Informal freezes
Royal Court ruling
Comment
Informal freezes
From a regulatory risk perspective, one of the most difficult situations that a business which offers offshore financial services must face arises when it is obliged to make a disclosure to the financial crime authorities in relation to a client. Often, the customer in question is relatively wealthy and therefore an important client to the business. It is up to the compliance officer to initiate internal discussions, emphasising the business's reporting obligations and to point out the risks of failing to fulfil these obligations.
If the client wants to do something with its money once a disclosure has been made, a new round of internal discussions ensues, almost invariably followed by a request to the financial crime authorities for consent to engage in the relevant transactions. If the authorities refuse consent, the business finds itself between a rock and a hard place. It cannot complete the transaction for fear of potentially committing a criminal offence but, in most circumstances, it cannot inform its client as to why it cannot complete the transaction for fear of committing a tipping-off offence. However, in such situations the client understandably puts enormous pressure on the business and may threaten to bring a breach of contract claim, to which the business (in Guernsey, at least) has no statutory defence. This impossible situation can go on indefinitely.
One of the key differences between the anti-money laundering regime in the United Kingdom and that in force in each of the Channel Islands is that there is no legislative time limit within which the financial authorities must decide whether to make a formal (and eventually public) application for restraint of the suspect assets. In the United Kingdom, the Serious Fraud Office has 35 days in which to make a formal restraining application. If no application is made, the business can proceed to implement the transaction without fear of criminal prosecution for a proceeds of crime offence.
The situation in Guernsey has caused confusion and attracted widespread criticism – foreign clients and lawyers are unable to understand how a system creating such an 'informal freeze' can have been enacted and is allowed to endure. However, following the Royal Court ruling in Garnet Investments v BNP Paribas, it seems that there is light at the end of the tunnel.
In Garnet the court considered a more convoluted version of the situation described above. For various reasons, the funds entrusted by Garnet were restrained for approximately eight years, during which period the financial authorities refused to provide the finance business with consent to engage in the proposed transactions. This occurred even after a civil freezing order over the funds, obtained by the alleged victim (a foreign government), was discharged.
Eventually, the client sought the release of the funds through the mechanism of judicial review. In considering the client's application, which was made on several grounds, the court found that the authorities' decision to refuse consent was both unreasonable, given that there were no known investigations touching on the funds, and disproportionate, given the length of time that the funds had been informally restrained. On that basis, the court quashed the decision. Presumably, the client now has its funds at its disposal (although the authorities have sought to appeal). Interestingly, the court also found that in the particular circumstances, Garnet had the right to obtain reasons from the authorities as to why consent was refused.
In Garnet the action was brought by the client, rather than the business. In most cases it is difficult to see how a business might be sufficiently motivated to bring its own judicial review proceedings. However, it is important to be aware that the option exists, particularly where the interests of the business and the client are aligned, as in certain trust situations.
The court's criticism of the informal freeze situation (and its sympathy with the authorities charged with having to apply and administer this law) should provide impetus for legislative reform. It is to be hoped that such reform will take place as soon as possible.
For further information on this topic please contact Michael Adkins at Collas Crill by telephone (+44 1481 723 191), fax (+44 1481 711 880) or email ([email protected]).