The Guernsey Financial Services Commission (the “GFSC”) recently handed out fines totalling £35,000 to three directors of a Guernsey based licensed fiduciary services company and issued a public statement under section 11C of The Financial Services Commission (Bailiwick of Guernsey) Law 1987 (as amended) (the “Financial Services Commission Law”). This was the first such regulatory action of its kind in Guernsey.

Bedell Cristin Guernsey (Advocate Mark Helyar ) advised Kingston Management (Guernsey) Limited in the key period leading up to this regulatory action between April 2009 and the company being placed into administration, an action described by the GFSC as “a responsible course of action in seeking an administration order” at a time when it became clear that the GFSC was expressing what it describes as “serious issues” regarding compliance with current anti-money laundering (“AML”) regulations and the financial services business AML handbook.

Financial services businesses need to be aware of the following issues arising from this regulatory action and the set of circumstances behind it:

1. Despite the public statement that the issues in this case were largely beyond the directors’ control due to the extent of external control over business relationships, the directors were held responsible and fined accordingly.
   • Fiduciaries and any other financial services businesses need to ensure that the Guernsey board of directors of the company (the “Board”) is fully aware of its responsibilities and that the directors exercise a demonstrable degree of control (both personal and collective) over its business and client relationships, even if this means coming into direct conflict with the procedures and processes of a wider global group operation. A financial services business must have adequate information with which to be able to determine and monitor client relationships and
   • transactions. It will not be sufficient to simply pass blame on to a head office elsewhere; the responsibility rests in Guernsey with the Guernsey Board.
2. Despite having been appointed for a relatively short period, and despite the GFSC recognising that steps were taken to try to resolve compliance problems, one of the directors was still held liable to pay a substantial personal fine of £7,000.
   • It is important that directors understand that there is a collective board responsibility as well as a personal one in respect of AML regulations.
   • If you are a director of a licensed entity with AML compliance issues, then you should ensure that any concerns you have regarding AML issues are properly recorded and minuted at regular board meetings and that you do everything in your power to resolve them.
   • It clearly will not be considered a sufficient defence to indicate that specific AML or control issues are not your specific executive responsibility.
   • If you have real concerns about AML compliance, then you should seek personal legal advice, which is independent from the advice being provided to the company.
3. It is a fallacy that there must be money laundering or a high risk of it taking place or for a business to have a peculiarly high client risk for directors to become liable for a failure to comply with the AML regulations.
   • The regulations are in place to ensure adequate AML safeguards are in place, and will not just be enforced in circumstances where AML breaches have led to proven offences of money laundering.
4. The GFSC statement acknowledges that steps were taken to correct the issues with this company and that some of the issues were beyond the directors’ control.
   • These circumstances were, according to the GFSC’s statement, taken into account in handing out penalties of £7,000 and £14,000 to individual directors.
   • This suggests that in circumstances where there are no such mitigating factors, penalties could be significantly higher.
   • The maximum discretionary penalty under the Financial Services Commission Law is £200,000.
5. Directors need to be acutely aware of the new indemnity provisions of the Guernsey companies laws.
   • The Companies (Guernsey) Law, 2008 (as amended) prohibits a company or any associated company from indemnifying directors against such fines but the company can provide insurance to cover them.
   • Third party indemnities cannot, however, be provided which cover fines in regulatory or criminal proceedings.
   • Directors should be aware that if they do not have an insurance policy which covers regulatory fines, they will be obliged to pay them personally.
   • If fines remain unpaid, they may translate into an alternative period of imprisonment.
6. Directors may also be obliged to pay fines personally in certain circumstances before they can recover them from their insurers, depending on the construction and wording of their D & O insurance policy.
   • The payment may also be subject to an excess which the company would be unable to meet if it is considered to be by way of an indemnity for directors.
   • In circumstances where a company is insolvent, the insurance may lapse during winding up if there are insufficient assets to purchase run-off cover.
   • A liquidator or administrator will usually only be interested in purchasing run-off cover in circumstances where there may be claims for breach of a duty by the company against the directors which, if recovered, would be in the best interests of creditors.
   • In simpler words, an administrator or liquidator will not usually be interested in maintaining insurance out of company assets to protect a director’s personal liability to pay regulatory fines.

http://www.bedellgroup.com/content/688/guernseyfinesamlregulationupdate