as a separate legal entity from its shareholders and demonstrated a lack of competence and knowledge and understanding of the legal and professional obligations to be undertaken.

The contraventions and non-fulfilments of Mrs Ellis detailed above are not alleged to be deliberate or malicious.

Aggravating Factors

The contraventions and non-fulfilments of Mrs Ellis were considered serious as they have had a detrimental effect on certain clients of CHSL. With regard to the Family Trusts, they have significantly overpaid for simple closures of trusts and the distribution of the underlying assets. The Commission was concerned by Mrs Ellis’s failure to raise adequate challenge to the decision to falsely portray these fees as in any way connected to the requirements of the Commission.

The distribution of these fees to an account referred to as a “slush fund” by a fellow director, demonstrates a lack of judgement on the part of Mrs Ellis; and has undoubtedly damaged the reputation of the Bailiwick as an international finance centre.

Mitigating Factors

Mrs Ellis co-operated with the Commission and agreed to settle an early stage of the process and this has been taken into account by applying a discount in setting the financial penalty and prohibitions.

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

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 the Code of Corporate Governance (the “Code of Corporate Governance”)

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 Business (Bailiwick of Guernsey) Law, 2002 (the “IB Law”)

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

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (together “the Regulatory Laws”)

Mr Trevor James Kelham (“Mr Kelham”)

Ms Sarah Jayne Sarre (“Ms Sarre”)

On 25 April 2023, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To prohibit Mr Kelham under each of the Regulatory Laws from holding the position of director, controller, partner, manager and financial adviser under any of the Regulatory Laws for a period of 4 years;
2. In relation to Mr Kelham, to disapply Section 3(1)(g) exemption under the Fiduciaries Law for a period of 4 years;
3. To impose a financial penalty of £45,000 under section 11D of the Financial Services Commission Law on Mr Kelham;
4. To impose a financial penalty of £13,500 under section 11D of the Financial Services Commission Law on Ms Sarre; and
5. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Mr Kelham and Ms Sarre failed to fulfil the relevant criteria of the minimum criteria for licensing under Schedule 1 of the Fiduciaries Law.

BACKGROUND

Mr Kelham was Chief Executive Officer and Managing Director of a licensed Guernsey company (“the Licensee”), from 7 September 2012 to 23 May 2017.

Ms Sarre was a director of the Licensee from 1 April 2015 to 11 February 2020. She was Head of Compliance from 1 September 2013 to 21 August 2016. She was the Money Laundering Reporting Officer (“MLRO”) from 1 September 2013 to 1 April 2015. She became the (Acting) MLRO again from 30 October 2015 to 17 August 2016.

The Licensee was the subsidiary company of a larger group of companies that operated globally (“Group”).

In December 2012, three months after Mr Kelham had joined the Licensee as Managing Director, a Group Internal Audit (the “GIA Report”) identified a number of serious issues, including that: (i) compliance at the Licensee required strengthening; and (ii) there were deficiencies in the Periodic Review Process at the Licensee.

The GIA Report also identified that there was extensive reliance on manual processes, with many key controls performed and evidenced manually in paper trust files, which made systematic risk based supervisory review difficult and hampered effective management oversight.

FINDINGS

Failure to remediate CDD deficiencies on an inwards transfer of business from another jurisdiction.

In December 2012, Mr Kelham was informed by Group of the decision to close in another jurisdiction and transfer a proportion of clients to the Licensee from another Group company, licensed in that other jurisdiction (“Company A”).

The transfers were implemented pursuant to a “grandfathering” procedure. Grandfathering was a term used to describe a process by which the client files would be transferred in accordance with paragraph 150 of the Handbook. Paragraph 150 of the Handbook provided that, where reliance is being placed on information and documentation obtained by the transferring company (Company A), there should be an assessment to establish whether Company A’s CDD policies, procedures and controls were satisfactory and compliant with Guernsey regulatory requirements.

Rule 151 of the Handbook provided that, where deficiencies in identification data were identified (either at the time of transfer or subsequently), the accepting financial services business must determine and implement a programme to remedy any such deficiencies.

In the event, between July and October 2013 some 35 clients were transferred from Company A to the Licensee, comprising 51 structures with total assets worth in excess of USD 590m.

Between January and April 2014, serious issues were identified with the client files transferred from Company A in relation to non-compliance with the Handbook and Regulations.

A remediation plan was proposed. Mr Kelham was responsible for ensuring it was conducted in an effective and timely manner. In the event, remediation took at least 2.5 years to complete with the result that breaches of the Regulations remained un-remediated during that period.

In particular, breaches remained un-remediated during this period in respect of: the requirement to identify and manage financial crime risks (Regulation 3), identify and verify the customer (Regulation 4), obtain enhanced due diligence (Regulation 5), effectively monitor transactions and other activity (Regulation 11) and ensure compliance with the Regulations and corporate responsibility (Regulation 15).

Failure to identify, manage and oversee the risks in relation to the outwards transfer and/or termination of USD 1.4 billion in client assets

From October 2015, the Licensee started to receive instructions either to transfer structures to another Group company, (“Company B”) in a different jurisdiction (“Country X”) or to terminate structures, in either case by 31 December 2015. The affected structures were associated with individuals understood to be tax residents of Country Y.

These requests involved c. USD 1.4 billion of assets held by trust and company structures administered by the Licensee (“AUM”) and represented approximately 40% of the Licensee’s overall business from Country Y at that time.

Mr Kelham and Ms Sarre were aware of Guernsey being an early adopter of the international tax reporting standard known as the Common Reporting Standard (“CRS”). The CRS was a standard developed by the Organisation for Economic Co-Operation and Development, which required participating jurisdictions to obtain tax information from financial institutions, and automatically exchange that information with other participating jurisdictions on an annual basis. CRS was designed and intended to limit the opportunity for foreign clients to circumvent paying taxes in their home country.

In Guernsey, CRS was due to commence on 1 January 2016 and would have involved the automatic exchange of tax information between Guernsey and other jurisdictions. Country X was known at the time to not be adopting CRS, therefore tax information in relation to assets transferring to Country X would not be subject to the CRS.

In November and December 2015, Mr Kelham and Ms Sarre became aware of concerns being raised by Trust Officers of the Licensee relating to the rationale for these transfer/termination requests. These concerns included:

• Suspicions that the large number of contemporaneous requests were due to the impending introduction of the CRS in Guernsey. Trust Officers were concerned that clients from Country Y wishing to transfer structures to Country X may have been attempting to avoid tax and/or to delay having to declare tax information in relation to assets and/or were intending to participate in a tax amnesty in Country Y; and
• Suspicions that implausible rationales were being given for the requests which, coupled with the undue haste with which clients wanted structures to be transferred, suggested that the real rationale for the requests was likely to be something different.

Mr Kelham, as Managing Director and CEO, and Ms Sarre, as director and Acting MLRO, failed to ensure that the concerns raised by employees were properly investigated and addressed at the time, including at Board level, and prior to the transfers or terminations being implemented.

Mr Kelham and Ms Sarre failed to give proper consideration to the fact that, if the desire to avoid CRS was the or a motivating factor behind the requests, then it followed that there was a real risk that the AUM could well consist of funds tainted by tax evasion and/or other financial crime.

In November 2015, Mr Kelham personally addressed the Trust Officers in relation to their concerns about the requests for transfers or terminations. Mr Kelham gave the Trust Officers the impression that, whilst it may have been open to them to register Internal Suspicious Activity Reports (“iSARs”), they should not do so lightly and only if they were very sure of their facts because, if they were not, they could expose themselves to personal liability. As a result, the Trust Officers felt discouraged from making iSARs.

iSARs, which were made, were not investigated or acted upon promptly by Ms Sarre. Thus, an iSAR raised by a Trust Officer on the 16 November 2015, did not result in an external Suspicious Activity Report (“SAR”) until 15 April 2016. This was long after the legal ownership of the structures (and so the assets) had moved out of Guernsey.

Information also came to the attention of Ms Sarre in November 2015 which identified that some clients wishing to transfer to Company B had cited an intention to participate in a proposed tax amnesty programme in Country Y (“the Amnesty”).

The Amnesty was an opportunity for citizens of Country Y to participate in a tax amnesty proposed to take place in 2016. Those taking part would be exempt from criminal or financial charges in exchange for the relevant individuals repatriating their assets and paying a percentage of the assets’ value to Country Y’s Government.

By mid-November 2015, Ms Sarre had received information which identified that the Amnesty was another factor which could explain the requests to transfer or terminate trusts and corporate structures, namely with a view to repatriating assets to Country Y during 2016. This information should have served to reinforce concerns that clients, who were citizens of Company Y, wishing to transfer or terminate their relationships with the Licensee, might have been involved in tax evasion and that the assets themselves might represent the proceeds of other financial crime.

Ms Sarre failed to give proper consideration to the fact that an intention on the part of clients to participate in the Amnesty raised concerns that the AUM in question could be tainted by tax evasion. Although Ms Sarre drew the attention of the Board of the Licensee, at a Board meeting on 19 November 2015, to the fact that there was an imminent tax amnesty in Country Y, she failed to investigate or heed that an intent by clients to participate in the Amnesty was a further possible reason for the number of transfer and termination requests from clients from Country Y.

Notwithstanding the concerns raised and iSARs submitted by the Trust Officers, the transfers and terminations went ahead, following an ad-hoc process which did not comply with internal controls. Thus:

• No tax advice confirmations or letters in support of the reasons for transfer were obtained prior to transfer; and
• Some transfers still took place even though the relevant file had been marked with a “Refer to MLRO” code.

The Commission expects directors of a Licensee to ensure that the Licensee maintains a sound system of internal controls to safeguard assets and manage risks (paragraph 4.4 of the Code of Corporate Governance), whilst providing a suitable oversight of risk management within the Licensee (Principle 5 of the Code of Corporate Governance).

Mr Kelham, as Managing Director and CEO and Ms Sarre as director and Acting MLRO, failed to comply with paragraph 4.4 and Principle 5 of the Code of Corporate Governance, as they should have brought independent scrutiny and challenge to bear, ensuring that no transfers or terminations took place until they were confirmed as being regulatorily compliant.

By mid-January 2016, 36 client structures totaling USD 1.4 billion of AUM were either transferred to Company B, or the structure was terminated.

On 12 July 2016, Mr. Kelham signed tax confirmation letters in respect of the majority of the transfers, informing Company B that there were no outstanding tax issues in respect of the structures transferred. Mr Kelham signed these letters despite concerns being raised with him by an employee that insufficient data was held to enable such confirmations to be provided. At the time Mr Kelham signed these letters, fourteen of the structures were still subject to iSARs, seven of the structures were subject to external SARs; such structures would have had the “Refer to MLRO” code identified on their files.

In due course, all the structures identified in the letters signed by Mr Kelham had external SARs raised in relation to the suspicion of tax evasion. In one case, an external SAR was raised only 3 days after Mr Kelham provided the relevant tax confirmation letter.

Mr Kelham had no proper basis for signing the tax confirmation letters.

At least USD 265 million of the USD 1.4 billion of AUM that formed part of the transfers to Company B subsequently participated in the Amnesty, meaning that such funds (previously administered by the Licensee and transferred in the circumstances set out above) went on to be declared as part of an amnesty process for funds tainted by tax evasion.

Mr Kelham

The Commission’s investigation identified that Mr Kelham failed to fulfil the fit and proper requirements set out at paragraph 3 of Schedule 1 to the Fiduciaries Law, as he failed to demonstrate that he acted with competence, soundness of judgement, diligence, or with knowledge and understanding of his legal and professional obligations.

For example, Mr Kelham:

Failure to remediate the structures transferred to Licensee from Company A

• Contrary to Rule 151 of the Handbook and in any event, failed to take appropriate and/or effective action to remedy the serious deficiencies in the due diligence records held in respect of the clients transferred from Company A, resulting in attempts to remediate that took at least 2.5 years to complete;
• In failing to ensure that there was an effective and timely remediation programme in respect of the deficiencies within the client files transferred from Company A, caused the Licensee to continue to be in breach of the Regulations; in particular, the requirements to (i) identify and manage financial crime risks (Regulation 3), (ii) identify and verify the customer (Regulation 4), (iii) obtain enhanced due diligence (Regulation 5), (iv) effectively monitor transactions and other activity (Regulation 11) and (v) ensure compliance with the Regulations and corporate responsibility (Regulation 15);

Requests to transfer structures to Company B or to terminate

• Failed to demonstrate soundness of judgement when faced with concerns indicating that a significant proportion of the AUM, the legal ownership of which was transferring to Company B might well have been tainted by tax evasion;
• Failed to ensure that the concerns raised by employees were fully investigated and resolved before the transfer of legal ownership of the AUM out of the jurisdiction of Guernsey;
• Failed to ensure that policies and procedures were followed in respect of the transfers; and
• Failed to act with competence or with soundness of judgment, when signing letters confirming that the structures, which had transferred to another jurisdiction, were not subject to any outstanding tax issues, despite having been alerted to the fact that the assets in question might well be tainted by tax evasion; Mr Kelham should not have signed such letters.

Procedures and controls for the purpose of combatting financial crime

• In the period January 2014 to July 2016, failed to take adequate steps to ensure that the Licensee followed proper procedures and controls for the purpose of combatting financial crime.

In summary, Mr Kelham’s acts and omissions, as summarized above, exposed the Bailiwick of Guernsey to the risk of severe reputational damage as an international financial centre.

Ms Sarre

The Commission’s investigation identified that Ms Sarre failed to fulfil the fit and proper requirements set out at paragraph 3 of Schedule 1 to the Fiduciaries Law, as she failed to demonstrate that she acted with competence, soundness of judgement, diligence, or with knowledge and understanding of her legal and professional obligations.

For example, Ms Sarre:

• Failed to demonstrate soundness of judgement when faced with concerns indicating that the AUM, the legal ownership of which was transferring to Company B might well have been tainted by tax evasion;
• Failed, as Acting MLRO, to properly investigate iSARs reported to her; these should have been the subject of further investigation prior to the transfer of the structures to Company B or termination, and prior to the ownership of the structures (and so the assets) leaving the jurisdiction of Guernsey; there was a failure to appreciate and/or investigate that, if CRS and/or the Amnesty was a motivating factor for the requests to transfer or terminate, then the assets in question could consist of funds tainted by tax evasion;
• Failed to ensure that the Licensee maintained an effective iSAR and external SAR procedure;
• Failed to ensure that policies and procedures were followed in respect of the transfers; only once the requests had been acted on and legal ownership of USD 1.4 billion of AUM had left Guernsey’s jurisdiction (of which USD 265 million was to participate in the Amnesty), were meaningful investigations undertaken, which in turn resulted in large numbers of both iSARs and external SARs being made only after ownership of the assets had left the jurisdiction; and
• In the period from November 2015 to July 2016, failed to take adequate steps to ensure that the Licensee followed proper procedures and controls for the purpose of combatting financial crime.

In summary, Ms Sarre’s acts and omissions, in relation to the transfers to Company B and the terminations, exposed the Bailiwick of Guernsey to the risk of severe reputational damage as an international financial centre.

Aggravating factors

In respect of the delay in the remediation of the inadequate CDD on incoming transfers to the Licensee from Company A, the result was that during such period of delay, for which Mr Kelham was responsible, the position was unknown as to whether c. USD 590 million of AUM might involve money laundering, terrorist financing or other financial crime.

In respect of the transfers from the Licensee to Company B and the terminations, Mr Kelham and Ms Sarre allowed the ownership of client structures involving c. USD 1.4 billion of AUM (including at least USD 265 million of which then participated in the Amnesty) to leave the jurisdiction of Guernsey without proper and effective procedures and controls.

Mr Kelham and Ms Sarre gave insufficient regard to whether these funds involved tax evasion or were the proceeds of other financial crime.

These contraventions by Mr Kelham and Ms Sarre have exposed the Licensee and the Bailiwick of Guernsey to the risk of severe reputational damage as an international financial centre.

Mitigating factor

Both Mr Kelham and Ms Sarre have co-operated with the Commission throughout the investigation.

The Financial Services Business (Enforcement Powers) (Bailiwick of Guernsey) Law, 2020 (“the Enforcement Powers Law”)

The Protection of Investors (Bailiwick of Guernsey) Law, 1987 and the Protection of Investors (Bailiwick of Guernsey) Law, 2020 (collectively “the POI Law”)^[i]

Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 (“the Regulations”)^[ii]

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

The Licensees (Conduct of Business) Rules 2016 (the “COB Rules”)

The Finance Sector Code of Corporate Governance (“the Code of Corporate Governance”)

The Principles of Conduct of Finance Business

Crescendo Advisors International Limited (the “Licensee” or the “Firm”) Mr Hamish Jebb Hamilton Few (“Mr Few”)

The Guernsey Financial Services Commission (“the Commission”) decided that from 30 December 2022 it would take the following actions:

• To impose a financial penalty of £203,000 under section 39 of the Enforcement Powers Law on the Licensee;
• To impose a financial penalty of £33,810 under section 39 of the Enforcement Powers Law on Mr Few;
• To make an order under section 33(1) of the Enforcement Powers Law prohibiting Mr Few from holding the position of Controller, Director, Money Laundering Reporting Officer and Money Laundering Compliance Officer for a period of 3 years and 4 months;
• Pursuant to section 32(3) of the Enforcement Powers Law, to disapply the exemption set out in section 3(1)(g) of the Regulation of Fiduciaries, Administration Business and Company Directors, etc (Bailiwick of Guernsey) Law, 2020 in respect of Mr Few for a period of 3 years and 4 months; and
• To make this public statement under section 38 of the Enforcement Powers Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Licensee and Mr Few failed to ensure compliance with the regulatory requirements and failed to meet the minimum criteria for licensing set out in Schedule 4 of the POI Law.

The findings in this case were serious and spanned a significant period, including after 13 November 2017 when The Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law, 2016 came into force, which increased the maximum level of financial penalties. 

BACKGROUND

The Licensee was incorporated in Guernsey in December 2008 and is licensed under the POI Law 2020 to carry on the restricted activities of Promotion, Dealing, Advising and Management, for both Category 1 Collective Investment Schemes and Category 2 General Securities and Derivatives.

The Firm provides discretionary investment management services to private clients and a small number of non-Guernsey collective investment schemes. Its clients comprise high net worth individuals from, or linked to, jurisdictions which are regarded as posing a higher risk of money laundering, terrorist financing and/or bribery and corruption.

The Licensee is part of the Crescendo group of companies, established and majority owned by Mr Giacomo Jacques Diwan. Mr Diwan is not resident in Guernsey.

From its incorporation in Guernsey in 2008 until July 2017, the Licensee was administered at different times by three locally based service providers who each provided Compliance Officers and Money Laundering Reporting Officers (“MLROs”) to the Firm. Since then, it has operated as a standalone licensee with a physical presence in Guernsey and has outsourced its compliance function.

Mr Few was involved in the administration and latterly the oversight of the day-to-day business of the Licensee throughout his employment with each of the three different administrators from 2008 until August 2015 when he left the Firm’s then administrator. He joined the Firm’s final administrator in July 2016 and was then appointed Senior Manager of the Firm in December 2016 and has been Managing Director since January 2018. He has also acted as the Firm’s MLRO since March 2019.

The Commission’s investigation into the Licensee commenced at the end of 2019 following an on-site visit to the Firm in August 2019 as part of the Commission’s Thematic Review of Source of Funds/Source of Wealth in the Private Wealth Management sector. This was the Licensee’s first visit by the Commission however, a Risk Mitigation Programme was put in place at the end of 2016 following identification by the Firm’s then administrators, of anti- money laundering/countering of financing of terrorism (“AML/CFT”) deficiencies in 90% of its client files (90% of which were classified as high risk). A remediation project undertaken by the Firm was reported to have been completed by November 2017.

FINDINGS

The Licensee had no direct contact with its clients. Its business model meant that it was reliant on information provided by relationship managers who were employed by another company in the group based in Switzerland.  Service level agreements purportedly governed the relationship in terms of the services provided by the group office, however, despite being aware from the outset of becoming a standalone business in 2017, that the outsourcing agreement between the Licensee and its group counterparty was inadequate, the Board of the Licensee failed to ensure it was amended in a timely manner.

The Licensee failed to demonstrate that effective mind and management was in Guernsey - simply operating a rubber-stamping process for investment decisions, despite being a licensed investment manager.

The Licensee’s own business risk assessment recognised that as its clients were predominantly connected to jurisdictions known to have a higher risk of financial crime, the assets under management in terms of source of wealth/funds had a higher financial crime risk associated with them.

The Commission’s investigation found that the Licensee had failed to effectively identify, monitor and manage some of the financial crime risks associated with its clients as required by the Regulations and the rules within the Handbook (“the Rules”). These issues, which were found to be systemic in the operation of the Firm, were reflected in the Firm’s failure to comply with regulatory requirements that arise at all stages of the client relationship, from on-boarding to day-to-day management and monitoring. The failings are particularly concerning due to the large proportion of high-risk clients.

In particular, the Commission found:

The Licensee failed to properly conduct relationship risk assessments, taking into account relevant high-risk factors and to regularly review relationship risk assessments

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 regularly review such a risk assessment so as to keep it up to date.

There was no evidence of initial risk assessments on some of the files examined by the Commission. The files also evidence that the Licensee did not fully understand the nature of the business of its clients and was therefore unable to take into account all relevant information when conducting risk assessments and reviews.

Example 1

The Licensee’s business relationship with Ms A, a private wealth client from Country X, a high-risk country, began in September 2014. However, the first risk assessment for Ms A in the file provided to the Commission was carried out in March 2017.

Open-source information obtained by the Licensee in 2020 revealed that Ms A’s father was an ex-government leader of Country Y – a country known for the prevalence of bribery and corruption, particularly amongst government officials. It also reported that he had previously been wanted by Interpol for alleged illegal financial operations abroad and tax evasion (albeit the arrest warrant was withdrawn following a decision that his prosecution had been politically motivated). Ms A’s relationship to him meant that she was a Politically Exposed Person (“PEP”) and the risk that her source of wealth may have come from him – and that these may have been the proceeds of crime – should have been carefully considered by the Firm prior to taking on the business, as well as in the enhanced monitoring and high frequency reviews that are required for a PEP client. Had the Licensee collected sufficient data on Ms A (including her maiden name) as required by the Handbook it would have been able to discover this open- source information prior to 2020.

In addition, the intended source of funds for Ms A’s account came from companies which had issued bearer shares which are known to be used to conceal beneficial ownership.

Example 2

Company B, a private corporate client, was incorporated in 2012 in a high-risk country, Country Z; and it issued five bearer shares. The five recorded beneficial owners were individuals associated with the fishing industry. The first risk assessment on file was conducted in July 2015 and made no mention of the financial crime risk associated with bearer shares.

In 2020 the Licensee discovered adverse open-source information which potentially linked two of the original beneficial owners of Company B to the illegal fishing trade. This information had been available since 2011, prior to the take-on of Company B, however, these potential links to the laundering of the proceeds of crime had not been investigated by the Licensee, either at the outset of the relationship, during routine reviews, or when the ownership purportedly changed.

Example 3

Company C, also a private corporate client incorporated in high-risk Country Z, issued two bearer shares. Company C became a client of the Licensee in March 2011, the first risk assessment on file was dated October 2012 and made no mention of the financial crime risk associated with the issue of bearer shares.

In addition, one of the recorded beneficial owners was involved in an industry known to be linked to the production and trafficking of drugs. This risk was not considered by the Licensee in either the initial, or subsequent routine risk assessments.

Example 4

Company D is a private corporate client owned by Trust A set up for the benefit of the family of the settlor. Company D was taken on in January 2011, the first risk assessment on file was completed in October 2012 and did not acknowledge the risk of the settlor’s commercial interests in an industry frequently linked to financial crime.

In March 2015 the Licensee identified adverse information regarding fraud, trafficking and tax evasion linked to the settlor of Trust A and another of its private wealth clients. Following reassurance from a lawyer who provided the CDD documents of the settlor to the Licensee, the Firm made no further enquiries around the adverse media and it was not referred to in the subsequent risk assessment conducted in July 2015.

The Licensee failed to understand the ownership and control structure of a customer and identify PEPs

Regulation 4 of the Regulations and the related provisions of the Handbook relate to customer due diligence and require firms to identify the beneficial owner and underlying principal and take reasonable measures to verify such identity. In the case of a legal person or legal arrangement, firms must take measures to understand the ownership and control structure of the customer. Regulation 4 also requires a financial services business to determine whether the customer is a PEP.

Example 1

The Licensee failed to identify Ms A as a PEP until six years after the start of the business relationship.  The relationship manager in the group office was the ex-husband of Ms A, however, neither he, nor the group office shared this crucial information about the client with the Firm and the Firm’s lack of enhanced due diligence allowed it to go unnoticed until 2020.

Example 2

In September 2017, the relationship manager from the group office informed the Firm that the beneficial ownership of Company B had changed and one of the original five owners now owned 100% of the company. No evidence was provided to the Licensee to verify this change of ownership of this high-risk client.

Example 3

In September 2017, the Licensee received a share register for Company C which showed that the two bearer shares had been cancelled in December 2015 and shares issued to one of the original beneficial owners.  The Firm had been unaware of the change in ownership of Company C for almost two years.

Example 4

In 2015, the Licensee identified open-source material linking the settlor of Trust A to high- ranking officials in high-risk jurisdictions. However, the individual was not classified as a PEP until 2020, nine years after the business relationship with him was established.

Example 5

Mr E was introduced to the Licensee in June 2015 and was a business associate of the settlor of Trust A.  At the time of take-on, due to Mr E’s association with another of its clients, the Licensee was already aware of the adverse media surrounding Mr E, which identified him as a PEP due to his partial ownership of a company also owned by PEPs.  The adverse media also linked Mr E to individuals known to be involved in bribery and corruption. Despite having this information, the Licensee failed to recognise Mr E as a PEP until 2020, five years after the client was taken on.

The Licensee failed to carry out Enhanced Due Diligence (“EDD”)

Regulation 5 and the relevant provisions of the Handbook detail the EDD 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.

The Licensee relied on relationship managers in the group office to provide it with letters summarising their basic knowledge of the clients’ source of funds and source of wealth. The Commission found little evidence of any corroboration of the claims made by the group office on file, or of any independent EDD being carried out by the Licensee on high-risk clients.

Example 1

Ms A’s ex-husband (who was a director of the Licensee at the time and a relationship manager of the group office) introduced her to the Firm and told them her source of wealth derived from the proceeds of their divorce. The Firm relied upon this basic information without obtaining any corroborating evidence.

In addition, her source of funds was anticipated to be two companies managed by the Firm of which she was the beneficial owner, however, when funds were received from third parties the Firm failed to investigate the rationale for the receipt of the funds and relied on the relationship manager’s uncorroborated explanation that the source of wealth was in fact the proceeds of a life insurance product that was originally taken out by her current husband for her benefit.

Example 2

The Licensee relied entirely on a letter from the relationship manager informing it that the source of wealth for the five individual beneficial owners behind Company B came from their background in the fishing industry. No corroborating evidence was obtained and no EDD was conducted by the Licensee despite this being a high risk client.

The Licensee knew very little about the business of Company B which was purportedly a trading company and had no corroborating evidence relating to the source of funds into the company. Over $8.7 million was received into Company B between May 2012 and October 2013 from third parties, some of which had no identifiable links to the fishing industry which Company B was purportedly trading in.

Example 3

Despite his interests in an industry linked to drug production and trafficking, no EDD was conducted by the Licensee on the beneficial owner of Company C and no attempts were made to corroborate the information provided by the relationship manger regarding his source of wealth.

Over $6 million was introduced into Company C from various accounts held by Company C in another jurisdiction which the Licensee had no oversight of. From information gathered in 2020, the Firm determined that funds had been received from another client of the group, as well as stock transferred from the personal asset holding vehicle of one of the group’s relationship managers.

Example 4

Due to the lack of visibility of account names, the source of funds into Company D’s account could not be identified. Over $200 million was received into Company D’s account over the course of the relationship yet the Licensee did not seek to conduct any EDD or verify the source of wealth until some seven years after taking on the business.

The Licensee failed to monitor transactions and activity

Regulation 11 details the requirements to perform ongoing and effective monitoring of existing business relationships, including scrutiny of any transactions or other activity. Regulation 5 also details that for high-risk clients there must be more frequent and more extensive monitoring.

The Licensee’s monitoring was ineffective and failed to consider third party payments being made to the client account (for example as seen in the files for Ms A and Company D referred to above) including where its clients were classified as high-risk and had numerous high-risk indicators and therefore, should have been subject to more extensive scrutiny.

The failure of the Licensee to identify adverse media, for example in the case of Company B, also demonstrated to the Commission that the Firm did not undertake effective monitoring.

The Licensee failed to ensure appropriate and effective AML/CFT policies, procedures and controls

The Regulations require a financial services business to ensure that its policies, procedures and controls on forestalling, preventing and detecting money laundering and terrorist financing are appropriate and effective, having regard to the assessed risk.

Whilst the Licensee identified that its clients were predominantly high-risk due to the jurisdictions they resided and undertook business in, the Board failed to establish and implement effective policies, procedures and controls to mitigate the risks.

Corporate governance failings

The Commission noted the model employed by the Firm, whereby investment advisory services, together with all client matters, are outsourced to the group office. However, there is a requirement for adequate oversight of the outsourced function and a requirement to demonstrate the ability to make prudent investment management decisions. The Guernsey licensee is required to hold adequate information in order to be able to make investment decisions on behalf of clients. Further, mind, management and control within the Bailiwick must be demonstrated to satisfy the minimum criteria for licensing under the POI Law.

The Licensee recorded very little information about the model portfolios presented to clients by relationship managers in the group office and how these reflected the client’s investment objectives.

The Licensee did not record the rationale as to the suitability of the investment recommendation for its clients and was unable to evidence compliance with the COB Rules and the Principles of Conduct of Finance Business relating to suitability and information about customers.

The Board represented to the Commission that access to client information, such as due diligence documentation and investment objectives, was available via the database system and that adequate processes were in place to ensure the suitability of the trade prior to any transactions being executed on behalf of clients. However, in addition to the failure to comply with the standards of due diligence required by the Bailiwick AML/CFT regulatory framework, the Firm was unable to demonstrate that it performed sufficient analysis of the buy or sell advice provided to it to ensure that it is advising and managing the assets and investments in a prudent way. The Board was unable to evidence that it challenged investment advisory instructions being made on its clients’ behalf.

The Firm failed to demonstrate that there was sufficient constructive discussion, understanding or deliberation over the investment management and advisory decisions it makes on behalf of its clients. Such discussions would be expected, on an ongoing basis, to include consideration of portfolio constitution, prospectus remit, investment performance and future expectations.

The Licensee established an Investment Committee in 2016, however this committee only met six times in four years and was not effective. The Licensee did not maintain records of discussions about its consideration of investment strategies or model portfolios, failed to obtain adequate or ongoing information on clients’ investment objectives and failed to execute an effective agreement with the group office regarding the outsourcing of certain services.

These factors led the Commission to conclude that the Board of the Licensee could not demonstrate its effectiveness in governing the Firm, acting in its best interests or observing the Principles of Finance Business. The investment management function was carried out by the group office and the licensed Guernsey entity simply acted on instructions received from there.

The Licensee failed to avoid, manage or minimise conflicts of interest

As demonstrated in the case of Ms A, the Licensee failed to comply with the requirements of the COB Rules and the Code of Corporate Governance in relation to dealing with conflicts of interest.

Ms A’s ex-husband managed her investments and not only was he a relationship manager at the group office, but a director of the Licensee at the time the business relationship was established. This presented a clear conflict of interest to the Firm who relied on information provided by him without independently verifying what it was told. In addition, the Licensee continued to act on instructions from him regarding her account after he had resigned as director and it had been discovered that he had supplied inconsistent information over the period of the client relationship.

The Firm failed to recognise and address the conflict of interest which arose between the underlying client and a director of the Licensee (who was also a relationship manager in the group office). This conflict was not properly documented or managed and he was permitted to make decisions on the client account and was relied upon for information, both at take on of the client and during reviews.

Mr Few

The Commission’s investigation identified that Mr Few failed to act with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.

Mr Few, who was appointed to the Board of the Licensee in January 2018, clearly identified and highlighted to an incoming director prior to the latter’s appointment in March 2018, that the Licensee had very little knowledge of its clients’ investment objectives and he was obviously aware that the policies and controls in place at the time were not sufficient to meet the requirements in Guernsey.  An attempt to employ someone with appropriate investment experience in May 2018 still did not resolve this issue.

Mr Few had been involved with the administration of the Licensee until August 2015 and then from December 2016 he became a senior manager at the Firm and latterly, managing director. His knowledge of the business model of the Firm, coupled with his expected knowledge of the Guernsey legal and regulatory requirements ought to have placed him in a good position to bring the Firm into compliance when it became a standalone licensee. However, despite his acknowledgement of the deficiencies that existed, he failed to ensure the necessary improvements were implemented to ensure the Firm complied with its regulatory obligations. The absence of these necessary improvements contributed to the failure of the Firm to meet the MCL in Schedule 4 to the POI Law. In failing to implement these improvements Mr Few did not act in the best interests of the company and demonstrated his own lack of fitness and propriety to act as a director of a licensee.

Aggravating factors

The Licensee’s business was inherently high-risk with 90% of its clients rated high-risk. There was adverse media on a number of the Licensee’s clients, which signposted the significantly heightened risk of the Licensee handling the proceeds of crime.

The Licensee 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 and thereby jeopardizing the reputation of the Bailiwick as an international finance centre.

Failings were found to have occurred from the time of take-on of business relationships, including not completing risk assessments and failing to undertake sufficient EDD on high-risk business relationships and these were not remediated during periodic reviews.

The Commission relied on assurances from the Board of the Licensee, in relation to the completion of the remediation project in 2017, which were inaccurate.

The deficiencies in the Firm’s corporate governance strategy were brought to the attention of the Board by Mr Few in 2018 but these were not effectively addressed.

Mitigating factors

In 2017 the Firm appointed a local compliance consultant to undertake the remediation of all the identified deficiencies in its client files as required by the Commission’s Risk Mitigation Programme. Subsequently, the Licensee continued to outsource its compliance function to a local provider who at no time alerted the Board to any substantial deficiencies or potential regulatory breaches. The significant and continued failings identified in the Commission’s investigation were not brought to the attention of the Licensee by its outsourced compliance function. Notwithstanding, the Board of the Licensee acknowledges that it remains responsible, including for the review of its compliance as required by paragraph 15 of Schedule 3.

Following the on-site visit, the Licensee agreed to a second Risk Mitigation Programme, which has been completed.

At all times the Licensee and Mr Few co-operated fully with the Commission. The Licensee and Mr Few 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 the duration of Mr Few’s prohibition.

End

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”)

On 20 December 2021 the Guernsey Financial Services Commission (“the Commission”) decided:

•    To impose a financial penalty of £140,000 under section 39 of the Enforcement Powers Law on the Licensee; 

•    To impose a financial penalty of £56,700 under section 39 of the Enforcement Powers Law on Mr Parr;

•    To impose a financial penalty of £56,700 under section 39 of the Enforcement Powers Law on Mr Northmore; 

•    To impose a financial penalty of £56,700 under section 39 of the Enforcement Powers Law on Mr Blows; 

•    To impose a financial penalty of £44,100 under section 39 of the Enforcement Powers Law on Mr Lloyd;

•    To impose a financial penalty of £44,100 under section 39 of the Enforcement Powers Law on Ms Giovinazzi; and

•    To make this public statement under section 38 of the Enforcement Powers Law.

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.

The findings in this case were serious 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.  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

The Licensee was established in Guernsey in August 1988 and undertakes fiduciary activities under a full fiduciary licence. 

The Firm provides trust services, including formation and administration of trusts, advice on formation and administration of trusts and the provision of trustees. 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.

Mr Parr has been a director of the Licensee since March 2006 and Managing Director since January 2015.  

Mr Northmore has been a director of the Licensee since January 2009.

Mr Blows has been a director of the Licensee since June 1992 and was the Managing Director until December 2014.  Mr Blows is also the Licensee’s largest ultimate beneficial owner having an interest in over 60% of the shares in the Licensee.

Mr Lloyd has been the Money Laundering Reporting Officer (“MLRO”) for the Licensee since April 2010 and a director since March 2013.

Ms Giovinazzi was the Compliance Officer for the Licensee between October 2010 and May 2018 and a director between January 2014 and May 2018.

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.  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.  

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

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.

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

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.

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. 

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. 

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.

The Licensee failed to carry out sufficient Enhanced Due Diligence (“EDD”)

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.

Regulation 7 requires that customer due diligence and EDD be carried out before or during the course of establishing a business relationship.

Example 2

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.  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.  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

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.  Company 2 was set up to own two London properties.  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.

Joint licensees of the Firm, as the corporate directors of Company 2, agreed in April 2017 to proceed with the purchase of the properties.  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.  The Licensee also identified internet articles linking Mr D to alleged fraud and corruption.

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.

The Licensee was therefore found to have failed to have taken reasonable measures to establish source of funds for this significant property purchase and this breach was compounded by the significant risk that the source of funds was the proceeds of Mr D’s alleged criminal conduct.

As a result of the red flags identified by the Firm 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

Regulation 11 details the requirements to perform ongoing and effective monitoring of existing business relationships, including scrutiny of any transactions or other activity.  Regulation 5 also details that for high-risk clients there must be more frequent and more extensive monitoring.

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.  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

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.  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.  

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

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.

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.  

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.  

Ms Giovinazzi had no involvement in this set of events following her retirement in May 2018.

The Licensee failed to adequately document the decision to exit a client

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.

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.  

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.  

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.  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

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. Rule 28 requires the board to ensure that the compliance review policy takes into account the size, nature and complexity of the business and includes a requirement for sample testing of the effectiveness and adequacy of the policy, procedures and controls.

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.

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.  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:

•    Failed to identify Mr A as a PEP when signing off the risk assessment for Trust 1;

•    Failed to ensure the decision to exit the relationship with Mr A was adequately documented; 

•    Failed to ensure the redemption of Limited Partnership 3’s sole asset was recorded in the relevant monitoring and oversight meeting; and

•    Did not ensure that the Licensee’s procedures and controls were appropriate and effective with regard to the Licensee’s high-risk appetite.

Mr Northmore

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

For example, Mr Northmore:

•    Failed to identify Mr A as a PEP when signing off the risk assessment for Trust 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; and

•    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

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

For example, Mr Blows:

•    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

•    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

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

For example, Mr Lloyd:

•    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;

•    Failed to ensure the decision to exit the relationship with Mr A was adequately documented; and

•    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

The Commission’s investigation identified that Ms Giovinazzi failed to demonstrate that she acted with competence, soundness of judgement and diligence.

For Example, Ms Giovinazzi:

•    Failed to identify Mr A as a PEP when signing off the risk assessment for Trust 1;

•    Did not ensure that the Licensee’s procedures and controls were appropriate and effective with regard to the Licensee’s high-risk appetite; and

•    Failed to ensure that the compliance monitoring programme was formally documented.

Aggravating factors 

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.

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. 

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.  

Mitigating factors

The Licensee identified some of the above issues prior to the on-site visit, in particular the lack of a formal compliance monitoring programme and errors in reviews being undertaken.  Steps were already being taken to remedy these issues prior to the on-site visit.

Following the on-site visit, the Licensee agreed to a risk mitigation plan, which it confirmed to the Commission had been completed.  This included appointing a third-party to review the effectiveness of its new procedures.  

The Licensee has appointed an independent non-executive director to its board in line with a requirement by the Commission to do so.  The Licensee has also agreed to establish an independent audit function, which will annually review the effectiveness of its anti-money laundering and countering the financing of terrorism procedures.  

At all times the Licensee and the Directors co-operated fully with the Commission.  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.

End

ⁱ  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

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 Disclosure (Bailiwick of Guernsey) Law, 2007 (the “Disclosure Law”). 
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 Principles of the Code of Corporate Governance (the “Code of Corporate Governance”). 
Standard Chartered Trust (Guernsey) Limited (in liquidation), (the “Licensee” or the “Firm”). 

On 4 June 2020, the Guernsey Financial Services Commission (“the Commission”) decided: 

• To impose a financial penalty of £140,000 under section 11D of the Financial Services Commission Law on the Licensee; and 

• To make this public statement under section 11C of the Financial Services Commission Law. 

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that the Licensee failed to fulfil the minimum criteria for licensing (“MCL”), under Schedule 1 of the Fiduciaries Law, which set out the minimum criteria under this Law. 

BACKGROUND 

In 1991, the Licensee was established in Guernsey to undertake fiduciary activities under a full fiduciary licence. 

The Licensee’s primary business was the establishment and full administration of trust and managed company structures. These services included the establishment and management of corporate structures, the provision of registered office, directors, secretary, trustees and nominee shareholders and estate planning.

The majority of the Licensee’s clients were high-risk. 

The Licensee is a subsidiary of Standard Chartered PLC, which is the principal holding company for the Standard Chartered group of companies (“Group”). The other Group companies relevant to this public statement are Company A and Standard Chartered Trust (Singapore) Limited (“SCTS”)'. 

Between September and December 2012, Group Internal Audit carried out an assessment of the Licensee and highlighted a number of serious issues, inter alia: the compliance function required strengthening and there were deficiencies in the periodic review process. 

The Commission undertook a full risk assessment (“FRA”) of the Licensee between 13 and 16 May 2014. During this assessment, the Commission noted that the Licensee had already embarked on a risk mitigation plan, involving ten work-streams regarding areas of the business requiring remediation, one of which was to remediate a number of outstanding client risk assessments. 

The Commission followed up the May 2014 FRA with an engagement visit on 15 December 2015. The Commission noted at this time that whilst some progress had been made with the Licensee’s ten-point remediation plan, the Commission still had concerns that the Licensee had an over-reliance on manual processes, and that there was an ongoing financial crime risk associated with the ever increasing amount of action points arising from the ongoing client risk assessment project. 

The Commission imposed two risk mitigation plans on the Licensee in an effort to address the aforementioned issues. 

In July 2016, the Licensee informed the Commission that it was intending to close down over the next twelve months and all clients would be transferred either to SCTS, or to another Guernsey service provider. 

The Commission considered it necessary to impose, and SCTG agreed to, a number of licence conditions with the Licensee, in order to, amongst other things, ensure that financial crime risks would be appropriately managed during the wind down period. 

One of these licence conditions required the Licensee to appoint an external company to undertake an independent assessment of the Licensee’s client files. This company (the “Compliance Company”) was appointed in October 2016. 

The Commission undertook a further FRA between 12 and 20 December 2016, during which serious issues were identified with, inter alia, financial crime control failings regarding client files. The Commission’s Enforcement Division’s investigation into the Licensee commenced in May 2017.

On 19 May 2020, the Royal Court of Guernsey appointed joint Liquidators to the Licensee for the purpose of winding up the Firm. 

FINDINGS 

The block transfer of business to the Licensee from another jurisdiction without the appropriate skill or consideration 

In December 2012, a decision was made by Group to close Company A and transfer a proportion of Company A’s clients to the Licensee. 

The Commission expects a licensee to act appropriately when taking on a block of business from another jurisdiction, ensuring as far as possible that this new business will adhere to the high standards expected with regards to financial crime regulations. This guidance was detailed in the Handbook in force at the time, guidance note 150 refers. 

Whilst taking on new clients the Commission also expects that a licensee ensures: (i) it takes responsibility for the key policy of on-boarding clients; (ii) any group on-boarding policy is specific to the Firm’s legal and regulatory requirements; and (iii) it can identify and manage any potential risks these new clients may pose to the Firm by having a sound system of internal controls, as required by Guidance 2.3, 4.2 and 4.4 of the Code of Corporate Governance. 

Inadequate controls to manage risk 

The Licensee at the time of the transfer was under-resourced and had existing issues with its compliance function. 

The Licensee subsequently failed to act appropriately when taking on this block of business, most notably by: 

• Bypassing its normal client take on procedure, and replacing it on the suggestion of Group with a new procedure, with the Licensee instructing employees to take on the business as quickly as possible, without the involvement of the firm’s Compliance function and forgoing any review of these high-risk clients until 12 months after they had been on-boarded. 

The Commission found that the Licensee failed to take responsibility for its on-boarding policy, without adequate consideration as to whether Group policy was suitable for Guernsey regulatory environment, breaching Guidance 2.3 and 4.2 of the Code of Corporate  Governance; 

• Taking on the new clients without any adequate assessment that Company A’s client due diligence policies, procedures and controls were appropriate for it to rely on the due diligence records held by Company A, contrary to guidance in paragraph 150 of the Handbook. 

• Suspending for several months an internal compliance monitoring programme, which was a key control process that could have identified regulatory breaches as soon as the clients were on-boarded, thus breaching Guidance 4.4 of the Code of  Corporate Governance. 

Regulatory breaches subsequently identified post transfer 

A licensee is expected, at all times, to comply with the requirements of the Regulations, including, ensuring it knows its customers and applies appropriate controls to monitor these relationships so any suspicious behaviour can be identified. 

Regulation 4 relates to Customer Due Diligence. This stipulates that a financial services business shall identify and verify its customers using identification data. 

Regulation 5 relates to Enhanced Due Diligence (“EDD”). This stipulates what 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 and taking steps to understand source of wealth and source of funds (“SOW/SOF”). 

Regulation 11 relates to ongoing effective monitoring. This stipulates that a financial service business shall perform ongoing effective monitoring of its business relationships; ensuring that the extent and frequency that it is carried out considers whether the relationship is high-risk. 

The licensee must also comply with Principle 5 of the Code of Corporate Governance that requires the Board of a licensee to provide suitable oversight of risk management.

Between January and March 2014, the Licensee began to identify serious issues with the clients transferred from Company A and put in place a remediation plan, which although it was envisaged would take 6 months to complete, in reality took over 3 years to complete. 

During the course of this remediation, the Licensee discovered potential breaches of the Regulations with over 97% of the client files received from Company A. 

The following examples are representative of some of the serious issues identified:

 Client File Example 1 - Failure to identify and corroborate source of wealth for a high-risk client 

The Licensee was unable to corroborate earnings of USD400k per annum for a high-risk client, (“Client A”), allegedly obtained from employment with a company involved in diamond processing, a high-risk activity. 

Client A (who was the Settlor of the trust) was unwilling to disclose the ultimate source of assets within the structure, resulting in the Licensee’s realisation in 2018 (some 5 years after on-boarding the client) that the assets may have been, derived from the proceeds of crime. 

The Licensee also concluded that Client A may have been acting as a nominee for another party and may not have been the true beneficial owner of the assets held within the structure. 

The Commission found the Licensee to have breached Regulations 4, 5 and 11. 

Client File Example 2 - Ineffective controls to manage Politically Exposed Person (“PEP”) risks 

A high-risk client, (“Client B”), who was the brother of a high-risk country’s current President and a son of its former President was identified to the Licensee as a PEP in August 2013, but failed to be included in the Licensee’s PEP Register until August 2015, some 2 years after being notified. 

The failure to maintain the PEP Register, an internal control to manage risk and provide oversight of risk management of high-risk clients, whilst also ensuring that its PEP relationships were kept under continuous effective senior management review, was a breach of Guidance 4.4 and Principle 5 of the Code of Corporate Governance and Regulation 5. 

The transfer and/or termination of USD 1.4 billion in client assets - the risks this posed to the Licensee and the Bailiwick 

Between late October 2015 and early December 2015, the Licensee suddenly started to receive instructions from clients to transfer to SCTS or terminate a total of 53 client structures. 

These requests amounted to USD 1.4 billion of assets under the Licensee’s management and predominantly originated from its clients resident in one country, Indonesia, and represented approximately 40% of the Firm’s overall business from Indonesia at that time. 

The Commission notes that the Licensee would eventually raise concerns that every transfer/termination represented the real risk of being linked to potential tax evasion and over USD 265 million of the USD 1.4 billion transferred/terminated, would subsequently be identified as participating in a tax amnesty in Indonesia. 

The Commission expects that a licensee should ensure that significant events affecting a clients’ whose assets it controls, such as a tax amnesty, are: (i) fully understood; (ii) managed with the utmost prudence and professional skill; and (iii) mitigated as far as possible and would not bring the Bailiwick into disrepute as an international finance centre. The Commission found that none of these expectations were met and the Licensee therefore failed to meet the requirements of the MCL. 

Failure to adequately address initial red flags 

During late October 2015, prior to the transfers/terminations, the Licensee became aware of numerous red flags being raised by its employees surrounding the rationale for the transfer/termination requests. These included: 

• Employee suspicions that the requests were being driven by the impending introduction of an international tax reporting standard, designed to limit the opportunity for foreign clients to circumvent paying taxes in their home country. This standard was due to be introduced in the Bailiwick ahead of being introduced in SCTS’s jurisdiction. In simple terms, employees feared that clients from Indonesia wishing to transfer to SCTS may have been attempting to avoid tax, or at least delay having to declare their assets; and 

• Employee suspicions that due to the fact that some rationales for transfer/terminations were being given which were undoubtedly implausible, (in some cases there was no rationale whatsoever), coupled with the undue haste with which clients wanted to transfer, meant that the real reason for transfer/terminations was for some other reason which the client did not want to declare. 

Whilst these concerns were discussed and considered by the Licensee, this did not lead to identifying any underlying motive for the requests, the development of an effective plan to mitigate these potential serious risks, or any slowing in the Licensee’s intention to transfer these clients as quickly as possible. 

The Commission was extremely concerned that the Licensee failed to adequately consider whether its clients’ had potentially evaded taxes in Indonesia and therefore the funds it controlled represented the proceeds of crime. 

The Commission found that the Licensee did not meet the requirements of the MCL, by showing a serious lack of prudence and professional skill when considering the financial crime concerns raised by its employees. 

Inadequate controls to manage the risk of transferring clients whose rationale for transfer were unclear 

The Commission expects that when problems arise with clients, in particular, where there is a suspicion of potential wrongdoing on the part of the client, a licensee will deal with the problem in an effective and expeditious manner, employing appropriate methods, including disclosing any suspicious activity, and not simply pass any problems on to another jurisdiction. Failing to deal with serious client issues, exposes the Bailiwick to the risk of reputational damage. 

However, despite the numerous red flags already raised regarding the transfer of clients to SCTS, the Licensee then engaged in an unbalanced process to expedite the transfers to SCTS. 

The Commission found that this unbalanced process demonstrated that the Licensee failed to maintain effective internal control to manage the risk of transferring the clients to SCTS and therefore breached Guidance 4.4 of the Code of Corporate Governance. 

Failure to corroborate clients’ SOW/SOF to the value of USD 1.1 billion 

Whilst the Commission’s investigation into the Licensee regarding the transfer of business from Company A to the Licensee, and from the Licensee to SCTS, uncovered specific failings; the examination by the Licensee and the Compliance Company of the whole client base, identified further systemic failings. 

The Commission expects a licensee to establish and understand the SOW/SOF of its high risk clients to satisfy itself that the funds did not originate from criminal activity. As part of its remediation of its whole client base, the Licensee and the Compliance Company identified that the SOW/SOF for USD 1.1 billion of assets under the Licensee’s management, was not corroborated to a satisfactory standard reflective of the risks within these relationships. 

Client Example 1 

A high-risk client (“Client C”) was a prominent business owner and Politically Exposed Person with an estimated wealth of over USD 270 million. 

Client C had been a client since 2006. However, despite having knowledge in 2014 identifying eleven links to adverse news on the client in relation to, amongst other things, fraud, money laundering and alleged corruption, the Licensee decided in 2015 to retain the business. 

Between February and May 2019 there were numerous emails concerning adverse media relating to a natural resources fraud involving the client. 

On 12 December 2019, the Firm concluded that the client may have benefitted from criminal conduct and accepted it could not corroborate Client C’s source of wealth. 

Client Example 2 

A high-risk client, (“Client D”) was involved in the merchandising of diamonds and jewelry, and had a reported wealth of over USD 230 million. The Licensee was unable to corroborate, amongst other things: 

• Client D’s claim that he drew a salary of USD 500k per annum; and 

• Client D’s reported wealth. 

In October 2018, the Firm concluded that all efforts to corroborate SOW had been exhausted due to a refusal by Client D to provide any further corroborating documentation. 

Client Example 3 

A high-risk client (“Client E”), who had PEP connections, was a client of the Licensee since 2011 and had settled over USD 690 million into a trust established by the Licensee. 

In 2018, the Licensee concluded that commercial activities within the trust structure were inconsistent with the rationale provided at the time of its establishment; this included a payment of over USD 50 million made from the trust to a holding company based in a different jurisdiction, which was owned by Client E. 

Client Example 4 

A high-risk client (“Client F”) was a client of the Licensee since 2011, with an estimated wealth of over USD 16 million. 

Between 2012 and 2015, Client F settled over USD 4 million into a trust established by the Licensee. 

Between 2012 and 2017 over USD 2 million was distributed from this trust to its beneficiaries, which included Client F. 

In October 2018, the Licensee accepted that the financial documentation received by the Licensee showed that Client F was never able to accumulate sufficient income over the years to settle over USD 4 million into the trust and concluded Client F’s source of wealth could not be corroborated. 

The Licensee was found to have breached Regulations 5 and 11 as it was unable to satisfactorily ensure it knew the origins of USD 1.1 billion of assets that it managed. 

Failure to keep adequate records 

Regulation 14 stipulates that a financial service business must keep a transaction document and any due diligence information. 

Principles 2 and 9 of the Principles, stipulate that a licensee should act with skill and diligence towards its customers and should organise and control its internal affairs in a responsible manner, keeping proper records. 

The Licensee was found to have breached Regulation 14 and Principles 2 and 9 as it failed to: 

• Implement in a timely manner a software solution to remedy the Licensee’s inability to effectively maintain a complete contemporary record of millions of USD’s worth of transactions; 

• Automatically archive the emails of all employees prior to August 2016; and 

• Have a procedure in place to archive messages sent through a real-time communications system. 

Failure to identify suspicious activity 

A licensee must, as required by Regulation 12(f), ensure it establishes and maintains such other appropriate and effective procedures and controls as are necessary to ensure compliance with the requirements to make disclosures. 

Between 1 July 2016 and 30 June 2017, a very significant increase in the number of disclosures were made compared to the period between 1 July 2015 to June 2016. As these disclosures involved predominantly clients who had been with the Licensee prior to 2015, the Commission concludes that the Licensee’s policies and procedures before July 2016 for identifying suspicious activity were inadequate, thus breaching Regulation 12(f). 

Failure to ensure that appropriate and effective policies, procedures and controls were in place to mitigate financial crime risks across the Licensee’s client base 

Regulation 15 relates to ensuring compliance with the Regulations. This stipulates that a financial services business 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. 

The Licensee was found to have breached Regulation 15 as it had ineffective procedures when it: (i) took on the clients from Company A; (ii) transferred the clients to SCTS; (iii) inadequately monitored its PEP clients; (iv) failed to promptly submit reports on suspicious activities; and (v) kept insufficient business records. 

Aggravating factors: 

The contraventions and non-fulfilments of the Licensee in this case are serious in nature. 

In particular the Commission was extremely concerned to find that the Licensee had: 

• managed USD 1.1 billion of client assets where the SOW/SOF was uncorroborated; 

• transferred USD 1.4 billion of assets to another jurisdiction when there was concern regarding potential tax evasion, with USD 265 million of these funds subsequently being declared in a tax amnesty; 

• given insufficient regard to whether any of its clients’ funds had evaded taxes and were the proceeds of crime; and 

• such were the magnitude of systemic and serious failings that it took over 3 years to remediate their client base. 

The contraventions exposed the Licensee and the Bailiwick to a significant risk of financial crime and reputational damage. 

Mitigating factors: 

The Licensee and Group embarked upon their own investigation when regulatory breaches were identified with the clients that had transferred to SCTS. 

The vast majority of failings originated prior to September 2016 and the Licensee has conducted a substantial remediation of its entire client base since this date. 

No evidence has been seen by the Commission to indicate that the Licensee’s failings were purposeful or malicious. 

At all times the Licensee co-operated fully with the Commission. The Licensee 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. 

'On 19 March 2018, The Monetary Authority of Singapore published a public statement in regards to SCTS’s regulatory failings, in relation to clients it had received from the Licensee.

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”);
Instruction (Number 6) for Financial Services Businesses (“Instruction 6”);

Safehaven International Limited, (the “Licensee” or the “Firm”).
Mr Richard John Bach (“Mr Bach”);
Mr Michael John Good (“Mr Good”);
Mr David Charles Housley Whitworth (“Mr Whitworth”);
Mr Stephen John Dickinson (“Mr Dickinson”) (together “the Directors”).
Miss Tracey Jane Ozanne (“Miss Ozanne” or “the MLRO”).

On 2 December 2020 the Guernsey Financial Services Commission (“the Commission”) decided:

• To impose a financial penalty of £100,000 under section 11D of the Financial Services Commission Law on the Licensee;

• To impose a financial penalty of £50,000 under section 11D of the Financial Services Commission Law on Mr Bach;

• To impose a financial penalty of £10,000 under section 11D of the Financial Services Commission Law on Mr Good;

• To impose a financial penalty of £10,000 under section 11D of the Financial Services Commission Law on Mr Whitworth;

• To impose a financial penalty of £1,000 under section 11D of the Financial Services Commission Law on Mr Dickinson (reduced from £10,000 in the light of submissions as to personal circumstances);

• To impose a financial penalty of £5,000 under section 11D of the Financial Services Commission Law on Miss Ozanne;

• To make orders under the Regulatory Laws prohibiting Mr Bach from performing the functions of controller, director, partner, manager, money laundering reporting officer, money laundering compliance officer and compliance officer of a regulated entity under any of the Regulatory Laws for a period of 6 years from the date of this public statement;

• To make orders under the Regulatory Laws prohibiting Miss Ozanne from performing the functions of money laundering reporting officer, money laundering compliance officer and compliance officer of a regulated entity under any of the Regulatory Laws for a period of 5 years from the date of this public statement;

• To disapply the exemption set out in Section 3(1)(g) of the Fiduciaries Law in respect of Mr Bach for a period of 6 years; and

• To make this public statement under section 11C of the Financial Services Commission Law.

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 Firm, the Directors and the MLRO failed to meet the minimum criteria for licensing set out in Schedule 1 to the Fiduciaries Law¹.

BACKGROUND

In 1981, the Licensee was established in Guernsey.  It was granted a full fiduciary licence in September 2002.

Mr Bach has been the 100% shareholder and managing director of the Licensee during the period under review.

Mr Good has been a director of the Licensee since October 2014.

Mr Whitworth has been a director of the Licensee since June 2015.

Mr Dickinson was a director of the Licensee between April 2015 and December 2018.

Miss Ozanne has been the Firm’s Money Laundering Reporting Officer (“MLRO”) since May 2014 and was the Compliance Officer between May 2014 and January 2017.

The Firm is a licensed fiduciary company which enables high net worth individuals to create companies to own and manage aircraft and luxury yachts.  The Firm provides Directors to run these companies and administers the companies through which high value assets are brought, managed and sold; bank accounts and credit cards are operated and sizeable sums of money are moved.

The services offered by the Licensee are considered by the Commission as inherently high risk due to:

• a client base of ultra-high net worth individuals, many of whom are High Risk,
• many of whom are also Politically Exposed Persons (“PEPs”), and/or
• who live in or operate businesses (some of a high risk nature) in countries identified as high risk.

The nature of the Licensee’s services make it vulnerable to be used to facilitate the laundering of the proceeds of crime.

FINDINGS

The Commission conducted an on-site visit to the Licensee in October 2016.  The aim of the visit was to examine the appropriateness and effectiveness of the Licensee’s policies, procedures and controls in accordance with the requirements of the Regulations and the Handbook².

In doing so, the Commission reviewed (among other things) thirteen client files.  Of the thirteen files reviewed, breaches of the Regulations and Rules were identified in at least nine files, equating to a 70% failure rate.

The issues fell broadly into seven categories and examples of these are detailed below.

Failure to properly conduct relationship risk assessments, taking into account relevant high-risk factors and to regularly review relationship risk assessments.

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 a business relationship, and any occasional transaction; and there must be clear documented evidence as to the basis on which the assessment is made and the risk assessment must be regularly reviewed to keep it up to date³.

Company 1.  This company was incorporated in Guernsey in 2006 and the Licensee was the administrator of the company.  The purpose of the company was to own a motor yacht valued at circa 5 million euros. 

The client was an ultra-high net worth individual from a high-risk country.  During the business relationship  the Licensee identified that the client was working with and being associated with individuals who were politically exposed, and the client himself was identified as being involved in the management and control of state (high-risk country) owned organisations linked to armaments, the extractive industry and IT services for the military. 

The Licensee failed to identify the client as a PEP for the first ten years of the relationship, despite reviews in 2009, 2011, 2012 and 2014 having noted material which should have readily identified the client as a PEP⁴.

The Licensee failed to conduct annual reviews of this High Risk client, despite this being a requirement of the Licensee’s own procedures. Risk assessments were incomplete and/or ineffective, with risk assessments not always being approved by a manager and warning signs identified in risk assessments not being followed up.

Company 2.  The company was set up and administered by the Licensee in 2009.  The purpose of the company was for the purchase of a circa £7 million motor yacht, which would be run on a commercial basis as a charter vessel.

The charter vessel was sold in 2015 for approximately £3.7 million (having been advertised originally at £6.9 million).  The funds from this sale were paid into the customer’s personal bank account.

Later in 2015, the Licensee was informed that the client had purchased a high value luxury asset for approximately £1.4 million.  The funds for this luxury asset were reported to have come partly from the sale of the charter vessel.

The Licensee set up a holding company for this luxury asset.

The Licensee became aware in August 2016 of media reports detailing that the client had been arrested in another jurisdiction for a multi-million pound fraud, reportedly linked to organised crime.  The news report detailed that as a result of the fraud the customer had opened up a web of bank accounts and money from these accounts was linked to, amongst other things, the purchase of luxury vessels.

In 2018, the customer was sentenced to eight years imprisonment and fined 20 million euros for the above fraud.  A media report at the time detailed the client’s ownership of the charter vessel and specifically named Guernsey as one of the locations where the customer’s bank accounts were held.

Throughout the relationship there were risk indicators which were not followed up or investigated, most notably:

• The failure to investigate the source of any of the funds for the purchase and maintenance of the assets held throughout  the relationship;
• The failure to investigate unexplained cash withdrawals on the credit cards issued on Company 2’s bank accounts, these ranging from circa 52,000 euros to circa 82,000 euros;
• Why funds from the chartering the motor yacht were paid direct to the client and not into Company 2’s bank accounts; and
• The lack of any documented rationale as to why the vessel was sold at such reduced price.

Company 3.  The Licensee took on the administration of the company in 2010.  The purpose of the company was to hold a motor yacht valued at circa 3.9 million euros. The clients (a father and son) behind this company also owned a large extraction company located in a jurisdiction listed by the Commission at the time as a jurisdiction which required a financial services business to exercise a greater deal of caution when dealing with business from the jurisdiction.

In 2014, news articles began circulating relating to the clients, these referred to:

• Allegations of fraud, embezzlement and forgery;
• The assets of the client’s extraction company had been frozen following a large industrial accident; and
• One of the clients was under arrest in relation to the industrial accident.

In 2016, the motor yacht was sold on request of the client.  In 2018, one of the clients was sentenced to 15 years imprisonment in relation to the industrial accident.

A client risk assessment was conducted by the Licensee in September/October 2014, which highlighted the above high risk indicators, along with general CDD/EDD failings.  The Licensee failed to take any measurable steps to address these severe risks.

Company 4.  Risk assessments for this high risk client were not carried out sufficiently regularly once serious issues were raised re due diligence, failings were not reviewed by Managers and action points or warnings raised were not investigated or followed up.

Failure to carry out Client Due Diligence (“CDD”) and Enhanced Due Diligence (“EDD").

Regulations 4 and 5, and the relevant provisions of the Handbook detail the requirements needed to identify a customer and the extra measures required to establish the Source of Funds/Source of Wealth of high-risk customers.

Company 1.  The enquiries made of this high-risk PEP client regarding their Source of Wealth were met with the response ‘Own business.’ There was no evidence that the Licensee corroborated this statement.

The Licensee never established or corroborated the Source of Funds for the customer’s motor yacht valued at circa 5 million euros.

The Licensee, as at October 2016 (some ten years after the client had been taken on), still did not have a certified copy of the client’s passport; and did not have a certified copy of a utility bill by which the client’s address could be verified.

Company 2.  The Licensee failed to establish the source of funds used to purchase the £7 million motor yacht and failed to establish the source of funds for the high-risk client.

Company 3.  The Licensee failed to establish the source of wealth or source of funds for this high-risk client, with both being simply detailed as ‘own business.’ The Licensee accepted some CDD documents in a foreign language with no explanation of how the Licensee understood the information provided.

Company 4.  Failing to hold compliant CDD for the client for over 6 years.  Failing to carry out appropriate or any investigation so as to establish and corroborate the high-risk client’s source of wealth or source of funds for the purchase of a £4.6 million motor yacht.

Company 5.  Source of wealth recorded for the PEP client was recorded on the 2014 client risk assessment as ‘own businesses mainly based in DRC [Democratic Republic of Congo].’  No evidence was identified of any corroboration of this.

Failure to monitor existing business relationships.

Regulation 11 and Rules 274-278 of the Handbook stipulate 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.

Company 1.  One of the client’s companies made three loans of approximately 500,000 Euros to Company 1.  The Licensee did not document the commercial rationale for these transactions and thus could not demonstrate that it understood their purpose.

Company 2.  As part of the administration of the company, the Licensee monitored the transactions re credit cards issued on the company’s bank accounts.  However,

• In 2011, approximately 50,000 euros was withdrawn in cash.  These withdrawals were missed completely during the 2011 client risk assessment; and
• In 2012 and 2014, approximately 30,000 euros and 80,000 euros were withdrawn in cash.

The Licensee had no evidence of what these large sums of cash were used for.

Furthermore, the vessel owned by Company 2 was used as charter vessel and the arrangements for these charters were made through a company unconnected to the Licensee.  Between, 2010 and 2014, approximately 4.9 million euros was recorded as having been earned as a result of chartering, of which approximately 2.3 million of this was attributable to fees paid by the client.

The Licensee claimed that there was nothing unusual about a client chartering his own vessel or the amount paid.

The Commission noted that was no evidence that the Licensee had ever given consideration to the money laundering risks associated with an individual chartering a vessel owned by himself and the charter fees being paid back to him, particularly in circumstances where the Licensee held no evidence on source of wealth or source of funds for the purchase of the vessel.

Company 3.  Red flags identified during a 2014 client risk assessment included:

• 2014 media reports which contained allegations against the clients re fraud and tax evasion;
• 2014 media reports detailing that the assets of one of the clients had been frozen; and
• Due diligence was not up to date.

These red flags were ignored and no action was taken to address these known risks.  CDD documents requested in December 2015 were not provided until March 2017.

Company 4.  Funds were received into company accounts administered by the Licensee from unknown 3rd parties and without carrying out and obtaining appropriate due diligence of the source of those payments.

Company 6.  Monitoring of the business relationship was non-existent, leading to a situation in 2016 where it appeared from the information held on the file that the Licensee had no knowledge of: who the new UBO was (the original UBO had died in 2011); the location of the vessel held by the company; whether it was insured or who was using it.

Failure to comply with Instruction 6 issued in 2009.

Instruction 6 issued by the Commission in November 2009 required firms to review the policies, procedures and controls in place for existing customers to ensure that by close of business on 31 March 2010 the requirements of the Regulations and Chapter 8 of the Handbook were met for customers taken on before the 2007 Regulations came into force, and that the firm had taken any necessary action to remedy any identified deficiencies  and satisfy itself that CDD information which was appropriate to the assessed risk was held for those customers.

As is apparent from what has been set out above, the Licensee failed to comply with Instruction 6.

Failure to comply with timing of identification and verification requirements and the requirement to terminate the business relationship.

Regulation 4(3)(a)-(d) details the requirements for verifying the identity of a customer and beneficial owner.

Regulation 7 stipulates that identification and verification of identity pursuant to Regulations 4 and 5 must be carried out before or during the course of the establishment of a business relationship.

Regulation 9 stipulates that where a financial services business cannot comply with any of the provisions of Regulation 4(3)(a) to (d) [on verification of identity], it must terminate the relationship, or not enter into a proposed business relationship.

Company 1.  Despite occasional requests for verification of identity and address documentation resulting in no further documentation being obtained, consideration was not given by the Licensee to termination of the relationship with the client, due the inability to comply with Regulation 4(3)(a)-(d), until the Licensee terminated the relationship in June 2017.

As a result of the failures including those in relation to identification and verification of this customer, the Licensee was exposed to the potential risk of having been used to facilitate money laundering and the Licensee is not in a position to defend itself by being able to show that it had identified and assessed this risk and was fully compliant with the Regulations and Rules designed to protect fiduciaries from this risk.

Company 3.  The requirements for identification and verification of identity were not met before or during the course of the establishment of the relationship and no consideration was given to terminating the relationship as a result.

Failure to establish and maintain appropriate and effective procedures and controls to ensure compliance with the requirements to make disclosures.
Regulation 12(f) stipulates that a financial services business shall ensure that it establishes and maintains appropriate and effective procedures and controls as are necessary to ensure compliance with requirements to make disclosures under Part 1 of the Disclosure (Bailiwick of Guernsey) Law 2007, as amended and sections 15 and 15A of the Terrorism and Crime (Bailiwick of Guernsey) Law 2002, as amended.

Company 3.  In September and October 2014, a Client Risk Assessment recorded the following details:

• An arrest warrant had been issued for one of the clients;
• The second client behind the Company had been arrested and charged; and
• An open source check had revealed that an individual linked to the company owned by the clients was involved in potential fraudulent activity and tax evasion.

However, a formal disclosure was not made by the Licensee until December 2016.  The Commission therefore concludes that the Licensee’s policies and procedures before December 2016 for identifying suspicious activity were inadequate, thus breaching Regulation 12(f).

Failure to establish effective policies, procedures and controls for forestalling, preventing and detecting money laundering and terrorist financing; and failure to establish and maintain an effective policy for the review of compliance, ensuring that a review of compliance was discussed and minuted at a meeting of the board at appropriate intervals.

Review of Compliance matters by the Board.  It is apparent from the Board minutes and the matters which emerged from the file reviews that prior to a remediation project instigated in 2014:

• The Licensee had no effective means of reviewing compliance or the effectiveness of its AML/CFT policies and no compliance monitoring programme;
• The MLRO position was not sufficiently resourced;
• Client relationships had not been either risk assessed or monitored; and
• Client due diligence requirements had not been complied with.

The 2014 remediation project. Reports compiled by separate outsourced compliance companies, the Commission’s 2016 onsite visit and the client file reviews detailed, showed that the steps taken by the Licensee between 2014 and 2016 were not effective to resolve the compliance failures.

Resourcing of the MLRO Function.  Miss Ozanne was appointed to the roles of MLRO and Compliance Officer with no previous experience; roles which are of central importance to a financial services business.  However, the Board also required her to deal with such things as staff HR, oversight of compliance projects, client matters, budgets, holding weekly staff meetings, and to be the link between the Managing Director, staff and managers.

The investigation into the Licensee identified that Miss Ozanne did not have either the time or the experience or expertise to carry out the function of MLRO effectively⁵. 

In particular, Miss Ozanne failed to:

• Ensure on a number of occasions that risk warnings were followed up or ensure that compliance failures were addressed;
• Ensure that the Board was adequately warned of the compliance risks faced by the Licensee during the 2014-2016 period;
• Complete client risk assessments and failed to inform the Board that the MLRO function was inadequately resourced, that the necessary tasks were not being completed and that it was not possible for her as MLRO to do so.

Effectiveness of the Board.  The Board of the Licensee was dominated by one person, Mr Bach during the period considered during the investigation.  Mr Bach’s leadership has been characterised by a failure to accord sufficient priority to matters of compliance and a failure to ensure that compliance failings were remediated in an effective manner.

Although the Licensee had sought to strengthen the Board with the addition of Mr Good and Mr Whitworth as non-executive Directors and Mr Dickinson as the Finance Director, their introduction did not ensure the transformation of the compliance health of the Licensee.

It was apparent to the Commission that none of the Directors were aware of the extent of the compliance failings and risks faced by the Licensee until they were pointed out by outsourced compliance companies and the Commission.

Mr Bach

The Commission’s investigation identified that Mr Bach failed to demonstrate that he acted with competence, soundness of judgement, diligence; or with the knowledge and understanding of his legal and professional obligations.

For example, Mr Bach:

• Failed to recognise the significance of warnings from staff or the independent compliance reports commissioned;

• Failed to take appropriate and/or effective action to remedy the failings or prevent failings in the future;

• Failed to dedicate sufficient resources at a sufficiently early stage to bring the Licensee into a compliant position; and

• When directly involved with making decisions on compliance matters, clients were allocated inappropriate risk ratings, insufficient due diligence was conducted and insufficient monitoring was undertaken.

Mr Good

The Commission’s investigation identified that Mr Good failed to demonstrate that he acted with diligence.

For example, Mr Good:

• Failed to give sufficient priority to compliance issues and failed to grasp the severity of the situation the Licensee was in between 2014-2016;

• Failed to question sufficiently what the Licensee was doing in terms of compliance, despite having held the position of MLRO at other firms.

Mr Whitworth

The Commission’s investigation identified that Mr Whitworth failed to demonstrate that he acted with diligence.

For example, Mr Whitworth:

• Failed to give sufficient priority to compliance issues and failed to grasp the severity of the situation the Licensee was in between 2014-2016;

• Failed to make adequate enquiries as to compliance matters; and

• Failed to investigate or realise the general extent of failings in the Licensee’s general compliance or the risks that the Licensee was exposed to through compliance failings.

Mr Dickinson

The Commission’s investigation identified that Mr Dickinson failed to demonstrate that he acted with diligence.

For example, Mr Dickinson:

• Failed to give sufficient priority to compliance issues and failed to grasp the severity of the situation the Licensee was in between 2014-2016; and

• Failed to raise enquiries or concerns as to the level of outstanding risk reviews or the inadequacy of the resources allocated to compliance.

Miss Ozanne

The Commission’s investigation identified that Miss Ozanne was not a fit and proper person to be a Money Laundering Reporting Officer of a licensed fiduciary.

For example, Miss Ozanne:

• Failed to follow up on deficiencies identified in client file reviews;

• Failed to conduct sufficient due diligence and sufficient monitoring, carried out inadequate or inaccurate assessments of risk and in some cases inexplicably downgraded client structures from High Risk to Standard Risk;

• Failed to make clear to the Board the seriousness of the compliance situation and the fact that the position of MLRO was not sufficiently resourced; and

• Failed to demonstrate a soundness of judgement when dealing with a number of high risk clients, thus exposing the Licensee to the risk of being used for the purpose of laundering the proceeds of crime.

In the imposition of the penalty on Miss Ozanne, the Commission has taken into account the fact that Miss Ozanne is a salaried employee and not a director of the Firm and that a 5 year prohibition order has also been made.

Aggravating factors

The result of the failings was that the Licensee was unable to assess the risks posed to it and the Bailiwick in terms of financial crime.  This was particularly serious given the high proportion of clients with High Risk or High Risk and PEP status.

The Licensee’s failings exposed the Bailiwick to the risk of financial crime.  In two of the client files reviewed there is a high possibility that structures administered by the Licensee may have been used for transactions involving the proceeds of crime, which is a matter which jeopardises the reputation of the Bailiwick as an international finance centre.

Mitigating factors

Since the compliance failings were identified in 2014 the Licensee has made efforts to rectify the contraventions and non-fulfilments through remediation projects.
At all times the Licensee, the Directors and the MLRO co-operated with the Commission during the investigation.

1 And also Schedule 4 to the POI Law, Schedule 4 to the IMII Law, Schedule 3 to the Banking Law and Schedule 7 to the Insurance Business Law, sets out the minimum criteria under these laws.
2 All references to the Handbook relate to the Handbook in use at the time.
3 Regulation 3 and Handbook Rules 52-61.
4 A breach of Regulation 4 and Rule 179 of the Handbook.
5 As prescribed at the time.1 And also Schedule 4 to the POI Law, Schedule 4 to the IMII Law, Schedule 3 to the Banking Law and Schedule 7 to the Insurance Business Law, sets out the minimum criteria under these 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”);
 
Mr Stephen Bougourd (“Mr Bougourd”)
 
On 7 December 2020, the Guernsey Financial Services Commission (the “Commission”) decided:
 
1. To impose a financial penalty of £7,000 under section 11D of the Financial Services Commission Law on Mr Bougourd;
 
2. To make orders under the Regulatory Laws prohibiting Mr Bougourd from performing the functions of director, controller, partner, manager and financial adviser of a regulated entity under any of the Regulatory Laws for a period of 362 days from the date of this public statement;
 
3. To disapply the exemption set out in Section 3(1)(g) of the Fiduciaries Law in respect of Mr Bougourd for 362 days; and
 
4. To make a public statement under section 11C of the Financial Services Commission Law.
 
The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Mr Bougourd failed to fulfil the minimum criteria for licensing under Schedule 1 to the Fiduciaries Law.
 
BACKGROUND
 
Introduction 

Between 30 March 2015 and 4 November 2016, Mr Bougourd was a Director and Head of Client Services for a company that undertook fiduciary activities under a full fiduciary licence (the “Licensee”).
 
In December 2015, Mr Bougourd received a referral from a colleague informing him of an enquiry from a third party (“Party A”), which required a Guernsey company. Party A’s lawyer was known to the Licensee and Party A had an existing client relationship with the Licensee, via one of its subsidiaries. However, Mr Bougourd was unable to follow up this referral at the time due to the pressure of other work commitments.
 
In early January 2016, Party A, through its lawyer, approached the Licensee directly and again enquired about the purchase of a Guernsey registered company, established in 2015.
 
On 22 January 2016, Mr Bougourd confirmed to Party A's lawyer that the Licensee had a company (“Company A”), established in 2015, that had only shares issued, no assets, liabilities or trading history. In essence, Company A was a shelf company, that is, a company that remained dormant but was readily available should the case arise. Company A had a corporate director of which Mr Bougourd was the representative.
 
On 25 January 2016, Party A's lawyer informed Mr Bougourd that Party A wanted to appoint its own directors to Company A, whilst also wishing Company A to be renamed (the “Renamed Company A”). Party A's lawyer also asked Mr Bougourd whether it was possible to have the transfer of the Licensee’s ownership of Company A to Party A, backdated to 2015.
 
Backdating of documentation
 
After an unrecorded telephone discussion between Mr Bougourd and Party A's lawyer, on 1 February 2016, Mr Bougourd signed a letter of engagement dated 31 December 2015, despite this date incorrectly representing when the Licensee and Party A had begun the business relationship.
 
On 8 February 2016, in a series of e-mail exchanges between Mr Bougourd and Party A's lawyer in relation to the transfer of ownership of Company A, Party A's lawyer asked for confirmation of “the transfer as of 31.12.2015 – the auditors are pushing us” whilst stating that in an ideal case “to keep in our records only the name [of the Renamed Company A]”.
 
On 16 February 2016, Mr Bougourd proposed the new business relationship at the Licensee’s Business Acceptance Committee. The Business Acceptance Form (“BAF”) reflected that the Licensee would provide “a limited service to Party A, (an existing Guernsey “shelf” company formed in 2015……”) whilst noting that "[Party A] will be wholly owned by [“Party B”], a Luxembourg company that is listed on the Euronext Paris market".  It included a “post-on boarding action point” which read, “To obtain from the advising lawyer the rationale for the structure and the nature of the services that will be provided intra-group”. Prior to the meeting, Mr Bougourd had not obtained the rationale for the structure, and he did not do so afterward despite the post-on boarding action point. There was no mention on the BAF that any documentation would have to be backdated in order to accept the on-boarding of this client.

During the course of February 2016, a number of administrative steps were taken to prepare 7 documents backdated to 31 December 2015.  Mr Bougourd signed these documents as an "A" signatory, either in his capacity as a director of the Licensee or as a representative of the Corporate director of Company A.
 
These documents created false and misleading business records showing the Licensee formally transferring their ownership of Company A to Party A, whilst resolving to change Company A’s name to Renamed Company A.
 
These documents included a stock transfer form, a Company A board minute, a share certificate, a declaration of trust, a written resolution, a letter from the Licensee and minutes of an Extraordinary General Meeting. Any third party reviewer of this documentation would have had the false impression that these events occurred on 31 December 2015, when they did not.
 
Submission of false and misleading information
 
On 24 February 2016, as a result of Mr Bougourd’s actions, a filing by the Licensee to a public body resulted in the creation of a false and misleading record that showed on 31 December 2015 two directors replaced Company A’s director, when this was not true.
 
Mr Bougourd also signed a further document backdated to 31 December 2015 in a formal request to change Company A’s name to Renamed Company A as of this date, in the knowledge that this would be submitted to a public body to alter an official record, despite this being untrue. 

Although it transpired that changing the name of Company A to Renamed Company A could not be backdated by the public body, this does not detract from Mr Bougourd’s intention.
 
Subsequent enquiries with Party A as to the rationale for the requirement of backdating the documentation failed to obtain any explanation from Party A.

FINDINGS  

When in 2016, Mr Bougourd was asked by Party A's lawyer whether it was possible to backdate the transfer and renaming of Company A to 2015, Mr Bougourd failed to enquire at that time of Party A's lawyer as to the rationale for backdating the transfer, or consider the potential regulatory, legal or financial crime risks of signing business records that would convey false information and be misleading.
 
Mr Bougourd should have known that by backdating the letter of engagement with Party A to 31 December 2015 it served as a false instrument, ensuring that any further documentation signed on or after 31 December 2015 would give the false appearance of having been executed after the client had been taken on.
 
Mr Bougourd failed to question certain financial crime red flags in his e-mail exchanges with Party A's lawyer on 8 February 2016, such as:
 
(i)    Why the auditor would be pushing for documentary evidence to show Party A’s ownership of the Renamed Company A, when on 31 December 2015 it was still owned by the Licensee and was Company A; and 

(ii)    Why Party A would not want any reference to Company A in their business records and whether this was an attempt to disguise the fact that the Renamed Company A, up until 31 December 2015, had a previous identity.
 
By Mr Bougourd backdating the transfer of ownership and appointing new directors so it appeared that on 31 December 2015 the Renamed Company A was owned by Party A, with Party A’s appointed directors, led to inaccurate business records that gave a false and misleading impression, as none of these events occurred until 2016.
 
Mr Bougourd maintained that his actions were done only to service an existing client’s needs on an enquiry that he believed he should have serviced in 2015, when Party A was first referred to him, but he was unable to deal with due to being under the pressures of work due, to a lack of staff resources.
 
In summary, Mr Bougourd abused his authority whilst as a director of the Licensee, prioritising servicing the client’s needs to the detriment of all else, failing to identify certain red flags or otherwise failing to give more immediate attention to those red flags that were identified, and forgoing his legal responsibilities as a director. At no time did he adequately consider the potential legal, regulatory, financial crime or reputational risks of knowingly signing documentation that misrepresented the facts and that he would have known were misleading, and which would have permanently formed part of Company A’s business records.
 
The failures by Mr Bougourd outlined above demonstrate a lack of probity, diligence, competence, soundness of judgement and as a result, Mr Bougourd failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 1 to the Fiduciaries Law.
 
Aggravating Factors
 
Mr Bougourd’s actions which led to the creation of false and misleading business records, whilst also causing a public body to be misled into creating a false official record, were serious.
 
Mitigating Factors  

Mr Bougourd, whilst citing he was under pressure at work, asserts he was not motivated by financial gain in relation to accepting this client. Mr Bougourd fully cooperated with the investigation throughout and accepted the findings against him, agreeing to settle at an early stage. This has been taken into account by applying a 30% discount in setting the penalties imposed.  
 

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)
The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)

Stephen Paul Dewsnip (“Mr Dewsnip”)

On 27 July 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To impose a financial penalty of £7,000 under section 11D of the Financial Services Commission Law on Mr Dewsnip; and

2. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Mr Dewsnip failed to fulfil the minimum criteria for licensing under Schedule 7 to the Insurance Law.

Background

Mr Dewsnip was a non-executive director of Global Insurance Group Limited (“GIGL”), which was licensed under the Insurance Law. Mr Dewsnip was a director of GIGL from 21 December 2011 to 25 August 2016.

Under an agreement between GIGL and a United Kingdom intermediary (which had some common ownership with GIGL) (“Intermediary A”), Intermediary A issued insurance policies on behalf of GIGL. Intermediary A was also able to collect premiums from policyholders on behalf of GIGL and retain a portion of the premiums as a loss fund to pay claims on behalf of GIGL (“the Claim Fund”). Bordereaux reports (a list, or summary, of policies issued and premiums charged and/or claims paid) should have been prepared monthly by Intermediary A and net premium settlements made quarterly to GIGL.

The Commission conducted a risk assessment visit to GIGL in July 2017 (“the July 2017 Visit”). As a result of the July 2017 Visit, the Commission had concerns over GIGL’s oversight of functions outsourced to Intermediary A, in particular the management of the Claims Fund. The Commission also found that GIGL had not conducted any audit of the activity carried out by Intermediary A and could not adequately monitor the solvency of GIGL due to the frequency of reporting from Intermediary A.

GIGL began to request that the payments be regularised from November 2015 onwards. However, regular payments from Intermediary A were not forthcoming. The outstanding amounts were only paid to GIGL after intervention by the Commission and after investment into Intermediary A by a third party. This called into question the liquidity of GIGL’s major asset.

Findings

As a director of GIGL, Mr Dewsnip failed to ensure the implementation of effective systems of control, in particular in relation to the Claims Fund held by, and the bordereaux reporting from, Intermediary A.

As a director of GIGL, Mr Dewsnip also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner.

Aggravating Factors

The actions of Mr Dewsnip could have seriously put at risk the payment of claims to policyholders and therefore could have posed a risk to the reputation of the Bailiwick as an international finance centre.

Mitigating Factors

Mr Dewsnip accepted the findings against him and agreed to settle at an early stage. This has been taken into account by applying a 30% discount in setting the financial penalty imposed.

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)
The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)

Global Insurance Group Limited (“GIGL”)
Shane Younger (“Mr Younger”)
Christopher Percival (“Mr Percival”)

On 10 July 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To impose a financial penalty of £48,650 under section 11D of the Financial Services Commission Law on Mr Younger;

2. To impose a financial penalty of £30,100 under section 11D of the Financial Services Commission Law on Mr Percival; and

3. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that Mr Younger and Mr Percival failed to fulfil the minimum criteria for licensing under Schedule 7 to the Insurance Law.

Background

Mr Younger and Mr Percival were non-executive directors (from 22 December 2011 to 22 February 2019 and 22 December 2011 to 14 July 2017 respectively) and the majority shareholders of Global Insurance Group Limited (“GIGL”) which was licensed under the Insurance Law. Mr Younger and Mr Percival are also Chief Executive and director of a United Kingdom insurance intermediary (“Intermediary A”) respectively. Mr Younger and Mr Percival are also minority shareholders in the ultimate holding company of Intermediary A. As a result of Mr Younger and Mr Percival’s position with Intermediary A, they had access to more information than the other GIGL directors regarding Intermediary A’s business activities related to GIGL.

Under an agreement between GIGL and Intermediary A, Intermediary A issued insurance policies on behalf of GIGL. Intermediary A was also able to collect premiums from policyholders on behalf of GIGL and retain a portion of the premiums as a loss fund to pay claims on behalf of GIGL (“the Claim Fund”). Bordereaux reports (a list, or summary, of policies issued and premiums charged and/or claims paid) should have been prepared monthly by Intermediary A and, if due, net premium settlements made quarterly to GIGL.

The Commission conducted a risk assessment visit to GIGL in July 2017 (“the 2017 Visit”). In the period prior to the 2017 Visit, apart from the first quarterly payment to GIGL by Intermediary A, the only payments made were the exact amounts required to pay GIGL’s reinsurers. GIGL’s management accounts showed that the amounts outstanding from Intermediary A grew whilst GIGL’s cash remained low. The amounts due from Intermediary A were GIGL’s major asset.

GIGL began to request that the payments be regularised from November 2015 onwards. However, regular payments from Intermediary A were not forthcoming. The outstanding amounts were only paid to GIGL after intervention by the Commission and after investment into Intermediary A by a third party.

Findings

Mr Younger

During the relevant period of 2012 to February 2019:

As a non-executive director of GIGL, Mr Younger failed to ensure the implementation of effective systems of control, in particular in relation to the Claim Fund held by, and the bordereaux reporting from, Intermediary A. Whilst Mr Younger contends that other directors of GIGL were visiting Intermediary A to check the accuracy of reporting by Intermediary A, those directors claim no visits to check the accuracy of reporting took place and no reports of any checks undertaken at such visits have been provided.

As a non-executive director of GIGL, Mr Younger also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.

A risk register was prepared by another director of GIGL in October 2016, which was subsequently considered by Mr Younger as a director of GIGL. Credit risk, which was defined as financial loss through counterparty failing to meet obligations, was deemed to be low likelihood and medium impact in the risk assessment.

A risk assessment of outsourced activity was also prepared by another director of GIGL in May 2018, which was again considered by Mr Younger as a non-executive director of GIGL. Again, credit risk was deemed to be low likelihood and medium impact.

Given the issues that had been ongoing since November 2015 regarding the payments due from Intermediary A and that Intermediary A was GIGL’s largest debtor, this is surprising. As a result, Mr Younger failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL.

The failures by Mr Younger outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Younger and as a result Mr Younger failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.

Mr Percival

During the relevant period of 2012 to July 2017:

As a non-executive director of GIGL, Mr Percival failed to ensure the implementation of effective systems of control, in particular in relation to the Claim Fund held by, and the bordereaux reporting from, Intermediary A. Whilst Mr Percival contends that other directors of GIGL were visiting Intermediary A to check the accuracy of reporting by Intermediary A, those directors claim no visits to check the accuracy of reporting took place and no reports of any checks undertaken at such visits have been provided.

As a non-executive director of GIGL, Mr Percival also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.

Mr Percival failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL despite the issues that were occurring with Intermediary A’s failure to pay at the time of his consideration of the risk assessment prepared in October 2016.

The failures by Mr Percival outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Percival and as a result Mr Percival failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.

Aggravating Factors

The actions of Mr Younger and Mr Percival could have seriously put at risk the payment of claims to policyholders and therefore could have posed a risk to the reputation of the Bailiwick as an international finance centre.

Mitigating Factors

Mr Younger and Mr Percival accepted the findings against them and agreed to settle at an early stage. This has been taken into account by applying a 30% discount in setting the financial penalties imposed.

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services Commission Law”)
The Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)

Global Insurance Group Limited (“GIGL”)
Christopher Schofield (“Mr Schofield”)
Andrew William Robert (“Mr Robert”)

On 8 June 2020, the Guernsey Financial Services Commission (the “Commission”) decided:

1. To impose a financial penalty of £42,000 under section 11D of the Financial Services Commission Law on GIGL;

2. To impose a financial penalty of £17,500 under section 11D of the Financial Services Commission Law on Mr Schofield;

3. To impose a financial penalty of £10,500 under section 11D of the Financial Services Commission Law on Mr Robert; and

4. To make a public statement under section 11C of the Financial Services Commission Law.

The Commission considered it reasonable, proportionate and necessary to make these decisions having concluded that GIGL had materially contravened the Insurance Law and that GIGL, Mr Schofield and Mr Robert failed to fulfil the minimum criteria for licensing under Schedule 7 to the Insurance Law.

Background

GIGL is a Guernsey company incorporated on 21 December 2011. GIGL was licensed to conduct general insurance business by the Commission on 25 January 2012. GIGL provided medical health insurance products to expatriate individuals and companies employing expatriates around the world.

Mr Schofield has been a director of GIGL since 22 December 2011. Mr Robert was a director of GIGL from 21 December 2011 to 14 July 2017.

Under an agreement between GIGL and a United Kingdom intermediary (which had some common ownership with GIGL) (“Intermediary A”), Intermediary A issued insurance policies on behalf of GIGL. Intermediary A was also able to collect premiums from policyholders on behalf of GIGL and retain a portion of the premiums as a loss fund to pay claims on behalf of GIGL (“the Claim Fund”). Bordereaux reports (a list, or summary, of policies issued and premiums charged and/or claims paid) should have been prepared monthly by Intermediary A and net premium settlements made quarterly to GIGL.

The Commission conducted a risk assessment visit to GIGL in July 2017 (“the July 2017 Visit”). As a result of the July 2017 Visit, the Commission had concerns over GIGL’s oversight of functions outsourced to Intermediary A, in particular the management of the Claims Fund. The Commission also found that GIGL had not conducted any audit of the activity carried out by Intermediary A and could not adequately monitor the solvency of GIGL due to the frequency of reporting from Intermediary A.

Findings

GIGL

As a significant part of GIGL’s business was outsourced to Intermediary A and (as GIGL could outsource functions but not responsibility) it was an important function of GIGL to oversee the functions outsourced to Intermediary A, including that the reporting from Intermediary A was accurate.

Mr Schofield and Mr Robert confirmed to the Commission that no visits to Intermediary A were made for the purposes of checking the accuracy of the reporting to GIGL by Intermediary A prior to the July 2017 Visit. In addition, no documentation was provided to the Commission that showed that such checks were being undertaken. Mr Schofield and Mr Robert told the Commission that GIGL took the information provided by Intermediary A at face value and that GIGL relied on the GIGL directors who were also directors and/or shareholders of Intermediary A to raise issues.

As a result, GIGL failed to establish, and operate within, effective systems of risk management and internal controls and failure to retain at least the same degree of oversight of, and accountability for, any outsourced material activity or function (such as a control function) as applies to non-outsourced activity. Therefore GIGL breached (i) Principles A:10 and A:16 of the Code of Corporate Governance from 1 April 2016; and (ii) prior to 1 April 2016 paragraphs 2(h) and 3(b) of the Licensed Insurers Code of Corporate Governance. GIGL also failed to fulfil the minimum criteria for licensing set out in paragraphs 1(2) and 6(1) of Schedule 7 to the Insurance Law.

In the period prior to the July 2017 Visit, apart from the first quarterly payment to GIGL by Intermediary A, the only payments made were the exact amounts required to pay GIGL’s reinsurers. GIGL’s management accounts showed that the amounts outstanding from Intermediary A grew whilst GIGL’s cash remained low. The amounts due from Intermediary A were GIGL’s major asset.

GIGL began to request that the payments be regularised from November 2015 onwards. However, regular payments from Intermediary A were not forthcoming. The outstanding amounts were only paid to GIGL after intervention by the Commission and after investment into Intermediary A by a third party. This called into question the liquidity of GIGL’s major asset.

As a result, GIGL failed to maintain adequate liquidity or make adequate provision for depreciation or diminution in the value of its assets (including provision for bad or doubtful debts). Therefore, GIGL failed to fulfil the minimum criteria for licensing set out in paragraph 6(1) of Schedule 7 to the Insurance Law.

The amounts due from Intermediary A were deemed to have been outstanding for more than 90 days as at 30 April 2017 and 30 April 2018. This resulted in these amounts attracting a capital factor of 100% under the Insurance Business (Solvency) Rules, 2015 (“the Solvency Rules”) (i.e. in effect they are ignored as an asset in calculating whether GIGL complied with solvency requirements). As a result, as at 30 April 2017 and 30 April 2018 GIGL failed to hold regulatory capital resources greater than or equal to its Prescribed Capital Requirement in breach of paragraph 9 of the Solvency Rules. GIGL also failed to fulfil the minimum criteria for licensing set out in paragraphs 1(2) and 6(1) of Schedule 7 to the Insurance Law. In addition, GIGL failed at all times to maintain capital resources in accordance with rules of the Commission in breach of section 30(1) of the Insurance Law.

GIGL failed to deposit the annual return, accounts and audit report for the periods ending 30 April 2015, 30 April 2016, 30 April 2017 and 30 April 2018 within a period of four months beginning on the close of the financial year to which the accounts relate in breach of section 37(1) of the Insurance Law.

The significant amount of activity carried on by Intermediary A, the lack of oversight of this activity by GIGL and the lack of cash flow into GIGL brings into question whether there was any substance to the activity of GIGL within the Bailiwick.

Mr Schofield

As a director of GIGL, Mr Schofield failed to ensure the implementation of effective systems of control, in particular in relation to the Claims Fund held by, and the bordereaux reporting from, Intermediary A.

As a director of GIGL, Mr Schofield also failed to ensure that the amounts due from Intermediary A were paid to GIGL in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.

Mr Schofield prepared a risk register on behalf of GIGL in October 2016, which was subsequently considered by the board of GIGL. Credit risk, which was defined as financial loss through counterparty failing to meet obligations, was deemed to be low likelihood and medium impact by Mr Schofield.

Mr Schofield also prepared a risk assessment of outsourced activity in May 2018, which was again considered by the board of GIGL. Again, credit risk was deemed to be low likelihood and medium impact.

Given the issues that had been ongoing since November 2015 regarding the payments due from Intermediary A, that Intermediary A was GIGL’s largest debtor and that Mr Schofield subsequently told the Commission that the board had increasing concerns about the repatriation of funds during 2017 to 2018, this is surprising. As a result, Mr Schofield failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL.

The failures by Mr Schofield outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Schofield and as a result Mr Schofield failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.

Mr Robert

During his time as a director of GIGL, Mr Robert failed to ensure the implementation of effective systems of control, in particular in relation to the Claims Fund held by, and the bordereaux reporting from, Intermediary A.

As a director of GIGL, Mr Robert also failed to ensure that the amounts due from Intermediary A were paid to the Licensee in a timely manner, in particular after November 2015 when this was first raised with Intermediary A by GIGL.

Mr Robert failed to adequately consider the risks to GIGL of Intermediary A failing to honour its debt to GIGL despite the issues that were occurring with Intermediary A’s failure to pay at the time of his consideration of the risk assessment prepared by Mr Schofield in October 2016.

The failures by Mr Robert outlined above demonstrate a lack of competence, experience, sound judgement and diligence by Mr Robert and as a result Mr Robert failed to fulfil the fit and proper requirements set out in paragraph 3 of Schedule 7 to the Insurance Law.

Aggravating Factors

GIGL had more than 2,000 policyholders around the world and the lack of adequate capital and liquidity could have seriously put at risk the payment of claims to these policyholders and therefore posed a risk to the reputation of the Bailiwick.

Mitigating Factors

Mr Robert made efforts to raise the issues during his time as a director (and subsequently). In addition, Mr Robert raised with the board of GIGL the fact that GIGL continued not to receive quarterly settlements despite the request to regularise payments in November 2015.

Mr Schofield made extensive efforts to rectify the breaches following the July 2017 Visit. This included recommending to the GIGL board in June 2018 that it cease underwriting new insurance business.

GIGL is no longer writing insurance business and has paid all known outstanding claims.

The Commission is not aware of any policyholders not being paid due to the lack of liquidity within GIGL.

GIGL, Mr Schofield and Mr Robert have been open and co-operative with the Commission since the issues were identified.

GIGL, Mr Schofield and Mr Robert accepted the findings against them and agreed to settle at an early stage. This has been taken into account by applying a 30% discount in setting the financial penalties imposed.

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 (the “Financial Services  Commission 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 Insurance Business (Bailiwick of Guernsey) Law, 2002 (the “Insurance Law”)  

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

The Banking Supervision (Bailiwick of Guernsey) Law, 1994 (the “Banking Law”) (together the  “Regulatory Laws”) 

Criteria Wealth Management Limited (“CWM”) 

Mr Mark Peter Penney (“Mr Penney”) 

Mr Marc Adam Roxby (“Mr Roxby”) 

On 4 May 2020, the Guernsey Financial Services Commission (the “Commission”) decided: 

1. As a result of the company having been compulsorily wound up as at 31 January 2019, with no  funds available for distribution to unsecured creditors, to impose no penalty on CWM under section  11D of the Financial Services Commission Law; it should be noted that, but for the insolvent  liquidation of CWM, the Commission considered that a discretionary penalty of £50,000 on CWM  pursuant to section 11D of the FSC Law would have been appropriate (ceteris paribus);  

2. To impose a financial penalty of £40,000 under section 11D of the Financial Services Commission  Law on Mr Penney; 

3. To make orders under section 34E of the POI Law, section 18A of the IMII Law, section 28A of  the Insurance Law, section 17A of the Banking Law and section 17A of the Fiduciaries Law,  prohibiting Mr Penney from holding the position of director, controller, partner, manager, financial  advisor, general representative or authorised insurance representative for a period of 6 years;  

4. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Penney  for a period of 6 years; 

5. To impose a financial penalty of £20,000 under section 11D of the Financial Services Commission  Law on Mr Roxby; 

6. To make orders under section 34E of the POI Law, section 18A of the IMII Law, section 28A of  the Insurance Law, section 17A of the Banking Law and section 17A of the Fiduciaries Law,  prohibiting Mr Roxby, from holding the position of director, controller, partner or manager for a  period of 4 years; 

7. To disapply the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Roxby  for a period of 4 years; and 

8. To make a public statement under section 11C of the Financial Services Commission Law. 

The Commission considered it reasonable, proportionate and necessary to make these decisions having  concluded that CWM, Mr Penney and Mr Roxby failed to fulfil the minimum criteria for licensing, and  in particular that Mr Penney was not a fit and proper person to hold the positions of director, controller,  partner, manager, financial adviser, general representative or authorised insurance representative and  Mr Roxby was not a fit and proper person to hold the positions of director, controller, partner or manager  under Schedule 4 to the POI Law and the IMII Law (and also were not fit and proper persons to hold  those respective positions in terms of Schedule 1 to the Fiduciaries Law, Schedule 7 to the Insurance  Law and Schedule 3 to the Banking Law, which set out the minimum criteria under these Laws). 

Background 

CWM is a Guernsey company, incorporated on 27 September 2012. CWM had six full time employees  until 2018, including three financial advisors, which included Mr Penney and Mr Roxby (from 25 February 2013 to 29 June 2018). Mr Penney was the Managing Director of CWM from incorporation  until 31 January 2019 and Mr Roxby was a director of CWM from 2 December 2014 to 15 June 2018.   

CWM was licensed under the POI Law and the IMII Law on 20 December 2012. CWM was licensed  under POI Law to carry on the restricted activities of Advice and Promotion in connection with  Category 1 Controlled Investments – Collective Investment Schemes.  CWM was not at any material  time licensed to carry out any restricted activity in relation to Category 2 Controlled Investments -  General securities and derivatives.  CWM was licensed under the IMII Law as an insurance  intermediary, to advise on and arrange long-term life insurance, savings products and single premium  business.   

The Commission conducted an on-site thematic visit at CWM in October 2013 (“the 2013 Visit”).   Following the 2013 Visit, CWM wrote to the Commission outlining improvements in CWMs processes  and procedures.  The Commission wrote to CWM again in July 2015 warning CWM against switching  clients without proper consideration of rebalancing risks within existing products and had set out the  Commission’s expectation that exit penalties, investment timeframes, adviser remuneration and product  provider charges should form part of the assessment underlying any recommendation. The Commission  conducted a further on-site visit of CWM in April 2016 (“the 2016 Visit”). The purpose of this visit  was to ascertain compliance with the Commission’s letter of July 2015.  The Commission found issues  including lack of evidence that recommended surrender/withdrawal was in clients’ best interests;  ineffective peer review of Advice provided to clients; and acting outside the terms of CWM’s licence  by performing the restricted activity of Management. Whilst CWM disagreed with the Commission’s  findings from the 2016 Visit, CWM committed to implement a Risk Mitigation Plan.  

In May 2017, a complaint was made to the Commission by a licensed entity - on behalf of its client,  and CWM’s former client, Client X.  Client X was an elderly client and CWM’s largest client from  December 2013 onwards until the end of the client relationship.  The licensee also provided the  Commission with copies of documents provided by CWM to Client X.  These documents disclosed a  sale of CWM’s own shares to Client X by Mr Penney.  The documents also identified advice provided  to Client X relating to the surrender of long-term insurance bonds.  The pattern of advice evidenced in  the Client X file raised concerns of widespread similar practice of unsuitable advice and led to the  Commission reviewing a sample of other client files to determine if the pattern of unsuitable advice was  more widespread.  

Following consideration of the investment advice in the client files, the Commission noted that CWM  was advising on and promoting Structured Notes, which the Commission believed were Category 2  Controlled Investments.  CWM was not licensed to advise on and promote Category 2 Controlled  Investments.   

Mr Roxby resigned from CWM with effect from 16 June 2018. Mr Penney and a Non-Executive  Director sought a purchaser for CWM’s book of business, but ultimately this search was not successful.  An order for the compulsory winding up of CWM was obtained dated 31 January 2019. The  Commission accepted surrender of CWM’s licences under the POI Law and the IMII Law on 28  February 2019.  

Findings 

CWM’s Sale of Structured Notes 

CWM was licensed under the POI Law to carry on the restricted activities of “Advice” and “Promotion”  in connection with Category 1 Controlled Investments – Collective Investment Schemes.  It is not  disputed by CWM, Mr Penney or by Mr Roxby that CWM was not licensed at any time to carry out  any restricted activity in relation to Category 2 Controlled Investments – General Securities and  Derivatives.   

The Structured Notes advised on and promoted by CWM are contracts that fall within the classification  of Category 2 Controlled Investments under Schedule 1 of the POI Law by reason of the investments  comprising derivatives.  Some of the Structured Note fact sheets seen by the Commission state that the  product is a derivative instrument. 

The Structured Notes that CWM was promoting to and recommending to its clients were typically  structured products comprising a bond plus a derivative instrument or instruments (typically linked to  the value of one or more equities). CWM engaged in the Restricted Activities of Promotion and Advice  in relation to the Structured Notes.  CWM was not licensed to promote or advise on Category 2  Controlled Investments and therefore in promoting and/or advising on Structured Notes, CWM was  conducting unlicensed business. 

Mr Penney and Mr Roxby’s position in response to the Commission was that the categorisation of the  Structured Notes was a “grey area” and they believed that the Structured Notes did not fall within  Category 2 Controlled Investments.  

The question of whether the licence of a business extends to cover the business being conducted is so  fundamental, and the consequences of conducting unlicensed business are so serious, that the CWM  Directors ought to have taken legal/expert advice on what they considered at the time to be a “grey  area” to resolve the issue before starting to sell Structured Notes to their clients. It was not disputed that  no such advice was taken at that time.  

The consequences of conducting unlicensed business in Structured Notes  

The Structured Notes comprised a significant part of CWM’s business.  In the period 11 March 2014 to  26 April 2018, Mr Roxby advised CWM’s clients to invest a total of £2,865,000 in 148 Structured  Notes.  In the same period, Mr Penney advised CWM’s clients to invest a total of £745,000 in Structured  Notes. The consequences of CWM conducting unlicensed business in relation to Structured Notes, and  of Mr Penney and Mr Roxby collectively failing to prevent CWM undertaking controlled investment  business for which it was not licenced, have been, predictably, serious in that – 

• CWM has contravened section 1(1) of the POI Law in relation to advice, promotion and sales of  Structured Notes to its clients over the years 2014 - 2018; 

• CWM’s professional indemnity insurers have to date refused to provide indemnity in relation to  advice, promotion and sales of Structured Notes by CWM, because it was unlicensed business and  thus clients of CWM, Mr Penney and Mr Roxby have been exposed to, and in some cases have  suffered, uninsured losses (although there may be recourse through an award by the Channel  Islands Ombudsman in respect of a small number of complainants and professional indemnity  insurance may respond in respect of these albeit no awards nor confirmation of the insurance  position have been confirmed to date); and 

• CWM has been exposed to reputational risk, legal risk and regulatory risks. 

As at 31 December 2018, CWM had received requests for compensation in relation to the Structured  Notes in the sum of £79,000 and had settled one complaint in the sum of £4,000 compensation.  

The contraventions and the conduct by CWM, of unlicensed business, is evidence of a failure on the  part of CWM to fulfil the Minimum Criteria for Licencing under Schedule 4 of the POI Law in the  following respects: 

• Paragraph 1(2)(b)(i), ‘contravened any provision contained in or made under this Law’; and 

• Paragraphs 2(1)(b) and (c) which state the ‘business of the applicant or licensee… will be carried  on’, ‘with professional skill appropriate to the nature of the activities’ and ‘in a manner which will  not tend to bring the Bailiwick into disrepute as an international finance centre’.  

Both Mr Penney and Mr Roxby failed to fulfil the Minimum Criteria for Licencing under Schedule 4  of the POI Law in the following respects:  

• Paragraph 1(1)(a), ‘competence’ and ‘soundness of judgement’ by giving advice to clients  recommending Structured Notes, which comprised Category 2 Controlled Investment Business for which CWM was not licensed and failing to obtain proper advice about the controlled investment  status of the Structured Notes;  

• Paragraph 1(1)(c), jeopardising the ‘reputation of the Bailiwick as a reputable finance centre’,  evidenced by investor complaints resulting from CWM’s Category 2 Controlled Investment  Advice;  

• Paragraph 1(1)(e), ‘knowledge and understanding of the legal and professional obligations to be  assumed or undertaken’ in terms of the failure to realise their recommended Structured Notes  investments as Category 2 Controlled Investments under the POI Law;  

• Paragraph 1(1)(g), ‘policies, procedures and controls to comply with any rules, codes, guidance,  principles and instructions’ by the failure of CWM’s investment policy and committee to correctly  identify that CWM’s licence did not include advice or promotion of Category 2 Controlled  Investments under the POI Law and under the POI Law; and 

• Paragraph 2(b) “contravened any provision contained in or made under – this Law …or the  regulatory laws”. 

Whether CWM provided suitable Advice and Information to its clients about Structured Notes 

The Structured Notes were complex and high risk investments and each of the financial advisors  promoting and recommending these products to clients (had this been licenced business of CWM which  as set out above, it was not) ought not to have done so, without a proper understanding of the risks and  the disadvantages of investing in these products, and without communicating those risks to the clients.  Over the period 2014 to 2016, CWM, Mr Penney and Mr Roxby wrongly categorised the Structured  Notes as low risk when they were high risk and this led to unsuitable recommendations being made to  many of their retail clients, who had low risk appetites, to purchase Structured Notes.  This was a breach  of Rule 5.2.2(c)(i)  of the Licensees (Conduct of Business) Rules, 2009, 2014 and 2016 (“the Licensee  Rules”).  Clients were therefore not made aware of the true nature of the risks of the Structured Notes,  in particular the risks of capital loss up to 100% of capital invested, which is a breach of Rule 5.2.3(d)  of the Licensee Rules.   

Further, CWM did not provide a clear statement of prior disclosure in relation to all remuneration that  it was to receive for the Structured Notes transactions, indeed it made statements that failed to disclose  the distribution fees paid to CWM on the Structured Notes which could be as high as 8% of the capital  invested.  This was a breach of Rule 5.2.4 of the Licensee Rules. This comprised a breach of Rule  5.2.3(a) of The Licensees (Conduct of Business Rules) 2009 which obliged the Firm to provide prior  disclosure to its client of “the basis or amount of its charges” for the provision of services and a breach  of Rule 5.2.3(d) of The Licensees (Conduct of Business Rules) 2009 which obliged the Firm not to  recommend a transaction to a client unless it had taken “reasonable steps to make him aware of the risks  involved including conflicts of interest” and a breach of Principle 5.  From 1 January 2015, this also  comprised a breach of Rule 5.2.4(b) of The Licensees (Conduct of Business Rules) 2014 and 2016  which requires the Firm to provide prior disclosure of all charges/remuneration to be received in  connection with each associated transaction and again a breach of Principle 5 as set out above.  

CWM’s Financial Advisors, including Mr Penney and Mr Roxby, were required only to provide advice  on matters upon which they were competent and qualified to advise.  CWM’s Board failed to ensure  that each of its financial advisers held such qualifications to at least the minimum standard as published  by the Commission. CWM’s Advisors did not have qualifications meeting the Commission’s published  minimum requirements relating to Category 2 Controlled Investments when they should have both had  the requisite qualifications no later than 31 March 2016.  This was a breach of Rule 3.5.3(e) of the  Licensee Rules. 

The contraventions set out above represent a failure by CWM to fulfil the Minimum Criteria for  Licencing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate  to the nature and scale of his activities’ and 2(2)(b) ‘act in accordance with’ the Principles of Conduct  of Finance Business (“the Principles”); and in terms of the IMII Law Schedule 4, Paragraph 1(1)(b)  ‘with professional skill appropriate to the nature and scale of his activities’ and 1(2)(a)(i) ‘act in accordance with’ the Principles.  

Mr Penney failed to ensure CWM adhered to Principle 2 of the Principles.  In this regard Mr Penney  failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI Law and  IMII Law in terms of: 

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, “competence” and  “soundness of judgement” in relation to unsuitable Advice provided to CWM’s clients  recommended Structured Notes; and  

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in Structured Notes recommendations,  advice and information provided by Mr Penney.  

Mr Roxby also provided unsuitable Advice to CWM’s clients, recommending Structured Notes  investments. Mr Roxby failed to ensure CWM adhered to Principle 2 of the Principles.  Mr Roxby  therefore failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the POI  Law and the IMII Law in terms of: 

• Paragraph 1(1)(a) and Paragraph 3(2)(a) of IMII Law, “competence” and “soundness of  judgement” in relation to his unsuitable Structured Note Advice to CWM’s clients; and  

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in Structured Notes recommendations,  advice and information provided by Mr Roxby.  

CWM’s Advice to and Dealings with Client X 

Whether CWM provided suitable advice to Client X 

Mr Penney  

Client X was at the relevant time an elderly retail client with some knowledge of financial transactions  but no professional expertise. Mr Penney advised Client X to surrender two insurance bonds in  February/March 2014.  Mr Penney advised Client X to reinvest the proceeds of one bond (“the larger  insurance bond”) into three similar bonds from the same provider in order to provide for Client X’s  heirs.  Mr Penney advised Client X to reinvest the proceeds of the second bond (“the smaller insurance  bond”) into a discretionary managed portfolio.  This advice was unsuitable.   

In particular: 

1. Mr Penney failed to establish and/or record Client X’s investment objectives and risk tolerance  properly or consistently.  File notes made by Mr Penney and the recommendation letters were  inconsistent with regard to investment objectives and risk tolerance. Mr Penney would record  his advice in these documents as if the idea for the advice or strategy had come from Client X,  when in fact it had been Mr Penney’s advice or suggested strategy.  This was seen throughout  the documentation and was disingenuous at best, and, at worst, thoroughly misleading. 

2. Mr Penney provided unsuitable advice and, in some cases, misleading advice (including tax  advice on which he was not qualified to advise) to Client X, in relation to the larger insurance  bond.  Mr Penney failed to establish that the transaction he recommended in relation to the  larger insurance bond was in Client X’s best interests. 

3. Mr Penny also gave misleading advice about the tax liabilities that Client X had “accrued”,  giving the impression, as recorded in his recommendation letters and his file notes of  conversations with Client X, that they had somehow accrued a tax bill of nearly £600,000. He  later made admissions to the Commission that the tax had not in fact accrued (and was not in  fact payable at the time and would not be payable at all by Client X’s heirs on the demise of  Client X) and further that the maximum tax payable by a Guernsey resident was £220,000 in  any one year.  Despite these facts, Mr Penney repeatedly gave the impression to Client X that  his suggested restructure of the insurance bonds would save Client X’s tax liabilities and allow  Client X “to take advantage” of the tax cap of £220,000 when the truth was that the tax cap was  always available. 

4. Mr Penney should not have recommended this complex and difficult transaction without  independent expert tax advice which Client X should have received in writing and which  stipulated that the transaction was in their best interests.  Without this, it was impossible for Mr  Penney to reconcile his conflict of interest – CWM would earn no trail fees on the existing  insurance bonds (ie. if the original structure was left in place) but would only earn initial, and  trail fees, on new or restructured products. This was not disclosed to Client X, and the conflict  of interest neither disclosed nor managed.  

5. In relation to the smaller insurance bond, which had no tax issues, Mr Penney’s  recommendation was to encash this bond in its entirety and invest in a discretionary managed  portfolio – thus paying new on-boarding fees (and generating initial and trail fees for CWM  which would otherwise not have been available to CWM had the initial structure remained in  place). Mr Penney failed to establish that the transaction he recommended in relation to the  smaller insurance bond was in Client X’s best interests. 

6. Mr Penney failed to advise Client X about alternative restructures or investments that might be  more cost effective and tax efficient solutions for them.   

7. Mr Penney failed to disclose remuneration to be earned by CWM on products sold to Client X,  and recommendation letters were in some cases misleading in implying that CWM would not  earn commissions or fees on particular products sold to Client X, when they would in fact do  so; and 

8. Mr Penney made internal file notes, which purported to be contemporaneous records of advice  given to Client X and of conversations held with Client X.  These were in fact so confusing and  internally contradictory that they could not be relied upon as contemporaneous evidence unless  also corroborated by external evidence; Mr Penney had in fact drafted several file notes relating  to Client X during 2017 in response to a request for more information from his compliance  officer, but had backdated these file notes to give the appearance that they were  contemporaneous notes recording advice given to Client X in 2014.  

During the period 2014 to 2016, Mr Penney gave additional unsuitable advice to Client X in relation to  Structured Notes and other investments.  In particular: 

1. Mr Penney failed to establish and/or record Client X’s investment objectives and risk tolerance  properly or consistently.  

2. Mr Penney provided unsuitable advice to Client X and failed to give proper risk warnings in  relation to the Structured Notes and other investments over the period 2014-2017, in that the  Structured Notes were proposed as low risk when they were in fact high risk and warnings  given about the risk of capital losses were either absent or insufficient; and 

3. Mr Penney failed to disclose, sufficiently or at all, the remuneration to be earned by CWM on  products sold to Client X, and recommendation letters were in some cases misleading in  implying that CWM would not earn commissions or fees on particular products sold to Client  X, when they would in fact do so. 

Overall, the advice provided to Client X by Mr Penney was neither suitable nor provided by CWM’s  Advisor with “integrity”, nor with “due skill, care and diligence towards its customers”; and conflicts  of interest were not managed, in contravention of Principle 1, 2 and 3 of the Principles. In this regard  Mr Penney failed to fulfil the Minimum Criteria for Licencing as described in Schedule 4 to both the  POI Law and the IMII Law in terms of fit and proper person considerations:  

• Paragraph 1(1)(a) of the POI Law and paragraph 3(2)(a) of the IMII Law, “probity”, “competence”  and “soundness of judgement” in relation to unsuitable advice provided to Client X; and 

• Paragraph 1(1)(e) of the POI Law and paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the multiple contraventions contained in advice provided to Client X written by  Mr Penney. 

Mr Roxby 

During the period 2014-2017, Mr Roxby was in all cases the Advisor tasked with the responsibility for  reviewing and checking Mr Penney’s advice to Client X. Mr Roxby was supposed to provide “four  eyes” review for each piece of advice Client X received as CWM’s authorised Financial Advisor (and  also as a Director, from December 2014).

There was no evidence of Mr Roxby providing any effective check or challenge to Mr Penney – he  simply signed off Mr Penney’s advice, even when there were obviously questions to be asked about the  tax position and the suitability of the advice being provided. Mr Roxby abdicated responsibility and  endorsed all of the advice given by Mr Penney, thus providing no check or challenge to Mr Penney, and  therefore did not perform his allotted function within CWM. 

Mr Roxby, by his failures in lack of care and diligence when peer reviewing Mr Penney’s advice to  Client X and his failures to challenge, correct or prevent the provision of unsuitable advice to Client X  thereby failed to adhere to Principle 1, 2 and 3 of the Principles.  Mr Roxby therefore failed to fulfil the  Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper  person considerations:  

• Paragraph 1(1)(a) of the POI Law and paragraph 3(2)(a) of the IMII Law “competence” and  “soundness of judgement” in relation to his failure properly to peer review and his tacit approval  of advice given by Mr Penney to Client X on behalf of CWM which was unsuitable advice; and 

• Paragraph 1(1)(e) of the POI Law and paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assume or undertaken’, demonstrated  by his failure properly to peer review and tacit approval of Mr Penney’s unsuitable advice to Client  X. 

The failures to fulfil the Minimum Criteria for Licensing by Mr Penney and Mr Roxby contributed to a  failure by CWM to meet the Minimum Criteria for Licensing in terms of the POI Law Schedule 4,  Paragraph 2(1)(b) ‘with professional skill appropriate to the nature and scale of his activities’ and  2(2)(a) ‘act in accordance with’, the Principles. Under similar provisions in the IMII Law Schedule 4  Paragraph 2(1)(b) and 1(2)(a)(ii) the behaviours of Mr Penney and Mr Roxby also contributed to CWM  Firm failing to meet the Minimum Criteria for Licencing. 

Conflicts of interest in relation to the private sale of CWM shares by Mr Penney to Client X in  January and July 2016 

Client X acquired 5% of CWM’s shares from Mr Penney for £65,000 in January 2016.  Client X paid  the £65,000 purchase monies into Mr Penney’s personal bank account.  Mr Penney personally retained  £60,000 of the £65,000 in relation to this transaction while the balance was paid to CWM.   

The updated share register was ratified at a CWM board meeting on 28 January 2016, at which Mr  Roxby was present.  This was the only reference in the minutes to the first share sale transaction between  Mr Penney and Client X. Mr Penney did not declare any conflict of interest at the board meeting in  relation to the sale of shares to Client X. 

In July 2016, Mr Penney emailed the CWM directors, including Mr Roxby, stating that Client X wished  to increase their shareholding in CWM to 10% and that he had agreed in principle to sell Client X  a  further 5% of his own shares in CWM.  Mr Penney asked for confirmation from the other directors  whether they had any objections.  Mr Roxby confirmed he had no objections.   

Client X purchased a further 5% shareholding in CWM from Mr Penney in July 2016 for £65,000.  As  with the first share sale transaction, the £65,000 was transferred by Client X to Mr Penney’s personal  bank account.  None of the £65,000 was loaned to CWM by Mr Penney.  He retained the entire sum for his personal benefit. 

Mr Penney and another director had signed off the company accounts on 20 June 2016 which showed  that, for the prior financial year, CWM was trading at a loss.  It was unlikely, therefore, that any dividend  would be paid by the end of the year, contrary to what Mr Penney had stated twice to Client X. 

Client X was at all times categorised by Mr Penney himself as a “lower risk” or “medium risk” retail  investor, and not at any stage a high risk investor.  The letters of 2 January and 19 July 2016 from Mr  Penny to Client X describing the share sale transactions are wholly inadequate in bringing to their  attention all the matters that Client X, and/or any independent financial/legal advisor, needed to know  about the transaction.   

Mr Penney ought to have set out in writing and in clear terms, at minimum, the following information:  (i) Mr Penney was acting in his personal capacity in the transaction and was not acting as Client X’s  financial advisor; (ii) Client X should take independent legal and/or financial advice on this transaction;  (iii) CWM would not receive the funds. The share purchase monies were for Mr Penney’s private  account and that he would personally profit from the sale; (iv) Mr Penney had not undertaken an  independent share valuation and Client X should have the shares valued independently; (v) CWM was  presently loss making, and there were no plans to declare a dividend during 2016; (vi) an audited set of  the latest accounts to be enclosed which should be shown to the independent advisor/s and (vii) a clear  risk warning to the effect that the purchase of the shares was a high risk investment, which could result  in 100% loss of capital since these shares were illiquid investments in a private company which was  presently loss making.  If Client X had appointed an independent legal/financial advisor, then Mr  Penney ought to have requested a signed letter from her independent advisor stating such advice had  been given before the transaction could proceed. 

Mr Penney did not act in an open and transparent manner in relation to the share sales to Client X. In  relation to both share purchase transactions, it was a situation where the onus lay on Mr Penney to give  Client X full disclosure of his conflict of interest and also of all the risks involved in the transaction and  there is no evidence that he did so. Instead, Mr Penney, even at interview, appeared to consider it was  sufficient to give Client X the opportunity to take independent legal advice.  But, to Mr Penney’s  knowledge, Client X did not take independent legal or financial advice on the transactions, and nor did  they have the full disclosure needed from Mr Penney to make an informed decision on the risks of the  transactions. In those circumstances, Mr Penney ought not to have proceeded with the transactions given  the glaring conflict of interest he faced, being both financial advisor to Client X and beneficiary,  personally, of the proceeds of the transactions. 

Client X was significantly disadvantaged by both transactions. They transferred cash/medium risk  assets into very high risk illiquid shares in a private, loss making company with no security and a high  prospect of substantial or total capital loss.  Client X did indeed lose the entire capital invested in the  shares in the sum of £130,000.  

Mr Penney could not establish that the price paid by Client X was a fair price for the shares for the  following reasons: (i) Mr Penney did not himself obtain an independent valuation of the shares; (ii) Mr  Penney’s calculation of the price of the shares was subjective, informal, undocumented and based on  assumptions as to future fees and earnings for CWM that were not reconciled with existing management  or audited accounts; on a market valuation method, the transaction for the purchase of 50 shares in  CWM from another shareholder in January 2016 was the closest and most relevant comparator but Mr  Penney had paid £500 per share to that shareholder in January 2016 and yet Mr Penney charged Client  X £1,300 per share per share for the January and July 2016 share sale transactions which raises a serious  question as to whether Mr Penney was charging Client X a fair price for the shares; and on a multiples  method of valuation, there was no contemporaneous documentation (ie, at the time of the share sales  transaction) or independent valuation advice to support the valuation Mr Penney arrived at.  

The sale of CWM’s shares by Mr Penney to Client X in January and July 2016 demonstrates the failure of CWM and its Directors to identify, mitigate and manage the serious conflict of interest. The fact that  Mr Penney sold CWM’s shares to Client X at a price he cannot establish on the evidence as fair, and  that he personally profited from the sale proceeds without full disclosure to Client X (and/or insisting  that they took independent advice) was improper and aggravates the breaches on the part of Mr Penney.   This demonstrated a lack of personal probity by Mr Penney.  Together these matters demonstrate that  Mr Penney acted with a lack of probity, competence and soundness of judgement, and evidence his  failure to fulfil the Minimum Criteria for Licencing under the Regulatory Laws. 

CWM had an opportunity to prevent Mr Penney selling CWM’s shares to Client X when Mr Penney  discussed the January share sale in advance with Mr Roxby. Mr Roxby and Mr Penney did not tell  CWM’s other director about the January 2016 sale.  The consequence of Mr Penney’s and Mr Roxby’s  failures meant the conflict of interest was neither identified nor managed adequately by CWM. 

By his lack of care and diligence, and failures to avoid and manage conflicts of interest, Mr Penney  failed to ensure CWM adhered to the Principles 1, 2 and 3.  Mr Penney failed to fulfil the Minimum  Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper person  considerations:  

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, ‘probity’, ‘competence’  and ‘soundness of judgement’ in relation to the sale of his shares in CWM to Client X; 

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by the private share sale to Client X despite the conflict of interests; and 

• Paragraph 2(c)(i) of the POI Law and Paragraph 3(3)(c)(i) of the IMII Law ‘engaged in a business practice’ that ‘appears to the Commission to be deceitful or oppressive or otherwise improper’. 

Mr Roxby, by his lack of care and diligence, and failures to prevent and manage conflicts of interest,  failed to ensure CWM adhered to Principles 1, 2 and 3 of the Principles.  Mr Roxby failed to fulfil the  Minimum Criteria for Licencing as described in Schedule 4 to both the Laws in terms of fit and proper  person considerations:  

• Paragraph 1(1)(a) of the POI Law and Paragraph 3(2)(a) of the IMII Law, ‘competence’ and  ‘soundness of judgement’ in relation to his failure to raise questions and concerns in relation to the  sale of CWM’s shares to Client X; and 

• Paragraph 1(1)(e) of the POI Law and Paragraph 3(2)(e) of the IMII Law, ‘knowledge and  understanding of the legal and professional obligations to be assumed or undertaken’,  demonstrated by his lack of challenge to, and tacit approval of, the private share sale to Client X  and the resultant unmitigated conflict of interest.  Mr Roxby did not think to intervene in the share  sale transactions, despite the fact that Mr Roxby had overseen the recommendation letters and  correspondence between Mr Penney and Client X for two years in his role as peer reviewer, and  therefore understood how Mr Penney was a trusted advisor to Client X. 

The contraventions set out above demonstrate CWM’s failure in terms of Principles 1, 2 and 3.  These  breaches also represent a failure by CWM to meet the Minimum Criteria for Licensing in terms of the  POI Law, Schedule 4 paragraph 1(1)(g) and the IMII Law, Schedule 4 paragraph 3(2)(g), ‘policies  procedures and controls to comply with any rules, codes, guidance, principles and instructions’. 

CWM’s Records were insufficient in many cases to show the provision of suitable advice to other  clients 

Analysis of CWM’s investment surrender log and some sample examples of written advice provided to  clients other than Client X demonstrated patterns of switching, underpinned by generic reasoning that  failed to document sufficiently, or at all, in the following three areas: (i) the reasons for the  recommended investment switches; and/or (ii) the costs savings or other advantages that would accrue  to the client from the switching; and/or (iii) the costs of the proposed new investments. 

The repeated similar justifications for product surrender and reinvestment in 2016 and further repeated  wording in 2017 suggest that the recommendations to clients were not sufficiently personalised but that  CWM’s financial advisors adopted formulaic or generic standard templates. The advisors to the clients  included Mr Penney and Mr Roxby.  CWM by its advisors frequently did not fully document to the  clients how much the alleged “cost savings” added up to, and how those cost savings justified the  recommendation to switch.  CWM and its advisors, including Mr Penney and Mr Roxby, ought to have  documented this clearly and set out a comparison between the costs under the existing investment and  the costs under the recommended new investment in order to assist clients to decide whether to accept  his recommendations.  CWM’s records were therefore in several cases, in addition to Client X,  insufficient to demonstrate and fully document that the surrender was in the clients’ best interests. 

Finally, to the extent that any of the CWM clients were recommended Structured Notes, the same issues  arose in relation to a failure on the part of CWM, and its Advisors, to warn of the significant risks of  loss of capital, a failure to document the high risk rating for Structured Notes, and a failure to establish  suitability, and/or to document appropriately why these recommendations were in the best interests of each client. 

The contraventions outlined above demonstrate CWM’s failure to adhere to Principle 2, ‘A licensee  should act with due skill, care and diligence towards its customers and counterparties.  

The breaches also constitute a failure by CWM to fulfil the Minimum Criteria for Licencing in terms of  the POI Law, Paragraph 1(1)(b) ‘diligence’ and Paragraph 1(1)(g) ‘polices procedures and controls to  comply with any rules, codes, guidance, principles and instructions’. In addition, the same  contraventions represent similar failures under the IMII Law to fulfil the Minimum Criteria for  Licencing with particular regard to, Paragraph 1(1)(b) ‘professional skill appropriate to the nature and  scale of his activities’ and Paragraph 2(a) ‘act in accordance with’,  ‘(i) the Principles of Conduct of  Finance Business’ and ‘(ii) any rules, codes, guidance, principles and instructions issued from time to  time under this law’. 

By their failures to observe high standards of integrity and act with due skill, care and diligence in relation to the matters set out above, Mr Penney and Mr Roxby (until July 2015), failed to ensure CWM  adhered to the Licensee Rules, the Code of Conduct for Authorised Insurance Representatives (until 31  December 2014), the Code of Conduct for Financial Advisors (from 1 January 2015), and Principle 2  of the Principles.  Therefore, CWM failed to fulfil the requirement of the Minimum Criteria for  Licencing in terms of the POI Law Schedule 4, Paragraph 2(1)(b) ‘with professional skill appropriate  to the nature and scale of his activities’ and 2(2)(a) ‘act in accordance with’ the Principles. Under  similar provisions in the IMII Law Schedule 4 Paragraphs 1(1)(b) and 1(2)(a)(i) CWM also failed to  fulfil the Minimum Criteria for Licencing. 

Aggravating Factors 

Other than the complaint from Client X and the complaints of Structured Notes holders, none of the  matters comprising breaches set out above were brought to the attention of the Commission. 

In relation to the advice given by CWM, Mr Penney and Mr Roxby and the failures to document reasons  for recommendations and failures to disclose remuneration, CWM has a poor regulatory history as far  back as the first Commission visit in 2013, and again highlighted by the Commission’s visit of 2016.   

The failure to take legal advice in relation to the nature of the Structured Notes and the consequent  conduct of unlicensed business in selling approximately 200 Structured Notes to clients has resulted, in  some cases, in uninsured losses for clients. 

Mr Penney’s advice to Client X, an elderly client, resulted in a significant tax bill for Client X, as well as significant commission income for CWM.  The commission from restructuring Client X’s insurance bonds generated 15-20% of CWM’s income for 2014. 

In relation to the share sales to Client X, Mr Penney engaged in very deliberate improper conduct,  profiting to the sum of over £100,000. 

Mr Roxby failed to provide any check or challenge to Mr Penney in relation to the failures relating to Client X and this meant that he provided no protection to Client X in relation to very serious failures and contraventions by CWM and Mr Penney. 

Mitigating Factors 

CWM appointed a third party consultant to assist with remediation following the 2016 Visit.  Thereafter,  CWM completed a remediation plan to the satisfaction of the Commission.  The remediation improved  CWM’s compliance with regulatory requirements.   

In relation to the conflicts of interest regarding the sale of shares to Client X, Mr Penney and Mr Roxby  admitted during the Investigation that the conflicts of interest policies at CWM were inadequate and  that they did not manage the conflicts of interest as they were obliged to.  CWM subsequently revised  its conflicts of interest policy and amended its articles to prevent the sale of shares to its clients. 

Mr Roxby did not make any personal gain from the sale of shares to Client X.   

Following the Commission’s letter of July 2015, Mr Roxby appears to have taken into account the  Commission’s comments in his advice to clients. 

CWM, Mr Penney and Mr Roxby co-operated with the investigation.

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”).  

Louvre Fund Services Limited, (the “Licensee” or the “Firm”) 

Mr Kevin Gilligan (“Mr Gilligan”) 

Mr Charles Peter Gervais Tracy (“Mr Tracy”) 

Mr Derek Paul Baudains (“Mr Baudains”) 

Mr Julian Dai Lane (“Mr Lane”)   (together “the Directors”) 

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

• To impose a financial penalty of £77,000 under section 11D of the Financial Services Commission Law on the Licensee;  

• To impose a financial penalty of £52,500 under section 11D of the Financial Services Commission Law on Mr Gilligan; 

• To impose a financial penalty of £31,500 under section 11D of the Financial Services Commission Law on Mr Tracy;  

• To impose a financial penalty of £28,000 under section 11D of the Financial Services Commission Law on Mr Baudains;  

• To impose a financial penalty of £14,000 under section 11D of the Financial Services Commission Law on Mr Lane; 

• To make orders under the Regulatory Laws prohibiting Mr Gilligan from performing the functions of director, controller, partner or manager of a regulated entity under any of the  Regulatory Laws for a period of 6 years and 2 months from the date of this public  statement; 

• To make orders under the Regulatory Laws prohibiting Mr Tracy from performing the  functions of director, controller, partner or manager of a regulated entity under any of the  Regulatory Laws for a period of 3 years and 6 months from the date of this public  statement; 

• To disapply the exemption set out in Section 3(1)(g) of the Fiduciaries Law in respect of  Mr Gilligan and Mr Tracy for periods of 6 years and 2 months; and 3 years and 6 months  respectively from the date of this public statement; and 

• To make this public statement under section 11C of the Financial Services Commission Law. 

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 Law and Schedule 4 of the POI Law. 

BACKGROUND 

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.  

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.  

Mr Gilligan has been a director of the Licensee since August 2008 and Managing Director since January 2011.   

Mr Tracy was a director and the compliance officer of the Licensee between August 2003 and December 2016. 

Mr Baudains has been a director of the Licensee since July 2000. 

Mr Lane has been a director of the Licensee since October 2011 and was the MLRO between February 2012 and March 2017. 

The Commission’s investigation into the Licensee commenced in 2017; and as part of this investigation, Oben Regulatory Limited was appointed as inspectors. 

FINDINGS 

The Commission’s investigation found: 

The Licensee failed to administer certain funds in accordance with the Principal Documents and Information Particulars 

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”).  

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”).   

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. 

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 

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. 

The Commission expected that these appointments should have enabled the Licensee to gain a greater oversight of the scheme it was administering.  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. 

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. 

Therefore, the Licensee was unable to consistently value the assets in accordance with the Principal Documents and Information Particulars. 

Example 2 

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”).  These assets were natural resources of high-value, the specialist trade in which requires careful scrutiny, in particular, regarding the provenance of assets. 

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). 

The Commission’s investigation identified serious compliance failings in respect of Scheme B, and these are described in more detail below.  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. 

The inability to satisfy the provenance of the assets constituted a breach of the Principal Documents. 

The Licensee failed to abide, at times, with contractual and legal obligations 

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 

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. 

Mr Gilligan and Mr Tracy were appointed to the board of directors of both Company C and Company D in January 2013.  

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. 

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. 

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.   

However, the Commission’s investigation identified that the Licensee failed to obtain adequate documentation (i.e. invoices) to confirm the purchase of any assets. 

The Licensee failed to adequately identify and manage conflicts of interests 

The Licensees (Conduct of Business) Rules 2009, 2014, 2015 and 2016 (the “COB Rules”) apply to investment Licensees conducting, amongst other roles, administration. 

Rule 11.1.1 of the COB Rules requires a Licensee to establish, implement and maintain an effective conflicts of interest policy. 

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 

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. 

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.  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. 

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. 

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.   These assets would form the majority of the assets purchased by the scheme. 

As detailed earlier, due to issues with the documentary proof of ownerships, these assets have not, to date, been sold. 

Example 2 

The Commission identified that a number directors (including those of the Licensee) sat on the boards of Company C and Company D.  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. 

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. 

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. 

The Licensee failed to obtain adequate client due diligence and enhanced due diligence in relation to its book of business 

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. 

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.

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. 

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. 

Principle 3 of the CSP Code stipulates that a fiduciary licensee must comply with the Regulations. 

Example 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. 

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. 

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. 

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. 

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.” 

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: 

• Person B was not the same person as the person open source research had been conducted on; and 

• No documentary proof was obtained to verify Person B’s expertise in the specialist trade area. 

Example 2 

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. 

The Licensee failed, at times, to effectively monitor business relationships and transactions 

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 

The Licensee failed to monitor Scheme A effectively as they were, at times: 

• Unaware when assets had been purchased; 

• Did not obtain satisfactory evidence of the purchase of all assets; and 

• Placed an over reliance on verbal reporting from non-locally based board directors. 

Example 2 

The Licensee failed to monitor Company C and Company D effectively as they: 

• Released funds to an overseas company which was not listed as a counter-party on any agreement; 

• Failed to obtain any invoices for the purchase of assets; and 

• Placed an over reliance on verbal reporting from non-locally based board directors. 

Example 3 

The Licensee failed to monitor Scheme B effectively as they: 

• 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 

• Did not adequately determine the provenance of the assets mentioned above. 

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. 

The Licensee failed, at times, to ensure proper books and records were kept and that these were readily retrievable 

Regulation 14 stipulates that a financial service business must keep a transaction document and any due diligence information. 

Principles 3 and 6 of the CSP Code stipulate that a Licensee should keep appropriate records and comply with the Regulations and the Rules. 

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   

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. 

The Licensee failed, at times, to exercise effective policies, procedures and controls for forestalling, preventing and detecting money laundering and terrorist financing 

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. 

Principle 3 of the CSP Code stipulates that a fiduciary licensee must comply with the Regulations. 

Example 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. 

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.    

The Directors failed, at times, to adhere to a director’s fiduciary duty to act in the best interest of a company 

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 

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. 

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 

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. 

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. 

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.   

For example, Mr Gilligan: 

• Failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence; 

• Did not ensure that assets purchased in relation to Scheme A had satisfactory proof of ownership; 

• 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; 

• Did not sufficiently challenge the preference for verbal reporting regarding Scheme A and Company C and Company D; 

• Permitted monies linked to Company C and Company D to be transferred to a company with no contractual links; 

• Permitted purchases of assets in relation to Company C and Company D without obtaining sufficient proof, such as invoices; and 

• 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 

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. 

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. 

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.   

For example, Mr Tracy: 

• Failed to ensure that the policies and procedures of the Licensee were adequate, particularly with regards to client due diligence; 

• Did not ensure that assets purchased in relation to Scheme A had satisfactory proof of  ownership; 

• 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; 

• Did not sufficiently challenge the preference for verbal reporting regarding Scheme A and Company C and Company D; 

• 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 

• 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 

Mr Baudains, as well as being a director of the Licensee, was a director, at various times, on the boards of Scheme B. 

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. 

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.   

For example, Mr Baudains: