The FATF-style regional body that checks jurisdictions' anti-money-laundering (AML) regimes for signs of weakness visited Guernsey in 2016 and will do so again next year, according to its timetable. In the meantime, the regulator might increase the penalties that it levies on directors at financial firms and take a harder look at their compliance with their contractual obligations.

Recent global health concerns have led to rapid and significant shifts in business practices. It is too early to make meaningful predictions about the length and scope of those changes, but the Bailiwick's response will obviously develop. Notwithstanding large-scale disruption in the short term, the Isle of Guernsey’s financial sector is well-equipped to come through this disaster. We must, therefore, assume that the Guernsey Financial Services Commission's regular inspections of firms will resume in due course and that a further MONEYVAL assessment will proceed in 2021.

MONEYVAL, incidentally, is the Council of Europe's Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism. The Council of Europe is an international organisation with 47 member-states. No country has ever joined the European Union without first belonging to the Council of Europe.

In this context, it would be imprudent for businesses to assume that current events will serve to fundamentally affect compliance requirements or provide acceptable excuses for regulatory failures.

The enforcer

In January 2016, MONEYVAL issued an assessment of the Bailiwick's anti-money-laundering (AML) and "countering the financing of terrorism" (CFT) controls. Its report concluded that the jurisdiction had made major progress in the observance of evolving regulatory standards and was "largely compliant" with international money laundering guidelines. MONEYVAL tempered this accolade with the suggestion that "the relatively limited number of cases involving third party [money laundering] by participants of the financial industry and the amounts of property laundered and confiscated...indicates room for [a] more effective application of [money laundering] provisions."

In the period after MONEYVAL's assessment, the GFSC issued guidelines about the way in which it wanted to enforce its rules. It promised to take a risk-based approach to supervising firms and recognised the need to balance effective enforcement with a desire not to deter good people from trying to join the island's financial sector. The interplay between firm enforcement, acceptable risk parameters and inherent commercial pressures has always encouraged lively debate on the island.

The question of questions

In that context, many people have wondered whether enforcement cases will become less frequent (or even stop altogether) once (i) all remaining problems are dealt with and (ii) licensees have learnt lessons from the details of cases that the regulators have published.

The simple answer to that question is no. There is, in fact, every reason to believe that enforcement activity will increase once normality returns. The jurisdiction has a legitimate need to demonstrate its commitment to regulation in accordance with developing international standards and enforcement cases will inevitably remain a part of that effort.

Recent lessons

There is truth in the view that those who fail to learn from the mistakes of their predecessors are liable to repeat them and it is helpful for us to consider issues that emerge from the recent approach to enforcement.

The GFSC's public statements after 2016 show that the frequency and severity of sanctions have increased and it has become rare for the regulator to levy fines solely on corporate licensees. Between 2009 and January 2016, there were 14 public statements in which the GFSC sought to impose fines totalling approximately £850,000. In just over four years since January 2016, there were 12 public statements with fines totalling almost £1 million (including those that would have been imposed against Certes Capital Ltd but for its insolvency). Moreover, approximately 80% of the regulator's public statements since 2016 mention fines against the officers of financial firms.

It remains the case that failings identified by the GFSC have not tended to result in the commission or facilitation of criminal offences in finance. However, the "guidance bandings" (which came into force in November 2017) that accompany the recently-inflated maximum financial penalties recognise this and show us that sanctions are to be expected even when financial crime has not occurred, with suggested fines of up to £200,000 for firms and £100,000 for individuals before there is any "significant risk of financial crime or being used to facilitate financial crime."

Beyond the numbers

Recent experience also points to a growing willingness on the part of regulators to explore (at both a macro and micro level) wider issues involving the conduct of licensees and relevant officers. They are looking especially hard at the following.

• Firms' understanding of, and compliance with, their legal and contractual obligations. If a firm has, for example, bestowed directors on vehicles that form part of an investment structure, the GFSC may try to work out whether any board members are overseeing the entities to which they owe duties in a proper manner. It might take a detailed look at the information that board members have received and try to find out whether have found it useful.

• Whether firms oversee their decisions about investments in a meaningful way. This could take in the background checks that the firms undertake when appointing "third parties" such as investment managers and the evidence that they can present to the regulator to show that those third parties are managing investments well and reporting information about them properly.

• Directors acting in the best interests of the companies that they serve. One can only interpret this fiduciary duty subjectively. This means that anybody (including a regulator) who tries to work out whether a director is fulfilling it should ask himself whether that director honestly considers his actions to be in the best interests of the company. The GFSC, however, might fail to do this properly. A dispute certainly might occur if the GFSC wants to accuse a director of neglecting his duty on the basis of what it thinks (with the benefit of hindsight) that he ought to have done at the time.

• Local compliance in the context of global policies and procedures. Countries enshrine global reporting standards in their laws and regulations in different ways and this sometimes leads to regulatory arbitrage. Guernsey's licensees are, in my experience, unwilling to facilitate regulatory arbitrage but the GFSC may nevertheless want to check up on this. It may try to find out whether firms on the island are relying upon non-resident entities in their groups for AML/CFT controls because this might serve to weaken or frustrate local policies and standards.

Wider considerations

This article is not the place for a comprehensive analysis of external influences and/or local concerns that might affect regulatory requirements. The following observations, however, might be beneficial.

• If global economic factors squeeze firms' budgets, they could find themselves in difficulty as they struggle to complete infrastructural projects. On previous visits to firms, the GFSC has pointed out problems with infrastructure, along with failures to comply well with risk-mitigation or "remediation" plans. (Remediation occurs when a firm takes remedial action to comply with regulatory rules more effectively in this-or-that area, sometimes after a fine or prompting from the regulators.) In these circumstances, an early identification of problems and an active and structured dialogue with the GFSC could be vital for any firm that wants to avoid a fine.

• MLCOs (money-laundering compliance officers, a Channel-Islands phenomenon) are relatively new in Guernsey but the GFSC's themed examination of the jobs that MLROs (money-laundering reporting officers) have to perform may be instructive. The GFSC's report indicated that, although each firm's MLRO and MLCO helps the board to keep money-launderers at bay, the board retains "substantial responsibilities for the prevention and detection of money laundering and financing of terrorism...and they must ensure adequate oversight of these roles, in order to demonstrate adherence to the regulatory framework." Relevant officers ought, therefore, to be able to prove to regulators (on request) that they are overseeing things properly and that a clear and consistent thought process runs through the way they test the abilities of their MLRO(s).

• If the global economy suffers for the rest of this year, insolvencies are likely to become more common. Any firm that faces insolvency is likely to have to consider the regulatory implications of the way it manages conflicts of interest (where, for example, one person might sit on the boards of several companies with varying intergroup funding obligations); the conduct of directors (particularly to do with the need to have paramount regard to creditors' interests); or any effect that impending insolvency might have upon the firm's adherence to Guernsey's 'substance' rules (where, for example, the rules dictate changes to the number of employees in Guernsey, or to expenditure or even to the entire firm's physical presence there).

• The British Financial Conduct Authority wrote a recent "Dear CEO" letter in which it exhorted firms to address non-financial problems to do with misconduct. It indicated that it was going to pay more attention to this problem in future. It is entirely conceivable that the Bailiwick's regulator will also do this.

The world turned upside down

Recent events demonstrate the speed with which plans can go awry. It is, however, reasonable to assume that the regulatory environment will resume its development both because of, and despite, external factors. Financial firms should continue to learn lessons from enforcement cases and to look more widely for clues about regulatory issues that could gain increasing traction.

In any event, the Bailiwick of Guernsey's approach to AML and CFT controls is likely to remain as robust as that of any other offshore financial regulator. There is also good reason to anticipate more and more regulatory enforcement in advance of MONEYVAL's next assessment in 2021. The way in which licensees meet their obligations will be as crucial to their future success as almost anything else.

* Adam Cole can be reached on +44 (0) 1481 748 912 or at adam.cole@walkersglobal.com