17 SOME PARTICULAR CASES
17.1 Overview
There have been few cases in the last 20 years requiring the prosecution of individuals or companies arising from criminal activity in the financial services sector. When such cases have arisen they have been prosecuted in the appropriate courts. None of the cases would be considered to be a major case when compared with major cases in the United Kingdom. The cases worthy of mention are:
(a) The prosecution of a trust company employee on charges of misusing computer data and forgery - 3 1/2 years imprisonment.
(b)(i) The prosecution of the managing director of a licensed deposit taker for fraudulently inducing investors to invest monies on deposit by dishonestly concealing the fact that the institution was prohibited from carrying on business because its licence to take deposits had been withdrawn -1 year's imprisonment (suspended) and a £28,000 fine.
(ii) The prosecution of a principal shareholder and director of the same institution for conspiring with the managing director in the same fraud - a fine of £40,000 or 1 year's imprisonment in default. The defendant did not pay the fine and served the period of imprisonment.
(c) The prosecution of the principal of a trust company on two counts of theft from clients - 2 years imprisonment. The conviction on one count was quashed on appeal to the Court of Appeal and the sentence on the other reduced to 18 months. The Court of Appeal also discharged a Royal Court deportation recommendation.
(d) The prosecution of the principal of a trust company and also a company with which he was concerned for false accounting and unlawful deposit taking - 1 year's imprisonment.
The Guernsey Authorities have during the same period also assisted in the extradition of two persons resident in Guernsey. None of the above mentioned cases are of sufficient importance to merit a detailed review.
In the last 20 years the major rôle of the law enforcement authorities and the courts in cases involving the financial services sector has been in assisting authorities in the United Kingdom and elsewhere in the investigation of criminal conduct committed in the United Kingdom or foreign countries. Assistance has been given in the tracing of property and where appropriate in the restraint and confiscation of the proceeds of drug trafficking.
The setting up of the Guernsey Financial Services Commission ("the Commission) as a new regulatory authority resulted in part from lessons learned as a result of the affairs of Barnett Christie (Finance) Limited which are referred to in detail below. The Commission has been actively involved with institutions in each of the fields in which it acts as supervisor and regulator. Outlines of illustrative cases where action has been taken are set out below. In each case the regulatory stance of the Commission has proved justified, the need for a strict regulatory régime reinforced and, where appropriate, lessons have been learned.
17.2 Barnett Christie (Finance) Limited
In 1976 the Advisory and Finance Committee resolved not to renew the registration of Barnett Christie (Finance) Limited ("BCF"), a deposit-taker registered under the Protection of Depositors (Bailiwick of Guernsey) Ordinance, 1971 ("the Ordinance"). After taking legal advice a decision was taken by the Advisory and Finance Committee that there was no legal obligation to publish the fact that the registration had been withdrawn. It was expected that BCF would not thereafter take further deposits. However, between 1 January 1977 and December 1978, BCF continued to take deposits. It did so in breach of the criminal law, but in circumstances where the public was not aware that that was so. BCF went into insolvent liquidation in December 1978.
If publication of the decision not to renew the registration had taken place in January 1977 BCF would have almost certainly gone into liquidation at that time and paid a greater dividend (circa 50p in the £) than that actually paid (32p in the £). Furthermore, no one would have invested money in BCF after January 1977. In April 1994, one of the depositors, Mrs Firth ("F"), successfully sued the States for their failure to publish, in January 1977, a list of the then registered deposit-takers which would necessarily have excluded BCF.
A number of other depositors had issued summonses against the States making similar allegations to that made by F. Soon after the settlement of the judgement obtained by F in the "test case" the Advisory and Finance Committee referred the question of compensation for other depositors to the States of Guernsey. The States authorised the Advisory and Finance Committee to settle the claims of depositors who could satisfy the Committee and H.M. Procureur that they were entitled to recover damages in circumstances similar to that of the test case.
In December 1984 the States of Guernsey resolved that a Committee of Enquiry be set up to ensure that the Barnett Christie affair be thoroughly investigated and that the report should be made public. A leading English Queen's Counsel and senior chartered accountant were appointed. Their 159 page report was made public and considered by the States in December 1987. The inspectors did not recommend that depositors should be recompensed in full for the losses incurred because it was never the intention of the States that there should be a guarantee to depositors that their deposits would be repaid. The inspector also noted that the errors which were made were errors of judgement by members of the Advisory and Finance Committee, conscientiously endeavouring to apply legislation. Furthermore, a reasonably alert depositor would have appreciated that deposits with BCF involved some risk over and above the nugatory risk of placing on deposit with, say, the subsidiary of clearing bank.
The inspectors did not consider it appropriate to recommend that any change should be made as to the basis upon which the States had made settlement with depositors. The States had followed the principles established in F's test case.
The inspectors noted that in 1978 the Advisory and Finance Committee had adopted a policy of issuing new registrations only to "banks of stature". The Inspectors approved of this approach. They also noted that the Advisory and Finance Committee's approach to banking supervision had radically altered in the years that had passed since the decision not to renew the Barnett Christie registration. The criteria for registration had been severely tightened, the government department at that time supervising deposit-takers had been expanded, new monitoring criteria had been introduced, and with the introduction of a Banking Supervisor, the approach to banking supervision had been further formalized. The Inspectors noted that the lessons of the affair had been learned.
The States of Guernsey noted the inspectors' report and directed the Advisory and Finance Committee to report to the States with specific proposals for the amendment of the appropriate legislation in line with certain detailed recommendations made by the inspectors. The report specifically noted "with approval the setting up of a Financial Services Commission as a supervisory authority".
In light of the lessons already learned from the affair, in May 1986 the States had resolved that a Commission to be known as the "Guernsey Financial Services Commission" should be created. The Financial Services Commission (Bailiwick of Guernsey) Law, 1987 was enacted and the Commission commenced functioning on 1 February 1988.
In December, 1988 the Advisory and Finance Committee reported to the States on the settlement of depositors' claims in accordance with the terms of the settlement which had been accepted by the States in 1984. The managing director and another director of BCF were successfully prosecuted in the Royal Court. The offences and sentences are detailed in paragraph (b) on page 97.
17.3 Baring Brothers (Guernsey) Limited
Barings (Guernsey) Limited (then known as Baring Brothers (Guernsey) Limited) is a licensed bank under the Banking Supervision (Bailiwick of Guernsey) Law, 1994 ("BSL"). Barings (Guernsey) Limited's own problems arose initially from the fact that the funds it had placed with Barings in London could not be released because that company was in administration and, technically, the local operation was insolvent. The Commission immediately imposed a condition on the bank's licence that it should not accept or pay out any money without the consent of the Commission. Barings (Guernsey) Limited was (and still is) custodian/trustee to a number of collective investment funds and to several unit-linked life funds, many of the former managed by its sister company Guernsey International Fund Managers Limited ("GIFM"). GIFM at all times continued to be solvent and traded as normal throughout the Barings/Leeson affair.
It was clearly advantageous to ensure that Baring Brothers (Guernsey) Limited did not go into liquidation as it had very considerable financial and strategic value and would be material to any deal that might be struck. Once in liquidation the bank would have had to cease trading and could not have been resurrected. The Commission, therefore, agreed with the management of the bank that they should not open the doors on the Monday morning (27 February 1995) but should try to carry out outstanding transactions. Any transaction which was an exception to the condition then attaching to the bank's licence had to be approved by the Commission. Such decisions were difficult for the bank's management to propose and for the Commission to agree to since the bank was, on any reasonable view, insolvent. In practice, the Commission was relying on the limitation of liability provided under the BSL so long as it was acting in good faith. (Section 55 of the BSL states "No liability shall be incurred by... the Commission, or by any member, officer or servant... in respect of anything done or omitted to be done after the commencement of this Law in the discharge of any function conferred by or under this Law unless the thing was done or omitted to be done in bad faith".) Clearly this was a calculated risk but one which was judged to be in the best interests of depositors and worth taking to preserve value in Guernsey in the short and long term.
Decisions were made daily - even hourly -always bearing in mind that in the Commission's view it was in the best interests of the depositors that the bank was not put in liquidation but rather kept as a going concern until a buyer was found. At times it was necessary to dissuade creditors and their legal representatives from forcing the bank into liquidation by advising them that they could disadvantage their position - ie they would not receive interest on their deposits and it made it less likely that the bank would be sold. The Commission was only able to sustain this position for so long as it appeared likely that the group was likely to be sold as a group and as a going concern.
The administrators in London, against all the odds, were successful in selling the whole Barings group, which included a large and valuable asset management sub-group, to ING thereby securing the interests of all customers and counterparties of the group, an infinitely more favourable outcome than piecemeal disposal of parts of the group in liquidation. However, in reviewing the situation after the event, it was pretty clear that no matter how tight the ring fence might have been around the Guernsey bank, and even had it not placed funds with the bank in London, it is doubtful whether the local operation would have survived the failure of the parent bank. What became evident as the crisis unfolded was that counterparties immediately took steps to hold on to what funds they had, irrespective of what part of the Barings group they were due to. In any case, had the parent bank failed the important ingredient of confidence would have been fatally damaged.
One positive point was that it was much easier to deal with the crisis as it unfolded with the supervisors of banking, investment business and insurance under one roof, working together and with a chief executive (Director General) who had the authority to decide between them where the best interests of the public lay in any given situation.
This in turn meant that the Commission could devote all its time and energies to the central object - of maintaining the status quo so that a prospective buyer could feel that they were getting a group retaining essentially its existing value rather than the much less attractive debris of a group which had collapsed. Provided that the group was acquired intact and recapitalized, the depositors with the Guernsey bank were assured that their money was 100% intact, as opposed to a proportionate dividend which they would have received in a liquidation. This thought ruled everything that the Commission decided in the difficult two weeks while the sale was negotiated.
Some supervisors/regulators who dealt with the group were less focused on this central consideration and some appeared more concerned with their own position. Their demands for guarantees, injections of capital etc contrasted with the supportive stance maintained by the Commission. Just how important the latter was only came home to Commission officials when the chairman of Barings Guernsey called on them after the crisis was over and stated: "If you had not taken the supportive attitude which you did throughout, it is no exaggeration to say that it would not have been possible to negotiate the sale to ING or any other acquirer."
17.4 Insurance Company x
Insurance company x was a subsidiary of a European Union Member State licensed insurer in good standing with the authorities in that Member State. The Insurance Division became suspicious following a change in ownership of the parent company and the injection of inappropriate assets into that company. The Commission suspended the registration of the insurance company by imposing conditions, despite the parent being still of good standing in its home country. Conditions were imposed by the Commission to the effect that the company was to cease writing insurance business of any description. Both companies were ultimately placed in compulsory liquidation.
17.5 Insurance Company y
The insurance manager of the captive of a media group was under pressure to move monies back to the parent and the remaining moneys would have been insufficient to meet the possible future liabilities of the captive.
The insurance manager reported, (as required), the possible material change of circumstances and a condition was imposed to the effect that no monies should leave the insurer without the express written permission of the Commission. The Commission understands that the insurer was the only solvent company in the group - it was subsequently liquidated releasing surplus funds to the liquidator.
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