In June, the Royal Court of Guernsey handed down judgment in Hazel Liang v RBC Trustees (Guernsey) Limited, a case which is of particular interest for the trust industry.
For a full analysis of the facts and legal principles in the case, see the article prepared by our risk and regulatory colleagues Nin Ritchie and Michael Adkins here, but in summary Liang concerned a claim by a beneficiary of a Guernsey trust against the trustee that trust funds be distributed in circumstances where the FIS had refused to provide its consent to the distribution.
Liang is the flip side of the coin that is the decision of the Guernsey Court of Appeal in The Chief Officer, Customs & Excise, Immigration & Nationality Service v Garnet Investments Limited (Guernsey Judgment 19/2011). Garnet was similar in that it concerned a refusal by the FIS of a request for consent to distribute funds. But differed in that the account holder judicially reviewed the decision of the FIS not to consent, rather than directly enforce its right to the funds against the bank.
In Garnet, one of the avenues of challenge was that the failure on the part of the FIS to consent to the bank's distribution of funds to the account holder was a breach of Article 1, Protocol 1 of the European Convention of Human Rights. Article 1, Protocol 1 provides that a legal person has a right to peaceful enjoyment of his/its possessions.
In considering whether Garnet had been deprived of this right, the Court of Appeal indicated that as it remained open to Garnet to challenge the decision of the bank not to honour the contractual mandate by way of a civil law action, which would only fail if the bank had a relevant defence, no deprivation occurred. This seemed like a logical approach. However, the Court of Appeal went on to say, in an obiter comment, that the bank would have the burden of proving (to the civil standard) whether the funds were tainted as opposed to the account holder.
This therefore seemed to place banks and other financial institutions in an unenviable position of having to actually establish that funds which they held were in fact proceeds of crime. In practice, this line of reasoning would have more significant and potentially criminal implications for bodies such as trustees who do not have the protection of a bank mandate between them and the beneficiary. It is now standard practice for bank mandates to have a form of wording that permits the bank not to make payment if it has AML concerns. However, trustees must often rely on the position absent contractual protection, which may have been that outlined by the Court of Appeal.
Fast forward 6 years and the decision of the Royal Court in Liang seems to have put to bed any suggestion that the burden of proving whether funds are proceeds of crime or not lies with the financial institution.
The Deputy Bailiff agreed with the trustee's advocate that the financial institution would struggle to prove, to a civil standard, that the funds are the proceeds of criminal conduct, because it would not know all the details of the sources of funds beyond what it had been told and so would be unable to advance the evidence that goes to the heart of the issue the Court has to determine; and; it has no means of requiring explanations because it is not in the same position as law enforcement. Further, any explanation given about provenance of funds are matters under the control of the person asserting that funds are not proceeds of criminal conduct.
This led to an unfortunate consequence for Mrs Liang, who was also not in a position to demonstrate the provenance of the funds as this was in the control of her estranged husband.
However, we consider that had the Royal Court not taken this approach then any trustee finding itself in a similar position would be stuck between non-compliance with a Court order and potential criminal liability. In arriving at this decision the Royal Court has provided a pragmatic pathway for trustees to avoid being crushed between a rock and a hard place.