The GFSC has fined 2 Directors [one who was a MLRO] £58,500.00 for AML FAILS

On 25 April 2023, the Guernsey Financial Services Commission (the “GFSC”) issued regulator fines [£58,500.00] against  Mr Trevor James Kelham (“Mr Kelham”) / Ms Sarah Jayne Sarre (“Ms Sarre”)

1. £45,000 on Mr Kelham;
2. £13,500 on Ms Sarre;

The GFSC also took action on Mr Kelham as follows:-

3. 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;
4. In relation to Mr Kelham, to disapply Section 3(1)(g) exemption under the Fiduciaries Law for a period of 4 years;

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.
• Head of Compliance from 1 September 2013 to 21 August 2016.
• Money Laundering Reporting Officer (“MLRO”) from 1 September 2013 to 1 April 2015.
• (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:

• Compliance at the Licensee required strengthening; and
• 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 regulatory 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.

Read here

https://www.gfsc.gg/news/mr-trevor-james-kelham-and-ms-sarah-jayne-sarre