Jersey enforcement (LGL & SGHAMBROS) - x5 critical learning points for Boards and Compliance Professionals

In February 2021, we saw, in Jersey, two significant legal and regulatory enforcement actions where the penalty and fine in question were substantial (a total of £719,451.21 in the case of SGKH and £550,000 plus £50,000 costs for LGL). Collectively these cases signal a shift to more legal and regulatory actions for procedural failings. These cases:

1. Demonstrate the long-tail risk that often arises in regulatory matters.  
2. The increasing drive within the JFSC and prosecuting authorities to demonstrate their supervisory effectiveness, coupled with a more significant number of regulatory visits, and
3. The primary focus for regulated entities should be ensuring they are adequately prepared for regulatory inspection to help them deal with issues arising.

The history in each case dates back several years:

1. In the case of SGKH, the JFSC's concerns appear to have first arisen in 2017 concerning resourcing of the compliance function; and
2. In LGL, the business's take-on dated back to 2010, and the JFSC started having concerns in late 2013.
3. And In both cases, the JFSC undertook on-site examination visits that identified further issues, and the matters both ultimately escalated to the conclusions set out above.

In consideration of the above, there are x5 critical learning points; these are as follows:-

Evidence

1. The primary focus must always be on ensuring your business operates within the law and regulation.
2. However, you cannot just do it:
   1. You have to evidence you are doing it.
3. In the SGKH civil penalty statement,
   1. The JFSC criticises the lack of detail in
      • Board minutes on crucial business documents and consideration and progress of risk issues flagged. Documents such as:-
        • The Compliance Monitoring Plan and
        • AML/CFT Business Risk Assessment.
      • The JFSC concludes the SGKH entities were unable to demonstrate adequate monitoring and control.
   2. Similarly, in the LGL case, the Court found
      • A lack of evidence of consideration of some critical points (see further below).
   3. There is a balancing act to perform – because
      • The JFSC also criticise specific SGKH compliance reports as too detailed.

• Too much detail can result in a lack of focus and can contain unhelpful elements.
• However, ensuring that you can point to evidence of proper discussion, conclusion and progress on regulatory risks is paramount.

Cumulative effect of risks and red flags

1. What is expected
   • The AML/CFT framework in Jersey is designed to ensure that Jersey is not used in the conduct of financial crime.
   • The 'risk-based approach' is intended to ensure that areas of concern are spotted and addressed.
2. In the LGL prosecution,
   • It is clear that LGL appreciated the business's high-risk nature and took several steps to mitigate those risks.
   • However, the Court concluded that multiple 'red flags' were either dismissed without sufficient justification or not spotted at all.
   • The red flags range from direct questions such as whether the funds' investment was authorised and lawful to more rhetorical questions such as why the fees were so high for relatively little work.
3. It is clear from the judgment in the LGL case that
   • Comfort should not be derived from the fact that other service providers, and even the regulator, are also aware of certain red flags.
4. The onus is on each regulated business to ensure it has
   • Identified the red flags,
   • Considered the cumulative effect,
   • Addressed them and
   • Documented that process.

Resourcing

1. The factual background to the SGKH civil penalty concerned compliance resourcing.
2. It is a requirement of the regulatory Codes that an effective compliance function is in place. The JFSC pointed to many instances in which it considered the compliance function
   • To be inadequately resourced,
   • Demonstrated by a lack of progress on key aspects due to resourcing,
   • Too many key person roles being held by compliance personnel,
   • Considerable overtime hours in the compliance team and
   • Resource concerns being raised with the board (though not adequately addressed).
3. It is also clear that resourcing is broader than simply demonstrating sufficient resources and compliance projects' progression.
4. There is also the need to ensure compliance has the appropriate voice and authority within an organisation. Sufficient attention and focus are given to compliance and risk matters by the board. In the LGL case,
   • The Court noted that recommendations from the compliance function had been overridden, seemingly favouring commercial interests.
   • There is a clear need to ensure that points raised by compliance are adequately considered, acted upon and evidenced.

Remediation

1. A key feature of all the JFSC's civil penalty public statements issued to date has been a lack of adequate remediation. It is a feature of both cases that issues were identified, either internally or by the JFSC, and were not adequately addressed.
2. The remediation process draws together the other topics discussed in this note – identify the issue, apply appropriate resources to it, plan what to do about it, and evidence the entire process.
3. If a business sees remediation as a race of getting to sign-off, there is likely to be a negative outcome. A careful and planned remediation and evidence of proper completion are essential, as is communicating that process to the regulator and getting buy-in.

Co-operation and Notification

1. In both cases, the regulated businesses co-operated through the enforcement process and received credit for doing so.
2. However, there were also earlier instances of
   1. Failure to notify the JFSC of relevant matters and
   2. Informing the JFSC, an issue had been remediated, which was not sustainable (in the JFSC's view, at least).
3. The duty of candour to the regulator is clearly of paramount importance and must be respected. It is, however, equally important to ensure correspondence is adequately considered and demonstrates a plan to address the issues identified appropriately.

The key facts

1. Firstly, the latest (3^rd) civil penalty issued by the Jersey Financial Services Commission (the JFSC) against entities in the SG Kleinwort Hambros group (SGKH). On 12 February 2021, the JFSC decided to impose the civil financial penalties identified below, according to the Financial Services Commission (Financial Penalties) Order 2015: £510,599.67 to SGKH Bank; £155,476.54 to SGKH Trust; and £53,375.00 to SGKH Corporate.
   1. https://www.jerseyfsc.org/news-and-events/sgkh-entities/
2. Secondly, LGL Trustees Limited (LGL) was prosecuted for two breaches of the Proceeds of Crime (Jersey) Law 1999 (the PoCL). Article 37(1) of the Proceeds of Crime Law provides that the Chief Minister shall by order prescribe measures to be taken by persons who carry on financial services business to prevent and detect money laundering.  Under Article 37(4), if a person carrying on a financial services business contravenes or fails to comply with the requirement that is contained in any order so made, the person shall be guilty of an offence.  Under Article 37(7), if that person is a body corporate, it shall be liable to an unlimited fine.  In this case, Defendant ("LGL") admitted that it failed to comply with the requirements of Article 11(1)(f) of the Money Laundering (Jersey) Order 2008 ("the Money Laundering Order") (Count 1) and Article 13(1)(a) and (b) of the Money Laundering Order (Count 2)
   • 19 February 2021 – sentencing - https://www.jerseylaw.je/judgments/unreported/Pages/[2021]JRC053.asp
   • 26 February 2021 - Sentencing - reasons. - https://www.jerseylaw.je/judgments/unreported/Pages/[2021]JRC058.aspx

Sources 

• https://www.mourant.com/file-library/media---2021/regulatory-enforcement.pdf
• https://www.jerseyfsc.org/news-and-events/sgkh-entities/
• https://www.jerseylaw.je/judgments/unreported/Pages/[2021]JRC053.aspx
• https://www.jerseylaw.je/judgments/unreported/Pages/[2021]JRC058.aspx