Episode 19 - When Legitimate Looks Low Risk: Sovereign Wealth Funds, AML Judgement & Regulatory Scrutiny

Sovereign wealth funds and state-linked structures are often perceived as low risk because they carry an assumption of legitimacy. But how should firms assess these relationships in practice?

In this episode, Michelle Clement is joined by Colin Solomon to explore the lessons arising from the Jersey v LGL Trustees Ltd re Angola case, and what it reveals about risk classification, onboarding assumptions, professional judgement, and regulatory scrutiny.

Together, they discuss how perceptions of legitimacy can influence decision-making, what regulators look for when reviewing files in hindsight, and how firms can ensure their risk assessments and rationale stand up to scrutiny.

Colin has also prepared a summary of the case and regulatory findings. If you would like a copy, you can connect with him on LinkedIn: https://www.linkedin.com/in/colin-solomon-07102613/.

Transcript

SPEAKER_00 0:01

Hello and welcome to this episode of the AML Clinic Podcast. I'm your host, Michelle Clement, a former SRA AML regulatory manager, now working with firms to build defensible AML frameworks grounded in how the SRA assesses risk and decision making in practice. In this episode, we're focusing on sovereign wealth funds and state-linked capital flows and how they're assessed from an AML risk perspective in practice. On the surface, these structures can often appear low-risk. They're institutional, state-linked, and carry an assumption of legitimacy. We're going to use a regulatory case from Jersey as a reference point for this discussion. The details of the case is useful, but the focus is what they reveal about how risk is classified, how assumptions are formed at onboarding, and how those assumptions influence judgment as a result, as the relationship rather progresses. To explore this, I'm joined by Colin Soldman, who brings a practical perspective on how these issues arise and what firms should be paying closer attention to. Colin is a senior specialist in offshore financial services, AML, and jurisdictional risks, with decades of hands-on experience in complex, highly regulated environments. He's particularly known for navigating the practical realities of trust structures, fiduciary risk, and cross-border compliance, especially where regulatory expectations meet operational reality. Colin, welcome back to the AML clinic.

SPEAKER_02 1:37

Michelle, welcome back. And for the second time, I've so enjoyed you introducing me, whilst being a little fearful of not meeting people's expectations. But thank you for the return welcome. It's great to be here, as they always say.

SPEAKER_00 1:52

And it's great to have you back on. So

Risks Associated With State Backed Entities

SPEAKER_00 1:54

thanks for joining me. So I wanted to start by setting a bit of context for sovereign wealth funds and entities with state-linked exposure. So what characteristics would typically define the risks associated with these types of entities? I love the way you start with an easy one, Michelle.

SPEAKER_02 2:15

It's huge sums. It's huge sums, and it's huge sums which, by their very nature, generate temptation. And then for me it's also about the front people. The front people are those who often those responsible in a government for that government's sovereign wealth investment employ or engage with to go out and and negotiate services with the rest of the world. Imagine, if you will, an African country, it has a government, that government's in place today. It decides to start to retain and invest some of its close national product to produce a wealth fund, to produce an income stream for the future, perhaps when times are more difficult, and it goes out and engages people to represent it in obtaining the financial services about the investment of that wealth fund. And in your introduction, you said we could speak about a case study from Jersey, a case study which is real because it is it's all about reality for me. But this is a case study which ends up being dealt with through the Jersey legal system, the Jersey regulatory system, but it actually does start in Africa. It starts with um with Angola. And Angola is one of those countries which I hope most listeners might think to begin with, that's a potential red flag of risk. Um, and that's not a slight on any Angolan uh or on the intentions of the people who try to serve Angola uh politically or through its service, but it's it's how the rest of the world might be perceiving Angola. And we have a situation whereby the Angolan government decided to establish a sovereign wealth fund and it engaged with people to go out and engage with professional service providers for the investment management of that wealth fund.

SPEAKER_01 4:18

And the quality of the professional service providers they engaged with in Jersey was not in itself problematic.

SPEAKER_02 4:29

What was problematic was the people they engaged with at the front. So a number of individuals were engaged with establishing the structure which then charged what were considered by the court with the benefit of hindsight as quite high fees. The word excessive might have been used, the word skimming might have been used, but it wouldn't be for me to repeat them and directly attribute them to anybody, but uh but I could. Um the individuals who were employed as front men had already suffered uh criminal charges or allegations of mismanagement, of bribery, um, and uh you have to instantly say, Well, we have a high-risk country and we have individuals who are the fronts or the intermediaries for this sovereign wealth fund who themselves don't have an unblemished career. So whilst you have structures, which in this instance included a limited liability partnership with general partners and limited partners where the investment was carried out and where investment services were provided, um those structures, to my mind, don't provide the legitimacy because the structuring could have been a foundation, it could have been a trust. It's not the structure that provides the legitimacy, I think it's the quality of the people who are involved. And that was probably too long an answer to your first question.

SPEAKER_00 6:02

No problem, Colin. Thank you. So just to summarize and um sort of a bullet point list of the risks um associated. So from everything you said, these types of entities can open firms to complexities with understanding ownership and control, because you spoke repeatedly about frontmen, um, political political exposure you mentioned, so collector risks perhaps, um, complexities with source of funds, a source of wealth, rather, in these instances, jurisdictional and geopolitical exposure, the perception of risk. So thank you, Colin. Um most appreciated. So

Assumptions and Misconceptions at Onboarding

SPEAKER_00 6:41

if let's move, let's build on that and move on to how this type of structure is actually classified in practice. Because a key issue in cases like this tends to sit in how the risk is actually initially framed at onboarding. So in some cases, there's a perception that sovereign wealth funds carry a lower inherent level of risk or heightened legitimacy. Where do you think those assumptions come from, Colin?

SPEAKER_02 7:07

I think they might they might come from the perception that it's always good to deal with a government. It's always good to deal with a government because we'll be dealing with credible uh democracies. Um, however, in that regard, we we we've had enough lessons recently that a an individual who today can be credible could become persona non grata tomorrow. Um we could talk about Roman Oramovich, an individual granted the rights to own a football club, granted the rights to live in the UK, granted the rights to choose to enter Jersey and live there, who, when world events, you reference geopolitical, when world events changed, that that individual becomes somebody who is um who is less welcome, shall we say. Um, but that opens another door to ongoing investigations as to uh alleged criminality as well. But for my mind, you you're right. Thinking that you've done the job because you've decided on boarding this risk is okay misses the point that today a government might be in power, that tomorrow is usurped by a popular revolution. Um think of Egypt, think of the uh the Middle East uh democracy crisis that ran a certain course not so long ago. Um, and the government that's in power today can be the ousted discredited government tomorrow. And if that government of today conducts sovereign wealth fund investment and then it becomes the ousted discredited government tomorrow, then in 24 hours you've got people looking at, well, what did the previous government do with our sovereign wealth fund? Where is that money? And if excessive fees have been charged for investment management, then that that poses some difficult questions. There's a regulatory issue here as well, because in the Jersey case, which I'm more than happy to provide details to of any of your um any of your audience who want to engage and ask for them, um the Jersey structure that was set up involved a number of entities uh which were fee earning or fee charging. And and there was certainly a a view when this came before the courts that the regulated business in Jersey failed to recognize the degree of risk at the start and then failed to address the ongoing risk as that ongoing risk played out. So to loop back to you, don't assume that you've assessed the risk correctly at onboarding, because the red flags can be hiding in plain sight, and don't assume that your monitoring is picking up changes in that risk profile as it goes along. Honestly, Michelle, um the the names of the entities that are involved are long and confusing. Um and it's it's about making sure you can see the wood for the trees, I think.

SPEAKER_00 10:19

Yes, absolutely, I agree. Um, I think also there's the element of the fact that it's state backed creates that sense of stability and credibility as well. And the fact that it's quite they're usually large institutions will give some element of familiarity and comfort, which sometimes, as you said, you know, um is the wrong assumption. So that's really helpful. So let's build on that and look at how

Key Takeaways for Compliance Professionals

SPEAKER_00 10:45

those assumptions actually translate into behavior and practice. So the Jersey entity we're referencing was fined, correct me if I was wrong, half a million pounds?

SPEAKER_02 10:54

It was with another £50,000 of fees. But that that fine, Michelle, is only the start of the process, isn't it? Because I I can say with some confidence that we can all imagine the opportunity cost spent on the part of the senior management of that business dealing with the investigation that led to a criminal prosecution. Um, what would their legal fees have been? Um that that's going to run to hundreds of thousands. What was the senior management time if you measured it, both in terms of opportunity cost and their charge out rate spent on just one retrospective regulatory matter? Huge, absolutely huge, as Julia Roberts might say in Pretty Woman.

SPEAKER_00 11:41

And also reputational risk as well, um, is another one to throw in there. So again, really helpful. So if we want or I want us to move on to what firms should be doing to ensure their decision making stands up to regulatory scrutiny. So when a file is reviewed in hindsight, because that's often where there's significant breakdown becomes a lot clearer is when the regular when the regulator looks at this type of scenario. So what typically raises concerns? And then on the flip side, but same question, opposite direction, what should firms be doing in real time to make sure their decision making is defensible later on. Okay. Can I take your second question first?

SPEAKER_02 12:24

What firms should do if they're looking to be prudent and say, well, how will this be judged in the future? Is try and look at their actions, which is what will somebody else view this as in the future. And genuinely, I go back to something which a former detective superintendent in the UK police um shared with me, which is keep asking yourself WH. And WH is the what, the when, the where, the who, and the how. And genuinely, if anybody wants uh as as we've offered, the the summary on the case of LGL Trustees Limited and its half a million pound fine for its involvement with the Angolan Sovereign Wealth Fund, they will see that there were stages along the timeline which is explained to the court that led to the court's judgment and fine, where not enough attention was spent on well, why is this happening? What's happening here? How is this happening and why? And I I I can't can't go away from the best defences to say how will this look to someone else in the future? Not I'm a fee owner, that's a big fee.

SPEAKER_00 13:46

I I agree with you as a former regulator. I can confidently also say that defensibility really does come down to whether someone can understand your reasoning at the time you made the decision that you made the decision. Um it's not necessarily just about what you concluded, it's you have to show your workings out, is the point that I'm gonna do. Thank you, thank you.

SPEAKER_02 14:07

Because I'm gonna jump in and say in the court records, there is evidence of a former compliance officer in this firm who recorded. Yes, and I paraphrase it's as if nothing else matters but the fee. I paraphrase, but there was an individual who said, and I'd need to go back to the exact wording rather than repeat it from memory, something like, it's as if we're going to do this no matter the risk. Now, how does that stack up, ex-regulator? What's your reaction to that, ex-regulator? I know what mine would be.

SPEAKER_00 14:45

Red flag,

Defensible Decision-Making in Compliance

SPEAKER_00 14:46

red flag, red flag. Yeah, okay. So it was a whistle stop tour of what would typically raise concern. So I'm conscious of time, um, if we could move on to something practical. So, what would you want compliance professionals dealing with sovereign wealth funds and similar structures to take away from this conversation?

SPEAKER_02 15:07

I think I'd want them to have asked a question right at the beginning and then repeat that question, which is can we manage this risk? If it can go wrong, it could go wrong. So if there's the potential to go wrong, then it could go wrong. For me, key takeaways check until you're satisfied, keep drilling. Is the is what you're seeing only the outer parts of an onion? Or are you seeing the inner parts of an onion? You need to keep looking at the peels, looking at the labels you're peeling off. And if we're thinking about drilling into something is a mining exercise, then then we need to remember that mines either flood or collapse every day. Um peel the onion. Someone who is only a 1% ultimate beneficial owner is still an ultimate beneficial owner. Don't rely on the caveats or the minimums that you're allowed to rely on if a discredited politician is a 1% owner of the entity servicing a sovereign wealth fund, then that discredited politician is still the 1% owner. Cross the T's and dot the I's, it's it's it's it's very much straightforward stuff.

SPEAKER_01 16:29

But the the key takeaways um what if the government changes in a hurry?

SPEAKER_02 16:36

What if they change in a hurry and ask for help? If if the fee earners are so adamant we want to take this on, and you as compliance have concerns, ask for help, ask fee earners the difficult questions. It won't make you popular, but it might make you more popular in the long run because you might want to say to them, Well, can I offer you this example of LGL Trustees Limited from Jersey, which involved a sovereign wealth fund and the people who abused, I'm gonna go with abused, their ability to abuse that sovereign wealth fund? I don't know how practical those were, Michelle, but for me it's keep asking difficult questions. How can it be as a firm we're earning such a fee if it's straightforward contractual work about a sovereign wealth fund's relationship with investment manager? Why is the fee so big? Who else is earning huge fees from this? Are the fees actually proportionate to the risk? Because if I'm the front man taking advantage of a sovereign wealth fund, um, is my fee proportionate to what I'm doing? Because if I was going to offer to manage, I don't know, a billion pound sovereign wealth fund, I'm not gonna take 1%, am I? I'm gonna take 0.0 something of a percent. So look at the commerciality. It's not just identity, it's not just addresses, it's not just source of funds, source of wealth, it's the commercial commercial. I'm not gonna get that word out, it's the commercial you try for me, Michelle.

SPEAKER_00 18:17

Commerciality of it that matters.

SPEAKER_02 18:20

That was teamwork.

SPEAKER_00 18:22

It was all really useful points, Colin. And honestly, the regulations um do speak to making sure that the transaction has an economic purpose. So um I'll I'll round it up that way.

SPEAKER_02 18:35

I think it's the reasonableness of that economic purpose as well. Every nation could justifiably look to create a sovereign wealth fund. It's it's laudable, it's credible, but it's the logistics of making it happen where the risk of criminality can lurk. Understand the commerciality, nearly got it right, of that.

SPEAKER_00 19:00

So, as Colin said, he has created a summary of the details of the Jersey case. So, if anybody would like to get in touch um with Colin for more details, please feel free to do so. Um, and I can link your details in the summary box if you're interested, Colin. Um fabulous. So this brings us to the end of this episode of the Omail Clinic Podcast. Thank you, Colin, for sharing your insights and helping us unpack how sovereign wealth and state link structures are to be assessed in practice. I hope this conversation has been useful in illustrating that risk in these scenarios is defined by how relationships are understood, challenged, and evidence in real time. If you found this episode to be useful, um consider sharing it with your colleagues who live in the world of nuance, risk, and razor thin judgment calls. And if there's any topic you would like me to cover in the future, I would love to hear from you. So thanks for listening to the AML Clinic Podcast. Until next time, stay informed and stay compliant.