Michael Adkins sees light at the end of the tunnel for those
affected by an 'informal freeze' following disclosure to
the financial crime authorities, when the Royal Court of Guernsey
quashed a refusal to release funds after an 8 year restraint.
Running an offshore financial services business can be a tough
job sometimes. One of the hardest situations, from a regulatory
risk perspective, is where you have had to make a disclosure to the
financial crime authorities in relation to a client. Often the
customer will be relatively wealthy and therefore an important
client to the business. The compliance officer will have already
had a few tense internal discussions emphasising the business'
obligations to report and the risk (which can be personal if they
are also the relevant reporting officer) if it does not.
Then the client wants to do something with their money. This
starts a whole new round of internal discussions and almost
invariably a request to the financial crime authorities for consent
to engage in the relevant transactions. When the authorities refuse
consent, the business is truly between a rock and a hard place.
They cannot complete the transaction, for fear of potentially
committing a criminal offence and in most circumstances they cannot
say why not, for fear of committing a tipping off offence. However
the client, somewhat understandably, is putting on an enormous
amount of pressure and is threatening a breach of contract claim to
which the business (in Guernsey at least) does not have a statutory
defence to. Now comes the worst bit. This impossible situation, in
Guernsey and Jersey, can go on indefinitely.
One of the key differences between the AML regime in the UK and
that in force in each of the Channel Islands is that there is no
legislative time limit placed on the financial authorities in which
they are required to decide to make a formal (and eventually
public) application for restraint of the suspect assets. In the UK,
the SFO has up to 35 days in which to make a formal restraining
application. If no application is made, the business can proceed to
implement the transaction without fear of criminal prosecution for
a proceeds of crime offence. This situation has been the subject of
adverse comment in a number of matters that Collas Crill has been
recently associated with - foreign clients and lawyers are simply
not able to understand how a system creating such an 'informal
freeze' can be enacted and allowed to endure.
It seems though, there is a light at the end of the tunnel,
thanks to the Royal Court of Guernsey.
In Garnet Investments v BNP Paribas, the Court considered a fact
situation broadly similar, albeit substantially more convoluted, to
that described above. For various reasons, it transpired that the
client's funds were restrained for a period of approximately 8
years, with the financial authorities continuing to refuse to
provide the finance business with consent to engage in the proposed
transactions during this period. This was even after a civil
freezing order over the funds, obtained by the alleged victim (a
foreign government), was discharged.
Eventually, the client (Garnet) sought release of the funds
through the mechanism of judicial review. In considering the
client's application, which was made on several grounds, the
Court found that the authorities' decision in refusing consent
was both unreasonable, given there were no known investigations
touching on the Garnet funds, and disproportionate given the length
of time that Garnet's funds had been informally restrained. On
that basis the Court quashed the decision, and presumably Garnet
now has its funds at its disposal (although we understand the
authorities have sought to appeal). Interestingly, the Court also
found that in those particular circumstances, Garnet had a right to
obtain reasons from the authorities as to why consent was
This was an action brought by the client, not the business and
in most cases it is difficult to see where a business might be
sufficiently motivated to bring their own judicial review
proceedings. However it is important to be aware that the option is
there, particularly where the interests of the business and the
client are aligned, which might arise in certain trust situations.
More broadly, the Court's criticism of the informal freeze
situation (which was not without some sympathy for the authorities
who are charged with having to apply and administer this law),
should provide some impetus for legislative reform. Let us hope we
do not have to wait 8 years like Garnet did.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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