Jersey: Permafreeze: The Judgment In Customs & Excise v Garnet Investments Ltd

Last Updated: 23 September 2011
Article by Clara Hamon

Those who thought the days of the extended informal freeze may be over, think again. Many in the financial services industry were heartened by a decision of the Royal Court of Guernsey earlier this year which granted an application for judicial review and quashed a refusal of consent by the Financial Investigation Service ("FIS") to the release of funds held by BNP. But a recent Court of Appeal judgment in The Chief Officer, Customs & Excise, Immigration and Nationality Service v Garnet Investments Limited [July 2011] has reversed that decision and held that where there is a suspicion that has not been dispelled, the police must be entitled to refuse consent whatever period of time has elapsed.

BACKGROUND

The judicial review application was issued by Garnet Investments Limited whose beneficial owner is Mr Hutomo, son of former President Suharto of Indonesia. BNP Guernsey hold $48million for Garnet from the acquisition of a 60% shareholding in Lamborghini which took place in 1998 shortly after his father lost power. Mr Hutomo was subsequently tried for corruption and then convicted of planning the murder of the judge in his corruption trial. In 2002 Mr Hutomo instructed BNP to transfer some of the funds to an account in another jurisdiction. BNP, suspicious that the funds may come from corrupt activities, refused and notified the FIS who refused consent.

Mr Hutomo stated that there were no longer any records to provide information on the acquisition of the Lamborghini shares. Unsurprisingly, this was not sufficient to allay the suspicions of the bank. In the particular circumstances of that case, the refusal of consent was considered by the Court of Appeal to be "not only rational but also inevitable".

JUDGMENT

The Court founded its decision on the basis that it is not the refusal of consent that gives effect to the freezing of the funds but the ordinary operation of the criminal law. Under the Criminal Justice (Proceeds of Crime) (Bailiwick of Guernsey) Law, 1999 it is a criminal offence to deal with funds, in the absence of consent, where it is suspected that they are the proceeds of crime. The practical effect of the law is that a person with a suspicion will be prevented from carrying out a transaction for fear of criminal liability and punishment and it is therefore the law that brings about the freeze, rather than the refusal of consent.

The Court considered the consent regime and found that the principal purpose of the consent provisions is to provide an opportunity to the police to give an exemption by consent where it is in the interests of law enforcement to do so. Reference was made to the significant differences between the anti-money laundering regimes in Guernsey and the UK and the fact that Guernsey has more limited mechanisms for dealing with the suspected proceeds of crime. Whilst the Court thought it highly unlikely that consent provisions in the law were intended to confer unregulated and informal freezing powers on the police without any mechanism for review or limitations, it also stated that it cannot have been the intention of the Guernsey legislature to place any obligation on the authorities to consent to a transaction that might involve paying the proceeds of crime away simply because time had elapsed or insufficient information had yet emerged to justify criminal proceedings. It was therefore not considered reasonable to imply into the statutory consent regime any period of time in which consent is to be granted.

HUMAN RIGHTS

The Court held that the refusal of consent did not constitute a breach of the Article 1 right to peaceful enjoyment of possessions. There was no deprivation of that right because the customer had a means of dealing with the property by way of making a private law claim.

REMEDY

The judgment affirmed that the appropriate remedy for a customer whose funds are informally frozen is to bring a claim against the entity holding the funds so as to enable the court to determine the issue. However, judicial review is still available if the consent decision is irrational, unlawful or involves a procedural impropriety. It is noticeable that the Court doubted that the burden of proof will necessarily lie upon the customer as stated by the then Deputy Bailiff of Jersey in Gichuru v Walbrook Trustees (Jersey) Limited [2008] JLR 131. In the Court of Appeal's view, it will depend on the precise terms of the contract between the bank and the customer.

PRACTICAL IMPACT

The effect of the judgment is that a refusal of consent can leave funds frozen indefinitely and the courts will have little sympathy unless the legitimacy of the funds can be demonstrated.

The Garnet case may involve more extreme cause for suspicion than most with its background of former presidents, murder and corruption. Nevertheless the Court emphasised the particular importance to an offshore jurisdiction of tackling money laundering and therefore any suspicion is likely to be taken seriously and a court will need to be satisfied that the funds are not derived from criminal conduct.

In summary:

  1. An extended informal freeze for an unspecified period is permissible.
  2. The police do not have to justify the withholding of consent or give reasons.
  3. The appropriate remedy is a private law claim, unless it can be shown that the decision is irrational, unlawful or procedurally improper.

So where an informal freeze is in place, investigators can breathe a sigh of relief that there will be no deadline imposed for giving consent or instituting proceedings. Customers, on the other hand, will have to prepare to bring an action and let the court determine the status of the funds.

The Jersey position, following Chief Officer of States of Jersey Police v Minwalla [2007] JLR 409 seems to be that the court is less willing than the Guernsey court to countenance an extended informal freeze, but is in accordance with the Guernsey position to the extent that the appropriate remedy is an action by the customer against the bank. It may be that in light of the Guernsey case the spectacle of the police attempting to prove overseas crime on limited evidence, as in Minwalla, will not be repeated.

www.bakerandpartners.com

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Authors
Clara Hamon
 
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