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The Guernsey Financial Services Commission says findings for a case against Zedra and one of its Executive Director's was “serious in nature but not systemic and were caused by multiple human failures.”
Mr Andrew Colin Borman received a financial fine of £15,000, and is now banned from holding the position of controller, director, money laundering reporting officer and money laundering compliance officer for two years following the investigation by the GFSC.
Zedra Trust Company Limited meanwhile received a fine of £90,000.
Mr Borman had been the Executive Director of the company for 10 years before being banned, and that process didn’t take place overnight.
The company was originally handed a place on a Risk Mitigation Programme back in 2019, after a site visit by the Investment, Fiduciary and Pension Division of the GFSC. Then there was a visit in 2021, when the Commission's Financial Crime Divisions visit “raised significant concerns regarding the Firm’s policies, procedures and controls.”
The GFSC’s statement continues: “He failed to demonstrate that he acted with competence, soundness of judgement and diligence.” This includes failing “to ensure adequate and accurate information was completed on new business forms”, and “failing to identify, manage and mitigate financial crime risks and take appropriate action”.
The stated purpose of "Client A" was making purchases from a UK property development group which had become distressed following the arrest of its company director, (“Mr X”). Mr X had been arrested on suspicion of conspiracy to defraud, bribery, and corruption. The arrest had caused investor and funder concern.
An individual (“Mr Y”) sought to establish Client A for what was said to be his own benefit. Mr Y was a professional, working in a reputable legal practice known to the Licensee. He explained that his practice included providing services to the U.K. property development group. He approached the Licensee (specifically Mr Borman) to establish Client A.
The Licensee and Mr Borman failed to identify, manage, and mitigate the evident risk that Mr X was potentially the beneficial owner of Client A and attempting to disguise that beneficial ownership and could potentially be using or intending to use Client A to mislead investors and possibly to launder the proceeds of crime.
Once Client A had been established, the Licensee and Mr Borman failed to identify the red flags in the Client relationship, even when attempts were made by Client A to transact business outside its stated initial purpose. For example, a proposal was made that Client A should make a loan to Mr X which would be funded by Mr Y. Mr Borman also failed to identify the red flags in relation to an unusual transfer of ownership of Client A from Mr Y to his long-standing friend (“Mr Z”), who was stated to have a significant financial connection with Mr X, in 2021.
The Licensee failed to carry out effective risk assessments regarding Client A, the commission describes these failures as "were serious in nature but not systemic and were caused by multiple human failures".
They and Mr Borman, also failed to understand the ownership and control structure of a customer, and in doing so "the Firm failed to correctly identify the beneficial ownership of Client A as required by Section 9 of the Beneficial Ownership Law".
Zedra Trust also failed to collect sufficient client due diligence and apply enhanced measures, this statement came as the GFSC found Mr Borman had failed to scrutinise the unusual transfer of ownership from Mr Y to Mr Z of Client A in 2021, and they add "Neither he, nor the signatories approving the transfer, explored the rationale for the transfer and the potential red flags, including Mr X’s control over Client A, that it exhibited."
Lastly on this point, on the magnitude at which due diligence had been abandoned:
"The Licensee, essentially due to the poor conduct of Mr Borman, failed to fully carry out enhanced measures on Mr Z. Specifically, the Licensee failed to corroborate the basis of his source of funds. The Firm did not obtain a copy of Mr Z’s consultancy agreement for services he purportedly provided to Mr X. This was critical as Mr Z’s source of funds to be used by Client A apparently derived from Mr X.
Despite the risks of the share purchase agreement being a circular transaction and the financial crime red flags attached, Mr Borman and the Firm failed to identify, manage and mitigate the risks of potential money laundering presented by this transaction."
Away from the due diligence, Zedra also failed to keep proper accounts and records. Fiduciaries Law means a licensee will not be considered as 'conducting business in a prudent manner' unless they also maintain 'adequate records and systems of control' of their business and records.
The GFSC goes into detail in its report, as well as adding in a one line summary of this: "These principles were not properly observed."
What the Commission did find was that discussions and decisions around the suspicious client were frequently not recorded by the Licensee and Mr Borman. They also found no records or minutes of a meeting of the Reputational Risk Committee that had met Zedra Trust Limited to discuss the reputational risk posed by Client A, before their onboarding.
The GFSC found that the board of directors were 'Ineffective board' and systems of controls. Now those controls are in place to ensure the 'forestalling, preventing and detecting money laundering and terrorist financing' according to the commission, and in relation to this 'Client A', there were issues around clear and transparent communication between the Firm’s compliance function and its administrative function. In fact they found concerns from compliance staff in April 2021 were not communicated to the appropriate individual or acted upon effectively until far too late.
The commission summarised it as such "While, in terms of documentation, the Firm’s systems were adequate, and training was delivered by competent personnel to Mr Borman and his team, in practice human error made them ineffective; the risk management of Client A was not effective".
Timing of identification and verification were also under the spotlight for the GFSC, as they found that the Licensee, due to Mr Borman’s actions, had signed and began to action the share purchase agreement for the U.K. property development group, (including receiving funds into its client account), despite not having sufficient identification and verification on Mr Z, who had also not signed a letter of engagement with the Licensee. The Commission state that Mr Borman failed to ensure that adequate due diligence had been obtained from Mr Z.
Although the GFSC makes it clear that both the firm and Mr.Borman himself co-operated with their investigation, there were also a number of failings. Their report talks in detail about errors in the company that should have been picked up, especially in reference to an initial visit in 2019 which has been considered as the first aggravating factor, where the firm was warned by a review body about some of these errors. The GFSC also considered the ignoring of Zedra's own Compliance staff to be an aggravating factor, as they had repeatedly acted appropriately, and warned Mr Borman and the Board of Directors.
However, the commission says: "The Licensee failed to consider the concerns from compliance staff appropriately and implement any effective change".
Other aggravating factors include the errors made at the time of take-on of Client A and throughout the business relationship, and that Zedra also failed to bring this matter to the attention of the GFSC after an external investigation in November 2021.
In terms of mitigating factors the Commission say the Limited Company had "co-operated fully with the Commission throughout the investigation and provided it with a copy of its internal investigation report during the on-site visit".
Their actions following that visit also led to another mitigating factor, with improvements to policies, procedures and controls being observed and they "made changes to the composition of its senior management team/Board, additional training has been provided to all staff and has taken steps to improve its governance and compliance framework and its onboarding procedure."
The judged that Mr.Borman is now banned from the position of controller, director, money laundering reporting officer and money laundering compliance officer a period of two years, and he received a £15,000 fine, whilst Zedra Trust Company Limited received a fine of £90,000.
The investigation's full report is available on the GFSC’s website.
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