Knowledge

Recent years have seen financial services businesses and their clients beat a well-worn path to the steps of the Royal Court of Guernsey to find a way to navigate the Bailiwick's "consent regime", which defines what happens to funds after a custodian reports suspicions about their origin or owner to the Financial Intelligence Unit ("FIU").

It would be fair to say that that picture is not a simple one but, as cases progress through the court, some clarity is emerging. With the experience of having acted on both sides of proceedings involving the consent regime – for custodians holding assets and for clients demanding their release – our experience is that parties on all sides can be clearer about what the Royal Court is looking for than may have been the case previously.

This short briefing explores the story so far.

Background

The FIU's Consent Regime Guidance (most recent version: April 2023) sets out what happens after an institution files a Suspicious Activity Report (a "SAR") in respect of a client. The filing of a SAR with the FIU is an administrative step by which a reporting institution proactively flags its concern about a client or where the client's assets have come from.

Once the SAR has been filed, the reporting institution cannot safely do anything with the assets without the express consent of the FIU (and, moreover, cannot tell their client about the existence of the SAR).  The more time that passes before that consent is forthcoming the more likely it is that the custodian will come into conflict with its client who will, at some point, instruct them to do something with the assets.

There is no fixed deadline by which the FIU must deal with requests for consent in respect of flagged assets (unlike in many other jurisdictions, including England) so in theory the impasse could last forever. In practice what tends to happen in reasonably short order is that frustrated clients take their equally frustrated custodians to the Royal Court seeking orders for the release of the assets.

The Royal Court

In the cases that have come before the Royal Court so far, the court has taken the approach that the first step is for the reporting institution to establish the justification for its suspicion in filing the SAR and, following that, the burden of proof then shifts to the client to establish, on the balance of probabilities, that the funds are not in fact the proceeds of crime.  Usually the FIU itself does not get involved in the proceedings which take the shape of an ordinary civil claim.

In Liang v RBC Trustees (Guernsey) Limited [2018] GLR 189, the Bailiff summarised the process that the court will follow:

 "The burden of proof properly shifts between the parties in this manner. A plaintiff will establish a prima facie case to have the instruction or request made to the institution complied with. A defendant will raise an impediment to being in a position to comply, which will be the combination of the suspicion held and the absence of law enforcement consent.

"In order to overcome that impediment, the plaintiff will have to prove that the position is that the suspicion is unfounded because the source of the funds is not tainted in the manner believed or suspected […] I am satisfied that the proper approach is to require the plaintiff to discharge the burden of proof in respect of provenance."

Key takeaways

The cases are fact-specific but the picture is developing as more matters proceed through the Royal Court. The key takeaways for custodians and clients caught in an impasse over frozen funds in the absence of the consent of the regulator to act include:

• The threshold for a reporting institution to make a SAR "must be more than [a] fanciful possibility that those funds were the proceeds of criminal conduct. For a valid suspicion to be held, it must go beyond a mere vague feeling of unease or general mistrust" (Laing, para 20).  This is a relevant point for trustees and administrators – the Royal Court has made it clear that the filing of an SAR is a serious matter and that it must be justified by some tangible evidence.
• There must be an identifiable connection between the 'frozen' assets and the original proceeds of the criminal conduct. The Guernsey courts have adopted a 'common sense approach' in establishing a "connection by identification with the actual proceeds of the alleged (assumed) criminal conduct" (LB Marshall KC in L, M N and Mrs B v Credit Suisse AG (Guernsey Branch) [2023] GRC026) and will give consideration to: the size of the company's enterprise as against any proceeds, the length of time elapsed since the alleged proceeds of criminal conduct arose, and the way the funds would have been used and mixed into, for example, the funds of an enormous, active, worldwide commodity trading company.
• From the perspective of a reporting institution, it is vital that robust anti-money laundering procedures are in place at the outset of client relationships.  In addition, regular reviews of each client relationship should be undertaken and any concerns should be dealt with appropriately and as soon as possible.
• These matters frequently end up in the Royal Court and can be extremely costly.  Whether it is from the perspective of a reporting institution or a client who suspects that their assets have been frozen it makes sense to seek specialist legal advice at the earliest possible stage. This is particularly key for reporting institutions managing processes, reviewing the adequacy of grounds for suspicion, and trying to ensure that tipping off offences are not inadvertently committed: all while coming under pressure from clients to explain delays in accessing funds.
• Clients of financial services providers regulated in Guernsey should comply fully and promptly with requests for information regarding source of funds both at the outset and throughout their relationships.  Failure to do so can itself give rise to suspicions.  If they are having unexplained difficulties accessing their funds, they should obtain advice on how to address this from specialists who are familiar with the Bailiwick's anti-money laundering ecosystem.

If you would like any further information, please get in touch with your usual Bedell Cristin contact or one of the contacts listed.