IN MAINTAINING COMPLIANCE NEWS COMSURE THOUGHT IT WOULD REVISIT a landmark decision – in fact it was the first of its kind in the United Kingdom or any of the offshore jurisdictions.

In 2005 the Jersey Royal Court has ruled that the obligation on financial institutions to maintain identification procedures is a continuing obligation. A single derogation is not permissible, and may lead to prosecution and conviction unless the financial institution can prove it took all reasonable steps and exercised due diligence to avoid committing the offence.

• Sentencing took place on November 25 2005.

Article 2 of the Money Laundering Jersey Order 1999, pursuant to Article 37 of the Proceeds of Crime (Jersey) Law, places financial institutions under an obligation to maintain the following procedures for the purposes of forestalling and preventing money laundering:

1. identification procedures;
2. record-keeping procedures;
3. internal reporting procedures; and
4. training procedures.

In turn, Article 2 refers to Articles 3 and 5 of the order.

1. Article 3 requires procedures to be put in place and applied by financial services providers with respect to “an applicant for business”.
2. Article 5 of the order (1) defines an ‘applicant for business’ as “a person seeking to form a business relationship… with a person who is carrying on any financial services business with a person in the island”.

The order extends the requirements of Article 3 to include

• procedures to identify the true principal where the applicant for business appears to be acting on another’s behalf.

Facts – part 1

1. Nicholas Bell is, and was at all material times, a director of Caversham Fiduciary Services Limited and Caversham Trustees Limited.
2. In December 2002 Bell was contacted by an English solicitor who was seeking, on behalf of UK resident Gary Stevens, to establish a trust to hold the sale proceeds of a sauna in London.

On December 4 2002 Clarke wrote to Bell advising that:

“Mr Stevens, as attorney for Mr Lee, received monies from the proceeds of the sale of a sauna in London and they now wish to reinvest those monies. Lee is a non-resident who wishes the monies to be kept offshore in the first instance.”

Facts – part 2

1. The fact that Stevens was acting as agent/attorney for Lee was further confirmed in the client questionnaire completed by Stevens.
2. No evidence of identity was requested by Caversham, Caversham Trustees or Bell with respect to the principal, Lee.
3. On December 10 2002 £850,000 was received into Caversham’s client account from the English solicitor’s client account.
4. Two days later Bell received instructions to transfer £825,000 to four separate third parties.
5. The payments were made on December 16 2002, the day after Caversham Trustees established the Advent Trust – a discretionary trust for which Stevens was the sole beneficiary and the £850,000 the initial settled fund.

Issues

The defendants

1. After hearing the prosecution’s evidence, the three defendants (ie, Caversham, Caversham Trustees and Bell) sought to argue that in order for an offence to have been committed under Article 37 of the Proceeds of Crime Law, the prosecution must prove, beyond reasonable doubt, that there had been a systemic failure in the maintenance of procedures.
2. In the defendants’ view, this required the prosecution to provide evidence of more than one failure to follow procedures.
3. No evidence was put forward in support of the defence provided by Article 37(10) of the law in order to show that the defendants had undertaken “all reasonable steps and exercised due diligence to avoid committing the offence”.

The prosecution

1. In reply, the prosecution argued that the word ‘maintain’ should be given its ordinary meaning and referred the court to the Oxford English Dictionary definition:
   • “To keep, preserve, cause to continue in being (a state of things, a condition or activity, etc);
   • to keep vigorous, effective or unimpaired;
   • to guard from loss or derogation.”
2. The prosecution also referred the Royal Court to the Trust Company Business Codes of Practice and the relevant passages of the Anti-money Laundering Guidance Notes for the Finance Sector, which are admissible in evidence before a court for the purposes of determining whether an offence has been committed under the law.
   • In particular, the prosecution referred to the following paragraph of the notes:
     • “7.07: Article 7(2) of the Order [Evidence of Identity] states that what constitutes an acceptable time span for obtaining satisfactory evidence of identity must be determined in the light of all the circumstances…
     • ….The trust company and company administration business can start processing the business or application for account opening immediately, provided that it promptly takes appropriate steps to verify the client’s identity and does not transfer any money out to a third party until the identity requirements have been satisfied.”

Decision

1. Commissioner Hamon rejected defence submissions and ruled that the word ‘maintain’ should be given its ordinary meaning, citing the Oxford English Dictionary definition.
2. The obligation to maintain procedures is an absolute onewhich must be sustained.
   • A failure to adhere to this obligation results, as in this instance, in an offence unless the defence can be proved.
3. Following the court’s ruling, guilty pleas were entered by each defendant.
   • In Bell’s case the plea was entered on the basis that each offence by the two corporate entities had been committed with his neglect.

Comment

The obligation on financial institutions with respect to the procedures provided for in the order is absolute and continual.

Any derogation from this obligation, including a single instance of failure, may leave the entity – and potentially the director or manager in question – exposed to conviction unless it can be shown that all reasonable steps and due diligence were exercised to avoid committing the offence.

While in this case the Royal Court did not consider what may constitute ‘all reasonable steps’, all financial institutions should be prepared to demonstrate that, with reference to obtaining evidence of identity, steps have been or are being taken in every case to obtain identification evidence as soon as reasonably practicable. Ideally, this should be when business is first introduced.

Therefore, financial institutions should ensure that evidence of identity is obtained before transferring any funds to third parties.

Regular, periodic checks should then be undertaken to ensure compliance throughout your organisation, given the breadth of the procedures

• http://www.thisisjersey.com/2005/11/26/financial-services-group-fined-100000/generally.
• http://news.bbc.co.uk/1/hi/world/europe/jersey/4271674.stm