Longest and costliest Cayman trial goes to appeal

The longest and costliest trial in Cayman’s history ended in first instance in June. The trial, which involved more than 40 lawyers from seven Cayman Islands firms, cost more than $100 million in legal fees and took nearly two years from opening statements to the delivery of the final judgment.

An entire wall of a courtroom with boxes golding the thousands of pages of documents for the Algosaibi case.
An entire wall of a courtroom was commandeered to hold the thousands of pages of documents that were considered in the Algosaibi case, which was settled on May 31 in the Grand Court of Grand Cayman after a two-year hearing. – Photo: Taneos Ramsay

Chief Justice Anthony Smellie dismissed claims from the Ahmad Hamad Algosaibi and Brothers conglomerate, known as AHAB, that the collapse of its business empire was the result of a multibillion dollar fraud perpetrated from within by Maan Al-Sanea, who had married into the family and ran its financial services business.

Rather than being a victim in the enterprise, Chief Justice Smellie decided that AHAB had worked with Al-Sanea and was the principal architect of what he described as “an enormous, long-standing Ponzi scheme” which defrauded more than 100 banks of “hundreds of billions of dollars.”

The chief justice ruled that Al Sanea, as director of the Money Exchange, a subsidiary of AHAB, had indeed presented falsified accounts to banks in order to borrow large sums of money to keep the business afloat and to enrich himself personally.

However, the chief justice concluded that Al Sanea had done so with the authorization of the partners of AHAB, who were not only fully aware of his conduct but were the “primary architects” of the fraudulent practices.

“The AHAB partners knew of and authorized the fraudulent borrowing through the Money Exchange and financial businesses,” Chief Justice Smellie wrote in a summary of his judgment, describing it as “a quid pro quo” for the “Money Exchange to procure fraudulent borrowing for the AHAB partners themselves.”

The total flow of cash through the Money Exchange was approximately US$330 billion, the judgment indicates.

He characterized Al Sanea’s behavior as part of a pattern of fraudulent practices established by AHAB over several decades.

“There can be no doubt as to the gravity of the fraud perpetrated by AHAB,” he wrote.
“This was a fraud carried out, with increasing sophistication, from as early as 1981. The total sums borrowed pursuant to AHAB’s fraud numbered in the hundreds of billions of dollars. In short, this was an enormous, long-standing Ponzi scheme which defrauded more than a hundred banks.”

AHAB, which instigated the litigation against multiple defendants, including the liquidators of Al-Sanea’s Cayman Islands companies, in an effort to recoup funds for its creditors, announced that it would appeal.

“AHAB have filed an appeal against the judgment and will vigorously contest the flawed narrative,” said Simon Charlton, acting CEO of AHAB, in a press statement.

He said the court had failed to take into account aspects of AHAB’s evidence and submission, particularly in relation to the partners’ knowledge of Al-Sanea’s activities and the withdrawals that he made from the company’s Money Exchange business.

AHAB also claims the chief justice reached his conclusions about the partners’ conduct based on inferences, which were not supported by the evidence before the court.

“The court accepted propositions and theories advanced by the defendants that were not put to AHAB’s witnesses during cross-examination and were also not supported by the evidence before the court,” according to the statement.

UK instructs its overseas territories to make company owners public

A section in the new U.K. Sanctions and Anti-Money Laundering Act stipulates that Britain’s 14 overseas territories, including the Cayman Islands, will have to introduce public registers of beneficial ownership by the end of 2020. If they do not, the U.K. government will issue an order in council to force Cayman and other territories to do so.

Orders in council, a relic from the colonial days, bypass the devolved democratic process in the territories. Therefore, they have been rarely used and generally only in the introduction of significant human rights issues.

In the Cayman Islands, for instance, the extraordinary measure, was used twice: to abolish the death penalty and to decriminalize homosexuality.

British lawmakers were fully aware that an order in council dictating public registers would disenfranchise elected representatives in the territories in an area of domestic responsibility for their local governments. But proponents of the amendment that introduced the measure claimed money laundering was now a matter of U.K. national security and therefore constitutionally under the jurisdiction of the U.K.

Unsurprisingly, the move provoked ire in the overseas territories, with many territory leaders describing the action as reminiscent of the colonial era.

Cayman Premier Alden McLaughlin said the position of his government is clear. “The attempt by parliament to legislate for this territory … is unlawful and we do not accept it.”

However, the Cayman government will take no legal action until an order in council to amend local legislation is issued, which, the premier said, may never happen.

If an order is made, the premier argued that a legal challenge would be necessary, irrespective of the underlying issue, as it could otherwise open up all kinds of legislation by the U.K. House of Commons in areas of responsibility that are devolved to the territories. Even then, the matter could take years to resolve.

In the meantime, Cayman would not make its beneficial ownership register public, unless it becomes a globally accepted standard, a position that the Cayman Island government has always maintained.

However, rather than being resolved through legal challenges of a potential order in council, the issue may come up sooner. The EU is already planning to add the existence of public beneficial ownership registers as one of the criteria for its blacklist of uncooperative countries in tax matters.

In 2017, Cayman avoided a blacklisting by committing to remedy, before the end of this year, what the EU called a lack of economic substance of Cayman-based entities. Minister for Financial Services Tara Rivers visited Brussels in May to talk to EU policymakers about the details of how economic substance is going to be defined. Even if Cayman can meet EU demands on the question of substance, public registers look set to become the next EU hurdle.

CIMA cautions investors over virtual currencies

The Cayman Islands Monetary Authority issued an advisory in April on the potential risks of investments in initial coin offerings, or ICOs, and all forms of virtual currency.

ICOs are a form of fundraising in which a startup company creates new virtual coins or tokens and sells them to the public to raise capital.

Customers should thoroughly research virtual currencies, digital coins and tokens, and the companies or entities behind them to separate fiction from fact, Cayman’s financial regulator said.

While the recent publicity surrounding virtual currencies, such as Bitcoin or Ripple, and initial coin offerings presents a tempting picture of high returns on investment, they also have a high potential for financial loss and fraud, CIMA advised.

Unlike a share offering, ICOs do not provide any ownership rights in the company, nor are they a loan to the company. In addition, ICOs are frequently unregulated and tend to involve complex, new technologies and products.

Moreover, if regulators consider an ICO in breach of local securities laws, the value and usability of the sold coins or tokens could be severely impaired.

As a result, investors can lose some or all of the money they invest, CIMA said.

Other risks associated with ICOs and virtual currencies highlighted by CIMA are the potential for incomplete information, exaggerated expected returns, price volatility, limited opportunities to resell the virtual currency, hacking attacks, fraud and limited regulatory protection.

The regulator warned that there have been several documented cases internationally where the money raised through an ICO disappeared without a trace. Tracking the funds is made difficult when fraudsters use multiple servers in different countries in combination with tools that mask the true Internet Protocol (IP) address of the users. Founders and promoters of these frauds have also operated under false names.

The regulator also reminded investors that virtual currencies are not legal tender in Cayman and that CIMA as a rule does not endorse investment products or companies.

Appleby, Guardian, BBC settle breach of confidence lawsuit

Appleby, The Guardian newspaper and the BBC settled a lawsuit brought by the offshore law firm against the British media organizations in the wake of the so-called “Paradise Papers” coverage that was based on documents that Appleby said were stolen from the firm in a cyberattack.

In the suit, Appleby claimed a breach of confidence by the media organizations and sought a permanent injunction against further use of the information, as well as the disclosure and return of the documents.

In a joint statement, the companies said “they have resolved their differences in relation to Appleby’s breach of confidence claim against The Guardian and the BBC.”

The offshore law firm maintained that the main objective for bringing the proceedings was to understand which of its confidential and privileged documents had been taken to be able to respond “meaningfully” to clients, regulators and colleagues about exactly what information has been taken.

According to the joint statement, The Guardian and the BBC have assisted Appleby, “without compromising their journalistic integrity,” by explaining which of the law firm’s documents the media organizations used.

In the lawsuit, Appleby claimed the documents used in the Paradise Papers coverage were stolen in a data breach and that there was no public interest in the stories published about it and its clients.

The Guardian and the BBC, in turn, argued that their “serious and responsible journalism” had revealed matters that were in the highest public interest and that otherwise would have remained secret.

Details of the settlement remained confidential, but the settlement statement did not refer to any requirement to pay damages.

Most documents belonged to the trust and fiduciary arm of the group, which was spun off a management buy-out in 2015 and now trades as Estera.

“It is now clear that the vast majority of documents that were of interest in the Paradise Papers investigation related to the fiduciary business that is no longer owned by Appleby and so were not legally privileged documents,” Appleby said in a statement.

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Michael Klein
Michael Klein Editor Compass Media Ltd. PO Box 1365, Grand Cayman, KY1-1108, Cayman Islands T: 345-326-1720C: 345-815-0064 E: [email protected] Michael is a financial journalist and copywriter.  In the past he has been responsible for the Risk Management and Corporate Finance sections of a British monthly Corporate Treasury publication.  He has written various financial handbooks, notably on European Banking and Cash Management and the Debt Capital Markets.   In addition he has worked as a copywriter for banks and investment funds and served as corporate communications consultant to US and European blue chip companies.   Michael holds an MA in Political Science and International Law from the University of Bonn in Germany. 

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