07 November 2013

Lloyds Trust Company (Channel Islands) Limited v Carlos Fragoso & Others [2013] JRC211

On an application by the Representor trustee under Article 51 of the Trusts Law, the Royal Court determined that it was appropriate not to apply recent English authority following, instead, a Privy Council decision (on an appeal from New Zealand), because for “important reasons of policy” the Court needed to make a decision that deterred fraud and the promoted the “ability to strip fiduciaries who have channelled their illicit funds through this jurisdiction of all benefits”.

Background

It came to the attention of Lloyds Trust Company (Channel Islands) Limited (the “Trustee”) that assets which it was holding as trustee of the Rex Trust, a Jersey law trust (the “Trust”), might comprise the proceeds of  crime. 
 
The Settlor of the Trust, Carlos Fragoso, (the “Settlor”)  had informed the Trustee on settling funds into the Trust in 1999 that the assets so settled were the proceeds of his work as a civil engineer in the US, Swaziland and South Africa. He failed to disclose when establishing the Trust that he held public office in Mozambique.
 
Meanwhile, in English proceedings brought in 2007 against a UK construction company, Mabey & Johnson (the “Company”)   by disgruntled former employees, for breach of contract arising from the alleged taking of secret profits, evidence was given that there had been a widespread practice of payment of bribes on behalf of the Company to secure construction contracts in a number of countries including Mozambique. These discoveries resulted in an investigation and criminal proceedings being instituted against the Company in which the prosecution’s opening statement made mention of a certain Mr Fragoso, described as chairman of the Mozambique National Roads Administration. The prosecution also revealed that Mr Fragoso was the apparent recipient of “commission” payments from the Company.
 
As an example of thorough due diligence, the Trustee became aware of the allegations and conducted its own investigation, leading to the filing of a suspicious activity report with the JFCU in Jersey. Furthermore, the Trustee asked Carlos Fragoso to provide evidence of the source of the funds that the Trustee was holding on trust, but he failed to do so.

The Proceedings

The Trustee made an application under Article 51 of the Trusts Law 1984, to which not only the Settlor, the Trust’s beneficiaries and the Attorney General but also the Government of Mozambique were joined, seeking an order that the trust fund be paid out to the Government of Mozambique. Neither the Settlor, nor the beneficiaries appeared in the proceedings.
 
The Royal Court, having heard evidence that some £153,000 “commission” had been paid to the Settlor, found, on the balance of probabilities, that all of the funds within the Trust represented the proceeds of bribes received by the Settlor in his position as a public officer for Mozambique but thereafter had to decide what to do with the proceeds of crime given the two conflicting lines of authority put before the Court.

The Authorities

There is a fundamental conflict between the English Court of Appeal authority, Lister v Stubbs dating back to 1890, and the Privy Council decision in Attorney General for Hong Kong v Reid [1993] UKPC 2. The nineteenth century case determined that the relationship between the employer and the recipient of the bribe was not one of “trustee and cestui que trust” but of debtor and creditor, with the result that there was no claim to the monies representing a bribe by the party to whose detriment it had been paid. 
 
The Privy Council in Reid disagreed and decided that the decision in Lister was
 
not consistent with the principles that a fiduciary must not be allowed to benefit from his own breach of duty, that the fiduciary should account for the bribe as soon as he receives it”.
 
As recently as this year, the English Court of Appeal has held itself bound “as a matter of judicial hierarchy” to follow Lister (FHR European Ventures LLP & Ors v Ramsey Neil Mankarious & Ors [2013] EWCA Civ 17) , and that only Parliament or the Supreme Court could change the position.

The Judgment

Reminding himself of the principles expounded by Bailhache, Bailiff, in State of Qatar v Al Thani [1999] JLR 118, to the effect that “it was only decisions of the Privy Council on appeals from this jurisdiction that formally bind this Court”, Commissioner Clyde-Smith explained that the question of which of the lines of authority was to be preferred had not been conclusively determined previously by the Royal Court. The Court considered a number of authorities but held that the decision of the Privy Council in Reid was “of the highest degree of persuasiveness”, all the more so given that “the English Court of Appeal...found itself constrained by precedent which it said made the law more complex and uncertain”.
 
The Royal Court held that the funds - net of any costs that the court might agree should be met from the funds – were held by the Trustee on constructive trust for the Government of Mozambique and should be paid direct to that Government given the Crown’s indication that the funds no longer be regarded as the proceeds of crime.

Conclusions

The Royal Court had intimated – obiter – in its judgment in Federal Republic of Brazil at al v Durant International et al [2012] JRC 211 that it would be likely, if asked to do so, to come down in favour of following Reid. This new decision puts the matter beyond any doubt and demonstrates the flexibility of the approach of the Royal Court when faced with long established English precedent – albeit one not binding in Jersey.
 
The judgment makes clear that the Royal Court remains prepared to forge a path clear from tracks laid by English authority and to steer its own way forward, with the importance of “Jersey Plc.” and the reputation of this jurisdiction, a significant and compelling consideration.
 
Please note that this briefing is only intended to provide a very general overview of the matters to which it relates. It is not intended as legal advice and should not be relied on as such.
 
© Carey Olsen 2013
 
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