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The Jersey Law Review - October 2004

SHORTER ARTICLES AND NOTES

THE INFORMAL ‘FREEZE’ UNDER PROCEEDS OF CRIME (JERSEY) LAW 1999

David O’Mahony

Introduction

1       One of the greatest practical difficulties created by the consent provisions of Part III of the Proceeds of Crime (Jersey) Law 1999 (“POCL”) has been finding the right way for a financial institution and its customer to proceed after the police have refused to consent to transactions.  The difficulty has been compounded by the fact that it has often been difficult to disentangle the legal issues and the roles of the various interested parties for the purpose of conceptual analysis.  The problem at the heart of the difficulty can be simply stated: a financial institution which is bound in law to honour its customers’ requests for payment may, if it suspects that the funds it holds are the proceeds of crime, commit a criminal offence in doing so.[1]

2       One way of solving the problem is provided by the POCL: if a police officer consents to the transaction, the financial institution has a defence.  Are there other ways to solve the problem?  The Royal Court has recently stated in Ani v Barclays Private Bank & Trust Ltd and Attorney General[2]  that there are at least two.

The facts

3       It is unnecessary to go too far into the facts of the Ani case. In brief, Edmond Ani, a Nigerian national, was the settlor and a beneficiary of a trust of which the trustee was Barclays Private Bank & Trust Ltd. (“Barclays”). In 2002 Barclays made a Suspicious Transaction Report (“STR”) and the police thereafter refused to consent to any movements of funds.  In fact the Attorney General was conducting an investigation into the provenance of the monies.

4       In October 2003 Mr Ani brought a representation which was served on the bank, seeking an order that it honour its commercial obligations towards him. He convened the Attorney General but claimed no relief against him.  Before the representation came to be heard the Attorney General’s investigation finished and Mr Ani was given access to his funds. At that stage Mr Ani sought to amend the representation to claim his costs from the Attorney General.  The application to amend was allowed but after argument costs were refused.

The possible courses of action

5       It is right to say by way of preface that the Deputy Bailiff began his analysis of the present issue by saying that “…an application for costs is certainly not the occasion upon which to give … general guidance.”  However, he went on to set out what he described as ‘…at least two alternative courses which might be followed by an aggrieved customer’. They were -

(a)     a public law action against the police seeking an order that the refusal to consent be quashed and that they give consent; or

(b)     a private law action by the customer against the financial institution seeking an order that it pay the funds in accordance with his instructions.

6       The Deputy Bailiff said that (a) would be a conventional application for judicial review which “would clearly face certain difficulties in succeeding”. He described (b) as “a better solution”.  In the course of its judgment the Royal Court quoted a number of passages from the English case Amalgamated Metal Trading Ltd. v City of London Police Financial Investigation Unit and others,[3] (“Amalgamated Metal”) describing them as helpful.  As regards (b), above, one of the passages reads -

“It is to my mind inconceivable that there could be criminal proceedings brought under s 93A[4] against a bank or other financial institution which has taken such steps as are reasonable in all the circumstances to resist proceedings but has nonetheless been ordered by the court to pay over money which subsequently is proved to be the proceeds of criminal conduct.”

An action against the police

7       The Court first made clear that as the statutory power to grant consent is imposed on the police, they are the appropriate party to an application for judicial review, and not the Attorney General. Another passage from Amalgamated Metal quoted by the Royal Court describes the role of the police officer in the following   terms -

“The only question which the police (‘the constable’ in the language of the statute) were asked was whether they consented to the payment being made. .. The 1988 Act is, however, silent as to the basis upon which consent is to be given or refused.  The provision would manifestly be unworkable if the constable could only justify the withholding of consent if he could demonstrate his satisfaction, to whatever might be the appropriate standard, that the funds are in fact derived from or used in connection with criminal conduct.  It seems clear from the section as a whole that the existence of a suspicion is sufficient to ground a proper refusal of consent…”[5]

8       A further passage seeks to remove some misconceptions as to the nature of any challenge to the police officer’s decision -

“…it was never in my judgment appropriate for AMT (the financial institution) to seek as against the police a declaration that the moneys are not the proceeds of criminal conduct.  It was never an issue between those parties whether the moneys were such proceeds, and there was and is no occasion for the creation of a lis between them directed to determination of that point. ..It would surely be odd if a legitimate withholding of consent which can be justified on grounds of suspicion were to lead to the situation in which the police must defend (and perhaps pay the costs of) proceedings directed towards determination of a question wholly different from that which they were asked, viz the ultimate question whether the funds are in fact derived from or used in criminal conduct…Such a procedure places an undue and inappropriate burden upon the police, effectively requiring them to litigate at public expense what are in truth private disputes between financial institutions and their customers. The arising of such disputes is one of the ordinary commercial risks which any financial institution faces…”[6]

9       After quoting those passages, the Royal Court stated -

“As Tomlinson J made clear, the issue would not be whether the monies were in fact derived from or used in criminal conduct. The issue would be whether the decision of the police to refuse consent was liable to be quashed on the usual grounds for judicial review e.g. that such refusal was a decision to which no reasonable police officer could have come.”[7]

An action against the financial institution

10     Again one of the passages from Amalgamated Metal which the Royal Court quoted is relevant -

“As I have indicated above I am not unsympathetic to the dilemma in which AMT finds itself.  I recognise that financial institutions do not wish to have judgments entered against them.  There are also increasing regulatory constraints upon their action.  However, there will be circumstances, as envisaged by the Court of Appeal in the Bank of Scotland case, in which the court simply cannot assist, and the bank will have to take a commercial decision whether to contest proceedings or not… Consultation and liaison with the police is obviously always prudent.  Every case will depend upon its own facts, but I cannot think that the court will require financial institutions to run defences which in the view of the their responsible legal advisers are unsustainable on the basis of the evidence reasonably available to them”.[8]

11     As Tomlinson J had observed in one of the other passages quoted ‘The arising of such disputes (between financial institutions and their customers) is one of the ordinary commercial risks which any financial institution faces…’.  Some comfort may be taken by financial institutions from the facts of the Ani case itself. In the alternative to claiming costs against the Attorney General, Mr Ani had claimed the costs of the representation from Barclays. The Royal Court also refused this alternative claim. The reason the court gave was:  ‘Once the suspicion had arisen, it was clearly reasonable for the trustee not to distribute funds in the face of a refusal by the police to give their consent.’

What the customer must prove

12     The burden of proof is upon the customer.  The Royal Court quoted Tomlinson J as saying -

“The situation is now, however, transformed by Wavesmetco’s (the party seeking the payment of the funds) application to introduce a counterclaim seeking payment of the money by AMT.  If I grant permission for that counterclaim to be introduced then at last issue will be joined between the two parties in contention………

13     I should indicate, insofar as it is not already apparent, that I reject as wholly inappropriate Wavesmetco’s suggestion that I should now make a final declaration to the effect that the moneys are not the proceeds of criminal conduct.  For the reasons I have already given that is an order of a type which the court could only consider making after trial of the issue.  Furthermore Wavesmetco has done nothing whatever to rebut the inferences which can be drawn from the material placed before the court by the liquidators.  If anything, its conspicuous failure to grapple with the issues has made the inferences more compelling.  In any event the issue now is not whether there should be made a declaration that the moneys are not the proceeds of criminal conduct but rather whether Wavesmetco has an enforceable claim to payment by AMT.”  (My emphasis.)[9]

14     The Royal Court added -

“At the trial of the issue the customer would have the opportunity of producing detailed evidence as to the provenance of the funds with a view to proving that the funds were not derived from or used in criminal conduct.”[10]

15     In fact Tomlinson J (in a passage not quoted by the Royal Court) said (with reference to the original action seeking a declaration that the monies were not the proceeds of crime) -

“Finally Ouseley J (at an earlier directions hearing) …observed that he for his part would decline to grant the declaration sought without a very clear explanation from directors from Wavesmetco as to the source of their funds, in the absence of which an order for cross examination of the directors or a stay of the proceedings might be ordered. Plainly, Ouseley J did not envisage that the court would be prepared to exercise its discretionary jurisdiction simply upon the basis of an absence of evidence proving that the money is the proceeds of criminal conduct. With that approach I respectfully agree.”[11]

Conclusion on the Ani judgment[12]

16     In this judgment the Royal Court envisages that in the ordinary course, a customer faced with a refusal by his or her bank to honour instructions on the grounds that by doing so the bank may be committing an offence would bring a civil action against the bank.  In the course of that action, the customer would have to establish the legitimacy of the funds. The issue would be whether the customer has an enforceable claim to payment by the financial institution.

17     These proceedings may well be expensive. They will certainly take a number of months (if not longer) to be resolved. The costs’ implications will depend on the facts of the case, but it is perhaps stating the obvious to note that the existence of the possibility of this form of action provides yet another serious commercial incentive to undertake proper due diligence on customers, their assets and transactions.

The new English regime

18     It will be of interest to those in the industry and the legal profession to note that the money laundering provisions of the Criminal Justice Act 1988 have now been repealed in England and Wales.[13]  A new system of reporting and consent has been created by Part 7 of the Proceeds of Crime Act 2002 (‘POCA’).   Part of the regime may be regarded as being easier for financial institutions. S 335 of POCA states that if within seven working days of making an STR, the institution does not receive notice that consent is refused the institution is to be treated as if it had consent. If consent is refused in those seven days the refusal of consent can only last for a further 31 days.[14] This clearly reduces the problems addressed in the Ani judgment.[15]

19     However other parts of the regime are more onerous. S 330 makes it an offence not to make a disclosure if at least ‘reasonable grounds for suspicion’ of money laundering come a person’s way in the course of a business in the regulated sector. This applies not only to MLROs and institutions themselves but to all employees.[16]   The regulated sector is growing. It covers the finance industry, but also lawyers and accountants in certain circumstances.  It is also right to say that under POCA (see section 40) restraint orders can be obtained much earlier in the investigation than saisie judiciaires can be under POCL.

Tipping off

20     A related issue under existing Jersey law that has the potential to cause problems for financial institutions is the offence created by article 35 ‘tipping off’. POCL of a financial institution (or anyone else for that matter[17]) who knows or suspects that there is or is to be action by the authorities in relation to an existing or proposed investigation, or who knows or suspects that an STR has been made, commits an offence if it discloses anything likely to prejudice the investigation.

21     What is the institution to do if it has such suspicion or has made an STR and is at the same time being pressed for payment by its customer?  In practice experience has shown that this provision is rarely a problem. Usually the police and the financial institution are able to agree on what may or may not be disclosed, but this issue has also been the subject of proceedings in the English Court of Appeal in Governor and Company of the Bank of Scotland v A.[18]

22     As seems to be a feature of some of the cases in this area, the parties in Bank of Scotland had real difficulties in properly framing the proceedings and isolating the issues. As a result the importance of the case goes beyond the current issue.[19] In so far as the question of tipping off was concerned the court stated -

“The question of the information which could properly be disclosed should have been capable of being resolved between the SFO and the bank, but if they could not reach agreement, then the court would have to resolve the dispute. The hearing could have been held in private and there would have been no question of A Limited (the customer) having to be served since it would not have been a party. If it was necessary for any order to be made, in proceedings against the SFO, then the appropriate order would have been an interim declaration under Part 25.1 (1) (b) of the CPR”.[20]

As to the costs of any such application, the court said -

“If there is a dispute as to whether a … disclosure made by the bank, the SFO on behalf of the police and the bank should try to resolve it between themselves. If they can not do so, that can be the subject of an application for interim declaratory relief in the way we have suggested. Unless the SFO acts unreasonably, it is likely that the parties to the application will have to pay their own costs.”[21]

23     But once again the court urged caution -

“The fact that the courts now have these powers, must not, however, be regarded as a substitute for financial institutions taking the decisions which should be their commercial responsibility. The court's powers are discretionary and only to be used where there is a real dilemma which requires their intervention.”[22]

Conclusion

24     This is a fascinating area and one which has created and will continue to create practical and legal difficulties. Gradually the courts are grappling with the issues and providing useful guidance.

David O’Mahony is a barrister of 7 Bedford Row, London, who assisted the Attorney General of Jersey in the Ani case.

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