Guernsey’s Beneficial Ownership Register

tindalldawn-1-e1454075780950I have been a bit quiet recently having not blogged this year but today I have decided to use the same blog I have just published on my political website.  It is my speech about the approval yesterday for the introduction of a private, central register of beneficial ownership of legal entities here in Guernsey.

“Sir, I will be supporting the proposition to establish a register containing beneficial ownership information for all forms of legal person.  We need this because it is essential that our law enforcement is provided with the tools to access this information as quickly as possible so that we can comply with international standards, fight crime and support our finance and business services industries.  I stand to give my support but also to give the subject the weight it deserves.  This is such an important move to take in the times we live in.

The proposal is for the Register to be open to those who need it and not publicly accessible.  This is, in my view, a sensible proposal.   Whilst there are calls for such registers to be open to the public, this is not based on a need to follow international standards but because of calls from pressure groups and the media.

From my involvement with industry, it is clear that they want us to follow international standards but not excessively which would put Guernsey at a competitive disadvantage.  I do not think the proposals do so.  In fact, I think they are a positive move supporting our commitment to law enforcement.

The widely accepted international standard on the recording of beneficial ownership is the one developed by the Financial Action Task Force or FATF which was first published in 2003 and further strengthened in 2012.  It does not require a publicly accessible register only that countries should ensure that there is adequate, accurate and timely information on the beneficial ownership and control of legal persons that can be obtained or accessed in a timely fashion by competent authorities.

This international standard has also been incorporated into the Global Forum on Transparency and Exchange of Information for Tax Purposes and is also followed in principle under the 4th Money Laundering Directive coming into force on the 26th June 2017.  I say in principle because, whilst the EU are seeking a central register, it requires a more extensive list of those who can access it than the FATF recommendation although, interestingly, it does not require the register to be public it merely suggests it as an option.

Whilst we are obviously not in the EU, not complying with the Directive may affect our ability to work with EU countries in the future.  This is not addressed in this Policy Letter and I would like reassurance that this aspect will be considered.

It is also important to remember that there are, already, extensive regulations in place which require all local trust and company service providers and other prescribed businesses and individuals to know the identity of the beneficial owners of Guernsey entities.  Those regulations also require the same information to be obtained for owners of entities incorporated in any jurisdiction in the world.

The recent 2015 MoneyVal report was most complimentary about the regulatory regime here but indicated they felt there were insufficient measures in place where no such provider was involved and the proposals in this Policy Letter are intended to improve these measures.

We also have, under Company Law, the role of Resident Agent whose responsibility, amongst other things, is to collect the information about beneficial owners albeit they do not need to establish the underlying natural person unlike under the Anti Money Laundering and Countering the Financing of Terrorism or AML/CFT requirements although both have a percentage ownership value below which identification is not required.   Propositions 7 and 9 will strengthen their role and accordingly I support these Propositions.

With all these ways of collating the information on beneficial ownership, why should we consider a public register?  Some say this is the way forward and point at the UK who have established a register last year.  But they’d be wrong.  The UK MPs calling for us to have such a public register of beneficial ownership probably don’t realise that the new UK legislation has not created such a register.

According to FATF, a beneficial ownership register should identify the natural persons who ultimately have a controlling ownership interest in a legal person but the UK register does not do that.  It does not even create a register of those who have ultimate control.  It merely creates an unverified register of those who have immediate control of a particular entity.  In my view this doesn’t even comply with the international standards so, as I have said before, why should we follow the UK down yet another path going in the wrong direction?

As well as not being required internationally, there are good reasons for keeping the details of beneficial ownership private.  These include a fear of kidnap or commercial sensitivity.  Some investment strategies made public could be impaired if this information was made public.  And who will prevent abuse of the information?

Most importantly, we all are entitled to a basic human right – the respect for private and family life – this is not secrecy but privacy: confidentiality.  As we said in the debate on the P&R Plan, regulation should be appropriate and proportional and this is an occasion when regulation should be no more and no less than what the international standard requires. The papers by the FATF and the OECD to the G20 Finance Ministers late last year made it clear that the focus is not on revising the standard but on implementation of the existing standard.  So I say let the ones who need to have the information, the Bailiwick’s law enforcement, have that information as speedily as possible.

However, that information must be kept securely; an important consideration for all of us in this age of cyber insecurity as highlighted by Deputy Lowe yesterday morning.  I am pleased with the choice of the Guernsey Registry as it will not only have the appropriate mechanisms in place to ensure the information is kept securely but, unlike the Guernsey Financial Services Commission, it will not be subject to a potential conflict of interest.

We do also need to ensure there are suitable legal gateways for the sharing of that information with domestic and foreign authorities for specified purposes.  Part II of the Disclosure Law which was brought into force on the 17th December 2007 and updated in 2014 sets out these various purposes and include criminal investigations and proceedings in the Bailiwick and elsewhere. Again I support this approach.

We then have Proposition 5 – to agree that P&R and Economic Development can appoint the Registrar.  As there is no mention in the Propositions that the appointment will be the Registrar of Companies as indicated in the Policy Letter, please can I have the reassurance that the Committees will not change their mind and, say, appoint the Commission instead?

The remaining Propositions are sensible recommendations especially in respect of the Resident Agents and bearer instruments.  The introduction of a statutory definition of beneficial owner will also be useful as is the alignment, after suitable consultation, with the anti-money laundering regime.   Similarly, the introduction of the right of directors to ask the Resident Agent to provide the beneficial ownership information on request but this could be enhanced if the Agent also has to provide the verification of such information.  I also note there is no provision to deal with the record keeping requirements when Resident Agents change – should the previous Agent keep the records to show they had fulfilled their role or should the documents belong to the company but accessible to the Agent?

Then there is the continuation of the ability for a statement being made that no beneficial owner has been identified.  This is necessary due to the complicated nature of ownership but I would ask for consideration that an explanation of why the owner cannot be identified to also be provided.

I am also concerned about the funding of the Registry.  Why does it have to come from the Bond?  We heard earlier that the implementation of the waste strategy would be better funded by the Bond as otherwise it would be paid for by the taxpayer and it would be more expensive if a commercial loan obtained but the Registry is a success story with more than £9 million transferred to General Revenue in 2015 so why can’t the costs be paid from their profits rather than the Bond with the inherent costs associated with such a loan?  In fact, why can’t the £214,000 loan outstanding at the end of 2015 be repaid too?  Whilst the Policy Letter seems to justify this I am not satisfied that this is commercially sound and an explanation would be appreciated.

However, I have also raised several times through the consultations, my concern as to why we are not being innovative in this field.  Why we are not being ahead of the curve for what is already a FATF standard and will also be a requirement in the future?  That is the register of trusts and other legal arrangements.

Pascal Saint-Amans, head of tax at the Organisation for Economic Cooperation and Development or the OECD, has said existing efforts to improve the sharing of information between countries – championed by David Cameron – needs to go further.  In particular, he said countries should look again at new registers of company ownership as these registers should also show similar information for trusts.

The FATF Recommendations state that the information available for legal entities should also be available in a similar way for legal arrangements – including trusts – with a view to achieving appropriate levels of transparency.

The 4th Money Laundering Directive states that “In order to ensure a level playing field among the different types of legal forms, trustees should also be required to obtain, hold and provide beneficial ownership information”.

Although David Cameron championed the public beneficial ownership register for legal entities, he acknowledged the important differences between companies and trusts indicating his reservations on such a register.  I am sure there are some in industry who may be fearful of my suggestion however, we need to be realistic and acknowledge that FATF, MoneyVal, and the OECD will get their way so let’s be proactive and design a register that is fit for our purposes and not wait to be told what we should do.  Be told by those who understand our finance and business services industries least.

I also note that two days ago New Zealand approved the recommendations of a report to introduce a private register of foreign trusts – trusts without a New Zealand resident settlor.  However, they are implementing it by using a manual spreadsheet database – we of course could be more sophisticated than that.

I should add that we do most of the work already under the AML/CFT regime so it would not be a stretch to start giving due consideration now to the question of whether to provide beneficial information on trusts to a private central register.  I believe that there are opportunities for our businesses if we lead the way so let’s grasp them.

So, Sir, despite recording my concern that that the Registrar is not stated in the Policy Letter to be the Registrar of Guernsey Companies and my disappointment that we are not being more progressive, I ask members to support these propositions. By doing so, we can fulfil the promises we have made to follow international standards and show our finance and business services industries that we support them by introducing regulation that is proportionate and appropriate.”

For those of you who wish to find out more of my political views then please visit http://www.dawntindall.gg

The Suspicious Lawyer – A Postscript

tindalldawn-1-e1454075780950For those who read the Commission’s FAQs for Legal Professionals issued on the 3rd October and my subsequent blog, you may wish to go back to their website and re-read them as they have changed – and for good reason.

On the News page, it gives the reason for the FAQs being issued namely because of changes to the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999.  These changes are now made clear. New Regulations were made by the Policy & Resources Committee on the 27th September and came into force on the 1st October 2016 amending paragraph 5(e) of Schedule 2.

So, when I noted in my last blog that the list of activities in the FAQs did not replicate paragraph 5(e) of Schedule 2, it was because the word “administration” had been removed from paragraph 5(e) of the Schedule 2 by these Regulations.

As the original FAQs and link no longer exists, I cannot tell if I should have noticed this, however, I am pleased to say the change is now very clear. Also there is a link to the Regulations amending the 1999 Law on the same News page for the FAQs and these very helpfully contain an Explanatory Note giving the reasons for the changes made.

The reason they removed the word “administration” is so that lawyers are no longer caught by measures to address money laundering or terrorist financing if they are carrying out routine administration provided that they are not doing so in their capacity as trust and company service providers. This is an example where our legislature (in this case the Policy & Resources Committee) have removed a requirement which is not contained in international standards so that we are comparable to our competitors such as the United Kingdom, Jersey and the Isle of Man.

So those lawyers who are carrying out routine administration work such as preparing board minutes, reviewing company books or making amendments to existing documents for companies, other legal persons or legal arrangements are no longer subject to the 2008 Regulations and the Handbook for Legal Professionals, Accountants and Estate Agents on Countering Financial Crime and Terrorist Financing (my emphasis!)

The Regulations also can be found here:

Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 (Amendment of Schedule 2) Regulations 2016

 

NRA – World Bank or IMF?

fatf-nraNational Risk Assessments have again been the topic of the week for me in the AML/CFT world with presentations and discussions galore.

One of the highlights was listening to Richard Walker at the GACO presentation discussing Guernsey’s NRA in more detail. Richard, who is the Director of Financial Crime and Regulatory Policy for the Policy & Resources Committee and an excellent speaker, was able to provide a very interesting update.  As some of you were not able to attend, I thought I would summarise the bits I found most illuminating.

Unlike the IMF and MoneyVal visits, the NRA is considered to be a different type of evaluation of a country’s AML/CFT risks and controls and it is up to the country to decide how best to complete the task.  Guernsey has chosen to ask the IMF to support the process unlike other jurisdictions who may have chosen to go it alone or use the World Bank.  Richard then proceeded to explain why it had been agreed that either the World Bank or the IMF’s involvement was necessary and then why the decision had been made to chose the IMF.

Whilst there is enough experience in the jurisdiction to decide upon the risks, it was felt that there would be disagreement on the methodology which should be used.  It was also felt that, as we will be under a great deal of external scrutiny to show the NRA was not open to bias, an independent evaluator would do the trick.  So, rather than spend too much time on the question of who does what, it was agreed that either the IMF or the World Bank would be asked to help.

The IMF was chosen despite the extra initial expense because it was felt the World Bank’s methodology was not suited to a jurisdiction like Guernsey but more suited to the bigger countries where corruption was the main concern. Whilst the World Bank model could and was adapting to be relevant to the type of business we have on Guernsey, the IMF’s methodology was already able to deal with trust and company services, cross border issues and e-gaming to name a few.

Richard went on to say that the World Bank’s methodology did not separate the three elements of risk – threat, vulnerability and consequence – so not clearly dealing with the impact.  The IMF methodology is considered much simpler and more structured and we are advised that it already has resulted in the need to spend less time on the work in Guernsey reducing its cost.

Having amassed a great deal of information from many sources such as annual returns, MLAs and STRs, the process moves from the on-island agencies to the completion of a survey by 65 firms.   Those being asked to participate are from a broad cross-section of business and international NPOs whose activity is funded in the Bailiwick.  The surveys are completed on an online platform used by the IMF and anonymous.  The pattern of the responses has been analysed and already the results have proved interesting.  Richard gave the example that the survey is saying that businesses think there is a threat from the UK, US and Russia yet up until now information had only indicated a high level of business from Russia but not an equivalent level of threat.  It is felt that, using the IMF, is showing that an independent evaluation methodology is proving its worth.

The survey is not an easy task – apparently some have said it is impossible to complete.  However, using  Francis Galton’s 1906 proposition of collective wisdom, Richard believed that, overall, the survey will be a useful measure of Guernsey’s AML/CFT risk.

So after the survey and the analysis will be further discussions and IMF workshops with authorities.  It is hoped that there will be two separate NRAs, one looking at the risks of money laundering and one at terrorist financing, and they will be issued in the autumn of 2017.   The reports will also include an annual statistical digest and will need to be reviewed every few years.

To be of value, it is essential that those risks identified in the NRAs filter down into the business and relationship risk assessments completed by firms.  Together with the new combined Handbook due out for consultation later in the year, it will result in a large body of work for you and your compliance teams.  That work can start now as the basis for the changes are already in the public domain.  As I have said, understanding the FATF Recommendations, reading the EU 4MLD and knowing your own business and customers thoroughly will be half, if not most, of the battle.

The Regulator’s Regulator?

tindalldawn-1-e1454075780950Next week, the States of Guernsey will be asked to note the annual report and accounts of the Guernsey Financial Services Commission for the year ended 31st December, 2015.  Under Rule 3(24) of the Rules of Procedure this means I will not be asked to agree or disagree with the contents of the Report as “to note” is construed as a neutral motion neither approving or disapproving.  So, having read the Report and wanting to make a few comments on its contents, I thought I’d put some thoughts down in my blog as the role of Regulator is such an important function for our industry.

What struck me initially was not their stated objectives; it was what was not  – the Commission does not seek to run a zero-failure regime. To quote the Director General, William Mason,

“Were we to set ourselves up to run a zero failure regime we would unduly constrain innovation, limit growth and seek to act in a risk averse fashion which would ultimately ensure little other than the impoverishment of the people of the Bailiwick as the financial services sector became a shadow of its former self.”

From an AML perspective, this means that, with the Commission using PRISM’s risk based approach to supervision, there will still be attempts by criminals to misuse the financial system.  Naturally, therefore, it is for businesses to follow the requirements of the legislation and the Handbooks to ensure those attempts fail.

It is good to hear that innovation is very much being encouraged by the GFSC and their open-door policy is often complimented especially when talking FinTech.  However, there is still the grumble in the AML world that there is insufficient consistency in the application of CDD requirements.  So, whilst there is a focus on providing data management to collate a customer’s identification information for KYC and CRS purposes, there is still a lack of clarity of how to get the documents which verify the customer’s identity such that they satisfy not only the different country regimes but the requirements of different institutions within each country.

Some companies seek to comply with the standard which satisfies the most respected country regimes which is a good starting point.  However, I found that, when submitting the documents, the approaches of institutions varied so much that the easiest way was to deal with each institution and get agreement on what they will accept.  Quite often they asked for more than their own country’s requirements resulting in me firmly pointing out that they were not complying with their own country’s legislation, that their policies were not based on that legislation and that they should vary their requirements to accept a consistent standard in line with FATF requirements.  I am pleased to say that this proved successful on all but one occasion and that failure was with a London branch of a Swiss bank with whom I had already had success.  The branch was not for seeing the light!

You might well say – and I would agree with you – that this was a time consuming method of getting a customer’s verification documents accepted.  However, the main theme with the client facing teams I dealt with was they wanted to ask their customers to provide only one set of documents and not to have to keep going back to the client for more information just because each different institution wanted something else.  So whilst you can collate in accordance with the main countries’ requirements, there will always be differences in interpretation until we have common standards for AML.

To compliment my approach, I always thought it best to advise our clients on the expense of certain relationships before willingly embarking on a painful account opening process.  Instead, client relationship managers should recommend going with those institutions which take a pragmatic approach with whom the firm has had a good relationship and saving their client’s money (and your time!).  I also believe a comprehensive checklist covering all the information and verification required which is fully complied with, checked for accuracy and, most importantly, not signed-off until it is complete in all respects should do the trick.

Some also say that the GFSC does not adhere to such common standards quoting other countries’ different rules as being more lenient.  My response is always that, in my experience, other countries apply the FATF common standards (almost) but do not enforce those standards to the same extent the GFSC does.  So results this misunderstanding. People believe the GFSC requires higher standards than others, higher than required by FATF but actually I believe it just has the right standards (well almost) but the difference is that they are fully enforced.  As such enforcement means we received a superb MoneyVal evaluation which brings in business, the argument that we should be more lax with those requirements is, in my mind, counter-productive.

The review of the Handbooks should iron out some of those annoying differences and should bring clarity to ambiguities that exist but leniency in respect of the requirements I do not agree with as, after all, getting it right is not that difficult if you are conversant with all the legislation and guidance and take advice as appropriate.

 

Link to the annual report and accounts of the Guernsey Financial Services Commission for the year ended 31st December, 2015 is   https://www.gov.gg/CHttpHandler.ashx?id=102816&p=0