Fortunate Drift Ltd v Canterbury Securities Ltd

• Jurisdiction: Cayman Islands
• Judge: (Kawaley, J.)
• Judgment Date: 16 September 2019
• Court: Grand Court (Cayman Islands)
• Date: 16 September 2019

FORTUNATE DRIFT LIMITED

and

CANTERBURY SECURITIES LIMITED

(Kawaley, J.)

Grand Court, Financial Services Division (Cayman Islands)

Financial Services — money laundering — information requests — defendant sought KYC information from plaintiff in circumstances where litigation to determine plaintiff’s claim to have validly terminated brokerage agreement with defendant and interim injunction discharged on parties’ undertakings inter alia by defendant not to transfer shares out of plaintiff’s account — no requirement under Proceeds of Crime Law (2019 Revision) and Anti-Money Laundering Regulations (2018 Revision) for defendant to continue to seek nor express power for court to compel plaintiff to produce information — court may require plaintiff to provide information in exercise of inherent jurisdiction and as condition for continuing order discharging injunction

Held, ruling as follows:

(1) The Proceeds of Crime Law (2019 Revision) and the Anti-Money Laundering Regulations (2018 Revision) did not positively require Canterbury to continue to seek nor provide an express power for the court to compel FDL to produce know-your-client or customer due diligence information. Compelling FDL to produce the information was not required to immunize Canterbury from potential criminal liability in circumstances in which (a) the service provider/client relationship had broken down and was subject to litigation before this court; (b) Canterbury’s continuing custody of the assets was pursuant to a court order; and (c) Canterbury had sought directions from the court. The legislative scheme required a financial service provider such as Canterbury to terminate a commercial relationship or transaction where information sought was not obtained. The court rejected Canterbury’s submission that it could not transfer the assets to a third party without first obtaining the information. Its duty would be limited to filing a suspicious transactionreport and affording the authorities an opportunity to intervene before effecting the transaction (para. 50; para. 66).

(2) The December 13th, 2018 order, which in substance granted discretionary injunctive relief, could not, however, properly be continued until trial unless FDL additionally undertook to comply with the valid information requests by Canterbury. Failure to do so would undermine the important public policy objects of the legislative scheme and would not be a course of conduct that should be rewarded by a court of equity which had been asked to grant discretionary interim relief. The court could, in the exercise of its inherent jurisdiction and as a condition for continuing the December 13th, 2018 order, require FDL to supply the information sought (paras. 64–67).

Cases cited:

(1)Bamford Publishers Ltd., Re, June 2nd, 1977, unreported, considered.

(2)Business, Enterprise & Regulatory Reform Secy. v. Amway (UK) Ltd., [2009] EWCA Civ 32; [2009] Bus. L.R. D121, dictum of Rix, L.J. considered.

(3)Phoenix Meridien Equity Ltd. v. Lyxor Asset Management, 2009 CILR 153, dictum of Smellie, C.J. considered.

(4)Public Trustee v. Cooper, [2001] 1 W.T.L.R. 901, referred to.

Legislation construed:

Anti-Money Laundering Regulations (2018 Revision), reg. 8(2): The relevant terms of this provision are set out at para. 37.

reg. 11: The relevant terms of this regulation are set out at para. 38.

reg. 18: The relevant terms of this regulation are set out at para. 42.

reg. 56(3): The relevant terms of this provision are set out at para. 40.

Anti-Money Laundering Regulations (2020 Revision), reg. 17A: The relevant terms of this regulation are set out at para. 39.

Grand Court Rules 1995 (Revised), O.29, r.2(4): The relevant terms of this provision are set out at para. 63.

Proceeds of Crime Law (2019 Revision), s.2: The relevant terms of this section are set out at para. 33.

s.133(1)(d): The relevant terms of this paragraph are set out at para. 34.

s.134(1): The relevant terms of this sub-section are set out at para. 34.

s.144(3): The relevant terms of this sub-section are set out at para. 34.

Schedule 6: The relevant terms of this Schedule are set out at para. 6.

Senior Courts Act 1981 (c.54), s.37: The relevant terms of this section are set out at para. 63.

The plaintiff claimed that it had validly terminated a brokerage agreement with the defendant and that the defendant was required to return to the plaintiff certain shares and the proceeds of sale of other shares.

The defendant (“Canterbury”) contested the claim of the plaintiff (“FDL”) and asserted a substantial counterclaim. After hearing FDL’s ex parte summons, the court granted an injunction restraining Canterbury from liquidating any shares it held for the benefit of FDL pursuant to an account agreement. The injunction was discharged on an inter partes hearing on December 13th, 2018 on the basis of various undertakings by the parties.

Canterbury subsequently learned that there had been a change in FDL’s beneficial ownership and sought updated know-your-customer particulars. A dispute arose as to whether FDL was required to provide the particulars in the circumstances. Canterbury applied by summons for an order that FDL provide the documents and information requested to enable Canterbury to satisfy itself that it was compliant with the Anti-Money Laundering Regulations. FDL was concerned that Canterbury might be able to use information supplied to its advantage in the litigation between the parties but stated that it would voluntarily provide any information that the court found was properly required to be supplied. During a recent CIMA audit of Canterbury, FDL was one of the clients that the CIMA auditor had randomly selected to review.

Canterbury submitted that (a) the purpose of the anti-money laundering regime was to ensure that the Cayman Islands met international standards of supervision and cooperation in the fight against financial crime; (b) Canterbury was required to avoid infringing the Proceeds of Crime Law (2019 Revision) and the Anti-Money Laundering Regulations; (c) transferring property which Canterbury knew to be suspected of being “criminal property” was prohibited by the Proceeds of Crime Law and the available defences were unlikely to be available; (d) rather than being prescriptive, the Anti-Money Laundering Regulations promulgated a risk-based approach that focused on the regulated entity itself making its own assessment of the risk associated with carrying on its business, including carrying out customer due diligence measures; (e) as part of its inherent jurisdiction to police and control the undertakings given in response to the December 13th, 2018 order, the court could and should order FDL to provide full responses to Canterbury’s request for updated documents and information; and (f) the court clearly possessed the inherent jurisdiction to compel FDL to produce the information sought in light of the fact that Canterbury held the relevant assets pursuant to a court order and having regard to the draconian provisions of the statutory law.

FDL submitted that (a) guidance was required to determine the scope of the parties’ obligations under the prevailing statutory regime; (b) Canterbury should return the entirety of the assets on the basis that the brokerage contract had ended and FDL no longer wished to conduct business with it; (c) FDL did not fall within the statutory definition of a customer because there was no subsisting business relationship; (d) the statutory framework did not provide any requirement on FDL to provide the information nor did it provide Canterbury with any legal right to compel its production; and (e) it was not obvious that the court’s inherent jurisdiction to police the undertakings given in place of the interim injunction included the power to compel FDL to produce the material sought.

C. Levers and H. Rasmussen for the plaintiff;

J. Asif, Q.C. and P. Mitchell for the defendant.

1 KAWALEY, J.:

Introductory

The plaintiff seeks to establish in this litigation that it validly terminated a brokerage agreement with the defendant dated May 9th, 2019 (“the account agreement”) and that the defendant is required to, inter alia, return to the plaintiff certain shares in Yangtze River Development Corp. (“YRIV”) (“the shares”) and the proceeds of sale of some of the shares. This claim is vigorously contested by the defendant which asserts a substantial counterclaim.

2 After hearing the plaintiff’s ex parte summons on December 7th, 2018, I granted an ex parte injunction restraining the defendant from liquidating any shares it held for the benefit of the plaintiff pursuant to the account agreement. Some shares were sold by the defendant before the injunction was served, so the injunction “bit” on the remaining shares and proceeds of sale still held by the defendant. On December 13th, 2018, the return date of the ex parte injunction, I declined to discharge the interim injunction altogether. Instead, I discharged it on the basis of the following undertakings offered by the parties when I indicated that I had decided that the interim injunction should be continued but that the plaintiff should be required to give the additional undertaking sought by the defendant. It was ultimately ordered:

“upon the Defendant giving the following undertakings:

i.that it will hold any of shares transferred out of the Plaintiff’s account with the Defendant into the Defendant’s account (the ‘Transferred Shares’) that have not been sold pending further order of the Court or the Plaintiff’s agreement;

ii.that it will hold the proceeds of sale of those Transferred Shares which have been sold, insofar as those proceeds remain in the Defendant’s control (the ‘Proceeds’), pending further order of the Court or the Plaintiff’s agreement. For the avoidance of doubt, the Proceeds amount to US$14,959,352.20; and

iii.that, save as otherwise allowed by any later order, or by agreement with the Plaintiff, the Defendant will not...