Action of this kind was foreshadowed by the Guernsey Court of Appeal in an earlier decision - namely The Chief Officer, Customs & Excise, Immigration & Nationality Service v Garnet Investments Ltd (6 July 2011) - and displays the ‘chilling effect’ of the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law 1999, Guernsey's prototype for the UK's Proceeds of Crime Act 2002.

Unlike its English counterpart, there is no mechanism under the POC Law whereby the FIS is deemed to consent to a transaction if it takes no action after a certain period (seven working days in England). The upshot is that funds can be effectively ‘frozen’ if somebody lodges a SAR and the FIS does not say that the owners of those funds (or anyone else) can touch them. In stark contrast to the English regime, where responsibility for taking action (and quick action, at that) falls squarely on the authorities' shoulders, Guernsey's law makes the financial institution the de facto enforcement agency.

On one view, this creates an unacceptable situation as assets can stay in limbo indefinitely unless their owner takes court action against the financial institution that holds them. That institution is also in an unenviable position as it bears the brunt of its client's frustration, being unable (at least initially) to explain the reason for refusing his otherwise lawful instructions.

Although Liang is the first private law decision of its kind in Guernsey, there are doubtless many other HNWs in the same position as Ms Hazel Liang and more such cases might be expected to appear on the court's list, especially since the Guernsey Court of Appeal indicated in the aforementioned Garnet case that such an action is the most appropriate course for someone in that situation to take.

The factual background of the case is not overly significant. In short:

• Ms Liang is a beneficiary to a discretionary trust by the name of the Lavender (2009) Trust, which RBC Trustees (Guernsey) administrates.  
• In 2011, RBC became aware of information that suggested that Ms Liang's now-estranged husband, Mr Li, was wanted by the Hong Kong authorities for questioning in relation to alleged property fraud.
• Mr Li was on Hong Kong's wanted list because he had left the jurisdiction and the investigations were pending. The alleged fraudulent transactions had been for the benefit of a company that had settled money in the trust, so RBC posted off a SAR to the FIS in 2011.
• In 2013, Ms Liang asked RBC to terminate the trust and distribute the trust funds. Because of the SAR, RBC was unable to oblige her or even (due to the tipping-off offences that appear in AML legislation everywhere) to tell her why it was not obliging her. Any compliance officer will be very familiar with this situation.
• Eventually, the FIS allowed RBC to divulge the basis of its suspicion to Ms Liang. It also allowed the fact of its ‘no consent’ decision to be made known to the client. RBC then started talking to Ms Liang with a view to obtaining further and independent evidence to show that the funds in the trust were not the proceeds of crime. Unfortunately, Ms Liang was reluctant to provide the information.

Ms Liang's first set of advocates initially (and interestingly) applied under the Trust (Guernsey) Law 2007 for an order to require RBC itself to ask the court how it should act in the circumstances. Ms Liang subsequently abandoned this application in favour of her action at private law.

Although RBC tried to strike a neutral pose throughout the proceedings, it was expected to help the court by presenting relevant evidence and testing Ms Liang's case. This is the nature of Guernsey's adversarial system of litigation. RBC, through its staff but also, crucially, through its advocate, had to take on the job that a prosecuting authority might be expected to do.

The court's findings

Essentially, the Deputy Bailiff found that RBC was reasonable in forming its suspicion upon which it based the SAR. Although he was sympathetic to the position that Ms Liang found herself in by virtue of Guernsey's law, he deduced that she had only established the fact that some of the trust funds were not the proceeds of crime.

The Deputy Bailiff was critical of Ms Liang's reluctance to provide information (which she should have been capable of providing) to show that the funds were clean. This is a useful reminder to any person who finds himself in Ms Liang's position, or acting for such a person, to provide whatever information or documents he possibly can to establish the provenance of funds after someone has raised a suspicion. If he takes a defiant or unco-operative approach, however, he can only expect to end up in Ms Liang's situation, embarking on a costly and time-consuming court case.

Perhaps the most interesting finding in the judgment is in relation to the burden of proof. It confirmed the Deputy Bailiff's previous decision in Jakob International Inc v HSBC Private Bank (CI) Ltd.

In Jakob, the Deputy Bailiff concluded that the onus rests first on a defendant (i.e. the financial institution) to show that its suspicion was reasonable and that it was therefore right not to follow the client's instructions. Once the defendant has done so, the burden of proof then shifts to the plaintiff (i.e. the client), who must prove (on the balance of probabilities) that the funds are not the proceeds of crime.

At trial, Ms Liang's advocate sought to revisit the Deputy Bailiff's finding in Jakob by arguing that the whole of the burden in the proceedings should fall on a defendant. That is to say that the defendant should not only have to prove reasonable suspicion, but also prove that "the provenance of the funds were the proceeds of crime."

The Deputy Bailiff gave this argument short shrift and accepted the arguments of RBC's advocate (Mark Dunster of Carey Olsen) that this would place an unnecessary and unreasonable burden on the defendant, a financial institution, which does not have the investigative powers of a government agency and does not possess (or have access to) the information that the plaintiff holds regarding the provenance of the funds.

What lessons can compliance officers learn from Liang?

• If a financial institution or a money-laundering reporting officer (MLRO) thinks that there is a possibility (which is more than fanciful) that a relevant fact exists that gives rise to some suspicion, it/he has enough reason to send off a SAR.
• When faced with a financial institution refusing to allow access to funds on the basis of a lack of 'consent' from the FIS, it is for the client to be as forthright and co-operative as he can be in order to show the authorities that the funds are clean. If they are, there is no reason for the client to be secretive about their source.
• The MLRO's job does not end when he has sent off his SAR. He must review the matter (and whether it is remains reasonable to be suspicious) continually.
• An MLRO must be prepared to be cross-examined in the witness box about the basis of his suspicion. His organisation should have borne this in mind when it appointed him. All MLROs must be robust enough to stand up in court.
• The organisation must have legal representatives who (a) are aware of the commercial/regulatory situation and (b) have enough trial experience to be able to cross-examine the client and any other witnesses meaningfully. This is a necessary way of protecting the organisation when someone questions its decision to send the SAR off and it also helps that organisation to fulfil its duty to the court to test the client's evidence.

* Carey Olsen's Mark Dunster (available on +44 (0)1481 732015 or at mark.dunster@careyolsen.com) and Simon Florance (available on +44 (0)1481 732010 or at simon.florance@careyolsen.com) successfully represented RBC at trial and indeed throughout the proceedings.