Suspicious [SAR/STR] and dealing with 'no consent' to unfreeze account – a recent Guernsey court decision

The GUERNSEY Royal Court recently found that assets in bank accounts were not the proceeds of crime, allowing the bank to transfer them to the customers.

INTRODUCTION

1. It is an offence for a business to deal with property where it knows or suspects that the property represents the proceeds of criminal conduct.
2. If a business obtains Guernsey's Financial Intelligence Unit (FIU)'s consent to the proposed act, this provides a statutory defence to the action in question.
3. If the FIU does not provide consent, the business cannot deal with the assets without the risk of committing a criminal offence and is often unable to disclose the reasons to the customer at the risk of committing 'tipping off'.

NO CONSENT

4. In a no-consent situation, the customer may bring a 'private law action' against the bank, seeking a declaration from the Court that the assets are not the proceeds of a crime.

L AND M AND N AND MRS B V CREDIT SUISSE AG, (GUERNSEY BRANCH) [2023] GRC026

5. In L and M and N and Mrs B v Credit Suisse AG, (Guernsey Branch) [2023] GRC026,
   • https://www.guernseylegalresources.gg/CHttpHandler.ashx?documentid=84507
6. Lieutenant-Bailiff Marshall KC granted this declaration and found that the bank should transfer the funds and investments in the accounts to, or to the order of, the customers.

THIS JUDGEMENT IS SIMILAR TO

7. BD Limited v Investec Bank (Channel Island) Limited [2022] GRC103, the Bailiff found that the bank should comply with the customer's instruction to transfer the funds away and close the account.

FACTS

8. The Plaintiffs were the three adult children and the widow of Mr B.
9. The children were the heirs to the estate of Mr B and held accounts with the Defendant into which monies coming from his estate were paid.
10. The accounts were effectively 'frozen' after the bank developed a suspicion that they were the proceeds of criminal conduct.

THE SAR AND THE SINGLE CRIMINALITY TEST

11. The concern centred around
    • The alleged bribery by Company X of a state-owned natural resources company to obtain preferential bids for contracts
    • And the suggestion that the proceeds of Company X ultimately made their way into the accounts.
12. A SAR was made, and the FIU refused consent for the bank to deal with the accounts.
13. The underlying action upon which the suspicion was based was not a criminal but instead a civil claim.
14. The civil claim did not prevent any proceeds from being the subject of money laundering offences in Guernsey because the test for such violations is that the relevant activity would be criminal in Guernsey

DECISION

15. Lieutenant-Bailiff Marshall reviewed the evidence provided by the Plaintiffs as to the source of the funds – including expert evidence from chartered accountants as to the impact that alleged unlawful profits would have had on a Company X's value – and concluded that she was satisfied that they were not the proceeds of criminal conduct.
16. Her primary basis for reaching this conclusion was that even if any proceeds of criminal conduct enriched Company X at the time, there was no sufficient (or even any) connection of identity between the monies that were paid into the bank accounts in question and the original proceeds of the criminal conduct.
17. This was due to:
    • The size of the company's enterprise as against any proceeds
    • The length of time elapsed since the alleged proceeds of criminal conduct arose (around ten years), and
    • The way the funds would have been used and mixed into the funds of an enormous, active, worldwide commodity trading company.
18. In essence, as a matter of 'common sense impression', it was all too far removed and too remote. Any link had simply become too distant.

Postscript

Lieutenant-Bailiff Marshall KC added a "postscript" of the then Deputy Bailiff McMahon in the first Liang case (Royal Court Judgment 20/2018),   

19. The then Deputy Bailiff (now the Bailiff) there drew attention to the plight of persons in the position of Mrs Liang there, and of the Plaintiffs here, when their funds or assets are informally "frozen" by the effect of an SAR made by their bank or trust service provider of which they may not even be aware – and made, almost inevitably, on
    • A "play it safe" basis by such institution, in its own regulatory and commercial interests – which then becomes coupled with a subsequent "no consent" (or, in practical effect, "do not pay") instruction issued by the FIU, again probably on a "play it safe" basis.
20. All this can be brought about by the institution's getting wind of actual or alleged criminal activity by some other person, of which, or even possibly of whom, the customer may be totally unaware, and of which activity they regard themselves as perfectly innocent.
21. The effect of being caught up in this situation is now that the customer is required to take proceedings such as the present to gain any access to his or her funds or assets, with the burden of proof being on him or her, to satisfy the Court of the "untainted" provenance of the funds in their account.
22. This is in a situation where they have very possibly not kept or preserved relevant records (not being aware that they might be required) possibly from many years previously, and they do not have the powers of law enforcement to compel production of relevant materials.
23. They may therefore even be unable to produce sufficient evidence actually to satisfy the Court, on balance of probability that their funds are not the proceeds of crime, as required
24. Of course, in such a private law action, the Court will, in applying the burden and standard of proof and deciding whether the plaintiff has discharged it, pay appropriate regard to the likely or apparent difficulties which such a plaintiff may be facing, in endeavouring to gather evidence from persons over which he or she has no control, who may have no incentive to assist, and which evidence may well, in any event have been lost with the passage of time and the destruction or loss of records.
25. The Court may well be sympathetic, therefore, to the burden placed on the plaintiff to surmount it. However, and as this case illustrates, any such sympathy does not relieve such a plaintiff of what can potentially be a hugely expensive evidence gathering exercise,
26. This has been a high-value case, but the costs incurred by the Plaintiffs would appear to have been considerable.
27. The prospect of a customer's possibly being caught up in such a predicament surely cannot have any advantage for Guernsey's finance industry; it can only be a potential deterrent to doing business here, even if only a mild one, and one wonders just how necessary it is for the appropriate balance between the free flow of trade and appropriate law enforcement mechanisms to combat financial crime and moneylaundering.
28. The system which has been adopted elsewhere, which puts a time limit on the efficacy of such a "do not pay" instruction, if this is challenged by the customer, requiring the relevant authority to take steps within a certain time to justify its prohibition or allow it to lapse, would seem to provide a fair and acceptable balance which apparently works well in other jurisdictions.
29. Whilst it is of course the case that the merits of adopting such a system are a political decision, if, as the Court of Appeal was apparently inclined to allow in Garnet, (above) 12 years ago, the problem were lack of investigative or communications resources, then it may well be that the situation has changed in the interim. In any event, consideration could perhaps be given to providing a longer time limit – say three months – for the authority to elect (or not) to take action.
30. On any basis, though, I would respectfully endorse the view expressed by DB McMahon in Liang that this point is worthy of re-consideration by politicians, with a view to possible amendment of the Law in the interests of the Guernsey finance industry and its responsible customers.

Source

https://www.guernseylegalresources.gg/CHttpHandler.ashx?documentid=84507