Mr Robert Archibald Gilchrist Sinclair

The Financial Services Business (Enforcement Powers) (Bailiwick of Guernsey) Law, 2020 ("the Enforcement Powers Law")

The Regulation of Fiduciaries, Administration Business and Company Directors, etc. (Bailiwick of Guernsey) Law, 2020 ("the Fiduciaries Law")

The Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 ("the Proceeds of Crime Law")

The Criminal Justice (Proceeds of Crime) (Financial Services Businesses) (Bailiwick of Guernsey) Regulations, 2007 ("the Regulations")

The Handbook for Financial Services Businesses on Countering Financial Crime and Terrorist Financing ("the Handbook")

The Finance Sector Code of Corporate Governance ("the Code of CG")

Code of Practice - Trust Service Providers ("the TSP Code")

The Principles of Conduct of Finance Business ("the Principles")

 

Mr Robert Archibald Gilchrist Sinclair ("Mr Sinclair")

 

On 20 January 2022, the Guernsey Financial Services Commission ("the Commission") decided:

• To impose a financial penalty of £196,000 under section 39 of the Enforcement Powers Law on Mr Sinclair.
• To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Sinclair from holding the position of controller, director, partner, manager, money laundering reporting officer and money laundering compliance officer for a period of 5.6 years.
• To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in section 3(1)(g) of the Fiduciaries Law in respect of Mr Sinclair for a period of 5.6 years.
• To make this public statement under section 38 of the Enforcement Powers Law.

The financial penalties issued in this case were imposed under The Financial Services Commission (Bailiwick of Guernsey) (Amendment) Law, 2016, which increased the maximum level of financial penalties available to the Commission.

 

BACKGROUND

Mr Sinclair was the managing director of a licensed Guernsey company that was incorporated in 2001 ("the Licensee") and remained in this position until June 2019. He was the minority (49.27%) shareholder of the Licensee during the period under review. Mr Sinclair also held the positions of Money Laundering Reporting Officer ("MLRO") from October 2008 to June 2019, Money Laundering Compliance Officer ("MLCO") from March 2019 to May 2019 and Compliance Director until June 2019.

The Licensee is a licensed fiduciary company, and its primary business is the establishment and administration of trust and corporate structures. Through its joint licensees the Licensee provides directorship, trustee, administration, secretarial and nominee shareholder services.

FINDINGS

The Commission's investigation (the "Investigation") commenced following a full risk assessment of the Licensee conducted in December 2018.

The Investigation found serious and systemic failings whereby Mr Sinclair failed to ensure the Licensee monitored and managed the financial crime risks associated with its customers as required by the Regulations and the rules within the Handbook ("the Rules"). The Investigation also found that Mr Sinclair failed to adhere to the Code of CG, the TSP Code and the Principles.

The Investigation identified that Mr Sinclair failed to demonstrate that he acted with probity, competence, experience, soundness of judgement, diligence, and knowledge and understanding of the legal and professional obligations to be unde1iaken. The Commission concludes that Mr Sinclair is not a fit and proper person due to his actions.

In particular, the Investigation found:

• The Licensee facilitated / enabled a client of a high-risk jurisdiction to move funds between trust structures and ultimately distribute them in a manner designed to obfuscate the origin of the funds. The position was exacerbated by the fact that a family associate of the client held a senior position in an EU sanctioned, government owned organisation of the high-risk jurisdiction, who was also under investigation for alleged misappropriation of government funds. The family associate was also the subject of an Interpol Red Notice at the relevant time. (See Example 1)
• The Licensee maintained a business relationship with a politically exposed person ("PEP") from a high-risk jurisdiction and with alleged links to organised crime in that high-risk jurisdiction. Furthermore, over a significant period of time, the Licensee was unaware that the underlying ownership of the structures it administered had significantly changed with a strong suggestion that this was done to distance the client from the structures. (See Example 2)

The Licensee failed to carry out ongoing and effective monitoring of clients

Regulation 11 (and subsequently paragraph 11 of Schedule 3 to the Proceeds of Crime Law) details the requirements to perform ongoing and effective monitoring of existing business relationships, including scrutiny of any transactions or other activity. Regulation 5 (and subsequently paragraph 5 of Schedule 3 to the Proceeds of Crime Law) also details that for high-risk clients there must be more frequent and more extensive monitoring.

Example 1

In 2002, the Licensee established a business relationship with Mr A, a national of Country A, which is a high-risk country known for its high level of bribery and corruption. Mr A was involved in high-risk business activities often working with the government in Country A.

The Licensee acted as trustee for Trust 1 which was settled by Mr A and as directors and secretary of companies held under Trust 1.

Following the death of the leader of Country A, Mr A requested that the Licensee change the name of Trust 1 and to replace him as a beneficiary of the trust with a family member. A Fellow Director/Shareholder of the Licensee noted that Mr A would still be shown as the settlor and that the trust would always have a history of being named "Trust 1". To achieve the closest result to Mr A's wishes, the Fellow Director/Shareholder suggested to Mr A the setting up a new trust ("Trust 2"), which would achieve the following:

• Mr A would not be named as settlor;
• the beneficiaries could be named as a class and exclude Mr A;
• there would be no link to Trust 1; and
• the Trust 2 could be called anything.

Mr A also wanted the name of an associated foreign company changed. This change was also effected for Mr A by the Fellow Director/Shareholder. The rationale behind the change of name for this entity was to remove any perception it was linked to Mr A's trading company in Country A.

Considering that Mr A had requested these changes shortly after the death of the leader of Country A, and that Mr A worked with the government of Country A, the Licensee should have scrutinised this activity closely. Instead, the Fellow Director/Shareholder suggested a method by which Mr A could deliberately disassociate himself from and obscure his connections to Trust 1 and the associated trading company.

The Licensee was later informed that Mr A had a brother who worked for a government organisation in Country A which organisation had entered contracts with Mr A's businesses.

The Licensee was informed that Mr A's brother and a group of companies he used were being investigated and had been accused of misappropriating funds from the government of Country A. This government organisation had been the subject of EU sanctions, enforceable in Guernsey, due to being an entity acting on behalf of the leader of Country A. Mr A was concerned that he may be subject to investigation. According to a file note of a conversation between a manager of the Licensee and Mr A's adviser, Mr A and his brother were confident that the investigation would be closed, however, the Licensee took this explanation at face value and took no further action to verify the relevant details. The Licensee did not consider that Mr A may have wanted to disguise his links to Trust 1 and the associated foreign company in case he was investigated and to avoid any sanctions attaching to him or the trust or company's assets.

The Licensee became aware of adverse media regarding Mr A and his brother, including that the government organisation with which Mr A's brother was associated was alleged to have given contracts to companies related to Mr A. During the same period of time, Interpol had published a Red Notice seeking Mr A's brother, however, the Licensee was unaware of the Red Notice at the time of its publication.

Shortly after the adverse media began to appear, Mr A contacted the Licensee from an unknown e-mail address, informing them of the change of e-mail address and requested distributions to be made from Trust 2 to bank accounts in another high-risk jurisdiction. Over the next few months, a significant propo1iion of Trust 2' s assets were transferred to bank accounts in this alternative high-risk jurisdiction in the name of Mr A who had, as described above, deliberately been removed as a beneficiary of the trust. The distributions were allegedly for and on behalf of a family member (named as the beneficiary) who apparently did not have a bank account, however, the Licensee was unable to provide definitive evidence to support this.

The Licensee failed to effectively scrutinise these transactions and consider whether they were disguised distributions to Mr A, in the knowledge that the changes to the structure that had been requested by Mr A had been made to remove Mr A as the settlor/beneficiary. Furthermore, there was contemporaneous adverse media surrounding Mr A and his business/family associates.

In addition, the payment of funds from Trust 2 to Mr A, who was not a beneficiary, without any rationale demonstrates that the Licensee was not treating the interests of the beneficiaries as paramount, as required by paragraph 4 of the TSP Code.

Example 2

The Licensee established a business relationship with Company I, a foreign registered company, in 2006, which at the time was ultimately owned by Mr B. Mr B was a high net worth individual from Country B, a high-risk country and was also a PEP. During the course of the business relationship, adverse media was identified by the Licensee, stating that Mr B had alleged links to organised crime in Country B.

Between 2006 and 2013, the legal ownership of Company 1 changed from Mr B to Mrs C, Mr B's mother. The Licensee was unaware of the change in ownership until 2013 and is still unaware of when the change took place or the rationale behind the change.

In 2016, the Licensee was made aware that the ownership structure had changed again in 2014. Ownership of Company 1 was split between 11 people/foundations/funds, with 80.2% of the shareholding being held in declarations of trust in favour of Mrs C. Some of the additional people/entities that became shareholders were related to Mr B, and one of them was an additional PEP in the structure. This was a further change of ownership of which the Licensee was unaware, and it added another ownership layer to the structure. Furthermore, the Licensee was only made aware of this change because of a request from a bank, not from its own ongoing monitoring of the business relationship as required by the Handbook.

In 2018, adverse media began to appear which reported that Mr B had made his mother the owner on a multitude of other companies and assets that had belonged to him, and the adverse media suggested that this may be an attempt by Mr B to hide his assets. Mr B was also subject to U.S. sanctions in 2018.

The Licensee also failed to appropriately monitor and record a loan that Company 1 had received. In or around 2008, Company 1 received a loan from an associated company, however, the Licensee did not have the corresponding loan agreement. In 2018 the Licensee contacted a representative of the associated company in an attempt to determine the rationale behind this loan and also requested a copy of the agreement. The Licensee was informed that the loan had been waived in 2017, and it was not provided with a copy of the agreement. For 10 years the Licensee failed to monitor this transaction and have the necessary documentation, oversight and understanding of it as required by the Handbook.

Example 3

The Licensee was the trustee of Charitable Trust 3. The purpose of this entity was to promote the education, health, culture and spiritual development of communities in Africa, India and Europe. Donations were made by the trustees on a recommendation from Mr D, the settlor of Charitable Trust 3.

In 2017, the Licensee contacted an individual about a donation to be made towards a school project. However, before payment was made, Mr D inte1jected and corrected the Licensee that the payment was in fact a birthday gift to an individual, a friend of Mr D. The Licensee continued and made the payment despite the fact that it was outside the purpose of Charitable Trust 3.

In addition, Charitable Trust 3 paid the university fees of an individual whose father was a senior manager in a natural resource company part owned by Mr D. The individual's father was also the Vice-Chairman of a subsidiary of the natural resource company which operated a mine in a high-risk country, part-owned by the government of that country.

A Fellow Director correctly identified that the direct payment of university fees could be considered to be disguised remuneration to the father of this individual and a breach of the trust deed. However, the Fellow Director then suggested an alternative method of paying the university fees to Mr D personally who could settle the fees himself. The Licensee and the Fellow Director failed to effectively scrutinise the risks of facilitating the payment of the university fees in this way. The Licensee also failed to consider whether these payments breached The Prevention of Corruption (Bailiwick of Guernsey) Law, 2003.

In addition, the payment of funds from Charitable Trust 3 outside of the trust deed demonstrates that the Licensee was not treating the interests of the beneficiaries as paramount, as required by paragraph 4 of the TSP Code.

The Licensee failed to take reasonable measures to establish source of funds and source of wealth for high-risk customers

Regulation 5(1) (and subsequently paragraph 5 of Schedule 3 to the Proceeds of Crime Law) required a financial services business to carry out enhanced customer due diligence ("EDD") where the customer, beneficial owner or underlying principal is a PEP or where a business relationship that has been assessed as high risk. EDD includes taking reasonable measures to establish the source of any funds and of the wealth of the customer and beneficial owner and underlying principal.

Example 4

In relation to Mr A and Trust 1 (see Example 1), during a period of eight years, a substantial amount of funds was received into Trust 1. Of this amount, a significant po1iion (almost 40%) was received via money exchange companies. These money exchange companies did not maintain records of who deposited the funds to finance transactions and so the Licensee was unable to ascertain whether it was Mr A who was the source of funds.

Whilst the Licensee was provided with translated contracts and invoices from Mr A as evidence of the amounts received, the Licensee could never establish that the funds received through the money exchange companies were the same as those detailed on the contracts and invoices.

Example 5

The Licensee provided director, administration, secretarial and nominee services for a Guernsey registered company, Company 2, which was owned by Mr E, a PEP in Country C. Between 2006 and 2007, Company 2 received substantial loans from a foreign registered entity with which the Licensee had no business relationship. The Licensee has confirmed that at the time of making these loans it had not asce11ained the source of funds or the source of wealth in relation to these loans.

When the Licensee contacted the administrator of the foreign entity in 2018 (some 11 years after the receipt of the funds) to establish the source of the funds for the loans, the Licensee was told that the owner could have changed several times and that it had no information on where the money had originally come from.

The Licensee eventually established (after Mr Sinclair's departure) that the funds loaned to Company 2 originated from Mr E.

The Licensee has since discovered that Mr E was a director of an infrastructure company, that had been the subject of a number of investigations, including allegations of bribery and corruption, thereby creating the potential that the source of the loans was linked to the proceeds of crime.

The Licensee failed to regularly review its customer risk assessments and ensure all relevant risk factors were considered

Paragraph 3(4)(6) of Schedule 3 to the Proceeds of Crime Law (and previously Regulation 3(2)(6)), requires a financial services business to regularly review, and where necessary update, its customer risk assessments. Rule 55 of the Handbook required a financial services business to ensure that all relevant risk factors are considered before determining the overall assessed risk.

Example 6

The Licensee's policy for conducting periodic reviews on its clients was as follows:

• for high activity high risk clients to be reviewed annually;
• lower activity high risk clients every other year; and
• standard risk clients every three to five years.

During the period between March 2014 and September 2019, there was a constant backlog of periodic reviews, including a time where 85% of the client base (which at the time was around 750 clients), had an outstanding periodic review. This resulted in the Licensee not adhering to paragraph 3(4)(6) of Schedule 3 to the Proceeds of Crime Law (and previously Regulation 3(2)(6)) or to its own internal policy regarding the same.

Example 7

With regards to Mr B and Company 1 (see Example 2), the Licensee had initially risk rated this relationship as high risk.

The risk assessment for Company 1 was reviewed in 2016 and the Licensee re-classified its risk-rating from high risk to standard risk due to Mrs C being formally recognised by the Licensee as the ultimate beneficial owner, and a person who was not considered a PEP or PEP by association to her son. However, the Licensee failed to consider a number of risk indicators, as required by Rule 55 of the Handbook:

• The Licensee was not informed of the change in ownership from Mr B to Mrs C (between 2006 and 2013);
• The potential that the new ownership structure obfuscated the true ownership by Mr B;
• The previous adverse media that Mr B was linked to organised crime in Country B; and
• The fact that the business relationship was still associated with Mr B, who was still considered a PEP.

The Licensee then failed to review this risk assessment when it became aware of the second change of ownership. This failure resulted in the structure remaining classified as standard risk notwithstanding that there was an additional PEP and an additional ownership layer in the structure.

Company 1 remained rated as standard risk until late 2018 when the Licensee re-classified it as high-risk, having identified that there were more PEPs involved. However, this was 6 months after Mr B had been sanctioned by the U.S. and 3 months after the adverse media surrounding Mr B and Mrs C was published, which adverse media the Licensee was aware of but did not give due consideration to relative to how it affected the risks associated with Company 1.

Example 8

Company 3, a Guernsey registered company, was incorporated by the Licensee in September 2011 as a special purpose vehicle to purchase a high value asset. The initial risk assessment rated Company 3 as high-risk due to the ultimate beneficial owner being a PEP, Mr E.

A review of Company 3 in 2018 identified that the risk assessment had not been reviewed and updated since 2011, some 7 years after the onboarding of this client. According to the Licensee's policy this should have been done annually. The Handbook also required this to have been done regularly and to keep the assessments up to date.

The Licensee failed to take measures to understand the ownership and control of customers

Regulation 4(1) (subsequently paragraph 4 of Schedule 3 to the Proceeds of Crime Law) required a financial services business to ensure that the steps outlined in Regulation 4(3) were carried out. Regulation 4(3)(c) required a financial services business to take measures to understand the ownership and control structure.

Example 9

As noted above (see Example 2), the beneficial ownership of Company 1 changed from Mr B to Mrs Cat a time between 2006 and 2013, without the Licensee's knowledge. Even though the Licensee became aware of this change in ownership in 2013, there was no documentation on the file that explained the rationale or the date of the change.

The Licensee failed to take measures to understand or consider whether Mr B continued to be the true ultimate beneficial owner of Company 1 via his mother, given the risk factors outlined above.

The Licensee failed to establish and maintain appropriate and effective procedures and controls to ensure compliance with requirements to make disclosures

Regulation 12(f) required a financial services business to establish and maintain such other appropriate and effective procedures and controls as are necessary to ensure compliance with requirements to make disclosures under the Disclosure (Bailiwick of Guernsey) Law, 2007 and the Terrorism and Crime (Bailiwick of Guernsey) Law, 2002.

Example 10

Whilst the Licensee did eventually comply with its disclosure obligations in relation to Mr A (see Example 1), the Commission has noted that the Licensee had missed a number of earlier oppo1iunities to fulfil its disclosure obligations. In particular, this is the case with regard to the following red flags:

• the establishment of a new trust for Mr A to disassociate him from Trust 1 and an associated entity shortly after the death of the leader of Country Z;
• the allegations against Mr A's brother and the potential impact this could have on Mr A, his structures and assets;
• the adverse media concerning Mr A and his brother; and
• the transfer of trust assets directly to Mr A via a high-risk jurisdiction despite the fact that he had not been made a beneficiary of Trust 2.

The Commission has concluded that the Licensee's procedures in relation to regulation 12(f) were not appropriate or effective to ensure that it made timely and full disclosures of suspicious activity to the Financial Intelligence Service.

The Licensee failed to ensure that its existing business was fully understood

Chapter 8 of the Handbook and Rule 246 (of the December 2007 Handbook) required the Licensee to ensure that its policies, procedures and controls in place for its existing business were appropriate and effective. In particular to ensure that the Licensee understood the business relationship and held all of the required due diligence commensurate with the risk attributed to the relationship.

Example 11

The Licensee's business relationships with Mr A (see Example 1) and Mr B (see Example 2) were established prior to the introduction of the Handbook. However, the Licensee failed to ensure that it had a complete understanding of these existing business relationships as required by Chapter 8 and Rule 246 of the Handbook, accordingly, the Licensee failed to identify appropriate red flags and take necessary action at the appropriate times.

The Licensee failed to avoid, manage or minimise conflicts of interest

Paragraph 3.2 of the Code of CG states that Directors have a duty to avoid, manage or minimise conflicts of interest and should, wherever possible, arrange their personal and business affairs so as to avoid direct and indirect conflicts of interest.

Example 12

The Licensee provided administration services to Company 4 a Guernsey registered company involved in natural resource extraction in a high-risk country. Mr D founded this company and Mr Sinclair was a director of it in his personal capacity.

Mr D gifted shares in Company 4 to Mr Sinclair, a Fellow Director and a Trust Administrator at the Licensee, conditional on a successful Initial Public Offering on a recognised Stock Exchange. These gifts were described in the Licensee's gift register as gifts to family and friends. Following the subsequent initial public offering, the shares held by Mr Sinclair, the Fellow Director and the Trust Administrator, were worth a significant sum of money.

According to the Licensee's relevant policy applicable at the time: (i) staff must not accept any gift if it is likely to conflict in any material way with any duty that the company owes to its clients or is likely to induce someone to breach a duty that they owe to any third party or to influence a public official, (ii) any gifts of cash or cash equivalent required the prior written approval of the Compliance Manager, and (iii) any gift over £500 required the prior approval of the Managing Director (which at the time was Mr Sinclair). The Commission has seen no evidence of prior written approval by the Compliance Manager in relation to the gift of shares. The Fellow Director's and the Trust Administrator's shares were approved by Mr Sinclair, however, Mr Sinclair approved his own gift of the shares without obtaining any written third-party consent. The Board of the Licensee were notified of the gifts six weeks after they had been received.

The receipt of such significant gifts was in breach of the Licensee's own policy and created a risk that Mr D could influence Mr Sinclair, the Fellow Director and the Trust Administrator. However, the risks associated with this potential conflict of interest were only identified by the Licensee after the gifted shares had been transferred and thus were not effectively managed or minimised.

The Licensee failed to have effective suitable oversight of the management and control of the potential risk of Mr Sinclair, the Fellow Director and the Trust Administrator committing an offence under The Prevention of Corruption (Bailiwick of Guernsey) Law, 2003, as required by Principle 5 of the Code of CO.

The Licensee failed to have internal controls to safeguard its assets and to manage risk

Paragraph 4.4 of the Code of CO states that a company should maintain a sound system of internal controls to safeguard the company's assets and to manage risk, and that the Board should regularly review such controls.

Example 13

As detailed in Example 12, Company 4 was a client of the Licensee and Mr Sinclair, a Fellow Director and the Trust Administrator were gifted shares in that entity. In addition to this the Licensee received shares in Company 4 in lieu of administration services provided over a period of time. Consequently, a Fellow Director/Shareholder (who was not individually gifted shares) became a direct shareholder of Company 4 by virtue of his shareholding in the Licensee.

Whilst providing services to Company 4, Mr Sinclair, the Fellow Director/Shareholder, the Fellow Director and the Trust Administrator were in a position to have access to sensitive, non-public information and documents relating to Company 4. The Licensee had no policies, procedures, or controls in place in relation to staff dealing in stocks / securities, and more impo1iantly an appropriate policy for dealing in or acquiring the shares of client companies that they administered.

Example 14

The Licensee provided director and administration services to Company 5 which was another company linked to Mr D. Company 5 had two subsidiaries involved in building data centres for the purpose of being rented out for mining cryptocurrency.

Company 5 entered into an agreement with a third-party investor in which it was agreed to receive an investment subscription by way of bitcoin. At the time in question, the Licensee understood that Company 5's bank had a policy of not accepting funds derived from cryptocurrencies. Despite this, Company 5's bank account received three tranches of investment from a company that was involved in over-the-counter trading of cryptocurrencies in respect of the third-party investor's investment by way of bitcoin.

The Licensee had no controls in place to adequately monitor and manage the risk that funds received were derived from cryptocurrencies.

The Licensee failed to deal with the Commission in an open and co-operative manner

Principle 10 of the Principles of Conduct of Finance Business states that a financial institution should deal with the Commission in an open and co-operative manner and keep the Commission promptly informed of anything concerning the financial institution which might reasonably be expected to be disclosed to it.

Example 15

In 2016 the Commission conducted a full risk assessment of the Licensee which found that there were a significant number of outstanding action points, a number of which related to anti-money laundering ("AML") and Countering the Financing of Terrorism ("CFT") issues.

Following this risk assessment, the Commission implemented a Risk Mitigation Programme in which the Licensee was required to provide a plan to the Commission detailing how it would reduce the number of outstanding action points to a manageable level and regularly update the Commission accordingly.

In October 2017, Mr Sinclair informed the Commission that outstanding action points had been reduced to a manageable level. However, the Commission conducted a further full risk assessment in December 2018 during which the Commission discovered that Mr Sinclair had failed to explain the full extent of the issues faced by the Licensee and that there remained a serious issue with the level of outstanding action points. The Commission reviewed the compliance rep01is to the board of the Licensee for the period March 2016 to September 2017 which showed that there were still a significant number of action points outstanding.

Mr Sinclair replied to the Commission the number of outstanding action points which were aged one month or older, rather than the total number of outstanding action points which was significantly greater.

As a result, the Commission concluded that the Licensee and Mr Sinclair did not deal with the Commission in an open and co-operative manner, as required by Principle 10.

Aggravating Factors

The Licensees' clients included high-risk clients, some of whom were PEPs, based in high-risk jurisdictions, and some of whom, the Licensee was aware had adverse media rep01is related to them.

The breaches were extremely serious and exposed the Licensee and the Bailiwick to the very real risk of being used to facilitate financial crime and thereby to the risk of damaging the reputation of the Bailiwick as a leading and well-regulated international finance centre.

The Licensee had a previously poor compliance history, in particular in relation to outstanding action points.

Mr Sinclair was willing to override the Licensee's internal policies, procedures and controls at the request of a client.

Mitigating Factors

Mr Sinclair has co-operated with the Commission and agreed to settle at an early stage of the process. This has been taken into account and an early settlement discount to the proposed financial penalty and prohibitions has accordingly been applied.