LGL Trustees Ltd, fined £550k [+50k] - what is known and what the Jersey court said about what happened

1. On Friday, 19 February 2021, the Royal Court imposed the following fine and costs for failing to comply with the requirements of the Money Laundering (Jersey) Order 2008
   • A fine of £550,000 on LGL Trustees Limited (LGL), and
   • Awarded costs of £50,000.  
2. LGL had pleaded guilty on 4 December 2020 to two related offences under
   • Article 37(4) of the Proceeds of Crime (Jersey) Law 1999 for breaches of the Money Laundering Order.
3. The offence contained within Count 1 concerned
   • A failure by LGL to recognise and respond to the risk that
     1. A structure set up and administered in Jersey might be used to embezzle funds from the public purse of an African country to benefit its rulers. 
   • The offence contained within Count 2 relates to
     1. LGL's failure to correctly identify and verify one of its customers' controllers, namely the National Bank of Angola's board members.
        • Onboarding = Having failed to obtain the information at the outset of the business relationship as they were required to,
        • +6 years  = they then failed to remedy this for another six years, which was a further and separate breach of the ongoing monitoring requirements of the Money Laundering Order.  
     2. https://www.gov.je/news/2021/pages/TrustCompanyFined.aspx

SUMMARY OF FACTS IS BELOW

• And to learn more about the case, the Bailiwick express reported on the case https://www.bailiwickexpress.com/jsy/news/focus-corruption-conviction-and-red-flags/#.YC-0ouj7RyE
• Also presented below are the key facts

Background

1. The case involved two breaches of the 2008 Money Laundering Order, which LGL was required to comply with, in respect of a business the trust company took on and maintained from 2010 to 2016, which involved using a limited partnership structure to invest public money from Angola into real estate around the world.
2. In 2010, when LGL first took on the business relationship, Transparency International had rated Angola 168th out of 172 countries in the world in terms of corruption perception.
3. Its former president, Jose Eduardo dos Santos, left office in 2017 after nearly 40 years, and was then condemned by his successor for enriching himself, his family and his associates by plundering state resources.
4. His relatives have since been removed from positions of power and influence, but at the time of the events covered by the case, they were widely rumoured to be profiting handsomely from their positions of power.

LGLs compliance officer was ignored

1. One of LGL's Compliance Officers, who has since left the company, said:-
2. It seemed that "nothing would dissuade the directors from accepting and maintaining this business, despite the negative publicity".
3. In August 2011,
   • She noted that LGL had still not found a Jersey bank to open an account and recommended terminating the relationship.
   • Owen Lynch disagreed with her, and the relationship continued.

Introduction -

5. In April 2010, Carey Olsen's Jersey office contacted LGL to establish a Jersey limited partnership for the Angolan state.
6. A Jersey limited partnership is a type of partnership used for investment purposes, with at least one General Partner - the Manager, who holds and controls the LP's assets - and at least one Limited Partner – a passive investor - both of which can be companies.
7. Three entities were set up in the island in late 2010, early 2011 and administered from then on by LGL:
   • A Jersey limited partnership called Quantum Plaza Limited Partnership (QPLP),
     1. which was at the heart of the Angolan investment structure
   • A Jersey company which was the Limited Partner in QPLP, called Quantum Plaza Limited Partner Limited (QPLPL) –
     1. This was owned 100% by the Angolan National Bank (BNA) and held 98% of the equity in QPLP
   • A Jersey company to act as General Partner of QPLP, called Quantum Global Real Estate (Jersey) Limited (QGRE) –
     1. this belonged to Quantum Global Real Estate AG, which belonged to Jean-Claude Bastos de Morais and his colleagues, and owned 2% of the equity in QPLP.
   • In January 2012,
     1. QPLP received $425m for real estate investment purposes plus $65m to be separately managed by Quantum Global as cash.
     2. QGRE received $10m as its 2% success fee.
   • From July that year, funds were invested via the underlying Plaza structure in substantial properties on:
     1. Savile Row in London ($308m),
     2. Fifth Avenue in New York ($59m),
     3. Atrium Hotel in Munich ($63m) and
     4. Tour Blanche in Paris ($161m). 

Meet Jean-Claude Bastos de Morais & Jose Filomeno ‘Zenu’ de Sousa dos Santos

1. The Limited Partnership was managed by an intermediary, a Swiss-Angolan national called Jean-Claude Bastos de Morais.
   • Bastos ran, and largely owned, a Swiss-based investment business called Quantum Global, which included companies called Quantum Global Real Estate and Quantum Global Wealth Management, as well as various other companies with Quantum Global in the title.
   • Bastos had strong Angolan political connections:
2. In 2008 he had set up Angola's first private investment bank, Banco Kwanza Invest, with the Angolan president’s son, Jose Filomeno ‘Zenu’ de Sousa dos Santos.
3. According to documents held by LGL, in 2009,
   • The Angolan Council of Ministers had commissioned Quantum Global Investment to negotiate the purchase of real estate investments outside Angola, into which the state could invest.
   • The funds - $1.6bn from the Angolan Federal Reserve - had been transferred to an HSBC account and were to be invested by the BNA. The scheme was to be a precursor for the establishment of a Sovereign Wealth Fund for Angola.

2011 - Bastos has a criminal conviction

1. Bastos was convicted by a Swiss court of "repeated qualified criminal mismanagement" in July 2011.
   • Bastos's offences had been committed 10 years earlier, in an unrelated matter.
   • As a Director, he had approved payments from an insolvent company to companies including one in which he had an interest.
2. There is no record of LGL questioning why Bastos had not previously disclosed the criminal proceedings.
3. LGL didn’t inform the commission of
   • Bastos' conviction either and continued to do business with him and Quantum Global. It didn't even obtain a copy of the judgment to establish the real nature of the offence.

2018 - Bastos and Zenu

1. Bastos and Zenu were later involved in the creation of Sovereign Wealth Fund for Angola, FSDEA, which would invest $5bn of Angola's oil revenue.
2. In 2018, both were arrested on suspicion of being involved in a fraudulent skimming operation in relation to the FSDEA, of which dos Santos was Chairman and from which Quantum Global received similarly colossal fees.
3. In early 2019,
   • Bastos reached a settlement with Angolan prosecutors under which Quantum Global entities transferred control of Limited Partnership bank accounts holding $2 billion to the FSDEA, and other assets, while no criminal charges were brought against him.
4. In August 2020,
5. Zenu was convicted of fraud in relation to $500m transferred from the BNA to an account in the UK and sentenced to five years in prison in relation to a scheme LGL had no connection with.

Timelines

1. The JFSC gave its consent on 16 September 2010
2. In December 2011, LGL requested to establish a new LP,
   • Plaza Global Real Estate Partners LP, owned by QPLP. QGRE, the Swiss parent of QGREJL was to act as investment adviser.
3. In August 2013, when LGL sought to set up two new Jersey LPs for the two new Angolan investment funds, the JFSC expressed reservations over
   • Angola’s corrupt government and the involvement of ‘Politically Exposed Persons’ –
   • Public officials deemed as presenting a higher risk for potential involvement in corruption or bribery.
4. October 2013,  Two months later, LGL applied for consent from the JFSC to set up further Jersey entities linked to the FSDEA.
   • A few days later, the JFSC became aware of Bastos’s conviction and its Director General, John Harris, told LGL he would have expected LGL to notify the JFSC or Registry when they found out about the conviction 10 months earlier.
     • LGL said they had made an “inadvertent error” when completing an application form and
     • Ticking a box that said none of the beneficial owners had been concerned in the management of a company which had been subject to an insolvent liquidation or the subject of a judicial enquiry.
5. In January 2014, the JFSC told LGL that they wouldn't give consent to the new entities because
   • of the risks associated with Bastos in such a key role and
   • Angola's high levels of corruption and low regulatory standards.
6. In March 2014, the JFSC raised further concerns about the control of the account which held funds used for the Quantum Plaza investments.
   • It should have been in QGREJL’s name but another company, Quantum Global Investment Management, which managed the cash assets in the account, had the ability to remove funds without QGREJL’s approval.
7. In 2015,
   • The BNA decided to convert its interest in the QPLP into shares, with a view to transferring those shares to the newly established sovereign wealth fund.
8. In January 2016,
   • The JFSC undertook a supervision visit to LGL and studied the Quantum Global relationship in detail.
   • Various concerns came to light,
     • One of which was the lack of due diligence for the members of the BNA board, which LGL admitted was an error.
9. Shortly afterwards, LGL began plans to remove the structure from Jersey.

THE FEE STRUCTURE

1. Under agreements with the BNA, Quantum Global was to receive
   • “Very substantial fees” for securing the investments, the majority of which would have gone to Bastos himself - assuming $1.6bn had been invested, they would have amounted to tens of millions of dollars annually.
   • While a fee and a success fee were mentioned to the JFSC, the copy of the Limited Partnership Agreement, which mentioned their value, was only sent three months after it had given its consent.
2. The biggest fee of all was a management fee.
   • As General Partner, QGREJL was entitled to a percentage of the value of assets under management, regardless of performance.
   • The fee started at 2.5% per annum, dropping to 2% after two years.
3. However, the real estate investments were not an actively managed fund and Bastos would therefore be receiving these millions for doing “virtually nothing”, the Court heard
   • “No one at LGL seems to have asked:
   • Could Angola really not have found a means of investing in real estate overseas that did not involve the guaranteed payment of up to $10m a year, regardless of performance, to a Swiss financier with personal connections to the President?” the Solicitor General said.
4. The Court heard there was an obvious risk the whole scheme was structured to provide
   • “For corrupt payments to be made, and for them to be moved around secretly using offshore companies to hide their origin”.
5. From 2012 onwards,
   • Management fees were paid from QPLP to QGREJL and corresponding dividends paid out from QGREJL to Bastos's vehicle, Blue Mountain, or later to the replacement vehicle QGRE Holdings.
6. In total, LGL’s records show
   • $29.9m paid out in dividends from QGREJL to Blue Mountain between November 2012 and September 2016 –
   • Meaning that, on average, some $7.5m per year left the Jersey structure.

HSBC ASK QUESTIONS

7. In May 2011, HSBC’s UK compliance department raised concerns about Bastos’s involvement after coming across an article in German and Swiss news alleging
   • That leading management figures from the Quantum structures had "a history of corruption and could now be involved in 'skimming' money out of Angola", largely due to Bastos being a close friend and business associate of the President's son.
   • LGL said it was “well aware” of the business relationships of all connected parties when it did its due diligence and that there was no proof to the allegations.
   • HSBC also raised the issue that Bastos could withdraw money from the corporate structure and divert it back to senior figures in Angola.
8. LGL replied they
   • Had “no control” over this element of the structure but that they were satisfied that the asset management fee was at
     • “A commercial rate” and
     • That “any ‘leakage’ at a higher level would not disadvantage the limited partnership structure”.
   • “The casual or euphemistic reference to the potential for corrupt kickbacks as ‘leakage’ speaks volumes as to the quality of [anti-money laundering] risk awareness at LGL,” the Solicitor General said.
9. Owen Lynch met Bastos and said
   • He had a “satisfactory account” of Bastos’s relationship with people in the Angolan government, and a denial of the allegations.
   • Quantum Global had told him the press articles were in the hands of their lawyers, and some had been removed from the internet.

The view of the Jersey court and the JFSC – NO SARS – NO JFSC NOTIFICATION

1. LGL neither informed the JFSC of
   • The skimming allegations or
   • Of HSBC's concerns
   • Nor did they make a 'Suspicious Activity Report'.
2. The Solicitor General noted.
   • "It simply carried on with the business, apparently satisfied by Bastos's denials,"
3. Jersey's Solicitor General told the Royal Court that,
   • While this DIDN'T PROVE that the Quantum Plaza structure was "a vehicle for corrupt payments",
   • It supports the validity of the concerns raised by HSBC and others as early as 2011,
   • Which LGL was "completely wrong" to dismiss at the time.
4. In September 2010,
   • LGL requested a meeting with its regulator, the Jersey Financial Services Commission, given the "obvious risk" associated with Angola before establishing the Jersey structure.
5. Owen Lynch, who was Managing Director at the time, told the commission
   • That LGL was comfortable with the business, and it was for Jersey to decide if they wanted it or not.
6. The JFSC noted the "interesting" relationship between Bastos and the Angolan president's son, but LGL said
   • The legitimacy of the source of funds had been demonstrated and
   • That no Angolans would be managing the assets.
7. The Solicitor General said that, while the JFSC had a duty to
   • "Preserve and enhance the reputation and integrity of Jersey in financial matters",
   • It is not its job to conduct risk assessments for businesses and
   • That its consent does not mean financial services do not have to carry out the anti-money laundering procedures required by the law.

Source

• https://www.gov.je/news/2021/pages/TrustCompanyFined.aspx
• https://www.bailiwickexpress.com/jsy/news/focus-corruption-conviction-and-red-flags/#.YC-0ouj7RyE