Jersey: Suspicious Activity - The Dilemma Continues

Last Updated: 8 December 2008
Article by Fraser Robertson

Issues arising from the filing of Suspicious Activity Reports ("SARs") under the Proceeds of Crime (Jersey) Law 1999 ("the 1999 Law") simply will not go away, and the Royal Court (in Gichuru v. Walbrook [2008] JRC 068) has again recently sought to provide yet further clarity in this area.

In Gichuru the nature of the problem arising once an SAR has been filed by a financial institution such as a bank, was again summarised. If the police consent to the bank complying with a customer's instructions to pay out money from the customer's account then the bank would of course be protected. But if the police do not consent the bank is faced with a dilemma. On the one hand its customer is demanding that payment is made in accordance with the mandate. On the other hand it has a suspicion that its customer has been engaged in criminal conduct, and if it makes the payment it will clearly facilitate the retention or control of the money by its customer. Accordingly, if it were to transpire that the money in the account was the proceeds of crime the bank will have committed a money laundering offence.

As the bank does not know at the outset whether the money in the account is in fact the proceeds of crime or otherwise, it is the usual practice for banks to err on the side of caution and refuse to make payment. The consequence is that the customer's account is informally frozen for so long as the bank has the relevant suspicion and the police do not consent.

The court contrasted the above with the structured protection in respect of a saisie (a freezing order) under the 1999 Law. The position was further contrasted with that in the UK where any informal freezing can only continue for a maximum of 38 days, failing which the police must make a formal application for a restraint order which must be discharged if criminal proceedings are not started within a reasonable time.

In Gichuru, following the filing of an SAR, the informal freeze had lasted for nearly six years without any criminal proceedings being commenced against the customer. The customer applied for an order that the financial institution should transfer assets to him in accordance with his instructions. The court confirmed that a customer in those circumstances had two remedies:

  1. A public law action for judicial review of the police refusal to consent to payment; or
  2. A private law action against the financial institution seeking to enforce his contractual rights.

It was contended on behalf of the financial institution following K Limited v. NatWest Bank [2007] that if it were a criminal offence to honour a customer's mandate there could be no breach of contract for the bank to refuse to honour its mandate. The court disagreed and held that a civil claim would lie if the customer could attack the factual foundation of the financial institution's stance.

In K the factual foundation was suspicion on the part of the bank, but the court in K went on to hold that it was not open to the customer to seek to cross examine the bank's officers in order to see if the suspicion did in fact exist. The Royal Court in Gichuru held that the factual basis which was being attacked was not that of suspicion (which could not be challenged) but whether the funds were in fact the proceeds of criminal conduct.

The court held that in any such private law action the police should not normally be convened, because if they were, they may have to give discovery of documents and information in advance of any criminal prosecution which might prejudice that prosecution.

It was contended that if the police were not a party, there was a substantial risk that the financial institution would not have all available evidence to hand as to whether the funds were the proceeds of criminal conduct. The court held that if a financial institution wished to obtain protection against a future criminal prosecution it was under a duty to take all reasonable steps to defend the customer's claim and to put forward all available evidence in support of the argument that the funds in question were the proceeds of criminal conduct. Further, a financial institution should know a considerable amount about the funds which it holds as a result of its duty under the various anti money laundering orders and codes of practice to know its customer and to be aware of sources of funds.

The court gave these guidelines as to the burden of proof in determining whether funds are the proceeds of crime:

  1. The customer must prove that he had money in the bank account and had demanded payment;
  2. Having proved that, the burden then switched to the financial institution to show why it should not pay. It would do that by proving on the balance of probabilities that it had the requisite suspicion which entitled it to refuse to pay unless it received police consent or the court so ordered;
  3. Once the bank had proved the necessary suspicion, the customer could only overcome that by asserting that despite the bank's suspicion, the funds were in fact not the proceeds of criminal conduct. The burden of establishing that lay firmly upon the customer.

The court gave some further observations as to the nature of any application for judicial review following the police refusal to consent to payment following an SAR. It observed that there was persuasive authority that the police were under a duty to keep a refusal to consent to payment under regular review. In that way there would be a series of rolling time limits in relation to ongoing decisions not to grant consent. The court also recognised that there was an arguable case that a refusal to consent by the police which may have been reasonable initially might become unreasonable and liable to be quashed if the investigation was taking longer than a reasonable time.

The court repeated its plea that consideration be given to amending the 1999 Law to avoid the potential injustice which can arise due to the indefinite informal freezing of assets. Amendments could include the introduction of time limits similar to those imposed in England (although the court recognised that it might be appropriate to have slightly longer limits than in the UK because of the international nature of business in Jersey which would necessitate liaising with overseas police force authorities). Also, the ability to obtain a formal saisie at an earlier stage than at present, i.e. once a criminal investigation has begun rather than having to await the point at which criminal proceedings were about to be instituted.

It will be of some interest to all those involved in the finance industry to await any legislative or case law developments in this challenging and problematic area.

This article first appeared in the autumn 2008 issue of Appleby Jersey's Resolution newsletter.

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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