02 March 2020

MLROs being challenged by Guernsey's suspicious activity report regime

Money laundering reporting officers (MLROs) and compliance professionals in Guernsey's finance industry would welcome more detailed guidance and clarity around the steps and processes involved in lodging suspicious activity reports (SARs), according to Carey Olsen regulatory experts Mark Dunster and Simon Florance.

Speaking at the firm's latest regulatory conference in Guernsey, titled 'To SAR or not to SAR – is that the question?', Mark and Simon explained that there was a lot of uncertainty in the minds of MLROs. This uncertainty arises around what constitutes a valid suspicion and the time frames expected to be met between having that suspicion and submitting a SAR to Guernsey's Financial Intelligence Service (FIS) under the provisions of The Disclosure (Bailiwick of Guernsey) Law, 2007.

"To say there is no guidance would be unfair but there are 116 paragraphs in Chapter 13 of the Guernsey Financial Services Commission's Handbook on Countering Financial Crime and Terrorist Financing which deals with reporting suspicion, but only four paragraphs in that chapter deal specifically with what suspicion means, and in a general way," said Simon.

"What local industry needs is meaningful guidance as to what constitutes suspicion in real and practical terms, be this from the legislature or the authorities administering Guernsey's AML/CFT regime."

Mark added that recommending practitioners look towards UK guidance for what constituted suspicion was itself questionable seeing as a Law Commission report issued in the UK last year revealed that, between October 2015 and March 2017, 15% of authorised disclosure SARs there did not meet the threshold of suspicion, meaning that 4,121 SARs should never have been submitted, while a further 47.6% demonstrated no objective grounds for suspicion.

"It is a worry. The job of the MLRO is difficult enough without this added uncertainty over what constitutes reasonable suspicion for the filing of a SAR," said Mark.

A further frustration for MLROs locally is the lack of a deemed consent regime. In the UK, when a SAR is lodged it is down to the National Crime Agency to look into it and to take action within a prescribed time frame. If no action is taken within that time then consent is deemed to have been given, but there is no similar mechanism under The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999.

"Under the Guernsey legislation, the FIS can simply refuse to provide its consent, and then do nothing more. It then falls to the customer to bring a costly and time consuming private action against the business in the Royal Court. Accordingly, in stark contrast to the English regime where the responsibility of taking action (and quickly) falls squarely on the authorities' shoulders, as should be the case, the Guernsey legislation effectively renders local industry the de facto law enforcement agency," said Simon.

"This can then create an unacceptable situation where assets are left in limbo and the local financial institution is placed in an unenviable position as it bears the brunt of its client's frustration, particularly given the institution cannot explain the reason for refusing the client's otherwise lawful instructions because of the threat of prosecution for tipping off."

Mark believes the processes and various stages involved in Guernsey's SAR regime and the lack of statutory guidance to go alongside it is placing yet another burden on the shoulders of Guernsey MLROs and the compliance sector generally.

"There are a lot of practical points that are essential an MLRO knows which, in our experience, are not written down in either the law or the regulator's guidance. If you are a very experienced MLRO you have probably learnt the hard way and know already but you don't want to be learning these things the hard way if you can possibly avoid it," said Mark.

"It should be perfectly legitimate for an MLRO to be asking 'why am I bearing such a crushing responsibility in which often legislation has put me between a rock and a hard place, and where I have two competing obligations?' MLROs should be entitled to say that they need to understand as much of the written and unwritten practices as they can."

* In May 2018 the Royal Court of Guernsey handed down its judgment in Liang v RBC Trustees (Guernsey) Limited – the first and only time a private law action has been brought in Guernsey by a person denied access to assets as a result of a SAR made to the FIS. Read more about the Liang v RBC Trustees case, which saw Mark and Simon represent RBC, and find out about the lessons to be taken away from it.