What lessons can be learnt from recent public statements in Guernsey and Jersey?

18 October 2024 | UK & Europe | Articles

Undertaking regulated activities in business is not without reputational and financial risk for both firms and key individuals alike, and there is a continual need to ensure compliance with the regulatory frameworks in both Guernsey and Jersey. Despite the negative impact for both Boards and individuals taking on the supervised roles, these can be mitigated using the lessons learned from recent public statements issued by the GFSC.

 Why should public statements not be ignored?

On 8 July, 26 July and 14 October 2024, the GFSC decided to make public statements with respect to Trident Trust Company (Guernsey) Limited (Trident Trust), Equiom (Guernsey) Limited (Equiom) and Zedra Trust Company (Guernsey) Limited (Zedra) respectively under its regulatory powers.

Similarly, the JFSC issued a public statement on 11 October 2024 with respect to Belasko Jersey Limited (Belasko).

The size of the financial penalties imposed by the GFSC were not insubstantial (varying from £90k to £455k) with separately imposed fines on employed individuals (varying from £15k to £63k) for failures to:

“ensure compliance with the regulatory requirements… and to meet the Minimum Criteria for Licensing pursuant to Schedule 1 of the Fiduciaries Law”.

For both the individuals and the firms, the most damaging is the (potentially) irretrievable impact to reputations, which cannot be truly quantified.

A further consequence is a substantial negative risk impact for firms for recruitment when the fines and public statements include the supervised roles of the Compliance Officer, MLCO and / or MLRO.

In contrast, although no fines were imposed on individuals, the JFSC imposed a more limited financial penalty  (£19k on Belasko for “negligently” contravening certain requirements of the Codes of Practice for Trust Company Business (“TSB Code”) and the JFSC Handbook for the Prevention and Detection of Money Laundering and the Financing of Terrorism for Regulated Financial Services Business (“JFSC Handbook”).

 What are the respective approaches of the GFSC and JFSC to enforcement?

A principal remit of both the GFSC and JFSC is to ensure the protection of the reputation of their respective Bailiwicks as an international finance centre.

In discharging this oversight, the GFSC’s approach to enforcement is to utilise the broad set of tools at its disposal to “appropriately” address “sufficiently serious” risks and misconduct on a case-by-case basis. Whilst no doubt personally and professionally damaging to any individuals involved, this has become an accepted part of providing financial services within the Bailiwick of Guernsey.

Whether or not you are a supporter of the public statements, the rationale published by the GFSC is that:

“By making enforcement outcomes public, the Commission [raises] awareness of regulatory standards and demonstrate[s] its commitment to regulation, in accordance with agreed international standards, thereby helping the Bailiwick’s firms to access third country markets”.

The JFSC approach has similar risk-based objectives for enforcement which are:

“to deter misconduct by way of meaningful consequences…to control, or where necessary remove from the industry, those firms or individuals that pose an unacceptable level of risk to our guiding principles…to raise awareness of regulatory standards and reset behaviours…[and] to prevent financial gain or benefit from non-compliance with regulatory requirements.”

What should we learn from these statements for both jurisdictions?

Up to a maximum of £400k for individuals in both jurisdictions and up to £4m (Guernsey) or 8% of average annual turnover (Jersey) for firms depending on the number of failings, level of seriousness (aggravating factors), and whether the matter was bought to the attention of the GFSC or JFSC by the person(s) concerned and their attitude towards the failings identified (mitigating factors). Co-operation, openness, and early settlement during investigations is vital in mitigating the level of fines.

Under the Guernsey regulatory framework, the Minimum Criteria for Licensing for each sector are based on the high-level principles such as integrity and skill, fit and proper tests, assurances that the business is not directed by one controlling individual, sufficient Board diversity, and general prudent conduct.

In relation to Trident Trust, Equiom and Zedra, the GFSC found that the firms failed to:

• put in place an effective and sufficiently diverse board to ensure effective oversight taking into account the size and volume of high risk within the business
• implement a strategy to ensure effectiveness of internal controls following acquisitions and identify risks involved in known under-resourced key functions caused by a significant turnover of staff and redundancies following an acquisition. This was done to prioritise financial performance and shareholder requirements
• verify, identify, manage and mitigate the exposure to the financial crime risks presented by UBOs and persons connected to sanctioned countries who controlled the client entities under administration
• identify clear risks within the business risk assessment and, as a consequence, rendered its sanctions screening processes ineffective
• regularly review its business relationship risks and effectively manage backlogs in periodic reviews
• inform the GFSC in relation to the regulatory status of a line of business
• verify sources and provenance of the funds when receiving funds including undertaking reasonable measures in gathering ECDD for high-risk customers
• collect sufficient client due diligence and apply enhanced measures and/or understand that enhanced measures would apply whether high risk or not, as a non-resident client of the Bailiwick
• recognise red flags such as circular funding arrangements to persons who were the subject of serious adverse media or unusual transfers of ownership to close associates
• undertake appropriate checks prior to transferring funds into third party accounts
• investigate negative adverse media focus on key principals
• effectively monitor ongoing transactions over a substantial period
• discharge responsibilities under the Disclosure and Reporting Laws to the FIU
• put in place effective policies, procedures and controls to identify and mitigate risks and/or failure to amend such following changes to the Handbook
• appropriately consider concerns and advice from internal compliance staff and/or not following approved internal controls at key stages, resulting in a failure to correctly identify the risk rating of the client
• keep proper accounts and records.

Under the Jersey regulatory framework, the TSB Code is based on similar principles. These include possessing the highest regard for the interests of its customers, organising and controlling affairs effectively for the proper performance of its business activities, demonstrating the existence of adequate risk management systems, transparency in its business arrangements, dealing with the JFSC in an open and co‑operative manner and not making statements that are misleading, false or deceptive.

By way of contrast, the JFSC found that Belasko failed to:

• maintain systems and controls that were adequate, operating effectively, and being monitored by the Board
• demonstrate the existence of adequate and effective systems and controls following the conclusions of its business risk assessment
• comply with approved internal policies, procedures, and controls leading to significant and material contraventions of the regulatory framework
• obtain adequate information to understand the purpose and intended nature of a business relationship
• acquire adequate due diligence on a power of attorney
• conduct enhanced ongoing monitoring to scrutinise and / or hold the required details for transactions
• tailor its controls to mitigate all financial crime risks and not re-consider all risks following trigger events, resulting in operating a customer relationship outside its risk appetite
• complete risk assessments in a timely manner and record all relevant risks and / or obtain sufficient information to verify the activities generating source of funds (including the flow of funds from a sanctioned entity)
• effectively demonstrate full compliance with the JFSC Handbook
• hold adequate, orderly and up-to-date records.

What were considered aggravating factors?

The GFSC considered some of the following to aggravate and raise the level of the fine:

• failure to notify the GFSC of any material control failure to comply with the Handbook or any serious breaches of the licensee’s policies, procedures or controls and / or failing to bring such matters to the attention of the GFSC prior to the conclusion of an investigation.
• perceived attempts to conceal significant control deficiencies from the GFSC prior to and during its on-site visit resulting in the GFSC identifying those deficiencies later.
• providing inaccurate and potentially misleading information to other financial institutions in relation to the true SOF of some of its clients.
• not taking immediate action to remediate known deficiencies and/or consider warnings from internal compliance staff whilst continuing to provide services to clients.
• not undertaking appropriate diligence in relation to a large book of business and a high-risk appetite with a significant number of high-risk clients, some of which were suspected of being involved in criminality.
• failure to complete appropriate risk assessments and failing to undertake sufficient enhanced measures.
• failure to remedy issues identified during a previous GFSC visit despite remediation undertaken.
• a perception that the ultimate parent company/private equity investor appeared to be more interested in its own financial position and the upstreaming of funds than compliance with the Bailiwick’s regulatory framework.
• not informing the GFSC of serious staff resourcing issues with a plan to mitigate the risks.

In contrast, the JFSC considered the following to aggravate and raise the level of the fine:

• failure to comply with approved internal policies and procedures which were not identified by the compliance monitoring programme.
• despite having access to the JFSC published guidance and documentation to reduce financial crime risks, not complying with the JFSC Handbook which effectively increased its financial crime risk.
• not notifying the JFSC of matters giving rise to non-compliance with the regulatory framework despite the failure being identified following an internal review.

What were considered mitigating factors?

The GFSC considered some of the following to mitigate and lower the level of the fine and other consequences:

• demonstrable co-operation with the GFSC in relation to the investigation.
• demonstrable evidence of an extensive remediation programme to remediate the failings identified.
• agreement to settle at an early stage of the process resulting in a discount.
• voluntarily informing the GFSC of identified failures.
• demonstrable evidence of attempts to remediate identified deficiencies including investing significant resources, hiring third parties to perform independent investigations and recommendations, and taking robust demonstrable actions (such as an internal remediation plan).
• implementing changes to the composition of its senior management team / Board, with additional training being provided to all staff with steps taken to improve its governance, compliance framework and its onboarding procedure.

The JFSC considered the following to mitigate and lower the level of the fine and other consequences:

• demonstrable co-operation with the JFSC throughout the enforcement investigation.
• no customers suffered losses from the matters identified.
• agreement to settle at an early stage of the process resulting in a discount.
• upon becoming aware of the issues, instigating a formal review of the customer and terminating the relationship soon after.
• demonstrable investment into strengthening its compliance function by recruiting a new Head of Compliance and appointing a new Money Laundering Reporting Officer.

 What key learnings can be applied to avoid repercussions?

The following pointers for Boards may help:

• maintaining documentary evidence and appropriate records of all relationships and transactions on an ongoing basis is crucial.
• ensuring that all risk controls are documented with evidence of actions taken to ensure that relevant notifications can be made timeously to both regulators in advance of any negative impacts in failing to comply with the regulatory frameworks.
• cultivating a culture to engage with the regulators at the earliest possible stage and to provide an open and co-operative approach with the regulator.

There is also clearly a growing need to engage with reputable consultants and other third parties to ensure that independent assurances are provided to the Boards in discharging their duties in a manner not inconsistent with the regulatory expectations.

How can Bovill Newgate help you apply the lessons learned from these public statements?

We have the quality and experience to assist you in navigating the difficult times with additional resources and expertise to ensure you stay compliant with the legal and regulatory frameworks, whether in Guernsey or Jersey (or both).

We can support you by:

• providing a gap analysis through a health check and / or internal audit services with skilled and experienced consultants to identify key risk areas within your business
• offering a ‘bridge’ where necessary in discussing solutions to problems with the GFSC and/or JFSC initially on a no-names basis ensuring client confidentiality
• running bespoke evaluation services for your Board
• developing Board-level enhanced management reports
• reviewing your policies, procedures, and controls, including the BRA
• using our modern compliance monitoring solution to complement your compliance function using an innovative compliance software solution called The Gateway
• providing practical consultancy advice in relation to all regulatory matters.