Mr William Stephen Cairns and Mr Du Preez Gert Vermeulen

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

The Regulation of Fiduciaries, Administration Businesses and Company Directors, etc. (Bailiwick of Guernsey) Law, 2020 (“the 2020 Fiduciaries 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, 15 December 2007 (“the Handbook”)

 

Mr William Stephen Cairns (“Mr Cairns”)

Mr Du Preez Gert Vermeulen (“Mr Vermeulen”)

 (together “the Former Directors”)

 

On 2 February 2023, the Guernsey Financial Services Commission (“the Commission”) decided:

1. To impose a financial penalty of £133,000 on Mr Cairns under section 39 of the Enforcement Powers Law;

2. To impose a financial penalty of £35,000 on Mr Vermeulen under section 39 of the Enforcement Powers Law;

3. To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Cairns from holding the position of controller, shareholder, director, manager, money laundering reporting officer and money laundering compliance officer of a licensee for a period of ten years and six months;

4. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in section 3(1)(g) of the 2020 Fiduciaries Law in respect of Mr Cairns for a period of ten years and six months;

5. To make an order under section 33 of the Enforcement Powers Law prohibiting Mr Vermeulen from acting as a director for a period of two years and one month;

6. To issue a Notice under section 32 of the Enforcement Powers Law disapplying the exemption set out in section 3(1)(g) of the 2020 Fiduciaries Law in respect of Mr Vermeulen for a period of two years and one month; and

7. To make this public statement under section 38 of the Enforcement Powers Law.

The Commission considered it reasonable and necessary to make these decisions having concluded that the Former Directors had failed to ensure compliance with the regulatory requirements, and the minimum criteria set out in Schedule 1 of the Fiduciaries Law.

The findings in this case were serious, spanned a significant period of time (predominantly pre-2018) and had the potential to jeopardise the reputation of the Bailiwick as an international finance centre.

Discretionary financial penalties were applied in this case using the levels of penalties in force pre 13 November 2017.

BACKGROUND

The Licensee was established in Guernsey in June 1978 and has held a full licence under the 2020 Fiduciaries Law[1] since April 2001.  The Licensee provides trust services, including acting as corporate trustee and the formation, management, and administration of trusts; the formation, management and administration of companies to hold assets on behalf of clients; and the provision of nominee services, including acting as or providing nominee shareholders and acting as corporate secretary.

Mr Cairns was an Executive Director between 1978 and October 2017; and was a shareholder controller of the Licensee from 1978 to May 2020.

Mr Vermeulen was an Executive Director between July 2014 and March 2018.

The Commission’s investigation commenced in March 2018 following the on-site visit to the Licensee in July 2017.

FINDINGS

The Commission’s investigation found that the Licensee had failed to monitor and manage the financial crime risks of its customers, which had resulted in serious and systemic findings being identified following two on-site visits in 2015 and 2017.  The fact that the Licensee failed to adequately address the findings between the two on-sites, despite being issued a series of Risk Mitigation Programmes by the Commission to rectify the findings, was seen by the Commission to be an aggravating factor in this case.

The Commission’s investigation also identified a specific group of trusts that had been with the Licensee for a significant period of time.  The breaches identified in relation to these trusts were viewed by the Commission as serious as the Licensee failed to, at all times, record accurately who were the settlors and beneficiaries of these trusts. 

This was particularly concerning to the Commission as tens of millions of pounds was identified flowing through these trusts (including a series of payments, over a five year period of circa sixteen million pounds to a foreign bank account for which the Licensee was unclear who the actual account holder was); and which due to the inaccurate, and at times misleading nature of the company and trust records, led to delays in statutory reporting to relevant authorities.

In particular, the Commission found:

Failure to act with integrity and probity

Principle 1 of the Principles of Conduct of Finance Business requires that “a financial institution should observe high standards of integrity and fair dealing in the conduct of its business.”

Principle 2 of the Code of Practice – Trust Service Providers, 2009; and Principle 2 of the Code of Practice – Corporate Service Providers, 2009, both require that “TSPs should conduct their business with integrity and should not attempt to avoid or contract out of responsibilities under this Code.”

Paragraph 1 of the Minimum Criteria for licensing (the Regulation of Fiduciaries, Administration Businesses and Company Directors, etc (Bailiwick of Guernsey) Law, 2000;[2] stipulates that the business of a licensed fiduciary must be carried out with integrity; and in relation to persons such as directors, they must act with probity.

Example 1

The Commission identified that in relation to Trust A, Trust B and Trust C, client agreements and written statements were signed by the Licensee which omitted any mention of third parties, despite there being clear knowledge that these third parties had benefited, either directly or indirectly from these trusts, often to the sum of millions of pounds over a protracted period of time.

The Commission viewed the client agreements and written statements as deliberately misleading.

Example 2

Following the issuance by the Commission in August 2014 of an Instruction for Licensees to, inter alia, review their compliance arrangements; the Licensee responded and confirmed in August 2014 that they had complied with the Instruction.

In November 2014, the Licensee self-reported to the Commission that 56% of its periodic reviews were outstanding.

The original confirmation by the Licensee misled the Commission as to the actual appropriateness and effectiveness of the Licensee’s compliance arrangements.

Failure to act in accordance with a fiduciary duty, to observe the utmost good faith and to act in the interest of the beneficiaries of trusts

Principle 4 of the Code of Practice – Trust Service Providers, 2009, requires a TSP to “treat the interests of beneficiaries as paramount subject to their legal obligations to other persons or bodies.”

Example 3

In relation to Trust C, the Licensee, acting as trustee, utilised the trust’s funds to purchase, via a holding company, circa $28,000,000 worth of shares, without undertaking the necessary due diligence. Two years later, these shares would be valued at nil value.

The Commission was unable to identify any independent appraisal conducted by the Licensee to satisfy themselves that the share purchase was a sound and credible investment for Trust C.

Example 4

In relation to Trust D, the Commission’s investigation identified that Person 1, over a period of time, had settled and received funds from the trust.  The main asset in Trust D were shares in a listed company where Person 1 held a senior position.

Separately, Trust E was established nine years later, with Person 2 detailed as the beneficiary.  Person 2 was linked to Person 1 via common directorship of a specific company.

Following this, some six years later, a deed of settlement resulted in Trust E being added as the beneficiary of Trust D, and all the assets from Trust D were transferred to Trust E.

Three days after this, Person 2 was removed as the beneficiary of Trust E and replaced with Person 3.  Person 3 was linked to Person 1 and 2 via common directorship of a specific company.

One year later the assets of Trust E (the shares in a listed company where Person 1held a senior role) were sold at a substantial profit.  The proceeds were ultimately lent to a subsidiary of Trust E and used to purchase a property.  This property was resided in by Person 1.

The Commission’s investigation did not identify any records that detailed the rationale for the following:

• Why the assets were transferred from Trust D to Trust E; or
• Why Person 2 and Person 3 were added as beneficiaries of Trust E.

The Commission’s investigation would identify that after the above re-structuring had taken place, Person 1 would inform the Licensee that they had come to agreement with Person 3 to receive the benefit from Trust E, as Person 1 was under investigation by authorities in another jurisdiction.

The Commission believes that regardless of the fact that it uncovered no evidence to suggest that the Licensee was aware of Person 1’s actual motives, there were numerous contemporaneous red flags in relation to the above restructuring, which should have alerted the Licensee to the need to investigate more fully these events – in particular, as the Licensee was the trustee of Trust D and Trust E at the relevant time.

Failure to monitor activity and transactions

Regulation 11(1)[3] requires a financial services business to perform ongoing and effective monitoring of any existing business relationship, which includes the scrutiny of any transactions or other activity, paying particular attention to all complex transactions, transactions which are both large and unusual; and unusual patterns of transactions, which have no apparent economic purpose or no apparent lawful purpose.

Rule 121 of the Handbook (2010 updated version) required a licensee to “understand the nature of the trust structure and the nature and purpose of activities undertaken by the structure sufficient to monitor such activities and to fully understand the business relationship.”

Principle 2 of the Principles of Conduct of Finance Business states that a financial institution should act with due skill, care, and diligence towards its customers.

Example 5

Over a period of five years, circa £16 million flowed out of the funds of Trust B and thereafter via subsidiary trusts to a bank account in another jurisdiction.

The Commission’s investigation identified that the Licensee had failed to perform ongoing and effective monitoring of Trust B, exemplified by the inability of the Licensee to definitively explain (i) why funds were flowing from Trust B to the foreign bank account; and more importantly, (ii) who the foreign bank account related to.

Example 6 

In relation to the investment activities of Trust A, Trust B and Trust C, the lack of monitoring was virtually absolute and was exacerbated by a lack of adequate records.  This resulted, on one occasion, a retrospective review undertaken by the Licensee in respect of Trust B, some 28 years after its creation.  The review detailed that there was an unknown opening balance of circa £4 million pounds.

Failure to keep proper books and records

Regulation 14(1) of the Regulations requires a licensee to keep copies of transaction documents.

Principle 5 – Code of Practice, Trust Service Providers, 2009; requires a TSP to, inter alia, “keep and preserve (as far as appropriate for the TSP’s functions and for at least the periods required by any applicable law) appropriate records of trusts business including accounts, tax records and minutes of meetings.”

Principle 5 of the Code of Practice – Corporate Service Providers, 2009; requires a CSP to keep a written record of the terms of the agreement with each client, including evidence of the client’s agreement to those terms.

In relation to Trust A, Trust B and Trust C, the Commission noted that the Licensee failed, for 26 years, to obtain client agreements, despite tens of millions of pounds of funds moving through these trusts via a web of subsidiary trusts and companies, with incomplete and vague details being recorded during this time regarding additional settlors and additional beneficiaries.

The Licensee failed to keep updated financial accounts for its clients, culminating in January 2017 with 800 sets of financial accounts spread across 325 client entities being outstanding.

Failure to ensure appropriate and effective AML/CFT procedures

Regulation 15(1)(b) of the Regulations requires a licensee to: “establish and maintain an effective policy, for which responsibility must be taken by the board, for the review of its compliance with the requirements of these Regulations.”

The Commission conducted an on-site visit to the Licensee in November 2015 and identified, inter alia, the following widespread and systemic failings:

• The Licensee had not established a compliance monitoring programme;
• The Licensee’s business risk assessment (“BRA”) did not adequately address the specific risks of the products, services and activities undertaken by the Licensee;
• The Licensee had inadequate client risk assessments;
• The Licensee had deficiencies in relation to customer due diligence (“CDD”); and
• The Licensee had failed to monitor its clients and undertake regular risk reviews.

The Commission issued a set of Risk Mitigation Programmes (“RMPs”), designed to rectify the identified failings.

The Commission conducted a further on-site visit to the Licensee in July 2017 and noted the following:

• The Risk Mitigation Programmes issued by the Commission had not been adequately completed; and
• Serious and significant failings were again identified in relation to, inter alia, client risk assessments and the monitoring of clients.

The Commission therefore has viewed the Licensee as a repeat offender.

Failure to manage conflicts of interest

Principle 3.2 of the Finance Sector Code of Corporate Governance 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.

During his tenure as a director, and latterly as managing director, Mr Vermeulen was loaned a large sum of money by Mr Cairns.  The Commission considered the potential that the financial obligation owed by Mr Vermeulen to Mr Cairns created a direct or indirect conflict of interest, that should have been recorded and managed appropriately.

This conflict of interest was not recorded on the Licensee’s conflict of interest register until some two and half years after the loan was made, nor was all of the board of the Licensee made aware of this loan at the time.

Mr Cairns

The Commission’s investigation identified that Mr Cairns failed to demonstrate that he acted with probity, competence, soundness of judgement and diligence.

For example, Mr Cairns:

• Was directly involved in the creation of client agreements and written statements in relation to Trust A, Trust B and Trust C, which the Commission noted omitted any mention of key third parties and was thus misleading;
• Failed to ensure the transaction in relation to the purchase of circa $28,000,000 worth of shares using funds from Trust C was properly monitored, a transaction that resulted in a total loss to the trust when the shares were subsequently found to have nil value;
• Failed to monitor the flow of circa £16,000,000 of funds from Trust B to a foreign bank account over a five year period; and who, when asked by the Commission who the foreign bank account related to, replied: “I don’t know;”
• Failed to adequately manage the conflict of interest created by his personal loan to Mr Vermeulen; and
• Failed to ensure the compliance function at the Licensee was adequate, and failed to ensure the remediation of the issues identified during the 2015 Commission on-site visit were effectively addressed.

Mr Vermeulen

The Commission’s investigation identified that Mr Vermeulen failed to demonstrate that he acted with probity, competence, soundness of judgement and diligence.

For example, Mr Vermeulen:

• Failed to ensure the transaction in relation to purchase of circa $28,000,000 worth of shares using funds from Trust C was properly monitored, a transaction that resulted in a total loss to the trust when the shares were subsequently found to have nil value;
• Failed to adequately manage the conflict of interest created by the personal loan he received from Mr Cairns; and
• Failed as Managing Director to ensure that that the failings identified during the Commission’s 2015 on-site visit were remediated, as can be seen from the failings identified during the Commission’s 2017 on-site visit.

Aggravating Factors

The Commission views the Licensee as a repeat offender, having had failings identified during both on-site visits in 2015 and 2017.  The Commission also noted that some failings identified in the 2015 on-site visit had not been adequately remediated by the time of the 2017 on-site visit, despite specific remediation plans being issued to the Licensee, by the Commission, in 2015.

The Licensee’s failure to accurately record at all times the settlors and beneficiaries of specific trusts was viewed as serious by the Commission, as these trusts were noted to have had substantial transfers of funds both in and out of them, often involving millions of pounds: transfers that appeared to the Commission to be not only be overly complex, but also lacking in documented rationales regarding their purpose.

The Commission believes that the Licensee’s failings in relation to the monitoring of these specific trusts and the failings in relation to record keeping in relation to these trusts, resulted in the risk that statutory reporting to relevant authorities would have been delayed and thus undermining those relevant authorities’ ability to discharge their functions.

Mitigating Factors

At all times the Former Directors have co-operated fully with the Commission.  The Former Directors agreed to settle at an early stage of the process, and this has been taken into account by applying a discount in setting the prohibitions and financial penalties.