The following case study shows provides a salutary lesson in what could happen if you do not follow policy and procedures.  The director in question (Mr Chick) exposed the Fiduciary Company to sanction for acting in breach of the Regulations and its own procedures.

The case

On 31 May 2018, the Guernsey Financial Services Commission (“the Commission“) decided:

1. To impose a financial penalty of £50,000 under section 11D of the Financial Services Commission Law on Mr Chick;
2. To make orders under section 17A of the Fiduciaries Law; section 18A of the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law 2002 (as amended); section 28A of the Insurance Business (Bailiwick of Guernsey) Law 1994 (as amended); section 17A of the Banking Supervision (Bailiwick of Guernsey) Law, 1994 as amended; and section 34E of the Protection of Investors (Bailiwick of Guernsey) Law as amended, prohibiting Mr Chick from performing the functions of director, controller, partner or manager for a period of 5 years;
3. The provisions of section 3 (1) (g) of the Fiduciaries Law be disapplied to preclude Mr Chick from holding up to six directorships, which would not otherwise be exempt, by section 3 of the Fiduciaries Law, on the grounds that he is not a fit and proper person to be a director of a company having regard to the Minimum Criteria for Licensing; and
4. To make a public statement under section 11C of the Financial Services Commission Law.

In particular, with reference to Schedule 1 of the Fiduciaries Law, failings have been found in relation to:

1. Probity, competence and soundness of judgment: paragraph 3(2)(a);
2. Diligence: paragraph 3(2)(b);
3. Protecting the clients’ interests; the interests of clients are likely to be threatened by his holding a fiduciary licence or that position: paragraph 3(2)(c);
4. Knowledge and understanding of the legal and professional obligations undertaken: paragraph 3(2)(e);
5. Engaged in conduct which reflects discredit on his method of conducting business or suitability to carry on regulated activity: paragraph 3(3)(c); and
6. Engaged in business practices or conducted himself in such a way as to cast doubt on his competence and soundness of judgment: paragraph 3(3)(d).

Background

1. The investigation concerned the conduct of Mr Chick between 1999 and 2015 as a director of a number of companies, certain of which carried on regulated activities under the authority of a licence granted by the Commission under section 6 of the Fiduciaries Law.
2. Mr Chick was one of the founders of a Guernsey Fiduciary Company (“the Fiduciary Company”), and at all material times, its majority shareholder and controller. Until 2008 he was the managing director of the Fiduciary Company and from 2008 to 2015 its chairman. At all material times, he had executive responsibilities with the Fiduciary Company.
3. Mr Chick also acted as a director of a number of client companies, two of which are pertinent to the matters investigated (“the Client Company(s)”).
4. The Fiduciary Company is the holding company of a group of companies, which provided financial services under licences granted pursuant to section 6 of the Fiduciaries Law. Amongst other companies which shared the licence were two trust companies (“the Corporate Trustees”) and a corporate service provider (“the CSP”). Mr Chick was a director of the Corporate Trustees and CSP.
5. During the material time Mr Chick was also a director of a Guernsey incorporated company (“Company A”).
6. Company A’s business is the development and marketing of communication systems. It is the holding company of a UK subsidiary (“the Subsidiary”). One of Company A’s functions was to raise monies to lend on to the Subsidiary to enable it to research and develop its telecommunication systems.

Findings

1. Company A Transactions and Conflicts of Interest
2. Company A was in the course of researching and developing a communication system. As such Company A (or the Subsidiary) was not making profits and consistently traded at a loss. Mr Chick and an associate were at all material times the controllers and directors of Company A. Mr Chick, and his associate, through another company (“Company B”) advanced substantial amounts by way of loans to Company A. By 2012, Company A’s liability to Company B amounted to £6,682,125 out of aggregate liabilities of £10,866,466.
3. Mr Chick informed certain clients (i.e. the ultimate beneficial owners of companies of which he was a director or the beneficiaries of discretionary trusts of which he was a director of the corporate trustee) of the existence of Company A and the possibility of investing in it, which, at all material times, required funding to carry on its research. In addition to this, at certain times Mr Chick approached some of these clients regarding lending money to Company A.
4. Mr Chick contends that each of the clients who indirectly invested, or lent monies to Company A, did so with full knowledge that Company A was a research and development company, that each of them conducted their own due diligence into Company A, and then made the decision to invest or lend monies without his involvement. He also maintained that each client was well aware of his (and that of his associate) interest in Company A. However, there was little formal contemporaneous evidence recording disclosure of the extent of Mr Chick’s interest in Company A. What evidence there was had to be deduced from emails and a description of the transaction by Mr Chick and there was little evidence of the extent of the disclosure.
5. The investments in Company A, made by two client companies (“Client Company 1” and “Client Company 2” or together “the Client Companies”); two employment benefit trusts (“EBT 1” and “EBT 2” or together “the EBTs”) and a Retirement Benefit Scheme (the “FURB”), resulted from Mr Chick’s acquaintance with the beneficial owners of the Client Companies and directors of companies which settled the EBT’s or FURB, who issued directions, or requests, to the Client Companies or to the trustees of the EBT’s or FURB, to make investments, after conducting their own inquiries.
6. It was accepted by the Commission that in relation to each transaction the investing or loaning party was aware of Mr Chick’s interest in Company A, but unless otherwise stated, only to the extent that he was a director of Company A, along with his close associate who was also a director of the Subsidiary Company.

The Commission found that Mr Chick acted in isolation in all the material aspects of the facilitation of the investments in, and loans to, Company A. In the transactions concerning the Client Companies, the FURB and the EBTs, there are failures on the part of Mr Chick, and these mainly arise from:A failure to document the instructions to him as a director of the Client Companies or Corporate Trustee acting as trustee to the FURB and the EBTs to invest in the shares in Company A or make a loan to Company A;

1. A failure to document the instructions to him as a director of the Client Companies or Corporate Trustee acting as trustee to the FURB and the EBTs to invest in the shares in Company A or make a loan to Company A;
2. A failure to document evidence recording what the beneficial owners of the Client Companies or the beneficiaries of the FURB or the EBT’s were told about Company A’s performance, or whether Mr Chick’s interest in the company was ever fully disclosed to the extent of his declaration of his interest in Company A’s equity through Company B, or the extent of his financial exposure through Company B;
3. A failure to document how Mr Chick’s conflicts of interest were managed;
4. A failure to properly document the terms and form of any investment or loan;
5. A failure to inform his fellow directors of Client Companies’ and of the Corporate Trustees of his clients’ wishes to invest in, or loan to, Company A; and
6. A failure to convene a board meeting of either of the Client Companies or the Corporate Trustee to consider and to authorise the investments or loans.

 

Trustee Duties

The actions of Mr Chick meant that the Corporate Trustee did not convene necessary meetings or take decisions in relation to these matters. This meant that the Corporate Trustee was not able to, did not have the opportunity to, and therefore failed to;

1. Keep appropriate accounts and records relating to the relevant EBTs and FURB. Therefore, it did not fulfil the requirements of section 21 of the Trusts (Guernsey) Law, 1989 and section 25 of the Trusts (Guernsey) Law, 2007 in relation to the duty to keep accurate accounts and records.
2. Monitor the trusts’ investments or to consider whether to seek repayment of a loan after the expiry of the 6 month loan period. Mr Chick caused the Corporate Trustee to enter into investments without due consideration by its board and without preparing records of the transactions. Mr Chick acted alone in arranging the transactions and therefore he should have ensured that proper consideration was given by the board and the proper records were prepared of the transactions.

Summation on the issues relating to the investment, or loans to, Company A made by clients

A recurring theme of the investments or the loans made by the Client Companies, EBT’s and FURB are:

a) a serious failure by Mr Chick to document matters adequately such as:

i.The form and extent of his disclosure of his conflict of interest; and

ii.The form and terms of investment or loans.

b) Mr Chick taking executive decisions without discussing the matters with his fellow directors, whether of the lending Client Companies, or his fellow directors at the Corporate Trustee acting as a trustee in the case of the EBTs and FURB.

In certain cases,

a) particularly that of the EBT 1, the lack of documentation led to the Corporate Trustee facing difficulties in identifying and recovering trust assets from Company A.

b) These instances highlighted the importance of documentation. It provides a paper trail of the reasons why the decision to invest was made which might protect the company or directors in the future. It also ensures that the management of the company are aware of the investment, and it enables successor directors to inform themselves as to the investment.

c) In the case of the investments by the EBTs and the FURB, Mr Chick’s willingness to accept instructions from persons connected to the Founder or settlor companies, led him to cause the Corporate Trustee to act in breach of trust because he committed the Trustee to investments in, or loans to, Company A without the Trustee discharging its duties as trustee by considering the merits of the investments or loans. The agreement of a single beneficiary in each of the trusts was insufficient to amount to acquiescence of all the beneficiaries.

d) Mr Chick’s anxiety to raise funds for Company A was such that it led him to disregard the extent of the Corporate Trustee’s fiduciary duties and the extent to which the Trustee would have had to implement procedures to deal with his conflict. Those procedures might have led to a delay in implementing the investment or loans or might have resulted in them not being made at all.

Politically Exposed Person Transaction

a) In 2013 a person (“Mr A”), who had previously been a client of the Fiduciary Company (but that relationship had ceased in 2010), contacted Mr Chick in relation to opening a bank account outside the United Kingdom in relation to the sale of a foreign property. Mr A was a member of the UK parliament and as such, for money laundering purposes, was categorised as a politically exposed person (“PEP”).

b) Mr Chick opened an account at a bank on behalf of the Fiduciary Company in respect of Mr A. The transaction proceeded as planned. Mr Chick:

1. Did not undertake appropriate enhanced CDD (as required by the Regulations);
2. Did not refer, prepare and document a risk assessment of the proposed transaction (as required by the Fiduciary Company’s internal policy and procedures);
3. Did not refer the matter to the Fiduciary Company’s Risk Committee for approval (as required by the Fiduciary Company’s internal policy and procedures);
4. Did not assign an appropriate risk level to Mr A and the business relationship in order to ensure the identification of any risk factors and the appropriate management of them (as required by the Fiduciary Company’s internal policy and procedures);
5. Did not refer the matter to other senior managers for approval (as required by the Fiduciary Company’s internal policy and procedures);
6. Did not document the considerations of the risk implications associated with the source of funds. As a result, he caused the Licensed Fiduciary to be in breach of the Rules and its own procedures providing for the creation and retention of documentation.

c) In failing to refer the transaction to the Fiduciary Company’s Risk Committee, Mr Chick acted in breach of the Regulations and the Fiduciary Company’s internal policy and procedures that were intended to ensure that it complied with the Regulations.

Lessons learned

a) The matters set out above are an example of Mr Chick’s impatience with procedure in circumstances where he had formed a view that a transaction could be implemented, without delay, due to his own knowledge of Mr A.

b) In doing so, he exposed the Fiduciary Company to sanction for acting in breach of the Regulations and its own procedures.

The Regulations and Rules

The Regulations provide that a financial service business must, prior to the establishment of a business relationship or carrying on an occasional business transaction, undertake a risk assessment of the relationship or occasional transaction and it must have regard to the rules and guidance in the Handbook.

1. Regulation 4 provides for customer due diligence, which is to apply to establishing a new relationship and carrying out an occasional transaction. Those steps include identifying the customer, any person acting on behalf of the customer and information must be obtained in respect of the purpose and intended nature of the business relationship.
2. Regulation 5 provides for additional customer due diligence in the case of a business relationship or occasional transaction for a party who is a PEP. Enhanced customer due diligence means obtaining senior management approval for establishing the relationship or carrying out the occasional transaction, taking reasonable measures to establish the source of any funds and taking such steps as would be appropriate to the business relationship and occasional transaction to understand the purpose and intended nature of each business relationship. The verification should be carried out before or during the business relationship or before the occasional transaction is carried out.
3. Regulation 14 provides that a financial service business shall keep any customer due diligence information for the minimum retention period (in relation to the sale of the property, 5 years from the date the occasional transaction was completed).

The Handbook has been issued (amongst other provisions) pursuant to the Regulation 3(2) of the Regulations to assist financial services businesses to comply with relevant legislation and will be taken into account by the Guernsey courts in considering whether or not a person has complied with relevant legislation. The Handbook sets out various Commission Rules (“the Rules”).

The consequences of entering into the arrangement with a PEP in accordance with Regulation 5(2)(b) were that the Fiduciary Company had to:

a) Properly identify the PEP in accordance with the requirements of enhanced due diligence and the transaction: Regulation 5;

b) Assess the relationship and the transaction: Rule 43;

c) Ensure that it documented the manner in and basis on which it had assessed the business relationship or the occasional transaction: Rules 59 and 61; and

d) Apply enhanced monitoring to the transaction: Regulation 11 and Rules 274, 276, 277 and 278. The requirement set out above would apply in the case of the PEP if a matter constituted a new business relationship, a continuing business relationship, or an occasional or one-off transaction. In the case of a one-off transaction, the enhanced due diligence must be completed prior to the transaction.

Aggravating factors

a) The departures from and non-fulfilment of the minimum criteria for licensing were not brought to the attention of the Commission by Mr Chick;

b) The contraventions were serious. They caused a regulated trustee to act in breach of trust, demonstrated a serious lack of diligence in ensuring that appropriate documentation was kept in relation to the actions of a director (companies acting for themselves as well as corporate trustees). They also caused a corporate trustee to fail to document matters relating to trust assets and demonstrated a lack of competence in the administration of companies’ affairs. In the case of the PEP, they involve a breach of the Regulations, the Rules, and the Fiduciary Company’s own procedures (including those relating to the opening of bank accounts) which could have exposed it to sanction or jeopardised its license;

c) The conduct in relation to the Company A investment or loans was deliberate as it was Mr Chick who took it on himself to implement arrangements when a person acquiesced in an investment or loan to Company A without consulting with his fellow directors or causing the Corporate Trustee to discharge its obligations as a trustee;

d) Mr Chick made no effort to rectify the matters complained of which were in the main separate matters which had been continued as opposed to continuing breaches which came to light in 2013 or 2014 and by which time Mr Chick’s executive responsibilities had been restricted. The failure to cause the Corporate Trustee to monitor investments was a continuing failure and one which Mr Chick wrongly considered could not be performed.

Mitigating Factors

a) Save in relation to one EBT where one of the beneficiaries was vociferous in his complaints as to how Mr Chick and the Corporate Trustee had managed matters, there were no complaints as to the investment in Company A by the persons who agreed that they should be made.

b) However, that is limited mitigation as in the case of the trusts, as there is no evidence that beneficiaries, other than the beneficiary consenting, knew about the investment.

c) Further, in the case of the beneficiary consenting, there is doubt as to whether they were fully aware of Mr Chick’s conflict of interest.

End

Read here https://www.gfsc.gg/news/article/mr-alan-michael-chick

Notes:

The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 as amended (“the Financial Services Commission Law”);

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000 (the “Fiduciaries Law”);

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 as amended (“the Regulations”);

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing (“the Handbook”); and

Mr Alan Michael Chick (“Mr Chick”)

The Commission considered it reasonable and necessary to make these decisions having concluded that Mr Chick did not satisfy the requirements of the Minimum Criteria for Licensing, pursuant to paragraph 3 of Schedule 1 of the Fiduciaries Law or the relevant requirements of the Minimum Criteria for Licensing under the Insurance Managers and Insurance Intermediaries (Bailiwick of Guernsey) Law, 2002 (as amended); the Insurance Business (Bailiwick of Guernsey) Law, 1994 (as amended); the Banking Supervision (Bailiwick of Guernsey) Law, 1994 (as amended); and the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended).