24 March 2021
Fraud, Asset Tracing & Recovery 2021/2022 – Guernsey (Commercial Dispute Resolution, CDR)
This guide explores the latest legislative, regulatory and enforcement developments in Guernsey, and provides expert analysis on industry-wide topics including cryptocurrency fraud, confiscation proceedings and the coronavirus pandemic.
Please click on the links below to jump to the relevant section:
- Executive Summary
- Important Legal Framework and Statutory Underpinnings to Fraud, Asset Tracing and Recovery Schemes
- Case Triage: Main stages of fraud, asset tracing and recovery cases
- Parallel Proceedings: A combined civil and criminal approach
- Key Challenges
- Cross-Jurisdictional Mechanisms: Issues and solutions in recent times
- Technilogical Advancements and their Influence on Fraud, Asset Tracing and Recovery
- Recent Developments and Other Impacting Factors
As Guernsey developed into a thriving offshore financial centre from the 1980s, it has had to adapt to meet the challenges posed by the model and resourceful fraudster. Its laws and jurisprudence have evolved rapidly to ensure it does not provide a haven for such people and their ill-gotten assets.
The Bailiwick of Guernsey has one of the oldest constitutions, political systems and judicial systems in the world and, apart from certain events beyond its control between 1940 and 1945, it has enjoyed centuries of stability. Guernsey’s close links judicially with senior (and indeed the most senior through the Privy Council) members of the United Kingdom Bar and judiciary means it has a system which is readily understood throughout the world.
This chapter deals with how those challenges have been met following the rapid popularity of Guernsey structures typically involving trusts, foundations and underlying companies. Guernsey courts have adopted international rules when required to make orders assisting proceedings in those jurisdictions whether freezing assets, disclosing documents/information and straight-forward asset tracing and recovery.
As will be seen later on, there are now many weapons in the armoury of those assisting the victim of fraud, when there is reason to believe that there exists in Guernsey either assets or information to which the victim is entitled.
2. Important Legal Framework and Statutory Underpinnings to Fraud, Asset Tracing and Recovery Schemes
Over many centuries the Bailiwick of Guernsey (the main Islands of which are Guernsey, Alderney and Sark) has developed a unique legal framework judicial system drawing on its routes and past connections with both England and France. Part of the Duchy of Normandy at the time of the Battle of Hastings but now a Crown Dependency of the United Kingdom, Guernsey follows the customary laws of Normandy which have continued unless replaced with modern laws or statutes. These modern rules are passed by an elected government (“the States of Guernsey”) or more fundamental rules which also need to be approved by the Queen of England through her Privy Council.
The judicial process starts with the Royal Court of Guernsey (the Royal Court) constituted by local judges with right of appeal to a Court of Appeal, which is in Guernsey but is constituted by Senior Queen’s Council from the Bar in the United Kingdom. In certain cases, there is ultimate right of appeal to the Privy Council in London.
For the purposes of this chapter, developments of Guernsey’s laws relating to fraud, asset tracing and recovery schemes have tended to follow those found in many developed legal jurisdictions and will have a familiar ring to them. In terms of its common law, decisions of the courts in England and Wales are persuasive but not binding unless they are based on provisions of statutory authority passed by the UK parliaments. For good reasons, Guernsey does not recognise the authority of any of the UK parliaments.
Civil remedies and tools
As stated above, common law practitioners in the area of fraud and asset recovery will find Guernsey’s law overall familiar, but there are some unique and useful differences. As far as civil fraud is concerned, the cause of action and remedies are for the most part drawn from Guernsey’s customary law, with a couple of limited exceptions under legislation, although modern day actions for civil fraud in Guernsey reflects the common law position in the United Kingdom.
In addition, given Guernsey’s status as an offshore finance centre, its courts will often deal with claims brought for breach of trust/fiduciary duties and by insolvency practitioners (both of local and foreign companies).
So, what are the main weapons in the legal arsenal for tracing and recovering the proceeds of fraud? Of course, there is obviously the remedy of damages but, as practitioners in the area will know, the proceeds of fraud will usually be moved quickly out of the hands of the actual fraudster – often, through various financial institutions across a number of jurisdictions.
Guernsey courts have available to them the well-recognised tools of asset tracing originating from the English courts, including:
- Disclosure orders under the principles set out by the House of Lords in Norwich Pharmacal v Commissioners of Customs & Excise  UKHL 6, which requires a third party even if innocent of any wrongdoing to disclosure information or documents to identify the wrongdoer (known as a Norwich Pharmacal order). The availability of a Norwich Pharmacal order is important in Guernsey, as there is no pre-action disclosure available under the procedural rules of the Guernsey courts, with the exception of personal injury/fatal accident cases.
- A variant of a Norwich Pharmacal order, which again requires a third party to disclose information and documents, is aimed at locating the victim’s proprietary funds and protecting them from dissipation. This comes from the English High Court decision in Bankers Trust Co. v Shapira  1 WLR 1274.
- Mareva-type freezing orders to prevent a defendant dissipating assets before final judgment, the statutory power for which comes from section 1 of the Law Reform (Miscellaneous Provisions) (Guernsey) Law, 1987. The Guernsey courts also have the power to grant ancillary disclosure orders as part of the injunction, particularly as to where funds have gone, so as to give the injunction “teeth”.
- Albeit rare, the Guernsey courts have been known to grant Anton Piller orders; that is, permitting a party to search premises and seize evidence without prior notice, where there is a real possibility that the evidence in their possession will be destroyed.
- “Gagging orders” which often form part of the above orders.
In Guernsey, injunctions in asset recovery cases for fraud are generally against local banks. As regulated and respectable financial institutions, the banks should abide by the Guernsey courts’ orders – this will ensure that any funds that are the subject of a freezing order are well and truly locked down.
Although it is a condition for a freezing order under the Law Reform (Miscellaneous Provisions) (Guernsey) Law, 1987 that the substantive proceedings are (or will be) brought in Guernsey, the Guernsey courts do have the power to waive this requirement if substantive proceedings are taking place in a foreign jurisdiction. A common example of this is where the Guernsey courts are asked to grant a “mirror injunction” to give effect to a worldwide freezing order granted in another jurisdiction – that is, where the order extends to assets located outside of the jurisdiction where the original injunction was granted.
Prior to the modern day Mareva-type injunctions, a Guernsey customary law procedure known as an arrêt conservatoire was traditionally used to seize property to prevent its dissipation. An arrêt conservatoire is available pre-action provided there is a Guernsey claim, and there is Guernsey property at risk of dissipation. The procedure is relatively straightforward with an ex parte application made to a judge in chambers, who then issues the arrêt which is executed by HM Sherriff (an officer of the Court with equivalent powers of a United Kingdom bailiff).
Albeit rarely used nowadays, the arrêt conservatoire retains some practical usefulness in that, unlike a freezing injunction, it takes effect in rem rather than in personam. If a defendant does not comply with an injunction, then the sanction is a contempt of court – this will mean little if both the fraudster and his/her assets have long left Guernsey. However, under an arrêt conservatoire, HM Sheriff can physically seize and lock down the property the subject of the fraud, in short order. This could be useful where the location of the property is known but the location and/or identity of the fraudster is not, or where, for example, the property is a luxury yacht (berthed in Guernsey) that could sail away at any time.
Another tool available to a claimant in Guernsey proceedings is the registration of an interlocutory act in those proceedings in the Livre des Hypothèques, with the leave of the Royal Court of Guernsey (the Royal Court). This is a customary law procedure dating back to at least the 19th Century, the effect of which is to create a charge over the respondent’s interest in any Guernsey property, with priority over any subsequent charges.
However, there will be times when the trail of the fraudulent proceeds goes cold and all the victim is left with is a judgment against a company or individual with no assets to their name. In that situation, the Guernsey courts have demonstrated a willingness to entertain a Pauline action.
The Royal Court acknowledged the availability of a Pauline action in Flightlease Holdings (Guernsey) Ltd v International Lease Finance Corporation (Guernsey Judgment 55/2005), which cited with approval the Royal Court of Jersey’s decision in In re Esteem Settlement (2002) JLR 53. In essence, a Pauline action provides a remedy to a creditor to set aside an agreement between its debtor and a third-party recipient, which was made to defeat the interests of that debtor’s creditors. It is a restitutionary Commercial Dispute Resolution remedy, and so does not result in the plaintiff being awarded damages.
Where a Pauline action can be very useful is where a debtor has deliberately transferred all of its assets, or at least enough to render the debtor insolvent, in a blatant attempt to defeat a creditor enforcing its judgment. Unlike many other restitutionary claims, a Pauline action does not require the creditor to have an equitable interest in the transferred assets.
The availability of the Pauline action in Guernsey is important for creditors as the Companies (Guernsey) Law, 2008 (Companies Law), which contains the statutory provisions for insolvent companies, does not currently contain an equivalent to section 423 of the UK Insolvency Act, 1986 (that is, the statutory remedy for the court to set aside a transaction defrauding creditors).
However, the Companies Law does provide a statutory civil remedy where the business of the company was carried on with the intent to defraud its creditors. This remedy is available to a liquidator, creditor or member of the company against any person knowingly involved in the conduct – “person” is not limited to, but will invariably be, a director of the company. The limitation with this remedy is that the Royal Court can only order that the person contribute to the company’s assets – if that person is a “man of straw”, then the Royal Court’s award will be pyrrhic.
It is also a useful tool where a debtor may have transferred assets into a trust at a time when he knew or ought to have been aware that he was unable to pay his debts. The Royal Court can make an order which will have the effect of setting aside the trust leaving the funds available for enforcement against the settlors’ debts.
Following judgment, a judgment creditor has three years to enforce a default judgment, or six years to enforce a judgment obtained after trial or by consent, with those periods being renewable for a further period on application to the Royal Court.
The principal enforcement procedure available to a judgment creditor is an arrêt execution. HM Sheriff seizes the judgment creditor’s moveable property which (if the judgment is not satisfied beforehand) is sold by court ordered auction with the proceeds distributed amongst all creditors.
A judgment creditor may also commence saisie proceedings (another remedy derived from customary law) before the Royal Court for the vesting of the judgment debtor’s land situate in Guernsey. Saisie is a procedure with a number of formal steps, and requires the marshalling of all the creditors to determine the priority of their claims.
The Royal Court also has the power to register foreign judgments under the Judgments (Reciprocal Enforcement) (Guernsey) Law, 1957. However, that law is limited as currently it applies only to the judgments of the superior courts of the United Kingdom and its Crown Dependencies, Israel, Netherlands, the former Netherlands Antilles, Italy and Surinam. Registration requires an application to the Royal Court, and the grounds of opposition are very limited. If granted, the judgment may be enforced in the same way as a Guernsey judgment.
If a foreign judgment was obtained in a jurisdiction not covered by the above law, then the foreign judgment creditor must effectively sue on the debt by issuing fresh proceedings in Guernsey. Although, the grounds for defending such an action are again limited – the judgment creditor is not required to re-litigate the substantive claim. If successful, then the claimant will be awarded a Guernsey judgment.
Lastly, and although not strictly a debt collection regime, a creditor can apply to the Royal Court for the winding up of a debtor company. If the debtor is an insolvent individual, he or she can be declared en désastre by the Royal Court, with all creditors sharing in the proceeds of the sale of the available assets. Désastre is not the same as a bankruptcy order, and the debtor is not discharged from his or her liabilities – the creditors can continue to pursue the debtor if more assets become available in the future.
Anti-money laundering regime
On the criminal side, it will come as no surprise that fraud is a criminal offence in Guernsey, both under the customary law and the codified offences contained in the Fraud (Bailiwick of Guernsey) Law, 2009.
As a result, Guernsey’s anti-money laundering is a key weapon in the fight against fraud (both locally and internationally). This is particularly so as the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 (the POCL), being Guernsey’s principal anti-money laundering legislation, applies a dual criminality test in determining criminal conduct caught by that law. That is, an act done legally in a foreign jurisdiction will be deemed criminal conduct for the purposes of the POCL (and, importantly, the money laundering offence) if it would be illegal to do that act in Guernsey.
The POCL created three significant criminal offences, namely:
- concealing or transferring proceeds of crime from criminal conduct;
- assisting another person to retain the proceeds of criminal conduct; and
- acquisition, possession or use of proceeds for criminal conduct.
The proceeds of crime includes a broad catchall definition of property, situated in or out of Guernsey, which arises “directly or indirectly, in whole or in part” from criminal conduct.
There is an exemption from criminal liability under the POCL offences if, before handling (or assisting in handling) criminal property, a person makes a disclosure of the relevant law enforcement agency – this is in the form of a suspicious activity report. In addition, there is a specific defence to the acquisition, possession, offence, where a person obtains criminal property for adequate consideration.
The POCL contains a wide range of investigatory and enforcement powers, which are available to Guernsey’s prosecuting authorities. These include the power to require the production of documents, and to seek from the Royal Court restraint orders over property, customer information orders and account monitoring orders.
Following the conviction of a person within the Bailiwick, the POCL gives the Royal Court wide powers to confiscate property (which was most likely secured pre-conviction by a restraint order) and to enforce that order. Further, the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Enforcement of Overseas Confiscation Orders Ordinance, 1999 provides the statutory framework for the enforcement of foreign confiscation orders by the Royal Court as if they were a domestic confiscation order.
However, in practice, where fraud is concerned, the authorities usually utilise the provisions of the Criminal Justice (Fraud Investigation) Bailiwick of Guernsey Law, 1991 (the Fraud Investigation Law) which provides them with considerably stronger investigative powers, in particular:
- the POCL deals with the proceeds of crime only whereas the Fraud Investigation Law is directed at the crime itself;
- under the Fraud Investigation Law, the person producing the disclosed documents may be compelled to explain them (or if he cannot produce the documents to state where they are), whereas under the POCL there is no power to compel explanation; and
- the Fraud Investigation Law empowers the authorities to issue a notice to attend, answer questions and provide information if there is reason to believe that the person has such knowledge or information. The POCL, however, requires an application to the Bailiff (Guernsey’s senior judge) for an order to produce information or documentation only where there is an investigation into whether a person has benefitted from criminal conduct or to the extent or whereabouts of the proceeds of criminal conduct.
Finally, Guernsey’s anti-money laundering arsenal is bolstered by the Forfeiture of Money, etc. in Civil Proceedings (Bailiwick of Guernsey) Law, 2007 (the Civil Forfeiture Law). This provides Guernsey’s authorities with non-conviction-based remedies to seize, detain, freeze, confiscate and have forfeited money which is the proceeds of or is intended to be used in “unlawful conduct”, coupled with investigatory powers similar to those under the POCL.
The Civil Forfeiture Law is, as the name denotes, a civil procedure to which the lower standard of proof applies, being the balance of probabilities. As a result, the authorities are provided with a useful avenue to investigate and confiscate monies where they cannot prove an offence to the criminal standard of proof (that is, beyond reasonable doubt).
In addition, the Civil Forfeiture Law can be beneficial to the victims of a fraud, as discussed later in this chapter.
The main stages of civil fraud and asset recovery in Guernsey reflect those in most other jurisdictions which have an adversarial system of litigation.
Civil fraud and asset recovery proceedings can take a number of forms – from a substantive fraud action in the Guernsey courts, to applying for disclosure orders or a mirror injunction to assist foreign proceedings, to enforcing a foreign judgment/arbitral award against Guernsey assets. Each of those various actions will have their own procedure and considerations, and it is outside the scope of this text to deal with each scenario. Rather, the stages below relate to fraud proceedings commenced in the Guernsey courts, but many of those stages will also apply to the other possible forms of action.
The first stage is pre-action, which is largely evidence gathering from available resources – both the information and documents held by the claimant and any other public available resources. This is the collation of the necessary evidence required to either commence the substantive action or, at the very least, sufficient evidence in order to apply for pre-action disclosure orders.
Unlike some other jurisdictions, Guernsey does not have a codified pre-action protocol, and so a plaintiff can commence proceedings without first sending a letter before action. However, in practice, such a letter will usually be sent, as there is an expectation by the Guernsey courts that it will be.
Of course, in fraud cases a pre-action letter may not be sent for risk that it will “tip off” the defendant and assets dissipated, at least not until some form of injunction is in place. This brings us to the second stage of fraud cases in Guernsey, which are disclosure orders and injunctions.
As discussed in the previous section, claimants in Guernsey can avail themselves of Norwich Pharmacal and/or Bankers’ Trust orders to identify the correct defendant and where proprietary funds have gone. These orders are often brought as a precursor to an injunction, once the wrong-doer and the location of the funds are known.
At the time an injunction application is brought, substantive proceedings will have been brought or will be soon after. Proceedings are commenced in Guernsey by way of summons which is served on resident defendants by HM Sergeant. Given the nature of Guernsey’s business, the defendant is often domiciled in another jurisdiction, which includes the United Kingdom, requiring the Royal Court to first grant leave to serve a summons out of the jurisdiction.
In order to obtain leave to serve, a defendant must be out of the jurisdiction. This is a fertile area for satellite litigation, which can greatly delay the substantive action, as a determined and well-funded foreign defendant can seek to challenge jurisdiction.
Nevertheless, the Guernsey courts have often expressed the view that if a foreign defendant has decided in the past to avail themselves of the advantage of using a Guernsey-based structure, he should not be allowed to wriggle out of being answerable to Guernsey Courts.
As for criminal fraud proceedings, these are commenced by the Law Officers of the Crown (being Guernsey’s prosecutorial authority) the Law Officers and follow the common criminal procedure of charge, plea, trial and sentence.
Following conviction and upon sentencing, the Law Officers of the Crown can apply for confiscation of the proceeds of the crime under the POCL, as discussed above.
The potential interplay between civil and criminal proceedings for fraud is considered in the next section.
Unlike other jurisdictions such as England and Wales, it is generally accepted that there is no right to a private prosecution in Guernsey. All criminal prosecutions are conducted by the Law Officers.
As a result, the most a victim of fraud (or their advocate) can do is make representations to the Law Officers that the offender should be prosecuted criminally. The victim will have no control over the criminal prosecution, in particular the evidence that may be adduced. However, the question which arises is whether to bring civil proceedings simultaneously, or await the outcome of the criminal trial.
One important consideration for a victim is the impact that civil proceedings may have on a confiscation order under the PCOL, made upon sentencing a convicted fraudster. If a victim has not, and does not intend to commence civil proceedings, then the Royal Court has a duty to impose a confiscation order over the fraudster’s property. That order will then be realised with the proceeds going to Guernsey’s general revenue and not the victim.
However, if a victim has brought or intends to bring a civil action, then the Royal Court only has power and not a duty to impose a confiscation order and, if it does, has a discretion to take into account a civil award. These provisions in the POCL are obviously designed to allow a victim a first bite of the offender’s assets by way of compensation.
Therefore, a decision will need to be made on timing. If the claimant starts civil proceedings first and then subsequently seeks to persuade the Law Officers to bring criminal proceedings, there may be a temptation for the Law Officers to await the outcome of the civil action. It may be prudent to persuade the Law Officers to commence criminal proceedings and as soon as these are underway commence a parallel civil action. Also, it should be borne in mind that under Guernsey law and rules of evidence, a criminal conviction for fraud will be admissible in civil proceedings of the fact of that conviction.
Accordingly, a claimant may be well advised to have commenced civil proceedings to ensure that the Court takes them into account in deciding to impose a post-conviction confiscation order (and, if so, in what amount).
Further, if moneys have been seized and are to be forfeited under the Civil Forfeiture Law (see above), then a victim may apply to the Royal Court for those monies if they (or property representing those monies) belong to the victim. There is no guarantee that the Law Officers would pursue to the civil forfeiture route but, if they did, then this avenue may be attractive (and arguably more cost effective) to a victim of fraud who is likely to have a proprietary interest in the monies seized.
The extent of any challenges facing a victim of fraud will depend on how sophisticated the fraudster has been especially in covering his tracks. Generally, it follows that fraudsters using offshore structures will indeed be sophisticated and often have used many different jurisdictions – thus creating a structure of smoke and mirrors. Furthermore, the digital age has facilitated the ability of fraudsters to spread the schemes like a web across the globe.
This is further compounded by the use of crypto currencies which are tougher to trace, together with darknet inscription technology which utilises a number of intermediate servers to mask the user’s real identity.
Despite all these more recent challenges, the main difficulty for the victim usually continues to be having access to the funds, resources and stamina needed to pursue the claim. Inevitably it is likely that the victim is already low on funds by reason of the loss arising from the fraud. The victim may be required to fund expensive professional advice and court proceedings over a number of years. Unfortunately, in Guernsey, lawyers remain prohibited from having a financial interest in the outcome of a case for their client so arrangements such as conditional fee agreements are not possible.
However, in recent times, litigation funding has found traction in Guernsey, which is discussed in the section on recent developments below.
It is common when tackling modern fraud that the fraudsters’ footprints can be found across multiple jurisdictions, requiring the engagement of different lawyers and courts and pursuing a joined-up strategy between all those jurisdictions. Modern fraud is “a patron of many countries but a citizen on none”.
For well over 30 years the Guernsey judicial system has recognised the need for it to be fully up-to-date in the global processes for ensuring that Guernsey does not become a “black hole” into which fraudsters can hide away their proceeds. The Guernsey courts have been quick to adopt all the usual mechanisms to assist the Mareva injunctions, disclosure orders, Norwich Pharmacal orders, Anton Piller orders – all pre-action and may include gagging orders if necessary. It is also commonplace for the Guernsey courts to grant in effect orders in aid of other jurisdictions, particularly upon receipt of letters of request from those jurisdictions.
Guernsey has also developed the principles arising from the common law concerning the characterisation of constructive trusts over assets which may be held in the possession of a relatively innocent third party, but nevertheless in law belong to the victim.
So far as international conventions are concerned, and arising from Guernsey’s positions as a Crown Dependency, it looks to the United Kingdom to be responsible for its international relations. The result is that Guernsey rarely enters directly into international treaties or conventions, but has their effect extended to it by reason of the UK’s participation. For example, the Hague Service Convention and the New York Arbitration Convention both extend to Guernsey.
On the criminal side, a number of international conventions have been extended to Guernsey, including the Council of Europe Convention on mutual legal assistance in criminal matters, the Council of Europe Convention on Laundering, Search, Seizure and Confiscation of the Proceeds of Crime, and the United Nations Convention against Corruption.
Investigation and asset tracing for large-scale multiple jurisdiction fraud litigation is rarely undertaken without the use of increasingly sophisticated software. The lawyer advising the victim will have a whole new range of experts familiar with the investigations needed using modern technology.
In particular, use of artificial intelligence has proved very effective with specialist service providers offering to track down both the current whereabouts of the fraudster and the possible site of assets in financial institutions around the world. The larger accountancy firms offer a wide range of services in this field and all the “Big Four” accountancy firms (together with many others) have offices established in Guernsey.
A most important development globally in recent years has concerned litigation funding.
It is probably fair to say that it was rarely seen in Guernsey until recently, given concerns that it may breach the rules against champerty and maintenance, where a third party has a financial interest in the outcome of any judgment.
The Royal Court finally addressed this issue in a decision in 2017 in Providence Investment Funds PCC Limited and Providence Investment Management International Limited. The outcome of that case, which considered the use of a litigation funding agreement by joint administrators, was that litigation funding can be used providing the terms of the agreement did not give the funder “control” of the litigation. In Providence, the Court held that the agreement did not give the funder control even though it required the joint administrators to follow the legal advice of a funder’s lawyers and in addition to consult with the funder.
The result is that litigation funders are now active in litigation conducted in Guernsey and victims are recommended to shop around for the best deals.
Other major developments have occurred in the area of insolvency. In January 2020, the States of Guernsey approved the Companies (Guernsey) Law 2008 (Insolvency) (Amendment) Ordinance 2020. That ordinance was designed to further enhance Guernsey’s reputation as a robust jurisdiction for restructuring and insolvency. Key changes include the introduction of new powers for liquidators who will be able to compel the protection of documents from former directors and officers and to appoint an Inspector of the Court to examine them. The proposed changes present a significant “beefing up” of the statutory investigatory powers available to insolvency office holders in Guernsey, which will be a vital tool in the investigation of wrongdoing and subsequent recovery action.
In addition, the Ordinance introduces a formal statutory remedy by which office holders will now be able to pursue recovery of transactions at an undervalue and extortionate credit transactions. Another important change is the ability to wind up a non-Guernsey company. It was felt that this was necessary in the light of Guernsey’s non-status of an international finance centre providing administration and asset management services to many foreign companies. This change brings Guernsey into line with other major jurisdictions and will allow the Royal Court to apply the Guernsey regime to foreign companies where they have a sufficient connection.
An original version of this briefing was published in CDR Fraud, Asset Tracing and Recovery 2021.