Knowledge

This briefing looks at the importance of "knowing your client", an important obligation that sits on many financial and non-financial services businesses, including law firms, in the context of recent Jersey litigation where the client of a bank had his assets frozen informally following a disclosure under the Proceeds of Crime (Jersey) Law 1999.

At this time of heightened vigilance against money laundering and the financing of terrorism, those operating in the regulated sectors will be familiar with the mechanisms whereby knowledge or suspicion of money laundering can be reported to the police. These mechanisms are designed to provide a defence to any criminal proceedings for institutions who have been caught up in money laundering and need to report suspicions or knowledge of money laundering to the police.  In the United Kingdom and elsewhere, strict time limits are applicable to dealing with such reports, and the police must act within specified time scales, upon the expiration of which, the institution becomes free to deal with those assets or funds as it, or its client, desires.  However, the position in Jersey is different.  There are no time limits, and once a report has been made by an institution, the police can respond at their leisure.

As was noted in the case of Minwalla [2007] JRC 137, this places the reporting institution in a dilemma.  If a bank forms a suspicion that its customer may be engaged in criminal conduct, and files a suspicious transaction report with the police, the police may either consent to the bank continuing to act normally (in which case there would be no issue), or refuse consent to the normal operation of the account.  Were the police to refuse consent, the bank could be faced with, on one hand, its customer demanding payment in accordance with the mandate, and on the other hand, a suspicion that its customer had been engaged in criminal conduct.  In the latter case, were it to make the payment, it would be facilitating retention or control of the money by its customer and may be committing a criminal offence.  In such circumstances, the bank will invariably err on the side of caution and refuse to make the payment.  The net result is that the account is informally frozen, for a period as long as the bank has a relevant suspicion and the police either do not consent or leave their decision pending.  As was noted in Minwalla, "it is clearly capable of causing great hardship and unfairness.  There may never be a prosecution, but the bank may retain its suspicion.  The result may be there is a person, against whom no criminal charges have been brought, and where there lies any suspicion, finds his assets formally frozen without there ever having been a court order to achieve this.  Furthermore the freezing of the account may continue for an indefinite period."

This is a dilemma which has exercised not only the Jersey courts but also the Jersey legal profession and those providing financial services in the Island.  It was, however, addressed by the (then) Deputy Bailiff in Gichuru v Walbrook Trustees (Jersey) Limited and others [2008] JRC 068.  In this case, Walbrook filed a suspicious activity report with the police in May 2002.  The police refused consent to Walbrook making any payments to Mr Gichuru.  Although there had been contact between Mr Gichuru, the Attorney General and the Joint Financial Crimes Unit, matters remained unresolved and the informal freeze lasted for nearly six years.  Eventually, there being no criminal proceedings against Mr Gichuru in Jersey or in Kenya, he applied for an order that Walbrook should pay the monies to him in accordance with his instructions.

When faced with such a refusal by a bank, a customer has two alternative remedies.  He can bring a public law action seeking a judicial review of the police decision, or he can bring a private law claim against the bank, seeking payment of the monies in accordance with its mandate.  The court reviewed the recent English authorities, which seemed to suggest a move away from a claim against the bank towards a judicial review of the police's decision, but maintained the position that both alternative remedies continue to exist in Jersey.

In the case of a public law action for judicial review of the police decision, the focus of the court's attention would be on whether that decision could be successfully challenged on one of the three conventional grounds for judicial review: i.e. the police took into account something irrelevant; failed to take into account something relevant; or the decision was so unreasonable that no reasonable police officer could reach it.

In a private law action against the financial institution, the issue for the court is likely to be whether the funds that have been requested are in fact the proceeds of criminal conduct.  The burden will be on the customer to show that they are not.  In this case, the court accepted the Attorney General's arguments that the police should not normally be convened to such actions on the basis that there is an obligation on the financial institution concerned, if it wishes to obtain protection against any future criminal prosecution, to defend the claim.  If a financial institution party to such proceedings allows a customer to obtain a decision in his favour without having maintained a proper defence, it will not have fulfilled this requirement and, accordingly, any decision of the court in ordering payment to the customer may not protect the financial institution from future criminal proceedings against it.

The court went on to note that a financial institution should understand the nature of funds which it holds.  First, it has a duty under the various anti-money laundering rules to know its customer and to be aware of the source of funds.  Secondly, once it begins to have concerns about the source of funds, it should ask questions of the customer in order to see if those concerns can be allayed. It is only if those concerns are not allayed that it may end up having the necessary suspicion, and make a report.  All of the information in the bank's possession should be made available to the court in any private law action. 

Given the widening of the anti-money laundering regime beyond financial institutions to other designated non-financial services businesses and professions such as lawyers, accountants and estate agents, this review by the court of the importance of knowing your client is significant.  Clearly, if an entity does not know its client, it is not going to be in a position to take "such steps as are reasonable" to defend any proceedings. In such circumstances, were the court to make an order directing payment away of funds, such an institution may become liable on two fronts, not simply for having paid away monies, but also for having failed to comply with applicable anti-money laundering regulations in the first place.

Gichuru reaffirms the options facing a customer whose assets have been subject to an informal freeze under the Proceeds of Crime (Jersey) Law 1999.  It also highlights the fact that institutions should talk to their clients in order to try to resolve any suspicions.  If they file a report to the police, they must be prepared, ultimately, for the prospect of litigation.  A recent example of a customer bringing a claim for breach of mandate is the English case of Shah and another v HSBC Private Bank (UK) Ltd ('Shah') [2012] All ER (D) 155.  The bank in that case delayed in executing payment instructions because it suspected the funds were criminal property.  The bank filed a suspicious activity report and awaited the consent of SOCA (the English equivalent of the JFCU) before making the payments requested.  The bank declined to provide its customer with any information concerning its failure to make the payments. The customer brought a claim against the bank for breach of mandate claiming damages for the bank's failure to process the payment instructions and provide the customer with information as to the facts which had caused the bank not to process the payment instructions.  The English High Court ruled that there must be an implied term in the contract that permitted the bank to refuse to execute payment instructions in the absence of appropriate consent where it suspected a transaction constituted money laundering. The Court also ruled that the bank was under no duty to provide its customer with information and that there had to be an implied term that allowed a bank to refuse to provide the information where to otherwise do so might result in 'tipping off' for example.

Whilst the options for customers of banks may be limited, other relationship may provide other opportunities to avoid the informal freeze. In Re Bird [2008] JLR 1 a trustee filed a SAR after the protector of the trusts in question was charged (but not yet convicted) with illegal gambling, racketeering and tax evasion.  The trustee refused to make payments out of the trusts without the consent of the JFCU or to communicate with the protector.  After the trustee made the SAR, the protector purported to appoint a successor protector who in turn appointed additional trustees who sought to change the law of the trusts from Jersey to Lichtenstein to circumvent the restrictions imposed by the trustee who was refusing to make payments from the trusts without the consent of the JFCU.  The trustee applied for directions as to the validity of the appointments and said that the appointments amounted to a fraud on a power as the protector, the trustee said, had tried to extract assets from Jersey which were otherwise subject to the PC(J)L restrictions. The Jersey Court found that the protector's intention in appointing a successor was to ensure the smooth running of the trusts in the event he was remanded in custody and held that the appointment had been made in good faith in the best interests of the beneficiaries. The appointments to circumvent the restrictions imposed by Jersey law and to make payments which the law prohibited were found not to be improper as they were made in good faith in the interests of the beneficiaries.  The intention was found to be consistent with the purpose for which the powers of appointment had been conferred. The intention to remove control of the trust from the trustee in Jersey was also found not be unlawful either because the appointments were not seeking to achieve something that was prohibited by Jersey law.  In Re Bird the trustee had refused to make payments without the consent of the JFCU but the Court said it was not prevented under article 32 from making payments without such consent. Unless and until the trust assets were proved to be the proceeds of crime, the Jersey Court held that it was not unlawful to make a payment.  The intention to remove control from the Jersey trustee was to circumvent a restriction which the trustee itself had imposed rather than Jersey law.  The change in identity of the protector and trustees did not result in assets being moved.  If the appointments had been made following the conviction of the protector on the other hand, then the court is unlikely to have recognised the appointments which would have been seen in those circumstances as intending to commit a crime.
 
Given the very few decisions of the Royal Court since the Proceeds of Crime (Jersey) Law 1999 came into force, institutions can take some comfort in the fact that the majority of the cases are resolved at an early stage, without reputations being sullied by litigation.