Jersey: Saisies Judiciaires: The Lifting Of Freezing Orders

BACKGROUND

On 29 April 2009, the Bailiff issued a judgment (the effect of which was stayed for one month) in relation to an application by Gary Stephen Kaplan ("Mr Kaplan") to discharge a saisie judiciaire which was granted in relation to his realisable property in May 2007 pursuant to the Proceeds of Crime (Jersey) Law 1999 ("the 1999 Law"). Mr Kaplan was an internet gambling entrepreneur who had built up his business over a period of some 10 years before finally floating it on the Alternative Investment Market in 2004. Mr Kaplan made a great deal of money from the flotation. The money was ultimately settled into two Jersey trusts administered by a Jersey trust company.

The gambling business was operated from outside the US but most of its customers were in the US. As is widely known, gambling in the US is strictly regulated and telephone or internet betting is unlawful in nearly all US States. In common with other actions taken against telephone and internet betting concerns operating within the US, the US Department of Justice ("US DoJ") got involved. The US DoJ charged Mr Kaplan in July 2006. He was arrested in the Dominican Republic in March 2007, extradited to the US and has been in custody since then.

In May 2007 a saisie judiciaire was granted on the application of the Attorney General on behalf of the US DoJ.

In February 2008, the US DoJ applied for, and was successful in obtaining, a Swiss order freezing the local assets. The majority of the assets, by way of value, are liquid assets held in Swiss financial institutions and real estate located in Costa Rica.

SUMMARY OF OUTCOME

The Attorney General won all the main legal arguments on the construction of the 1999 Law and the interpretation of the various provisions contained therein. However, the judgment ultimately came out in favour of Mr Kaplan as the court found that in exercising its discretion it could not maintain the saisie judiciaire principally due to events which had occurred since the original granting. These events had made the effective operation, management and control of the assets subject to the saisie judiciaire impossible, on the part of the Viscount, the continuing trustees and the former trustee.

CIVIL PROCEEDINGS

One of the distinguishing features of this case is the extent to which parallel civil trust proceedings have had an effect on the judgment in relation to the saisie judiciaire. These parallel trust proceedings culminated in a judgment delivered by the Deputy Bailiff on 28 January 2008.

As a consequence of the indictment laid against Mr Kaplan in July 2006, the inevitable Suspicious Activity Report made by the Jersey trust company, and the consequent breakdown in communication for fear of committing a tipping off offence, Mr Kaplan, as the then Protector of the two Jersey trusts, decided to remove the Jersey trust company. This was effected through the appointment of a corporate Protector who, in turn, ultimately appointed two non-Jersey based trustees. This was in order to facilitate the ongoing effective exercise of the Protector powers due to the fact that he was incarcerated in Missouri.

The Jersey trust company brought the civil proceedings before the granting of the saisie judiciaire on the grounds of alleged technical deficiencies in the appointments and of a fraud on a power. The granting of the saisie judiciaire by the Bailiff in May 2007, some eight months before the delivery of the judgment referred to above, clearly brought the gate down on the vesting of the assets in the additional trustees.

As we shall see later, the appointment of additional trustees has had a direct impact on the exercise of the discretion of the court in April 2009.

GENERAL ISSUES ON APPEAL

1. Burden Of Proof

The Attorney General and Mr Kaplan each maintained that the burden of proof for discharging or maintaining, respectively, the saisie judiciaire was on the other. The court found that it was inappropriate to talk of "placing a burden of proof" in the context of the policy objectives of the 1999 Law. The court concluded that the more appropriate test would be to consider whether it would be fair, reasonable and proportionate to maintain the saisie judiciaire, balancing all relevant considerations.

2. Construction Of The 1999 Law

A theme which ran through the proceedings was the extent to which the 1999 Law should benefit from a wide and flexible interpretation, especially where detailed points of law, which could never be expected to be covered in 'all crimes' money laundering legislation, were under consideration. The court's finding, supported by earlier findings, was that the 1999 Law should "be construed in such a way as to accommodate the widely different procedures in other jurisdictions designed to penalise the concealing or laundering of the proceeds of serious crime."

The message would appear simple – if assets look like criminally sourced funds, then they will be treated like criminally sourced funds, at least for the purposes of granting and maintaining a saisie judiciaire.

SPECIFIC GROUNDS FOR SETTING ASIDE THE SAISIE JUDICIAIRE

1. No Reasonable Expectation Of An External Confiscation Order Being Made

One of the requirements for a saisie judiciaire to be granted is that there are reasonable grounds for believing that an external confiscation order will be made. The prime reason for this is to ensure that a defendant's assets are not needlessly tied up in lengthy and potentially costly proceedings if the policy objective of the 1999 Law, namely to deprive criminals of their ill-gotten gains, will not be achieved.

In order to do so, the Attorney General relied on the fact that Mr Kaplan had been the subject of an indictment filed by a grand jury (an impartial panel of ordinary citizens) in the US. The indictment identified the property that the grand jury believed was subject to forfeiture – being the assets in the two Jersey trusts. Further, it was contended that he was entitled to rely on the correctness of the information set out in the letter of request and that "the presumption of regularity" under the Investigation of Fraud (Jersey) Law 1991 was equally applicable to saisies judiciaires obtained for foreign prosecuting authorities under the 1999 Law.

The court disagreed and drew a distinction between circumstances where the Attorney General himself was investigating serious or complex fraud and where assets had been frozen at the request of a foreign government. The court reviewed the indictment in detail and concluded that notwithstanding the Attorney General's apparent lack of detailed analysis as to whether there were reasonable grounds for believing that an external confiscation might be made, there were sufficient grounds.

2. The Dual Criminality Test

In broad terms, for a saisie judiciaire to be granted, the crime upon which the application is made must not only be a crime in the home jurisdiction, but also be an offence in Jersey for which a person is liable on conviction to imprisonment for a term of one or more years.

Gambling in Jersey is covered by the Gambling (Jersey) Law 1964 which clearly predates the internet. Under that law it is only in the case of a second or subsequent offence that a term of imprisonment not exceeding twelve months can be imposed. Mr Kaplan's previous conviction in 1993 and the fact that the indictment alleged more than one count involving unlawful gambling led the court to conclude that this would constitute a second offence and hence potentially lead to a term of imprisonment of twelve months.

Having established this, the court then grappled with the complexities of the indictment which was broken into three main areas:

  • RICO (Racketeer Influenced and Corrupt Organisations) offences;
  • Predicate offences of mail and wire fraud and transportation of gambling equipment; and
  • Forfeiture counts

The court, having heard at length about the intricacies of US federal law, decided to construe the 1999 Law broadly. The logic applied was that Mr Kaplan conspired with others to conduct an unlawful internet gambling business – internet gambling being unlawful by virtue of the fact that it has not been made lawful. It was not so much the offences under the gambling law which were at issue, but the allegations of a conspiracy to commit a criminal offence. The punishment for such an offence is imprisonment for more than one year.

The dual criminality test is one which has often been discussed in Jersey with much head scratching as to whether some offences which do not exist per se in Jersey (e.g. RICO offences) or which are subject to different standards of proof (e.g. the test for fraud in Jersey is different to that applied in the US version of mail fraud) would meet the test. This judgment assists in understanding the court's thinking. The court will be minded to draw a wide net when considering whether an offence in another jurisdiction meets the dual criminality test and it would be advisable to think more widely than the narrow predicate offences.

3. No Realisable Property In Jersey

The vast majority of the assets of the two Jersey trusts are located in Switzerland and Costa Rica.

Mr Kaplan argued that there was no realisable property in Jersey on which the saisie judiciaire could bite. The court, in analysing the relevant provisions of the 1999 Law, concluded that "realisable property" covered property held outside the island. Further,

the trust property was legally held by the Jersey trust company's two nominee companies, both of which are Jersey registered. The fact that underlying assets may be held outside the jurisdiction is no bar to the granting and maintaining of a saisie judiciaire.

As an interesting side note, the court agreed that the Viscount would have the ability under the 1999 Law to a) require the repatriation to Jersey of any realisable property (assuming the individual was within the jurisdiction) and b) compel a defendant to disclose his assets.

Having established there was realisable property, the Bailiff found that this was vested in the Viscount on the basis that Mr Kaplan had gifted the assets into the trust.

With respect to submissions by the Attorney General concerning Mr Kaplan's beneficial entitlement, the evidence all pointed towards the fact that Mr Kaplan was not merely the object of a discretionary power under the trust – his role was far more involved.

However, the existence of other family members as discretionary beneficiaries and the fact that there was no suggestion that the trusts were shams, made it difficult for the court to conclude that the phrase "beneficially entitled" should have a different meaning other than the ordinary trust law meaning.

A number of other grounds for setting aside the saisie judiciaire were raised including material non-disclosure and a supposed flawed warrant obtained by the US authorities.

THE JUDGMENT

Since the original granting of the saisie judiciaire in May 2007, a number of events took place which transformed the matrix of facts upon which it was originally based, namely:

  • The parallel civil trust proceedings which resulted in the appointment of two non- Jersey based trustees;
  • The retirement in December 2008 of the original, sole Jersey trustee
  • The resignation of the Jersey trust company directors from the underlying companies of the Jersey trusts; and
  • The freezing orders over the liquid assets in Switzerland.

The above state of affairs led the court to conclude that in maintaining the saisie judiciaire:

  1. The costs would have to be met from the public purse;
  2. There would continue to be paralysis in the management of the underlying assets;
  3. The new trustees would be unable to fulfil their fiduciary duties;
  4. The original trustee would be left in a legal no-man's land, unable to transfer the trust assets by virtue of the saisie judiciaire; and
  5. The Viscount would be powerless to exercise effective control – having the responsibility but no power under the 1999 Law.

The only downside would be that the US would lose control of the nominee companies indirectly holding the property in Costa Rica – as no proceedings had been instituted there in any event, there appeared little practical downside, even constructing the 1999 Law broadly.

Consequently, the court decided to lift the saisie judiciaire, but has stayed its decision for one month pending a possible appeal by the Attorney General.

CONCLUSIONS

In broad terms, the court was reluctant to allow Jersey to act as the world's policeman in providing assistance to foreign prosecuting authorities where there were significant difficulties in exercising these powers. This is even more so where there are reasonable prospects that foreign governments could take their own action in the jurisdictions in which the assets are located. Whilst there have been instances in the past where Jersey has fulfilled this role, the costs and practical implications of dealing with worldwide portfolios of assets should not be underestimated.

The case also demonstrates the increased willingness of the US authorities to pursue individuals' assets across the world. It also highlights the focus on a more profit based regime as opposed to a predominantly conviction based one. For trust and company businesses exposed to the US in sensitive activity industries (such as gambling), the risks are also elevated on a commercial and personal basis for those involved in establishing and administering such entities.

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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