Mr Benn and the Art of the Costume Change

Anyone of a certain vintage will remember Mr Benn: the bowler-hatted gent from Festive Road, stepping through the changing room door and, as if by magic, into a completely different life. Knight, spaceman, cowboy, cook: whatever the outfit demanded, he became.

If you run a small designated business in the Island, the AML/CFT Code asks something similar of you. You are the business owner, the person who brings in the work, and the person responsible for compliance, and from time to time the Code requires you to talk to yourself.

How did we get here? The Isle of Man Financial Services Authority stresses the utility and flexibility of the risk based approach, which focuses on applying regulatory requirements in a "reasonable" and "proportionate" manner. Broadly speaking, it works well. It allows a "one size fits all" framework to be scaled to the size, type and risk appetite of each business, and in many areas it lets smaller practices cut their cloth accordingly, without onerous procedures that bring little practical benefit. 

But for all that scalability, there remain moments of dissonance. 

Paragraph 30 of the AML/CFT Code requires an (at least) annual report to senior management, covering the business's AML/CFT environment and any legislative developments, progress on its own policies, procedures and controls, the compliance activity it has undertaken, and the results of its monitoring and testing. This obligation applies irrespective of the size of the firm. That sometimes places small designated businesses in the peculiar position of having to produce an annual report to themselves.

(On the bright side, if anyone catches you muttering away to yourself, you can at least tell them the FSA made you do it and tip your bowler hat in their direction.)

The good news is that the Handbook leaves it to you to decide how much detail the report needs, so for a sole trader it can be short. 

But the requirement makes a serious point. The person who runs the business and the person responsible for its compliance have different duties, different obligations and a different focus, even when they share a desk, a coffee mug and have the same name. “But it’s just me” won’t work for the Code and as one English director discovered, the courts aren’t keen on it either. 

The point was tested in Lux Films Ltd v Fowler, before the English High Court. The case sits at the other end of the scale from the annual report requirement, but the principle remains the same whether it’s governance, fiduciary duty or regulatory obligation: understand your roles and carry them out assiduously.

Andrew Fowler was one of three equal shareholders and directors of Lux Films, a video production company, and he ran much of its day to day business. As relations with his fellow directors soured, he set up his own company, Andrew Fowler Media Ltd, with himself as its only shareholder and director. While still a Lux director, he steered Lux clients and work towards his new company, billing more than £450,000 over the period. Mr Fowler reportedly described this as "a bit naughty", but "hard to prove". It turned out to be neither.

Lux sued both Mr Fowler and his company. That he had breached his duties to Lux was never going to be the interesting part: a director who diverts his company's business to himself is on well-trodden ground. The interesting part was the claim for the tort of “unlawful means conspiracy”.

"Unlawful means conspiracy" requires two or more legal persons acting together. Mr Fowler's answer was, in essence, “but it’s just me”, relying on the criminal law position that a director and a company he solely controls generally can't conspire because there is only one mind at work. The court held that the civil claim was different.

Mr Fowler's defence basically amounted to two people in a trenchcoat, costumed to pass as a single person. The court looked under the coat and found two separate legal persons, who had together diverted Lux's business. Both were held liable.

"But it's just me" rarely ends well, and you don't need to be diverting six figures of business for it to catch you out. It’s a regular issue for smaller firms and sole traders.

Picture the new client you've been courting for months. You want the work, the fee is agreed, and you'd like to get started on Monday. You are also the person who has to decide whether their source of wealth stacks up. The “sales guy” has closed the deal and the “business owner” has already said yes. The question is whether the “compliance officer” gets a proper turn in the changing room.

Or picture the long-standing client whose latest transaction doesn't sit right. If you are the MLRO, the Code still expects an internal disclosure, even when it's to yourself. The Handbook recognises this: for an MLRO, the internal disclosure is made when you prepare or record the information, before anything goes to the Financial Intelligence Unit. In other words, you stop, write down what has troubled you, and look at it as the MLRO, not as the person who has known the client for fifteen years. That changing room is beginning to feel like a revolving door. 

The takeaway here is simple: understand when you've stepped into a different costume, and let that costume do its own job.

In practice, that means asking a question before each decision: who am I being right now? If the answer is the compliance officer, look at the file as they would. Write down what you decided and why, even if it's three lines. And where you can't step out of one costume cleanly, because the client matters too much or the call is too close, borrow a second pair of eyes from someone who isn't wearing any of your outfits.

Indulge your inner Benn, and remember that each costume is its own person, not just you in a funny hat. Unlike Mr Benn's shopkeeper, the right costume won't appear as if by magic: you have to work at it.