Regulatory, international cooperation compliance and law enforcement overreach: An emerging issue in Caribbean financial centres

Supreme Court building at the Battlefield Park in Belize City, the capital of Belize in Central America

For several years now, I have been writing of my concerns regarding the conduct of regulatory, international cooperation compliance bodies and law enforcement agencies in the exercise of their statutory duties. As a former regulator, I understand and respect the jobs that these organisations do. They are often in a difficult position as they may be caught between the proverbial rock and a hard place. In addition, their activities are taking place in a context where some legal luminaries feel that the powers which they are exercising may indeed be rooted in statutes that are unconstitutional but which have not been tested in any court.

In this series, I shall examine several court rulings that opine on the conduct of these bodies, provide legal analysis and commentary and distil what I think are the principles to be gleaned and which are applicable from said decisions. I will begin by updating the readers on two important decisions from Belize and Anguilla which have been appealed since I wrote about them a few years ago. In the second article, I shall examine a seminal decision out of the BVI, Magnum Investment Trading Corporation and The Attorney General of the British Virgin Islands and will finish by looking at three decisions from Anguilla and BVI which examine the conduct of the Financial Services Commissions in those two jurisdictions.

Titan International Securities Inc v the Attorney General of Belize

The background to this decision was detailed in an article published on the 1 Nov. 2016.

However, to summarise, on 8 Sept. 2014, a 22-page indictment was unsealed in the US which charged Titan International Securities Inc. (Titan) and Kelvin Leach (the president of Titan) with being involved in a conspiracy and implicated in a fraudulent scheme with Robert Bandfield and his related companies, along with other persons in the U.S., to evade taxes.

They were also charged with being involved in securities fraud, money laundering, and other offenses.

That same day the US Department of Justice made a request for assistance under section 18 of the Mutual Legal Assistance and International Cooperation Act No. 18 of 2014 (MLAT) of the Laws of Belize to the attorney general (AG) of Belize to have Titan’s offices in Belize searched “as quickly as possible to prevent the destruction of evidence” and alleged that “a substantial amount of client information is held on hard copy files and on computers” in Titan’s office. The DOJ also asked that the request be kept confidential.

The request expressly stated that the documents needed included “any and all documents or other evidence (in copy or original) seized during the execution of search warrants”. The AG agreed and worked through the police to secure the warrant from a local magistrate to effectuate the search. The AG also requested the assistance of the financial intelligence unit (FIU). The magistrate issued the search warrant on the strength of the request to a superintendent “and to all and every Police Constable and Peace Officers of Belize and to the Officers of the Financial Intelligence Unit [(“FIU”] of Belize.”

Titan challenged the search warrant and constitutionality of the MLAT and sought a declaration that it was illegal. For purposes of this article, the issue of the MLAT will not be discussed since the court found that section 18 was constitutional. However, Justice Abel, after reviewing the facts, concluded that the search was executed in an unreasonable and excessive but not necessarily oppressive manner. He ruled that the actual search and subsequent events abused the authorisation granted to search the premises and seize items in Titan’s premises in the manner and way in which it was executed and as a consequence was a breach of Titan’s constitutional rights against arbitrary or unlawful interference with its privacy. The court held that the defendants ought to have been more careful about the manner in which it conducted the search and seizure.

Consequently, the court granted to Titan the declaration it sought that the indiscriminate removal of all files, records, computers and the effective shutdown of Titan’s office was disproportionate and in excess of any statutory authority to search and seize evidence in the possession of Titan and in aid of foreign court proceedings in the U.S. In addition, it awarded compensatory damages of US$4.46 million for the constitutional breach and while vindicatory damages were not awarded, legal costs in favour of Titan were.

Subsequent to my original article in 2016, the matter was appealed all the way to the Caribbean Court of Justice (CCJ) which is Belize’s final appellate court. In a judgment issued in October 2018, the CCJ agreed with the Court of Appeal which had earlier, in June 2017, set aside the US$4.460 million award in compensatory damages. The CCJ however, which is more pertinent for purposes of this article, awarded vindicatory damages in the amount of US$50,000 for breach of Titan’s constitutional right to privacy and affirmed the findings of Justice Abel with regards to the conduct of the police and FIU.

The CCJ ruled that the correct approach, when making such an award, was to assess the nature of the breach in terms of the particular facts of the case and to decide whether an additional award was required which would not only vindicate the rights of the party but would also deter the authorities from engaging in such conduct. The court considered the facts and circumstances of the case and took the following matters into account before making the award: (i) Justice Abel found that a copy of the search warrant was not left with Titan’s officials, (ii) he also found that items were taken which were not relevant to the request from the US government, (iii) the Court of Appeal agreed that the search was conducted in an unreasonable and excessive manner since there was no sifting of the records to comply with the specific request from the US; (iv) no inventory of the items taken was left with Titan, (v) Titan’s attorney was denied entry into the premises during the search and (vi) the said Court of Appeal found that the police officers acted in a very high handed manner during the operation.

Thus, while the CCJ reduced the money awarded to Titan, on grounds that are not relevant to this discussion, it reaffirmed the fact that the police and FIU breached Titan’s constitutional rights. This was a glaring example of law enforcement agencies overreaching in the exercise of their statutory powers which contributed to, but did not cause, the destruction of Titan’s business operations.

On a related matter, it is interesting to note that on the 15 March 2019, two of the defendants who were indicted in the US, Leach mentioned earlier and Rohn Knowles (both Bahamians living in Belize), successfully squashed the orders made against them in 2017 by the High Court to be extradited to the US to stand trial. By way of an order of the Court of Appeal, the extradition proceedings were stayed or stopped permanently, the men were released from bail and awarded their costs in the case both at the appellate and high court levels. This was because:

  1.  The evidence against Leach and Knowles was obtained by the US government in violation of their constitutional rights under the Belizean Constitution, namely the right against arbitrary search or entry and the right of privacy;
  2.  The US obtained evidence against them by violating the Belizean Interception of Communications Act; and
  3.  The extradition proceedings against them are an abuse of process of the Court.

While, of course, the actions of the US government are not those of regional bodies which is the focus on this article, it is clear that this trend to overreach and ignore procedure and the law is not unique to said bodies. Instead, it appears to be somewhat common amongst those who exercise state power.

The second case I shall examine comes from Anguilla and resulted from the collapse of its two indigenous banks which is a topic I have written on extensively over the past few years.

Martin Dinning et al v Satay Limited et al – Claim No. AXAHCVAP2017/0004

In an article published in this magazine on 26 April 2017, I detailed the decision in Claim No. AXAHCV 2016/00051 Satay Limited v Martin Dinning et al where Master Glasgow ruled that the Eastern Caribbean Central Bank (ECCB) did not have the legal authority to take over the two offshore banks in Anguilla. Thus, the ECCB did not enjoy the statutory immunity that would have protected it from legal action brought by the depositors of the said offshore banks. I have written extensively on this situation and to understand fully all the nuances of this article, it is imperative to read the aforementioned one, as well as those published in this publication on 23 May 2016 and 31 Oct. 2018. However, to recap quickly, I wish to note the following.

In August 2013, the ECCB took over the two indigenous banks in Anguilla as allowed for under the Eastern Caribbean Central Bank Agreement Act, R.S.A. c.E5 (the Act). Each of those banks had a wholly owned offshore banking subsidiary operating from within Anguilla which the ECCB also took control of. After the banking resolution of the situation was implemented in April 2016 by the ECCB and the Government of Anguilla (GOA), the offshore depositors sued the ECCB and the conservator directors, including Martin Dinning. Dinning and others were placed over the management of both the indigenous banks and the offshore subsidiaries during the period of the conservatorship by the ECCB. This legal action was because in the resolution process implemented by GOA, the depositors of the two offshore banks were not protected and they lost their deposits. This was in contrast to the depositors of the two indigenous banks which were onshore banks regulated by ECCB but who were provided for in the process. Their deposits were protected for the main part. The two offshore banks were licensed and regulated by the Financial Services Commission (the Commission) under the Trust Companies and Offshore Banking Act, R.S.A. c.T60 (TCOBA).

There has never been an explanation for this bifurcated approach to resolving Anguilla’s banking crisis at the time, at least as far as I am aware of. It is clear that had the offshore depositors been taken care of, none of this litigation would have resulted. Irrespective, some of the depositors took the ECCB and the conservator directors to Court. This resulted in the decision in Claim No. AXAHCV 2016/00051 stated above which was explained in great detail in my April 2017 article.

Subsequent to this decision, the conservator directors and ECCB appealed Master Glasgow’s decision and the Eastern Caribbean Supreme Court of Appeal (the Court of Appeal) in Claim No. AXAHCVAP2017/0004 referenced earlier, ruled against them in the main. It is to this decision that I now turn in making the argument that regulatory over-reach is an emerging issue for Caribbean IFCs and one which should concern all stakeholders.

In appealing the decision of Master Glasgow, the ECCB’s legal counsel argued that despite the fact that the powers of the ECCB to intervene in the affairs of the two offshore banks were only limited to investigating them, as affiliated institutions of the two indigenous banks, the actions taken were within the parameters of said powers and the notices of intervention issued back in August 2013.

Counsel, Paul Dennis QC, argued that ECCB was entitled to manage the offshore banks as it did because they were wholly owned subsidiaries of the onshore indigenous banks and the Act allows for the takeover of the property of said indigenous financial institutions. He further advocated that the intervention by ECCB to take all steps it considered necessary to protect the interest of the depositors and creditors of the indigenous banks was clearly stated in the notices of intervention. He argued that the offshore banks were depositors of the indigenous banks and their funds were co-mingled. In fact, the operations of the offshore banks were managed by the indigenous banks via service agreements between them.

Counsel pointed out that in affidavit evidence, an ECCB official stated that the funds were significantly co-mingled as to render it impossible to segregate them without adverse repercussions for financial stability. One must remember of course that the ECCB has as part of its statutory mandate a duty to maintain the stability of the banking system and the currency (the Eastern Caribbean Dollar) as well as the financial system and economy of Anguilla, and the other member states of the ECCB region.

The ECCB was the regulator for these banks and ought to have known that the funds were co-mingled. Thus, it should not have been a surprise that upon taking control of the indigenous banks that this situation was extant. The question becomes why did the ECCB allow for such a situation to exist in the first place especially since it was not the regulator of the offshore banks?

The other question becomes, where was the Commission which regulated the offshore banks in all this? And to date why has it not been joined in any of these legal actions to be called to account for its role in allowing such a situation to exist? It appears that the Commission acted as a bystander in this process and was subservient to the ECCB thus failing to properly exercise its statutory duties as mandated under the TCOBA and the Financial Services Commission Act, R.S.A. c.F28 which established it. Yet it has never been called to account for its behaviour. It is my hope that in the fullness of time, this shall be remedied since the ECCB is not the only regulator which failed in this scenario.

I must confess that as a former regulator, I have much sympathy with this line of argument.

It is clear that the ECCB saw the forest but did not focus on the individual trees. It looked at the over-arching statutory mandate which it has which is to protect the banking system of Anguilla but failed to pay attention to the specific features of the mechanisms by which it is supposed to fulfil said mandate. It is an error that, were I not a barrister, I too might have made in focussing on the broader picture and in speaking to one of the conservator directors privately, this was his point. The actions which they took were all done in good faith and designed to protect Anguilla’s banking system which they did. I am confident that he is correct in his beliefs and these actions were sensible to ensure financial stability.

However, in doing so, ECCB clearly erred because as was found by Master Glasgow, the Court of Appeal agreed that the ECCB did not have the statutory power under the Act to take over the offshore banks but only to investigate them as specifically set out therein.

Further, the court found that the actions which ECCB took, such as varying interest rates on deposits and limiting withdrawals, were more than investigating the offshore banks and thus outside the authority of the ECCB. In other words, the ECCB over-reached in exercising its statutory obligations, irrespective of the validity of its reason in doing so. As a result, it did not have the immunity which it otherwise would have had for the actions which it took which are being challenged by the offshore depositors.

Further, and this is inexcusable, in taking over the shares of the offshore banks, which of course were the property of the two indigenous banks, the ECCB failed to follow the statutory procedure set out in the Act. The ECCB, upon taking control of the two indigenous banks was entitled under the ECCB Act to take over all the property of the said banks, which included, of course, the shares in the offshore banks since shares are property. However, in doing so, it had to state the property it proposed to take over and the powers of control it proposed to exercise.

In the notices of intervention issued by the ECCB in August 2013 which announced the takeover of the indigenous parent banks of the offshore banks, this was not done. As a result, the ECCB could not exercise power of control over the shares of the offshore banks although it could have.

It is an open question as to whether or not, had the ECCB done what it was supposed to do, it would have been able to control the offshore banks in the manner in which it did, legally, despite not having specific power under the Act to do so? I venture to say that the answer is yes, since it would have been exercising control over the property of the indigenous banks, that being the shares in the offshore banks, which it had a right under the Act to do.

It is alarming to know that but for this procedural breach, the ECCB might not be in the current predicament which it faces today. Further, it is disappointing granted that at the time of the intervention, the ECCB must have made recourse to its legal department and GOA had at its disposal, the Attorney General’s Chambers for legal advice. The Commission also had legal counsel in-house and it is public knowledge that the Governor’s Office was also involved with the support of the Foreign and Commonwealth Office.

Yet with all these lawyers at their disposal, no one noticed that these procedural steps were not taken and in the end, should the Court rule against the ECCB at the substantive trial, it is the Anguillian people who will pay the price of the folly of the ECCB, its own government, the Governor’s Office and the Commission.

This is the danger of regulatory overreach and is the reason why I am writing these articles.

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Carlyle K Rogers

Carlyle K Rogers MBA, LLM is a barrister-at-law in Anguilla who practices in the areas of corporate and financial services law. He is also admitted in the BVI and New Zealand, owns and manages the Stafford Group of Companies.  He studied law in London at Queen Mary and Westfield College, University of London, where he obtained an LLB (Hons) degree in 2001 and with the University of London (International Programme) from which he obtained an LLM degree in Corporate and Commercial Law in 2005. He completed the Legal Education Certificate (LEC) at the Hugh Wooding Law School in Trinidad in March 2013 and was admitted as a barrister of the Eastern Caribbean Supreme Court in Anguilla and BVI in 2013. 
 

Carlyle K Rogers MBA, LLM
Stafford Group of Companies
201 The Rogers Office Building
Edwin Wallace Rey Drive
George Hill, Anguilla

T: 1 264 498 5858 + 1 264 498 5858 ; + 1 954 607 7239/7217
C: 1 264 476 5858 + 1 264 476 5858
F: + 1 264 497 5504
E: [email protected] 

 

Stafford Corporate Services

Stafford Group of Companies
201 The Rogers Office Building
Edwin Wallace Rey Drive
George Hill
Anguilla

T: 1 264 498 5858
T: + 1 264 498 5858
T: + 1 954 607 7239/7217
C: 1 264 476 5858
C: + 1 264 476 5858
F: + 1 264 497 5504 
E: [email protected]