Guernsey – NED’s and MLRO’s be aware
The Enforcement Team at the GFSC have had another busy year, issuing no less than 7 decisions, issuing fines totalling £475,750 with the highest fine on a company being £100,000 and the highest fine on an individual being £52,500. Common themes from those decisions include failures on the part of the Company and/or directors to:
- administer client relationships within the remit of the law,
- maintain proper books and records,
- to obtain and monitor CDD and EDD and,
- to implement and monitor effective system controls in relation to client relationships,
But what is very clear from the decisions is that the focus of the GFSC is not limited to executive directors, with a number of NED’s and MLRO’s being sanctioned in the case of Global Insurance Group, Safehaven International, and Louvre Fund Services.
In all three cases the individuals were criticised over a variety of issues but ultimately they all largely boil down to a failure to challenge the executive directors, or at least proving they had done so. Setting aside the individual circumstances of the cases, sanctions being issued to such individuals is going to make it harder than ever to recruit good quality people, which is already a significant issue for the finance industry in Guernsey. What makes two of the three cases even more significant was that they involved companies with pre-existing issues, one which had previously been sanctioned by the GFSC, the other with a remediation exercise already underway. By taking action against individuals in these kinds of circumstances, it is going to make the best NED’s and MLRO’s think twice before accepting appointments from small to medium sized financial services in difficulty, when probably it is these companies who likely need their help the most.
Jersey – Record fines of £700,000 issued to one group
Headlines were made recently in Jersey, when the JFSC gave notice of three civil financial penalties having been issued to three SG Kleinwort Hambros entities (SGKH). Although no client or customer had suffered losses as a result of the matters giving rise to the decision to issue the penalties, the JFSC considered that the breaches of the Codes of Practice applicable to regulated entities were sufficiently serious to invoke their jurisdiction under the Financial Services Commission (Financial Penalties) Order 2015.
This is the third time the JFSC has issued civil penalty fines, and is more than double the size of the previous largest penalty. It is worth noting that in this instance, an early agreement was reached to settle the process meaning that SGKH qualified for a 50% discount. Without the discount, the SGKH entities would have been liable to penalties of in excess of £1.4m.
The main complaints of the JFSC stemmed from a tripartite core of issues arising from a failure to ensure that the compliance function was properly resourced; a failure to organise, control performance and risk management at a board level; and a failure to deal with the JFSC in an open and co-operative manner.
However, from the date of the onsite examination conducted by the JFSC, the JFSC noted a series of mitigating factors which demonstrated that the SGKH entities sincerity in wishing to address the failures. The mitigating factors included full co-operation with the JFSC, the retention of a consultancy firm to assist the entities in identifying and addressing root causes and implementing a significant remediation exercise, a measure which in turn was fully supported by the wider group. Furthermore, as mentioned above, no client or customer suffered losses as a result. Without these mitigating factors, the clear message from the JFSC is that the civil penalties could have been significantly greater.
With this sanction, the JFSC continue to demonstrate its active role in safeguarding Jersey’s reputation by strictly applying the regulations and codes and a willingness to apply civil penalties even when no losses have been suffered by clients or customers.
The impact of Moneyval
One factor to always remember is that the GFSC and JFSC do not take their regulatory enforcement action in a vacuum, and it is important to consider trends and themes in their international context. Following Guernsey’s last Moneyval report which was published in 2016, it was noted that its regulatory standards were “largely compliant” with international money laundering guidelines, however this was subject to the caveat that “the relatively limited number of cases involving third party [money laundering] by participants of the financial industry and the amounts of property laundered and confiscated indicates room for more effective application of [money laundering] provisions”.
What is interesting to note, in the period between the Moneyval assessment which began in 2014 through to 2015, there was a significant uptick in regulatory enforcement action in Guernsey, and in particular the number of prohibition orders issued by the GFSC in cases involving Bordeaux, Guernsey Insurance Brokers and Confiance. In the period that followed after the Moneyval Report was published, whilst the GFSC continued to issue a range of sanctions including prohibition orders, if anything the stance of the Commission eased back slightly with some cases involving only fines on directors for AML failings, such as Louvre Trust, or in some cases no individual sanctions at all, as was the case with Blenheim and Richmond.
It is perhaps unsurprising therefore that with Guernsey facing a further Moneyval over the next couple of years, there has been a noticeable increase in the number and seriousness of the sanctions issued by the GFSC, both in terms of those decisions which have been published, as well as those where we are currently instructed but have not yet been finalised. It will be interesting to see whether this approach by the GFSC results in more appeals to the Royal Court against their findings in 2021 but this seems a likely outcome.
Fit and Proper, Non-Financial Misconduct and #MeToo
On the regulatory enforcement front there is no doubt that where the UK tends to go, the Channel Islands inevitably follows a few years’ later, as there remains so much in common between the jurisdictions even if the regulatory regimes are at first glance quite different. That is why it is interesting to see how the FCA have been dealing with the issue of Non-Financial Misconduct and the #MeToo agenda in the context of Fit and Proper.
Back in 2018, the FCA had indicated to the UK Parliament’s Women and Equalities Committee that it considered sexual harassment to constitute misconduct stating that a culture where “sexual harassment is tolerated is not one which would encourage people to speak up and be heard, or to challenge decisions. Tolerance of this sort of misconduct would be a clear example of a driver of poor culture. It would be an obstacle to creating an environment where the best talent is retained, the best business choices are made and the best risk decisions are taken.”
Last year saw the FCA turn these words into deeds for the first time, when it prohibited three individuals from working in the financial services industry following convictions for sexual offences all of which were committed separately. The full detail of those sanctions and the reasoning behind them can be read on the FCA website, but they all arose from serious criminal behaviour including voyeurism; sexual assault, engaging in controlling and coercive behaviour; and offences involving the making, possession and distribution of indecent images of children. All three individuals had already received sentences of between nine months to seven years’ imprisonment; and all three individuals have been required to sign the sex offenders register.
In context it is hardly surprising that these individuals were determined not to be “fit and proper”, with the Regulatory Decisions Committee concluding that, because of these criminal convictions, the individuals are not fit and proper persons, and lack “the necessary integrity and reputation to work in the regulated financial services sector”. Other more subjective cases will no doubt follow, where a criminal conviction has not been obtained. These cases will no doubt be more factually challenging to make the determination, however, without question this is an important first, albeit small, step in the right direction for the finance industry to grasp the realities of a post #MeToo world.
To date neither the GFSC or the JFSC have really tackled the issue in a meaningful way, but this must now surely be a case of when rather than if similar action will be taken in the Channel Islands. Both Commissions rightly focus on the need to protect our hard fought for international reputation as centres of excellence in the finance industry, but reputations that have been built over many years can be destroyed overnight – just ask Harvey Weinstein.