New legislation in Guernsey, brought in without industry consultation, has broadened the scope of tipping-off offences, making the island more stringent than other offshore jurisdictions. Mourant Ozannes' Rocco Cecere explains

Like other well-regulated jurisdictions, Guernsey's money laundering regime requires, in broad terms, that when a financial services business (FSB) suspects that one of its clients may be involved in money laundering, it must make a suspicious transaction report (otherwise known as an STR) to the Financial Intelligence Service (FIS), a joint unit of the Guernsey Police and Customs & Immigration Department tasked with receiving and analysing STRs.

Common sense suggests that the utility of the STR would be greatly reduced if the FSB, as the same time as making an STR, could inform the client that it had done so. The client could then act to frustrate any potential action which might be taken by the FIS. For that reason, the International Monetary Fund's (IMF) Financial Action Task Force (FATF), among its 40 recommendations, included a recommendation (number 14) that businesses should be prohibited by law from disclosing the fact that an STR had been made.

Legislative history in Guernsey

As initially drafted in 2002, the offence was made out when a person, knowing or suspecting that an STR had been made, disclosed any information to any other person who might prejudice any investigation that might be conducted as a result of the STR. That did not mean, as some considered, that there was a blanket ban on communicating the fact that an STR had been made. What it did require, though, was for a business placed in that position to consider whether prejudice might occur. If there was no prejudice, then there was no reason why the client could not be informed. In practice, however, FSBs tended to err on the side of caution.

A practice arose whereby an FSB would ask the FIS whether informing a particular third party would be likely to cause prejudice. In general, the FIS would co-operate where possible to assist any business facing an irate client wanting to know why its instructions were not being complied with.

That remained the position for some years. However, during its November 2008 visit to Jersey, the IMF stated that the tipping-off offence (similar in substance to that in Guernsey) did not comply fully with, in their view, FATF's recommendation 14. The IMF recommended that Jersey remove the limitation referring to prejudice and implement a blanket prohibition on disclosing the fact that an STR had been made.

That recommendation was clearly noted by the Guernsey authorities, who proposed amendments to the Guernsey tipping-off offence to bring it into line with recommendation 14. The industry objected, saying that if the UK had not itself saw fit to amend its tipping-off offence in this way, why should Guernsey? Seemingly as a form of compromise, the tipping-off offence was amended to add a further alternative – namely that an offence would not be committed if the information was disclosed in circumstances where it was reasonable to do so. Not only was that amendment out of step with the UK, it was not what was proposed by the FATF, and left businesses to second guess what was "reasonable".

That led to further amendments, enacted from 28 July 2010 without any public or industry consultation, which substantively re-write the tipping-off offence in a further unsatisfactory fashion.

Problems with the new tipping-off offence

Tipping off is now said to occur when a person, knowing or suspecting that an STR has been or will be made "discloses to any other person information or any other matter about, or relating to, that knowledge or suspicion." This causes some immediate and obvious problems.

First, it removes the requirement for prejudice. Thus, even after the money laundering client has been jailed and their proceeds confiscated, it would still remain an offence to discuss with the client or anyone else the STR that led to the result. There is simply no discretion. At best, the law officers (who are responsible for prosecutions in Guernsey) could indicate they would be unlikely to prosecute.

Second, it appears to go beyond even what is contemplated by recommendation 14, which requires FSBs to be "prohibited by law from disclosing the fact that a suspicious transaction report or related information" has been made. To comply with the recommendation, all that is required is to prohibit a person disclosing "to any other person that knowledge or suspicion". By leaving in place the words struck out, the drafter has broadened the offence, to prohibit discussion not only as to the fact of the knowledge or suspicion (which was what was presumably intended) but to also, potentially, inhibit discussion as to the underlying facts which may relate to that suspicion. That is bound to cause headaches as FSBs grapple with what it means in practice.

Third, the broadening of the tipping-off offence has exacerbated some of the problems that existed under the previous regime. Many FSBs among Mourant Ozannes' client base are part of international groups. Such FSBs may be required to report the making of an STR to certain areas within its own organisation. Similarly, it may have obligations to disclose such information to its insurers. Previously, an FSB may have relied upon the "reasonable" exception to make such disclosures without committing an offence. In the absence of that exception, an FSB will commit a criminal offence if it makes such a disclosure.

In the UK, the Proceeds of Crime Act 2002 not only maintains the requirement for a disclosure to be likely to prejudice an investigation, it also prescribes a number of exceptions that take much of the pressure off credit and financial institutions. The exceptions, which are the transposition of certain aspects of the European Union's third Money Laundering Directive, allow those institutions to make certain disclosures both within and between institutions.

For example, employees and partners of institutions are permitted to make disclosures to each other without committing an offence. Disclosures between institutions within the same group are also permitted in certain circumstances, as are certain disclosures between non-related institutions that may be co-operating to prevent money laundering or terrorist offences. No such exceptions are available in Guernsey.

Advising FSBs in relation to tipping off

FSBs have long faced tricky issues arising from the potential tension between the tipping-off provisions and the FSB's other legal obligations. For example, an FSB may, either as a party or a third party, be ordered to disclose documents relating to an STR in civil proceedings.

Similarly, an FSB refusing to honour the instructions of a client to transfer moneys will be pressed for an explanation by the client and may be sued for breach of mandate. On the other hand, if the FSB complies with the client's instructions, it exposes itself to the possibility of being constituted as a constructive trustee of the moneys paid away. Under the old regime, there was at least scope for an argument on prejudice. With that carve out removed, the FSB's problem has been exacerbated.

In these circumstances, it is recommended that the FSB establish an open and constructive dialogue with the FIS as early as possible. The FSB should try to come to some agreement with the FIS on what documents and information may be provided to the client, bearing in mind that the well-advised client is more likely to become aware of an investigation by the FSB adopting a stonewall approach.

However, even FIS co-operation will not provide the FSB with a defence to the tipping off. For that reason, the FSB should also seek to procure the agreement of the Guernsey law officers who may, at most, indicate that they are unlikely to prosecute. Again, however, this is comfort, not real risk mitigation.

In England, FSBs caught on the horns of a dilemma are able to seek declaratory relief from the courts. If no agreement can be reached between the FSB and the Serious Fraud Office (SFO), the FSB may apply to the court for an interim declaration setting out what information the FSB may rely upon when deciding what information to give to a client.

The respondent to the application is the SFO and it may be held in private and, of course, without notice to the client. The court will have regard to what the SFO believes may prejudice its investigations. However, the "no prejudice" and "reasonable" exceptions are no longer available in Guernsey, so it is very difficult to see what declaration a court in Guernsey could usefully make.

The most recent amendments to Guernsey's tipping-off provisions have put the bailiwick out of step with other jurisdictions. Some might be pleased that they are in the vanguard of the fight against money laundering, but that should not be at the cost of unwieldy legislation.

It is true that Guernsey's current regime offers certainty; essentially any disclosure made to any person (apart from the FIS) about any aspect of an STR or an investigation will constitute a criminal office. However, we would argue that such certainty has come at the expense of the flexibility which permitted disclosures that did not prejudice law enforcement efforts to combat money laundering and other crimes.

Rocco Cecere is an associate at Mourant Ozannes.