Looking Ahead to Moneyval - What is Next for Guernsey?

• Guernsey's approach to AML enforcement
  
  
• Wider considerations for the offshore regulatory background
  
  
• A warning on the macroeconomic situation and rising insolvencies

The GFSC has already resumed routine onsite inspections, is in the process of enhancing the financial crime risk returns that are submitted annually by regulated firms, and the revised September deadline for boards to approve money-laundering and terrorist financing business risk assessments is fast approaching.

While it is still too early to make meaningful predictions about the length and scope of any continuing disruption caused by the pandemic, at this stage it seems reasonable to assume that Guernsey’s next Moneyval assessment will proceed in 2021 or 2022. In this context, it would be imprudent for businesses to assume that current events will serve to fundamentally affect compliance requirements or provide acceptable excuses for regulatory failures. As such, it is important for licensees and relevant officers to maintain a regulatory focus and to consider issues that could gain greater regulatory scrutiny.

Approach to enforcement

In January 2016, Moneyval issued an assessment on the Bailiwick’s AML and CFT controls. The report concluded that the jurisdiction had made major progress against evolving regulatory standards and was “largely compliant” with international money laundering guidelines. Industry will, however, recall that this positive finding was tempered by Moneyval’s suggestion that “the relatively limited number of cases involving third party [money laundering] by participants of the financial industry and the amounts of property laundered and confiscated… indicates room for more effective application of [money laundering] provisions”.

In the period after Moneyval’s assessment, the GFSC issued guidance on its approach to enforcement. This included commitments to a risk based approach to supervision and recognition of the need to balance effective enforcement with the risks of deterring good quality candidates from the islands’ finance industry. The interplay between robust enforcement action, acceptable risk parameters and inherent commercial pressures has, though, tended to encourage lively debate.

In that context, a question that has commonly arisen is whether there will be a slowing (or even cessation) of enforcement cases once i) remaining historic problems are addressed and ii) licensees take account of the learning points flowing from published enforcement outcomes.

The simple answer to that question is no. There is, in fact, every reason to believe that enforcement activity will increase: the jurisdiction has a legitimate need to demonstrate its commitment to regulation in accordance with developing international standards and enforcement cases will inevitably remain a key part of that.

Recent lessons

There is truth in the view that those who fail to learn from the mistakes of their predecessors are liable to repeat them and it is helpful to consider issues that emerge from the recent approach to enforcement.

The GFSC’s post-2016 public statements demonstrate an increase in the frequency and severity of sanctions and it has become rare for fines to be imposed solely at the corporate licensee level.

Beyond the numbers, it remains the case that failings identified by the GFSC have not tended to result in the commission or facilitation of financial crime offences. The guidance bandings that accompany the increased maximum financial penalties recognise this, however, and demonstrate that sanctions are to be expected even where financial crime has not occurred: with suggested fines of up to £200,000 for firms and £100,000 for individuals before there is any “significant risk of financial crime or being used to facilitate financial crime”.

Recent experience also points to a growing willingness to explore (at both a macro and micro level) wider issues of licensee and relevant officer conduct. Recurring themes are, perhaps, less prevalent within this broader view, but instructive examples include scrutiny of:

• Understanding of, and compliance with, legal and contractual obligations. Where licensees have, for example, provided directors to vehicles forming part of an investment structure, the GFSC may critically consider whether board members properly oversee the entities to which they owe duties. That could result in detailed consideration of the flow of information coming into board members and what board members can demonstrate having derived from it.


• Meaningful oversight of investment decisions. This could capture the due diligence undertaken in respect of third party appointments (e.g. investment managers) and analysis of whether licensees can demonstrate that investments are being properly managed and reported by third parties.


• Directors acting in the best interests of the company to which they are appointed. The subjective nature of this fiduciary duty means that it should be analysed with regard to what a director honestly considered to be in the best interests of the company. This may lead to questions about how the GFSC determines whether the duty has been breached. One could, for example, see disputes arising if the GFSC seeks to assert a breach on the basis of what it considers (potentially with the benefit of hindsight) a director ought to have done at the relevant time.


• Local compliance in the context of global policies and procedures. International differences in the adoption of, for example, reporting standards could bring the possibility of regulatory arbitrage under the microscope. Experience dictates that Guernsey licensees are unwilling to facilitate regulatory arbitrage, but the GFSC may focus upon global policies and whether reliance upon non-resident group entities for AML / CFT controls could serve to weaken or offset local policies and standards.

Wider considerations

This article is not the place for a comprehensive analysis of external influences and/or local concerns that could impact upon compliance requirements. The following may, however, help to highlight potential areas of regulatory consideration:

• If budgets are squeezed by global economic factors, firms could find themselves in difficulty completing infrastructure projects. Where previous GFSC visits have highlighted infrastructure issues, compliance with risk mitigation programmes and/or remediation plans could come into sharp focus. In these circumstances, an early identification of problems and an active and structured dialogue with the GFSC could be vital to avoiding sanction.


• Money Laundering Compliance Officers (“MLCOs”) are relatively new in Guernsey but the JFSC’s themed examination on the role of MLROs may be instructive. The JFSC’s report indicated that, whilst assistance will be derived from those fulfilling their responsibilities as MLRO and MLCO, the board retains “substantial responsibilities for the prevention and detection of money laundering and financing of terrorism…and they must ensure adequate oversight of these roles, in order to demonstrate adherence to the regulatory framework”. Relevant officers will, therefore, want to ensure that they can demonstrate oversight and that clear and consistent thought processes run through tests of MLRO functions.


• As the global economy suffers, insolvency issues may gain greater prevalence. This could lead to wide ranging regulatory considerations including the management of conflicts of interest (where, for example, parties sit on the boards of multiple entities with varying intergroup funding obligations); directors’ conduct (particularly in reflection of a shift in duty and the need to have paramount regard to creditors’ interests); or any impact upon substance requirements (where, for example, changes are required to Guernsey employee numbers, expenditure or physical presence).


• The UK Financial Conduct Authority’s recent “Dear CEO” letter set out expectations for the management of non-financial misconduct issues and indicated that greater attention will be given to this problem. It is entirely conceivable that the Bailiwick will see regulatory action that reflects a broader societal focus on expected standards of behaviour.


• It will be important for firms to be able to demonstrate that they are giving due consideration to COVID-19-related risks, which, unsurprisingly have been a subject of direct regulatory focus over the past few months. Recent publications include FATF guidance on COVID-19-related money laundering and terrorist financing risks; a GFSC summary of home working information security risks; and a Data Protection Authority note on “protecting personal data in extraordinary circumstances”.

Conclusion

Recent events demonstrate the speed with which plans can be overtaken. It is, though, reasonable to assume that the regulatory environment will develop both because of, and despite, external factors. Those in industry should continue to adapt to guidance that emerges from previous enforcement cases and to look more widely for clues about regulatory issues that could gain increasing traction.

In any event, the Bailiwick’s approach to AML and CFT controls is likely to remain as robust as that of any other international finance centre. There is also good reason to anticipate an increasing scope for regulatory enforcement action in advance of Moneyval’s next assessment. How licensees meet those challenges will be as critical to their future success as almost anything else.