Guernsey Money Laundering Law

Also see below under Banking.

In its Annual Report for 2003, the Guernsey Financial Services Commission (GFSC) drew attention to the publication during the year of the International Monetary Fund's (IMF) report on the Bailiwick's financial regulation and criminal justice framework, revealing that Guernsey was assessed by the IMF to have a high level of compliance with international standards of regulation in banking, insurance, securities, trust and company service provision, anti-money laundering and combating the financing of terrorism.

Additionally, the report announced that during 2003, the Commission was involved in a number of initiatives with industry, working to ensure that the Bailiwick maintains its competitive edge whilst adhering to recognised standards. Director general of the GFSC, Peter Neville observed that: "2003 was a very good year for the Commission. We received an excellent IMF report, which commended our high regulatory standards. These same standards were cited by Robert Finch, the Lord Mayor of the City of London, as good reason to do business with the Island and he acknowledged that we stand alongside the City in terms of our integrity, innovation and standards of service."

In March, 2004, the Financial Services Commission issued a statement on anti-money laundering standards for existing customers following the issue of revised Recommendations by the Financial Action Task Force in 2003. The statement requires financial services businesses to assess the risk of each business relationship and to make sure that they have customer due diligence information appropriate to the level of risk.

It allows businesses in the financial services sector to consider whether simplified or reduced information is appropriate for low risk businesses and lower risk customers. This could mean for example, locally resident retail customers who have a relationship which is understood by the financial services business.

"The Commission has worked with the Guernsey Joint Money Laundering Steering Group, which contains representatives from across the finance sector, in developing this new statement,” explained Peter Neville. “The statement extends the existing flexibility provided by the Commission's Guidance Notes on the Prevention of Money Laundering and emphasises that unnecessary demands on lower risk customers should be avoided," he added.

The Commission said that it was not issuing more detailed recommendations at that stage on how the FATF standard should be applied in practice. It further announced that it intended to consult with industry by way of observation during on-site visits and by way of discussions, to develop such recommendations for inclusion in the revised Guidance Notes. A revised version of the Guidance Notes was to be issued only after full consultation with industry and the other Crown Dependencies.

Following discussions between the IMF and the Commission at the end of 2008, it was agreed that the IMF would undertake its assessment of the Bailiwick of Guernsey late in 2009. This assessment was originally scheduled to take place in January 2009, but the IMF took into account the severe effects of the global crisis, including the problems experienced at Northern Rock Guernsey and Landsbanki Guernsey.

The areas to be covered by the assessment were unchanged. A significant aspect was to do with the stability of Guernsey’s financial sector. It was also to cover banking, insurance and investment sector supervisory legislation and practice, together with anti-money laundering and counter terrorist financing legislation and its implementation.

Peter Neville, Director General of the Commission said: “The Commission is eager to participate in the IMF’s assessment process and looks forward to the broader perspective a later assessment will bring. For substantially more than a year we have been presented with significant challenges in crisis management. We have met these challenges. The very positive findings of the inquiry by Michael Foot of the Promontory group into the role played by the Commission in the Landsbanki Guernsey case should stand Guernsey in good stead."

He added: "We hope that one of the outcomes of the IMF’s future assessments will be the pulling together of the lessons learned by supervisors around the world during the crisis. Here in Guernsey the response has already included the introduction of a depositor compensation scheme. The hard look that Guernsey will be taking at the nature of its banking sector and the relationship between the financial industry in Guernsey and its counterparts in the UK will also be relevant to the IMF’s assessment. The IMF will want to gauge the effects of the financial crisis and the global economic downturn on the shape of the finance industry and the products and services it offers.”

In December 2008, a new regulation was introduced in Guernsey to prevent money laundering, which restricts the sale or purchase in the course of certain businesses of precious metals, precious stones or jewellery, where the payment is made in cash and exceeds GBP10,000. These regulations were proposed by the Guernsey Financial Services Commission, which sought to extend the Bailiwick’s anti-money laundering regime in order for it to meet international standards.

The Regulations are made under Sections 49A and 54 of the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 and are titled The Criminal Justice (Proceeds of Crime) (Restriction on Cash Transactions)(Bailiwick of Guernsey) Regulations, 2008 and were effective from December 1, 2008. Any person who contravenes the restriction commits an offence and is liable, for a first offence, to a fine of up to twice the value of the cash involved. The Guernsey government has asked that dealers in precious metals, precious stones or jewellery should report any attempted transactions in excess of GBP10,000 as suspicious to Guernsey’s Financial Intelligence Service.

In December 2009, the Guernsey Financial Services Commission proposed changes to its AML/CFT that will require postage stamp dealers, bullion dealers, firms of accountants which are currently not registered with the Commission, and firms (including sole practitioners) of insolvency practitioners, auditors and tax advisors to register with the Commission and to comply with the AML/CFT regulations, and with the rules in the Commission’s handbooks.

As the Commission is conscious that the requirements of the regulations may appear complex and onerous, especially to firms which have not previously been subject to any form of AML/CFT regulation or supervision, the guidance note provides information to assist such firms.

The guidance paper, available on the Commission’s website, provides a simplified overview of the requirements of the regulations and the rules in the Handbooks.

In April 2010, the Guernsey FSC announced the launch of a consultation on proposals to overhaul legislation that governs the prevention of money laundering and the financing of terrorism in the island.

The consultation paper proposes extensive amendments, namely to the following legislation:

The first part of the consultation discusses harmonizing the Commission’s on-site inspection powers throughout all governing legislation.

The definition of “regulatory laws” is also to be amended to provide a consistent definition across governing legislation. In particular this will improve the Commission’s checks when considering a license, by broadening the pool of relevant contraventions of regulatory laws that the Commission may take into account when considering an application.

It is also proposed that a textual amendment be made to legislation which governs penalties, namely harmonizing the texts of Section 88 of the Insurance Business Law, 2002 and Section 65 of the Insurance Managers and Insurance Intermediaries Law, 2002.

In addition, as part of a larger review of the definition of “FSB Regulations,” the Commission proposes inserting a new provision into the FSB Regulations which enables financial services businesses to disclose information to other financial services businesses and prescribed businesses, where it appears necessary for the purposes of forestalling, preventing or detecting money laundering and terrorist financing. This amendment is supported by the recommendation in recent IMF reports of other jurisdictions that they should consider including explicit provisions to provide for the sharing of information between financial services businesses.

The consultation paper is available on the Commission’s website, and interest parties were asked to submit comments by May 21, 2010.

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• A full fiduciary licence can only be granted to a company or a partnership, and authorises all regulated fiduciary activities. A full fiduciary licence authorises the licensee and its directors or partners, managers and employees to carry on regulated fiduciary activities (where the directors, etc. do so in the course of their duties to the licensee).
• A personal fiduciary licence can only be granted to an individual and authorises the holder to carry on a restricted range of fiduciary activities. Those include acting as a company director, as trustee (but not as a sole trustee), and as executor of a will or administrator of an estate. The holder of a personal fiduciary licence is prohibited from advertising by The Regulation of Fiduciaries (Fiduciary Advertisements and Annual Returns) Regulations, 2001.

The new law has its roots in a series of proposals made in the ‘Evans Report’, which was published following a root and branch review of the Island’s trust legislation by a working party under the chairmanship of Guernsey advocate Rupert Evans.

“This is yet another example of how the Guernsey government, the Island’s financial regulator and its industry practitioners, continually work together to maintain an environment that maximises business flows,” stated Peter Niven, Chief Executive of GuernseyFinance.

Guernsey has more than 50 years experience in providing trust and corporate services. As of February 2008, the Island hosted more than 140 licensed fiduciaries, ranging from large organisations to independent, boutique operations. Together, they held between GBP200 and GBP300bn worth of assets in trust.

Mr Niven added that: “Guernsey’s fiduciary industry has built a reputation for professionalism and expertise in using the modern structures that are available on the Island for the preservation of both institutional and individual/family wealth and assets. The amendments to Guernsey’s trust legislation include several significant changes like the introduction of Purpose Trusts that will particularly enhance the Island’s fiduciary environment."

He concluded: “However, we are far from resting on our laurels and work continues to introduce legislation that will allow the establishment of Foundations. The addition of this innovative tool will ensure that the Island’s practitioners are able to offer their internationally mobile clients the widest spectrum of products and services.”

In July 2009, Guernsey's Financial Services Commission announced proposals to overhaul regulation to enhance protection and oversight of Retirement Annuity Trust Schemes.

Retirement Annuity Trust Schemes (RATS) have been available as a form of personal pension provision in Guernsey for many years. Recently, with other options such as retirement annuity contracts becoming less widely available, RATS have been formed in larger numbers.

Their flexibility in relation to how assets may be invested, and benefits drawn on retirement, makes them useful in many circumstances. However, the same flexibility gives rise to the risk of RATS being used in circumstances where they are not the best solution or are not fully understood by the member.

The Commission fears that due to the cross-sectoral involvement in the schemes, regulatory framework, which applies to the firms which operate in different sectors but provide services in relation to the same structure or product, needs revision to set broader, more effective, guidelines.

In late 2008 the Commission circulated a discussion paper on RATS, highlighting some concerns about the present position. This arose from discussions with a group of practitioners across the relevant sectors of finance business. The problems identified by the group included:

The Commission reportedly received some very helpful responses to the discussion paper. It was clear to the Commission, both from the number, and the content of those, that there is widespread concern about the above areas within firms across all sectors of the finance industry.

As a result, the Commission produced a consultation paper summarizing its proposals for improving the regulatory framework under which firms provide services relating to RATS.

The Commission’s proposed rules include:

• To protect depositors;
• To protect the reputation of Guernsey as an International banking centre;
• To protect the best economic interests of Guernsey.

• In addition to being required to know their own customers, banks and other institutions will be required to look beyond their customers (for example, when they are trusts or companies) to establish the principals behind them.
• The new measures tighten up the requirements on banks and other institutions to ensure that due diligence is done properly - even where the customer is referred to them by another institution which claims to have carried out the background checks already.
• All institutions will be required to embark upon a progressive risk prioritised programme to bring the records of existing accounts up to current standards (where there are deficiencies in information and documentation held) if the nature of the client or transaction meets certain criteria.

Collective Investment Funds are supervised by the Financial Services Commission (FSC) under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (as amended) and the Collective Investment Scheme Rules 1988.

• The Collective Investment Schemes Rules 2002 (which cover Class A schemes); The Collective Investment Schemes (Class B) Rules 1990 (which cover Class B schemes);
• The Collective Investment Schemes Qualifying Professional Investors (Class Q) Rules 1998 (which cover schemes designed for qualifying professional investors);
• The Collective Investment Schemes (Designated Persons) Rules 1988;
• The Licensees (Conduct of Business and Notification)(Non-Guernsey Schemes) Rules 1994.

The growing use of Guernsey structures as vehicles for hedge funds has highlighted a number of areas where the existing investment fund framework can create problems, leading the Guernsey Financial Services Commission to issue a consultation document: ‘The regulatory framework for Hedge Funds in Guernsey’ in November 2003, setting out a range of practical issues, and seeking views from interested parties on those issues and the solutions which may be available.

The Guernsey Financial Services Commission also issued guidance on the disclosure regime for closed-end investment funds. That guidance re-emphasised the flexible nature of the Commission’s approach. Guernsey domiciled closed-end funds are subject to Guernsey company law and the Control of Borrowing regime, and it is clear, from the closed-end hedge funds already established under those arrangements, that few structural problems arise.

In the open-ended sector, the position is more complex. Open-ended funds are subject to the Protection of Investors (Bailiwick of Guernsey) Law 1987, as amended, (“POI”) and to rules and regulations made under that law. POI provides, inter alia, that all Guernsey open-ended funds must be authorised by the Commission - there is no provision for “unauthorised” funds – and that each fund must have a designated manager and a designated trustee or custodian.

In mid-2004, the GFSC published a document setting out its main conclusions regarding hedge funds. The findings are directed at the funds industry for vehicles which are popular with institutional investors, said Fiona French, the commission’s assistant director of investment business: "We always had the power to waive our rules. Now we’re saying publicly to hedge fund managers that these are the ones we’re prepared to waive to establish funds here. We’re technically not changing the rules because some elements we’ve always waived."

Areas where the commission will show flexibility include: not requiring a Guernsey-domiciled and licensed custodian to fill the role of a suitably qualified prime broker; no need for complex segregation requirements for prime brokers holding fund assets; waivers for funds which can demonstrate a need to use estimates of net asset value in advance of final NAV determination; and where estimation is permitted, there may be waivers of client money rules requiring segregation of subscription and redemption monies.

In May, 2006, the report of a Committee appointed in 2005 to consider investment sector legislation and regulation and to report to the Guernsey Financial Services Commission and to the Commerce and Employment Department recommended the creation of a "registered" fund sector, alongside the existing "regulated" sector. Unlike regulated funds, registered funds would not need prior approval from GFSC.

The report suggests that the same framework should apply to both open and closed end funds, which should be subject to a dedicated Funds Law, leaving the existing Protection of Investors Law to deal with other aspects of investment business.

It also recommended that public offers should be made subject to specific Prospectus legislation, rather than to the current Control of Borrowing regime, and that provision of services to certain funds domiciled outside Guernsey should also be liberalised.

The report additionally recommended that definitions of investment business in the POI Law be reviewed, that economic benefit should be abandoned as a criterion for licensing investment firms, and that some of the sets of rules made under the POI Law should be merged.

The report further reflects on the importance of expanding Guernsey's intellectual capital by attracting new service providers in areas other than fund administration, and notes the significance of personal tax rules and housing policy in achieving those objectives.

Peter Neville, Director General of the Guernsey Financial Services Commission, announced following publication of the report that:

"We very much welcome the proposals put forward in the Harwood Committee report. Streamlining authorisation and licensing processes will benefit: the investment sector by allowing faster responses; the Commission by letting its dedicated staff extend their monitoring of licensees rather than on pre-vetting funds; and Guernsey in general by ensuring that the service delivered by Guernsey investment firms continues to support and enhance our established reputation."

"Recent trends have seen new businesses - stockbrokers, asset managers and private wealth managers - outside the pure funds sector establish themselves here in Guernsey. We also endorse the report's recognition of the importance of expanding the widest range of investment activity in Guernsey."

"Once we have seen how the investment sector responds to the consultation, we look forward to working with them, with the Finance Sector Group and the Department of Commerce and Employment to bring about agreed change as soon as possible."

In May 2008 the Guernsey Financial Services Commission commenced a public consultation on a proposal to fast track the application process for specified licensees associated with Qualifying Investor Funds or Registered Closed-ended Investment Funds.

The main thrust of the proposal is that a Licence Assessment Committee will be convened to consider the issue of a licence under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 (the POI Law) within 10 business days of receipt of a complete formal application, together with confirmations from an appropriately licensed Guernsey service provider to the Commission that:

The introduction of the Qualifying Investor Fund regime in February 2005 and the Registered Closed-ended Investment Fund regime in February 2007 provided fund promoters and their Guernsey regulated service providers with two fast track application processes for defined investment funds, giving a guaranteed response time from the Commission.

Since the introduction of the two regimes, a significant number of fund applications have been made under them, and at the same time associated licence applications under the the POI Law have been made for parties seeking to provide management services to the funds.

Due to the statutory obligations imposed on the Commission when considering applications for licences under the POI Law, which do not apply in the same way to fund applications, the Commission said that it is not possible to guarantee considering applications for licences in the same time scale that apply to the two fast track fund application processes.

The Commission has acknowledged that this apparent “mis-match” in timescales is not ideal and proposes to introduce a regime which will reduce the timescale for the consideration of licence applications in specified cases.

Due to the statutory obligations referred to above it is not possible to reduce the relevant timescale to that applying to the associated fund applications, but it is considered that the proposed regime will introduce certainty of response in respect of licence applications made to the Commission.

The Commission proposes to introduce a framework applicable to licence applications under the POI Law for parties seeking to provide management services to Qualifying Investor Funds or Registered Closed-ended Investment Funds.

Parties seeking to conduct activities such as administration or custody for such funds or who intend to conduct restricted activities in connection with other types of investment fund business and/or non-fund business will need to apply and be assessed under the Commission’s standard licence application process.

In April 2009, it was announced that the Guernsey Financial Services Commission, in conjunction with a Working Party representative of practitioners across the investment industry, has been preparing new Conduct of Business Rules mandatory for all entities licensed under the Protection of Investors (Bailiwick of Guernsey) Law, 1987 as amended.

The Conduct of Business Rules are the first, and major, part of a process to replace the Licensees (Financial Resources, Notification, Conduct of Business and Compliance) Rules, 1998 and the Collective Investment Schemes (Designated Persons) Rules, 1988. The second and final part of the process is a revision to the Capital Adequacy Rules, which went into effect in April 2010 (see Banking above).

The Conduct of Business Rules recognise the very different activities undertaken by the population of licensees under the Law. The main highlights of the Conduct of Business Rules include:

In October 2009, Guernsey’s Chief Minister, Lyndon Trott, expressed confidence that discussions between the jurisdiction and key players in Europe will secure the future for the funds industry in Guernsey.

Trott said that he was fully aware and had been for some time of the serious threats posed by the EU Alternative Investment Fund Managers Directive, which seeks to regulate all alternative investment funds including private equity and closed-ended listed funds, where the island is a world leader.

Guernsey’s political and industry response, being led by the Commerce and Employment Department with the Guernsey Financial Services Commission and the Guernsey Investment Funds Association, has involved a series of meetings in Brussels.

Deputy Trott said:

“This development demonstrates just how vital it is that Guernsey continues to build relationships with Brussels.”

“Brussels is increasingly influential in setting global regulatory standards and our continued prosperity will increasingly depend on our relationship with them.”

The States team has held discussions with the European Fund and Asset Management Association, a number of financial institutions in Europe, and other key individuals involved in this debate.

Commerce and Employment Minister Carla McNulty Bauer said that the purpose of discussions in Brussels were four-fold:

Deputy McNulty Bauer said: “There is no doubt that this directive has the potential to have a significant impact on the global alternative funds industry. Guernsey is not immune from those effects.”

“But the directive also presents a significant opportunity for us. Our standards of regulation of alternative funds are high and stronger than that of many EU Member States. My Department is confident that Guernsey is well placed to achieve equivalence under the directive at some time in the future, though that will depend on how the directive changes during the coming months.”

The directive is unlikely to be finalized until the summer of 2010 and will then not come into force until 2014 or 2015. Until that time the status quo remains and Guernsey’s fund industry can continue to enjoy its current market access for the next five years.

Guernsey Finance, the promotional agency for the Island’s finance industry, has assured that, despite the European Union’s continued steps towards introducing the controversial Alternative Investment Fund Managers Directive, the future of Guernsey as a leading funds domicile is not in jeopardy.

Peter Niven, Chief Executive of Guernsey Finance, said:

“I am confident that no matter which approach is finally adopted by the European Union, Guernsey is well positioned to remain an attractive and competitive jurisdiction for European professional investors.”

“Under the latest proposals any third country hedge fund or private equity group will be able to gain an EU passport if it complies with the new rules and its home country applies global standards. We certainly believe that Guernsey meets all the relevant criteria, not least through our long-standing commitment to adopt international standards on regulation, transparency and information exchange. This has been recognized by the Island’s inclusion on the OECD ‘white list’ and the findings of the Foot Review.”

Niven added: “Guernsey’s government, industry and regulator will be continuing the joint work to understand the implications of the Directive, lobby for changes to the proposals, and promote a better understanding of our regulatory regime and alternative funds industry to ensure we have the best possible outcome for the island.”

In May 2010, European Union finance ministers reached an agreement on a mandate for the Spanish Presidency of the EU to negotiate with the European Parliament on a directive establishing an EU framework for managers of alternative investment funds. A final vote on the draft directive by the European Parliament was scheduled for July, 2010.