With increasing regulation and tougher penalties, KYC (Know Your Client) has been central to financial services industry compliance standards for many years. However, with several recent high profile cases in the media, once again, this is a hot topic of conversation.
The introduction in Jersey of the Proceeds of Crime (Jersey) Law 1999 was designed to provide a comprehensive code to protect and enhance Jersey’s reputation as a transparent and well-regulated offshore centre. The legislation deals with confiscation orders, money laundering, handling the proceeds of crime, tipping off as well as setting up procedures to ‘forestall and prevent money laundering’. These latter procedures apply to those carrying on a financial services business.
A financial services business is defined to include banks, trustees, bureaux de change and those involved in company formation and administration as well as credit references. Notwithstanding the detailed legislative provisions and the regular checks carried out on financial services businesses by the Jersey Financial Services Commission ("JFSC"), there have been few prosecutions brought.
In the case of Attorney General v Caversham Fiduciary Services Limited, Caversham Trustees Limited and Bell  JRC 165, the Royal Court sat to consider the sentence to be imposed following guilty pleas to charges of failing to comply with the requirements of Article 2(1)(a) of the Money Laundering (Jersey) Order 1999 ("the Money Laundering Order") contrary to Article 37(4) of the Proceeds of Crime (Jersey) Law 1999.
Article 2(1)(a) of the Money Laundering Order provides that:
(2) No person shall in the course of any financial services business carried on by him form a business relationship, or carry out a one-off transaction, with or for another person unless, (a) the person carrying on the financial services business maintains the following procedures:
- Identification procedures
- Record keeping procedures
- Internal reporting procedures
- Such other procedures of internal control and communications as may be appropriate for the purposes of forestalling and preventing money laundering.
The charges arose out of an incident in 2002 when one of the trust company’s directors was approached to set up a discretionary trust by a solicitor in England. He said that a Mr. Stevens had been appointed as attorney for a Mr. Lee. The latter, who was a non-UK resident, and who had recently received funds from the sale of a sauna business, wished to hold them through an offshore trust. The solicitor sent through documents to identify the attorney, but not the ultimate client.
No Connection with the Trust
A few days later, £850,000 was sent from the solicitor’s account to the trust company. Two days later, the solicitor requested the trustee to pay £825,000 to four entities, none of which had any connection to the trust. The trust was established, with the attorney as the sole beneficiary, and the next working day, the payments out were made. This failure to adhere to ‘know your client’ procedures came to light during a routine inspection by the JFSC nearly two years later.
At trial, the defendants originally submitted that there was no case to answer. They argued that the purpose of the particular provisions of the Money Laundering Order was to prevent a systematic failure in the maintenance of procedures. It was not meant to apply to a one-off failure as this appeared to be. However, the Court found that maintenance was an absolute duty and one breach alone was sufficient for the purposes of a criminal trial. The defendants then entered guilty pleas and were sentenced. They appealed on a point of law, and although the detailed judgment is not yet available, it is known that the appeal did not succeed and it is confirmed that even a single breach may constitute an offence.
At the sentencing it was accepted that the director had been negligent rather than conniving in any way. By way of mitigation, it was pleaded that the reputation of the defendants had suffered considerably (both individual and the entities) because of the prosecution. The director had left the trust company and had taken up a much lower paid position. All the defendants had been co-operative with both the police and the JFSC.
The Crown stressed the substantial amount of money involved, the short period in which the whole transaction occurred and the lack of internal control or communication. There was no laundering of any proceeds of crime in this case, but the Crown said that if there had been, it would have been calling for a term of imprisonment.
Taking these factors into account, the Court found as follows:
"Jersey’s financial reputation is capable of being destroyed in an instant. If actual money laundering had taken place here, the sentence of this Court may well have been higher. This case must serve as a warning to all financial institutions."
The Court fined the trust company and its associated company £65,000, the director £35,000 and ordered the defendants to pay the prosecution costs.
Shortly after the Court of Appeal judgment (6 February 2006) the JFSC wrote to all regulated entities reminding them of the necessity of maintaining adequate procedures at all times, and the possibility of a one-off breach leading to criminal liability. Although it was stressed that a decision to prosecute would ultimately be for the Attorney General, the JFSC wished to explain that not every breach would be so referred. Factors in assessing the gravity of the breach would include whether there was a threat to the client or the reputation of the island, whether it was deliberate or accidental, whether those involved co-operated, and whether there was a poor compliance history.
This case and the JFSC correspondence shows that it is not just those actually involved in money laundering who may be prosecuted, but also those who have failed to get to know their client.