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Senior Associate, Dispute Resolution
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A subjective suspicion that funds or assets may be the proceeds of crime
Where a trustee forms a suspicion that trust monies or assets may be the proceeds of crime, the beneficiary or settlor of the trust, or another party, will have to prove that the trust assets are not the proceeds of crime (this applies equally where a bank or other financial institution forms a suspicion in relation to the monies in a client’s bank account, but in this article we will refer only to the trustee context, for simplicity). In order to prove that funds or other assets are not the proceeds of crime, a trial will have to be conducted before the Royal Court in Guernsey, at which the settlor or beneficiary will have the burden of proving (on a balance of probabilities) that the trust assets are not the proceeds of crime. This will involve bringing evidence to the Royal Court of how the trust assets were acquired, and thereby showing that this was not as a result of criminal conduct. Until such time as the Royal Court declares such funds are not the proceeds of crime, an “informal freeze” will operate over such assets, as the trustee will not be able to transfer or otherwise deal with such assets, without itself committing a criminal offence.
Fortunately, the Guernsey Royal Court’s jurisprudence shows that the Royal Court takes a fair and balanced approach to a trial where a party seeks to prove that funds are not the proceeds of criminal conduct. This was evident in the recent Royal Court decision in Richard Tucker Loero v Credit Suisse Trust Limited [2024] GRC075, in which the Royal Court and Jurats found that Mr Loero’s assets held in trust were not the proceeds of crime, on the balance of probabilities test. The Royal Court also further restated and refined the principles applicable in matters such as this.
An “informal freeze” as a result of a SAR being lodged
Where the trustee forms a mere suspicion that the whole or part of the trust assets are the proceeds of crime, this sets in motion a chain of events leading to the trustee refusing to deal with trust assets in any way, including making any payments to the beneficiaries. Typically, in order to avoid the offence of “tipping off” under the Disclosure (Bailiwick of Guernsey) Law, 2007, the trustee will not give any reason for its refusal to deal with trust assets and will simply advise that the beneficiary should approach Guernsey legal representatives to take the matter further. This means even where a trustee makes a simple error which results in it becoming suspicious (as occurred in the Loero matter), this will usually not be cleared up as the trustee will not communicate its reasons, or even the fact that it is suspicious.
This sort of cryptic response is the result of the trustee in question having lodged a Suspicious Activity Report (SAR) with the Financial Intelligence Unit (FIU) as a result of having formed the suspicion referred to above. Moreover, the trustee is not free to communicate this reason to the beneficiary (as this would amount as noted above to unlawful “tipping off”). The trustee therefore invariably gives no reason for its position (which ironically makes it quite clear to anyone experienced in these matters that a SAR has been lodged).
The limited purpose of the FIU consent regime – consent rarely granted
Once it has formed a suspicion, the trustee is obliged under the law to lodge a SAR. The law gives the FIU the power to entertain and grant a request for consent by the suspicious party, to deal with trust assets in a particular manner. For example, a trustee may have received a request from the beneficiary to make a particular payment, and the trustee would request consent from the FIU to make such payment even though the trustee is suspicious that a whole or part of the trust assets may be the proceeds of crime. Absent consent from the FIU, to accede to a request (for example, to make a payment out of such funds) would amount to an offence under the Proceeds of Crime Law. In practice, because of the very limited circumstances where consent is to be given by the FIU, such consent is very rarely granted.
As a result, an “informal freeze” arises over the trust assets, as although these are not formally frozen by any court order (such as a Restraint Order) or other legal instrument, the trustee practically will refuse to make any payments or deal with trust assets unless there is a consent given by the FIU, as without such consent and given that it remains suspicious, the trustee cannot make any payment without committing an offence itself. The FIU has recognised this practical effect and states the following as to the purpose of the consent regime in its Bailiwick of Guernsey Consent Regime Guidance dated April 2023 (FIU Guidance), noting the following: “As was made clear by the Guernsey Court of Appeal in Chief Officer of Customs & Excise v Garnet Investments Ltd the purpose of the Consent Regime is to provide an opportunity for law enforcement to give an exemption from criminal liability by consent where it is in the interests of law enforcement to do so.”
The FIU Guidance states further that “Where consent was sought to transfer funds from that account and consent was refused, that simply means that it was not regarded as being in the interests of law enforcement to grant consent. The grant or refusal of consent is not an indication of the likelihood of funds being the proceeds of criminal conduct. It remains the case that, if you know or suspect that funds are the proceeds of criminal conduct, then by dealing with them in the ways described in sections 38 and 39 of the Proceeds of Crime Law and, in the case of knowledge, section 40 of that Law (and analogous provisions of the Drug Trafficking Law and the Terrorism and Crime Law), you will commit a criminal offence if your suspicion proves correct, unless you have first obtained consent to act from the FIU.”
Proving on a balance of probabilities that trust assets are not the proceeds of crime in a trial before the Royal Court of Guernsey
In practice, since the FIU rarely grants consent, where the trustee remains suspicious (which is subject to a very low subjective bar and is therefore usually the case), the only remaining practical course of action to free the funds from this “informal freeze” is for the beneficiary or settlor of the trust to prove that the funds are not the proceeds of crime, in a trial before the Royal Court. The party seeking to prove this will bear the onus of proof. The trustee will usually take a neutral role in such a trial, but if the basis for the trustee’s suspicion is challenged then it may take a more active adversarial role in the proceedings. It is important in such a trial to bring to the Royal Court all available evidence of the source of wealth which has resulted in the trust assets being held in trust, going back as far as possible in the factual chain (whilst acknowledging that there is a limit to the documentation which is expected to be retained after many years have passed and that a common sense approach must be taken, see L and others v Credit Suisse AG (Guernsey Branch) [2023] GRC 026 ). It is also advisable to engage an accountant or other financial expert who has knowledge of the beneficiary’s affairs to give evidence in the trial, as to the provenance of funds. Furthermore, it is invariably of great assistance to have independent expert evidence in the form of an independent witness (such as was the case in the Loero matter), who can assess the financial history and background provided and give an independent expert view on the provenance of funds and whether the version presented to the Royal Court passes muster in terms of the applicable anti-money laundering and forensic standards.
In terms of strategic litigation insight, it is important for any settlor of an offshore trust to make sure that not all of their available funds are held within this offshore trust, as the preparation and running of a trial is a costly exercise and while this is being prepared, until such time as there is a favourable ruling by the Royal Court (including potential appeals if necessary), a settlor or beneficiary will need a separate source of funds to litigate and maintain their own lifestyle, as the funds in trust where a SAR has been lodged will remain “informally frozen” until such time as the Royal Court has declared they are not the proceeds of crime. It is therefore highly advisable to have substantial alternate sources of funding available, separate from the assets held in the offshore trust.
ABT has substantial experience in dealing with matters of this sort, and in particular acting for beneficiaries and/or settlors in preparing for the necessary trial before the Royal Court, including liaising with the trustee and its legal representatives, selecting appropriate expert witnesses in Guernsey and running the trial before the Royal Court with a view to proving that the trust assets are not the proceeds of crime. If you require legal advice on dealing with this sort of problem, please contact Advocate Jeremy Le Tissier, Advocate Clare Tee or Nick Taitz and we would be happy to arrange a consultation.
