An illustration from two recent cases in Guernsey: Domaille, Clarke & Hannis[1] and Trevor Kelham[2]
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The IOM Financial Services Authority (IOMFSA) has a broad remit including ensuring fulfilment of its regulatory objectives (policyholder protection, combating/reducing financial crime and protecting the reputation of the Isle of Man as an international financial centre) as well as AML/CFT oversight of the designated business community. It seems to be a frequently repeated Industry topic of conversation, that there is a perception that whilst the IOMFSA consistently communicates that enforcement action is only used when it is ‘proportionate, reasonable, and appropriate’ to do so, ‘enforcement’ is seen as a ‘go to’ option in too many cases and too arbitrarily. Although the Regulator maintains that enforcement action is a last resort, this is not always the feeling amongst the regulated and registered, designated business world.
It is therefore perhaps timely that the appellate courts in Guernsey have considered the essence of this point, and suggestions of a ‘cavalier’ approach to enforcement levied at the Guernsey regulator, the GFSC, in two recent cases. On 18 January 2024, the Court of Appeal in Guernsey, handed down a comprehensive judgment in the case of Domaille and Others, and although considerable focus is aimed at criticism of the Court below, the overall outcome involves a consideration of the factors and tactics employed in an enforcement investigation. The Court of Appeal hearing follows on from an earlier decision in 2023 which also reviewed the fairness of the enforcement process relating to a Mr Trevor Kelham. The two cases are considered in this article with a view to seeing what comparisons or lessons can be learnt in the Isle of Man context.
The Domaille decision should be of considerable interest to those operating in the financial services sector, especially considering the similarly-minded judgments handed down in the recent cases of X, Y & Z v The Chairman of the Guernsey Financial Services Commission [2023] GRC032 and Kelham v The Chairman of the Guernsey Financial Services Commission [2023] GRC021, where the Royal Court found in favourable terms for the GFSC with none of the criticism that was found, and largely rejected, in the Domaille case.
Where does this leave us in terms of confidence in the Enforcement process in the Isle of Man?
There are mechanisms in Guernsey (as there are in the Isle of Man, Jersey and Gibraltar) not only to challenge the Regulator but to also gain reassurance that, by and large, the Regulator is conducting enforcement actions with the utmost adherence to fairness and just process. It would be wrong to try and draw comparisons too broadly, but the need to ensure that enforcement action is only taken when it is ‘proportionate, reasonable, and appropriate’, and then done so consistently, is where Industry needs to be willing to challenge and be prepared to continually ask questions of our Regulator.
It is widely known that the next round of Moneyval assessment is going to involve the Isle of Man within the next 2- 3 years and so the emphasis on robustness of the Island’s AML/CFT framework and effectiveness is coming under increasing scrutiny. The IOMFSA has recently made first use of its penalty powers under the Anti-Money Laundering and Countering the Financing of Terrorism (Civil Penalties) Regulations 2019. It is incumbent on the entire Isle of Man as an international financial centre to ensure that there is an effective enforcement deterrent that operates on principles of fairness and natural justice and does so in a clearly understood and timely manner.
The clear principles and guidance of the Guernsey Court of Appeal are certainly worthy of consideration in helping Industry, the Regulator and all other relevant agencies alike to strive for greater consistency and effectiveness across all of those oversight bodies in upholding the reputation of the Isle of Man’s financial sector.
Background
Kelham
Trevor Kelham acted as the managing director and chief executive officer of Standard Chartered Trust (Guernsey) Limited (the “SCTG”) between 2012 and 2016. An independent assessment in October 2016 found over 100 files held by the STGT, which related to transfers of assets totalling around $1.2 billion, to be non-compliant with the Criminal Justice (Proceeds of Crime) (Financial Services) Businesses (Bailiwick of Guernsey) Regulations 2007. In 2020, the Guernsey Financial Services Commission (the “GFSC”) subsequently imposed a 4-year prohibition order, a £45,000 financial penalty on Mr Kelham as well as a requirement to issue a public statement about the action taken.
Mr Kelham appealed to Guernsey’s Royal Court. However, Mr Kelham’s argument that the GFSC had failed to follow the provisions of its own Guidance Note in performing its quasi-judicial function, and further that the GFSC’s Senior Decision Maker had made multiple material errors in procedure in coming to his conclusions were dismissed. Moreover, in stressing Guernsey’s heavy reliance on the financial services industry in its economy and that the onus was upon industry actors to preserve the Bailiwick’s reputation by meeting relevant regulatory standards, the Royal Court dismissed Mr Kelham’s submission that the sanctions imposed on him were not fair, reasonable or proportionate, adding that there were lessons for other directors in a similar position to Kelham to learn from the case.
Artemis Trust Limited
In July 2022, the GFSC exercising the powers vested in it by the Financial Services Business (Enforcement Powers ) (Bailiwick of Guernsey) Law 2020 (the “Enforcement Law”), imposed prohibition orders on control function holders of Artemis Trust Limited (ATL), a Guernsey regulated fiduciary services company, Mr Domaille, Mrs Hannis and Mr Clarke (“the Respondents”) of eight, four and three years respectively, along with fines of £280,000, £90,000 and £30,000[3],
These penalties were imposed in respect of multiple findings by the GFSC that the Respondents had each acted without probity and had failed to meet certain aspects of the minimum criteria for licensing (“MCL”), charges which the Respondents had initially accepted.
The breaches giving rise to the sanctions followed a GFSC Full Risk Assessment visit in December 2018 (following an earlier similar visit in 2014). At material times, the Respondents held senior positions at ATL, which itself had also been sanctioned. Mr Domaille was a shareholder of ATL and main Board Director, Mr Clarke was an Associate Director and then main Board Member. Mrs Hannis rose through the company and also became a full Board Member. Various serious regulatory failings were identified relating to considerations around source of funds, and around the possibility of assistance in the movement of criminal property with connections to the Gaddafi regime.
The Respondents appealed to the Royal Court of Guernsey against the penalties imposed and a judgment of the Lieutenant Bailiff sitting alone was handed down on 18 April 2023 (here) quashing the prohibition orders and remitting the penalties back to the GFSC for reconsideration, with (lower) maximum amounts suggested. In a highly critical and somewhat colourful judgment, the Lieutenant Bailiff, in essence indicated that the GFSC had overstepped the mark with respect to its enforcement powers. That judgment found that the GFSC had:
- erred in law in finding that the Respondents had acted “without probity”;
- failed to conduct a fair and balanced assessment of the facts leading to an unwarranted view of the Respondents’ failings;
- erred in law or acted unfairly by imposing penalties on Mr Domaille and Mr Clarke calculated under increased fining powers which came into force on 13 November 2017 when some of the relevant conduct occurred prior to that date; and
- failed to take into account the sanctions previously imposed on Mr Domaille and Mr Clarke were inconsistent with previous decisions and penalties even taking into account the increases in fining powers conferred on the GFSC from November 2017.
The GFSC appealed the Royal Court’s judgment to the Guernsey Court of Appeal which has now in The Guernsey Financial Services Commission v Domaille, Clarke & Hannis [2024] GCA 003, found in the GFSC’s favour upholding all of its grounds of appeal.
Appeal Judgment
Ground One: The Royal Court had exceeded its jurisdiction.
The Court of Appeal concluded that the Lieutenant Bailiff, by embarking on a fact-finding mission and conducting a full merits-based de novo trial, in turn forming her own evaluation of the seriousness of the Respondent’s conduct, had assumed an evaluative and regulatory function. That function was the responsibility of the GFSC. The Royal Court was found to have ‘lost its focus’ through its appellate function of simply finding whether the decision made by the GFSC (through its appointed Senior Decision Maker) could be challenged as a matter of law.
Ground Two: Evidence of Actual Harm
The Court of Appeal found that the Lieutenant Bailiff had erred in law by failing to properly reflect on the seriousness of the anti-money laundering breaches in question and by assessing seriousness solely by reference to outcome, stating that as a whole, there was an inescapable inference that the Lieutenant Bailiff had treated the absence of any direct evidence of harm resulting from the breaches as a mitigating factor. Against the backdrop of Guernsey’s anti-money laundering framework, the Court of Appeal deemed that whilst direct evidence of actual harm may be an aggravating factor, it was not correct to regard the absence of such evidence to be a mitigating factor.
Ground Three: Probity and the Standard of Proof
The Court of Appeal held that the Lieutenant Bailiff had again erred in law, and whilst purporting to have applied the two-stage test for dishonesty laid down by the case of Ivey v Genting Casinos [2017] UKSC 67 as a means of determining the Respondents’ probity in the case, she had in fact considered the Respondents’ state of mind when conducting the breaches. Such an approach was inconsistent with Lord Hughes purely objective test in Ivey.
There is also a welcome and useful review and analysis of the relationship between concepts of ‘dishonesty’ and ‘integrity’ and serving as a reminder that a person can act with a lack of integrity without being dishonest.[4]
This was in the context of an assessment of the relevant civil standard of proof. Whilst purporting to adopt the single standard of proof on the balance of probabilities, the Lieutenant Bailiff had gone on to suggest that a considerably stronger body of evidence is required to make out a failure of professional probity or dishonesty.
In following the Supreme Court finding in Birmingham City Council v Jones [2023] UKSC 27, the Court of Appeal found that there is only one standard of proof at common law which is that of ‘on the balance of probabilities’ and that there is no general rule that the seriousness of a finding, or its consequences displace that standard.
The Court of Appeal further found in favour of the GFSC in that the Royal Court had been wrong to limit the circumstances in which a Prohibition Order may be imposed to those where there was a finding of a lack of probity or incompetence to an egregious degree. The Court of Appeal labelled such an approach as “unduly restrictive” and not reflective of the flexible nature of the Prohibition Order and the importance of the availability of such a sanction in furtherance of the regulatory objective; namely, to bring about and maintain high standards of conduct for those operating in Guernsey’s financial sector.
Ground 4: Fining Powers and Penalties
As earlier alluded to, until November 2017 the GFSC’s powers to impose financial penalties were previously limited to a maximum of £200,000 whether in respect of licensed entities or individuals. That changed through the amendment of s.39 of the Enforcement Law allowing for penalties of up to £4,000,000 and £400,000 to be imposed on licensed entities and individuals respectively. The Court of Appeal overturned the decision below, holding that the new fining powers would apply in all cases of breach, regardless of whether or not they occurred before November 2017.
Further, the Court of Appeal determined that the Lieutenant Bailiff had erred in law by having regard to the interrelationship between the penalties imposed on individual directors and the licensed entity where the individual was also a shareholder of that licensed entity, in determining the appropriate personal penalty. The Court of Appeal found that the Lieutenant Bailiff had failed to recognise the principle of separate corporate personality and had been wrong to suggest that the individual fault of Mr Domaille had been properly separated from the corporate sanction or that the personal sanction on him had become a “penalty of strict liability by association.” In recognising the concept of separate legal personality, the Court of Appeal determined that it was appropriate to impose financial penalties on entities and individuals which properly represent their respective failings. Further, criticism that the GFSC had wrongly failed to take into consideration sanctions imposed in other cases by way of comparison, was also rejected.
[1] The Guernsey Financial Services Commission v Domaille, Clarke & Hannis [2024] GCA 003
[2]Trevor Kelham v Chairman of The Guernsey Financial Services Commission 18 April 2023
[3] Mr Robert Sinclair, a founding shareholder of ATL along with Mr Domaille, and one time MD and MLRO received a civil penalty of £190,000 and Prohibition Order as part of the investigation, which he did not contest through these proceedings. Regulatory penalties were also imposed on ATL.
[4] A useful in-depth review of this subject is found in the judgment of Francis v JFSC on 4 December 2017 [2017] JRC203A; and also in Wingate v. Solicitors Regulation Authority [2018] EWCA Civ 336, Jackson LJ (at §97)
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The guidance in this note is for information purposes only and is not intended to be exhaustive. It is not intended to constitute legal or other professional advice, and should not be relied on or treated as a substitute for specific advice relevant to particular circumstances. Cains only advises on the laws of the Isle of Man and accepts no responsibility for any errors, omissions or misleading statements or for any loss which may arise from reliance on the information in this note.
