This advisory provides an overview of the Cayman Islands financial sanctions regime, which was updated following the United Kingdom's exit from the European Union, together with an outline of key practical steps to comply.
What are sanctions?
Sanctions are restrictions put in place by international organisations, in particular the United Nations, or countries to achieve a specific foreign policy or national security objective.
Sanctions can include trade sanctions, travel bans, transport sanctions and financial sanctions. Financial sanctions most frequently take the form of targeted asset freezes on named individuals and entities (referred to as 'designated persons') and can also limit the provision of financial services or restrict access to financial markets, funds and economic resources. This advisory focuses specifically on financial sanctions which may impact regulated and unregulated Cayman Islands entities.
Who must comply?
All legal and natural persons located or operating within the Cayman Islands – not simply regulated persons or persons subject to the Cayman Islands Anti-Money Laundering Regulations (as amended) (the "Cayman Islands AML Regulations") - are subject to the Cayman Islands sanctions regime, irrespective of where their activities take place. Any person in breach of an obligation under a relevant sanctions measure will be guilty of a criminal offence.
Which sanctions regimes apply in the Cayman Islands?
The UK Government passes Orders in Council from time to time extending the application of various UN and UK sanctions (and, prior to 31 December 2020, EU sanctions) to British Overseas Territories including the Cayman Islands. In addition, the Cayman Islands has the ability to impose its own domestic sanctions in certain circumstances under the Cayman Islands Terrorism Act (as amended) and the Proliferation Financing (Prohibition) Act (as amended).
Did Brexit change the Cayman Islands sanction regime?
The sanctions framework in the UK was amended on 31 December 2020 as a result of the UK's exit from the EU. At that point, EU sanctions regulations ceased to apply to the UK and simultaneously the UK implemented the substance of those regulations into UK law, as extended to the Cayman Islands through new Orders in Council. However, while the substantive sanctions are broadly speaking unchanged, businesses have been advised not to assume that all aspects of previous EU sanctions now contained in UK law are exactly the same, as in many cases the process of recreating the regimes in UK law has required clearer and more specific drafting.
What about US OFAC sanctions?
The sanctions issued by the United States Treasury's Office of Foreign Assets Control ("OFAC") are not directly applicable in the Cayman Islands. OFAC screening will not satisfy compliance with the Cayman Islands sanctions regime. However, Cayman Islands persons should note the extraterritorial effect of US OFAC sanctions, particularly for Cayman Islands entities owned or controlled by US persons, transactions involving a US person or any transactions which are conducted in US dollars. In practice, our clients' entities generally need to consider OFAC sanctions as well as Cayman Islands sanctions and should take appropriate advice from US counsel.
What is required of all Cayman Islands persons?
All persons subject to Cayman Islands sanctions should avoid breaching sanctions by ensuring that they do not (i) deal with funds or economic resources belonging to or owned, held or controlled by a 'designated person'; (ii) make funds or economic resources available, directly or indirectly, to, or for the benefit of, a 'designated person'; or (iii) engage in actions that, directly or indirectly, circumvent the financial sanctions prohibitions. If a person knows or suspects it is in possession or control of, or is otherwise dealing with, the funds or economic resources of a designated person it must immediately freeze them, unless it can rely on a legal exception in the legislation or it has a licence from the Governor of the Cayman Islands or Financial Reporting Authority ("FRA"). In many cases there also reporting obligations to the Governor via the FRA.
What does this mean in practice?
The extent and type of protective measures will depend on the nature of an entity's business and whether it is subject to the Cayman Islands AML Regulations. An assessment of an entity's likely exposure to financial sanctions, taking into account the specific nature of the entity's activities, will determine appropriate steps to mitigate the risk of breaching sanctions. As a breach of sanctions is a criminal offence, taking a risk-based approach is itself a risk-based decision. There are a number of ways Cayman Islands entities can protect themselves from inadvertently breaching sanctions, for example, when entering into a contract or transaction or onboarding investors or clients or providing ongoing services. Some practical steps are discussed below.
What additional financial sanctions obligations apply under the Cayman Islands AML Regulations?
In addition to complying with the Cayman Islands sanctions regime, all persons (regulated and unregulated) which are subject to the Cayman Islands AML Regulations must have specified policies, procedures and internal controls to ensure compliance with financial sanctions obligations applicable in the Cayman Islands.
These procedures include (i) having adequate systems to identify risk in relation to persons, countries and activities which shall include screening actual and prospective customers, investors, beneficial owners, service providers and other relevant parties against all applicable sanctions lists (as discussed below); (ii) ongoing monitoring of business relationships allowing for the identification of assets subject to targeted financial sanctions; (iii) reporting of record keeping; and (iv) measures for making staff aware of targeted financial sanctions requirements and training on the recognition and treatment of transactions subject to targeted carried out by, or on behalf of, any person whose assets are subject to financial sanctions applicable in the Cayman Islands.
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The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.