Financial crime: Court orders banks to open account for convicted fraudster
17 Dec 2018

The Royal Court in Jersey has ruled that a trust for a convicted fraudster should be allowed to open a bank account on the Isle, despite being denied banking services in other jurisdictions.

The case put before the Jersey court is linked to another infamous scam, unrelated to the trust settlor’s conviction – the Bernie Madoff fraud.

In 2005 a Jersey-based trust, the M Trust, invested over $1 million into an investment fund which itself had invested in the Madoff scheme.

The Jersey court notes that there is no implication that the funds from the M Trust are not from legitimate sources.

As part of the victim compensation program, the trust holds an undrawn cheque from the Madoff Victim Fund (overseen by the US Securities Exchange Commission) for £211,379.27, with the possibility of more payments to come.

‘Banned for life’

The complication, however, is that the trustee has been unable to open a bank account for the M Trust to receive the funds.

At the heart of the problem is the previous conviction of the M Trust’s settlor.

In 2009 the settlor was convicted for his role in a scandal involving New York State’s US$122 billion pension fund.

Prosecutors accused the settlor of obtaining millions of dollars in sham “finders fees” to facilitate lucrative investment opportunities for hedge funds, whilst secretly paying kickbacks to public officials.

Whilst other figures involved in the scandal received prison sentences, the settlor pleaded guilty, cooperated with authorities and as a result was convicted on misdeameanour rather than felony charges. He received a US$12 million fine, and was banned from the securities industry for life.

The inability to secure financial services for the trust has driven the trustee to turn to the courts for help under Article 51 of the Trusts (Jersey) Law 1984.

Under Article 51, trustees can apply to the court for direction on how the trustee may or should act in any manner concerning the trust.

Conflicting legal principles

The judgement noted that in this case, “It is not a question of seeking the Court’s approval for some momentous decision in accordance… but rather a question of seeking practical help.”
In his judgement, Bailiff Sir William Bailhache noted that the case brings conflicting legal principles into sharp focus.

On the one hand, banks do and should have a choice over the clients to whom they provide services, and it may be a reasonable decision on the part of the bank to not do business with certain clients who could pose an actual or reputational risk to the bank.

On the other hand, under the laws governing trusts, the trustee has an obligation to serve the best interests of the trust, which in this instance includes collecting the funds owed to M Trust by the Madoff Victim Fund.

Bailhache observed that there was no suggestion that the original investment into the Madoff scheme came from anything other than legitimate sources.

Bailhache also observes that there is no implication that the M Trust itself has been involved in any wrongdoing, and that the funds it seeks to receive are related to being a victim of a fraud rather than a perpetrator.

Furthermore, these funds are being overseen by the US Department of Justice, which presumably has conducted its own due diligence processes into the transaction.

“It is not unreasonable to conclude that the Department of Justice must have reached the view that there is nothing tainted about these monies, not just the monies that have been paid out of course, but the original investment into the Madoff Scheme in the first place.

“Had there been any question about the bona fides of that investment, one cannot think that the Department of Justice would have authorised the issue of the Madoff cheque,” Bailhache concluded.

Ethical questions

The inability of the trustee to secure banking services for the trust, to the extent that they were required to turn to the court system for help, raises substantial legal, ethical and practical questions for financial institutions.

There is no doubt that the settlor of the M Trust has a history of committing significant financial crime.

He has, however, been convicted and paid the price for his crimes and there is no indication that he has been involved in further wrongdoing since that time.

Like almost everyone else in developed economies, even reformed financial criminals need access to financial services to simply go about their daily lives.

It could be argued that the refusal to provide services to individuals after they have passed through the justice system and paid their dues to society constitutes an unfair ongoing punishment.

The question facing financial institutions is how to balance the legitimate desire to reduce their exposure to risk, including in the clients they do business with, against the potentially equally legitimate needs of those individuals for access to the institution’s services.

It’s a thorny issue, but in this case the court has attempted to provide a straightforward answer.

Bailiff Bailhache directed the trustee to open an account with a bank in Jersey to receive the funds, saying “the monies are due to the trustee, and the trustee should have banking facilities to enable it to receive those monies, where there is no evidence of any criminality attaching either to them or to the monies. In this context, the fact that the settlor has a conviction is neither here nor there.”

Financial crime: Court orders banks to open account for convicted fraudster

Melbourne-based Elise Thomas has a background in international affairs and a strong interest in financial crime, data and technology issues.

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