Law Society: Anti-Money Laundering and Financial Crime Conference 2017 RECENT CASES IN THE COURTS AND TRIBUNALS

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1 Law Society: Anti-Money Laundering and Financial Crime Conference 2017 RECENT CASES IN THE COURTS AND TRIBUNALS

2 Agenda Court cases Criminal - dishonesty: Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 Civil - de-risking: N v S and National Crime Agency [2017] EWCA Civ 253, [2017] Lloyd s Rep. FC 232, 7 March 2017 Enforcement cases SRA: Clyde & Co and others, 12 April 2017, [2017] Lloyd's Rep. FC 418 RICS: Dion Beard, [2016] Lloyd's Rep. FC 612, 8 September 2016 FCA: Deutsche Bank, 31 January 2017 CPS, ICAEW: Simon Rothwell, December 2016

3 COURT CASES

4 Dishonesty Ivey v Genting Casinos (UK) Ltd [2017] UKSC 67 The test of dishonesty When dishonesty is in question the factfinding tribunal must first ascertain (subjectively) the actual state of the individual s knowledge or belief as to the facts. The reasonableness or otherwise of his belief is a matter of evidence (often in practice determinative) going to whether he held the belief, but it is not an additional requirement that his belief must be reasonable; the question is whether it is genuinely held. When once his actual state of mind as to knowledge or belief as to facts is established, the question whether his conduct was honest or dishonest is to be determined by the fact-finder by applying the (objective) standards of ordinary decent people. There is no requirement that the defendant must appreciate that what he has done is, by those standards, dishonest per Lord Hughes, paragraph 74

5 De-risking litigation N v S and National Crime Agency [2015] EWHC 3248 (Comm) A bank formed suspicions about accounts held by particular customers of the Claimant, which were already being reviewed by the Claimant. Those accounts were frozen by the defendant, and it was common ground that they should remain frozen. The bank then froze effectively all of the Claimant's accounts and sought to terminate their banking relationship. It suspended the claimant's access to the online foreign exchange platform and its online facility to view and make payments from the claimant's client and other accounts. As the claimant had no alternative banking arrangements, a large number of individual customer transactions were left suspended. The Claimant sought a mandatory interim injunction against a bank to compel the bank to continue to provide the Claimant with banking facilities. The Claimant argued that the bank was not entitled to terminate the banking relationship without notice under its contractual terms, and had breached its duty of care.

6 The decision The Claimant had an arguable case and the ordinary principles relating to interlocutory injunctions applied, although it was to be a mandatory rather than a negative injunction. There was both a serious issue to be tried and the balance of convenience and justice required that the claimant should be given protection from the very substantial loss and damage which it imminently faced, provided that the bank could be given protection by reference to the provisions of the Act. The Court made an interim declaration to protect the bank against the risk of potential criminal liability which could flow from the continuing provision of its banking facilities.

7 The appeal - [2017] EWCA Civ 253 The NCA appealed the orders. Its purpose was not to reverse the transactions, but to avoid creating a precedent. The NCA contended that: (1) the judge lacked jurisdiction to make the orders since the statutory consent regime under POCA was determinative; alternatively that the statutory consent regime was highly relevant to the exercise of the judge's discretion; (2) the judge erred in law in finding that the NCA's consent meant that there was no evidence known to it that the monies to be transferred are or are suspected to be criminal property; (3) the mandatory interim injunction requiring RBS to process the transactions should not have been granted.

8 The decision (1) Absent clear legislative wording the statutory consent regime under POCA did not oust the jurisdiction of the court to grant interim relief. (2) Ordinarily it would be determinative and was highly relevant to the exercise of the court's discretion. (3) The public interest in the prevention of money laundering would in most cases be decisive in determining where the balance of convenience lay and in refusing interim relief. (4) The High Court s inferences drawn from the NCA's consent to proceed with the transactions were wrong. One could not infer from NCA consent that there was neither evidence nor suspicion of money laundering. A court needs to be cautious in drawing any inferences from evidence provided by a bank in such matters giving the short time it will have had to prepare its evidence and the constraints on it arising from the tipping off provisions in POCA (see paras 73 to 78);

9 The decision [2] (5) The case was not sufficiently exceptional to grant an interim declaration the effect of which would be final and determinative of the substantive legal questions as to whether RBS (a) committed a criminal offence in processing the transactions; and (b) whether RBS was obliged by the criminal law to make a disclosure to the NCA in the circumstances. (6) The court should not have granted a mandatory injunction. The balance of convenience favoured RBS. Given the inappropriateness of an interim declaration to provide it with protection, no mandatory interim injunction should have been provided. (7) The lower court had not had regard to the important public interest in the prevention of money laundering as reflected in the statutory procedure. The potential losses to N were an important factor but the potential losses were not a sufficient justification to grant interim relief having the effect of displacing the statutory procedure.

10 The decision [3] Whilst I do not consider that the jurisdiction of the court is ousted, I accept the NCA's alternative submission that the statutory procedure is highly relevant to the exercise of the court's discretion. It cannot be displaced merely on a consideration of the balance of convenience as between the interests of the private parties involved. The public interest in the prevention of money laundering as reflected in the statutory procedure has to be weighed in the balance and in most cases, is likely to be decisive. Cases justifying such intervention are likely to be exceptional, although the test is not one of exceptionality. One possible example given in argument might be demonstrable bad faith by the bank. A further difficulty faced by any bank customer making an application for interim relief is that the balance of convenience will generally favour the bank in that the inconvenience to the customer will be outweighed by the potential prejudice to the bank of being compelled by the order to commit, or risk committing, a criminal offence. per Hamblen LJ, paras 60 & 61; Hickinbottom & Simon LJJ agreeing

11 SRA ENFORCEMENT

12 SRA v Clyde & Co & others SDT, 12 April 2017 Clyde & Co has been fined 50,000, while three partners also received 10,000 each in fines for breaching accounting and money laundering rules. Costs of 82,454 were ordered to be paid by the firm and its partners on a joint and several basis In a case brought by the Solicitors Regulation Authority (SRA), the partners admitted they allowed a client bank account to be used as a banking facility, acting against SRA accounting rules and in breach of obligations under money laundering regulations.

13 SRA v Clyde & Co [2] None of the partners intended to breach any regulatory rule or principle. No harm was caused to any party because of the breaches. There was no breach of trust or suggestion that anybody had acted without integrity, probity, or trustworthiness. None of the partners made any financial gain from the breaches. The firm and its partners co-operated fully with the SRA in respect of every aspect of the investigation and made full and frank admissions at the earliest opportunity. The two partners who were responsible for the client transactions had both consulted the third partner in his capacity as money laundering reporting officer about the transactions. In one of the client matters, the partner also consulted the firm s General Counsel and took active steps to research the applicable regulatory rules.

14 SRA v Clyde & Co [3] Two partners admitted they had failed to take on guidance of the Law Society's fraudulent financial arrangements in acting as an escrow agent on behalf of the client. The most senior of the three partners was one of the firm s two money laundering reporting officers. Clyde & Co was also judged to have failed to follow rules on dealing with dormant client balances. The client involved in the case was not named in the settlement.

15 SRA v Clyde & Co [4] Notwithstanding, the two transaction partners remained personally responsible for their regulatory failings. As for the money laundering reporting officer, plainly he was trying his best to deliver the correct answer but alas he made the wrong judgment call. The SDT commented that the money laundering reporting office should have done better. The individual partners were experienced solicitors with unblemished records. As for the firm itself, Clyde & Co is a highly respected international firm, and it too has no previous disciplinary record. But as a global firm, the SDT noted that it was required to set an example for the wider profession, and whilst the failings were not deliberate, they were not acceptable either.

16 OTHER ENFORCEMENT CASES

17 Simon Rothwell the facts Rothwell provided tax and accountancy services to C Limited. The sole director and shareholder of C Limited (the client) told Rothwell that she had engaged a firm of tax specialists to deal with an HMRC tax enquiry. She also disclosed that she had over-claimed her mileage expenses and was asking the new firm of tax specialists to negotiate a settlement with HMRC on her behalf. Rothwell ended his business relationship with the defendant on this date. Subsequently, police interviewed Rothwell under criminal caution. He was told that the client had been involved in a large fraud against the NHS, using her company to generate fake orders for training provided by her husband, who worked within the NHS.

18 Simon Rothwell the outcome Rothwell was charged with failing to disclose to the authorities his knowledge of the overclaim for expenses which the client had disclosed to him. Rothwell, who had been in practice for 26 years, was convicted at Leeds Magistrates Court of a single offence under section 330. He was sentenced at Leeds Crown Court to pay a fine of 5,000. In December 2016 the ICAEW issued Rothwell with a severe reprimand, and ordered him to get training about money laundering within six months

19 Dion Beard, [2016] Lloyd's Rep. FC 612 DB was informed by a potential purchaser that he was intending to use criminal funds obtained illegally from the Russian Government to purchase a property. DB continued to progress the purchase and offered to introduce him to solicitors who would deal with the conveyancing. In fact, Boris was an investigative journalist and DB s actions were recorded as part of a television documentary, From Russia with Cash. The Panel was satisfied that DB should have known that a potential purchaser has disclosed that he was engaged in money laundering. As such, DB had a professional obligation to make a report to his firm s nominated officer for money laundering and/or to the police. The Panel determined that DB should be expelled from membership of RICS and ordered him to pay a contribution towards RICS costs.

20 Deutsche Bank, 31 January 2017 The FCA fined Deutsche Bank 163 million for failing to maintain an adequate AML control framework during the period between 1 January 2012 and 31 December This is the largest financial penalty for AML controls failings ever imposed by the FCA. Deutsche Bank exposed the UK financial system to the risks of financial crime by failing to properly oversee the formation of new customer relationships and the booking of global business. As a consequence of its inadequate AML control framework, Deutsche Bank was used by unidentified customers to transfer approximately $10 billion, of unknown origin, from Russia to offshore bank accounts in a manner that is highly suggestive of financial crime.

21 The details The FCA specifically found that Deutsche Bank s Corporate Banking and Securities division (CB&S) in the UK: performed inadequate customer due diligence failed to ensure that its front office took responsibility for the CB&S division s Know Your Customer obligations used flawed customer and country risk rating methodologies had deficient AML policies and procedures had an inadequate AML IT infrastructure lacked automated AML systems for detecting suspicious trades failed to provide adequate oversight of trades booked in the UK by traders in non-uk jurisdictions.

22 The damage The failings allowed the front office of Deutsche Bank s Russiabased subsidiary (DB Moscow) to execute more than 2,400 pairs of trades that mirrored each other (mirror trades) between April 2012 and October The mirror trades were used by customers of Deutsche Bank and DB Moscow to transfer more than $6 billion from Russia, through Deutsche Bank in the UK, to overseas bank accounts, including in Cyprus, Estonia, and Latvia. The orders for both sides of the mirror trades were received by DB Moscow, which executed both sides at the same time.

23 FCA future enforcement In its recently-published Business Plan 2017, the FCA indicated that it would seek to utilise its power to prosecute under the MLR where firms have poor AML controls, in order to impose business restrictions to limit the level of risk, provide deterrence messages to industry, or both.

24 CPS future enforcement The Code for Crown Prosecutions Therefore, where there is sufficient evidence to meet the evidential test under the Code for Crown Prosecutors, the following Public Interest factors in favour of prosecution for offences of money laundering should be very carefully considered: The importance of making it more difficult for criminals to legitimise their ill-gotten gains; The importance of deterring professional launderers; The importance of protecting the integrity of financial institutions domestically and internationally

25 Contact details Jonathan Fisher QC Bright Line Law Central Court 25 Southampton Buildings London WC2A 1AL DDI: +44 (0) Red Lion Chambers 18 Red Lion Court London EC4A 3EB DDI: