Some of the latest Cayman legislation and regulations are the Proceeds of Crime Law (2017 Revision) (the “Law”) and the Anti-Money Laundering Regulations, 2017 (the “Regulations”). Amended, supplementary guidance notes under the Regulations are also expected to be issued shortly, which may address the AML approach when dealing with specific business sectors (e.g. hedge funds). These changes illustrate the pro-active approach of Cayman Islands’ service providers in combating money laundering. It is also different from the usual, “reactionary” approach taken by other jurisdictions following a crisis situation.
Business falling within the ambit of the Law
The Law, the Regulations and the guidance notes relate to the conduct of “relevant financial business”. Relevant financial business includes insurance business, mutual fund administration or the business of a regulated mutual fund within the meaning of the Mutual Funds Law of the Cayman Islands and certain activities set out in schedule 6 of the Law (note: the Regulations do not apply to items 19 and 20 of schedule 6 until 31 May 2018). In each case where the Regulations are in force, a person must undertake client due diligence procedures at the relevant time.
Due diligence timing
Under the Regulations (which came into force on 2 October 2017), a person carrying out relevant financial business shall undertake customer due diligence measures when:
(a) establishing a business relationship;
(b) carrying out a one-off transaction valued in excess of fifteen thousand dollars, including a transaction carried out in a single operation or in several operations of smaller value that appear to be linked;
(c) carrying out a one-off transaction that is a wire transfer;
(d) there is a suspicion of money laundering or terrorist financing; or
(e) the person has doubts about the veracity or adequacy of previously obtained customer identification data.
Regarding the above, some hedge fund managers raise the concern that, perhaps, due diligence procedures may delay the launch of a new Cayman fund or a delay may cause the manager to lose an important seed investor who is anxious to invest. This is contemplated by the Regulations as they provide that, if permitted by the Regulations, a person may complete verification after the establishment of the business relationship, provided that this occurs as soon as reasonably practicable, it is essential not to interrupt the normal conduct of business and the money laundering or terrorist financing risks are effectively managed. If the “asap” approach is taken, however, there is an obligation on the person carrying out relevant financial business to adopt risk management procedures concerning the conditions under which a client may utilise the business relationship prior to verification.
When applying the risk-based approach, a person carrying out relevant financial business shall take steps appropriate to the nature and size of the business to identify, assess, and understand its money laundering and terrorist financing risks in relation to a customer of the person, the country or geographic area in which the customer resides or operates, the products, services and transactions of the person and the delivery channels of the person.
Regarding the foregoing, the person carrying out relevant financial business shall:
**document the assessments of risk of the person
**consider all the relevant risk factors before determining what is the level of overall risk and the appropriate level and type of mitigation to be applied
**keep the assessments of risk of the person current
**maintain appropriate mechanisms to provide assessment of risk information to competent authorities and self-regulatory bodies
**implement policies, controls and procedures which are approved by senior management, to enable the person to manage and mitigate the risks that have been identified by the country or by the relevant financial business
**identify and assess the money laundering or terrorist financing risks that may arise in relation to the development of new products and new business practices, including new delivery mechanisms and the use of new or developing technologies for both new and pre-existing products
**monitor the implementation of the controls referred to above and enhance the controls where necessary
**take enhanced customer due diligence to manage and mitigate the risks where higher risks are identified.
In addition, a person carrying out relevant financial business in respect of new products and business practices, new delivery mechanisms and new or developing technologies shall undertake assessment of risk prior to the launch or use of the new products and business practices, new delivery mechanisms and new or developing technologies and take appropriate measures to manage and mitigate risks.
Where the money laundering or terrorist financing risks are assessed as “high”, the Regulations require enhanced due diligence procedures to be performed. Most service providers in the Cayman Islands already take this approach, especially in the case of clients from certain jurisdictions or politically exposed persons.
Difficulty obtaining AML
While the Law, Regulations and guidance notes take a proactive, common-sense and business approach, a person shall not open the account, commence business relations or perform the transaction or terminate the business relationship if the person carrying out relevant financial business is unable to obtain information required by the Regulations to satisfy relevant customer due diligence measures. The person shall also consider making a suspicious activity report in relation to the customer.
The “Grisham” effect
Notwithstanding the fact that the Cayman Islands is ahead of the AML curve (i.e. its AML practices are deemed better than some onshore jurisdictions), movies and telenovelas still scream the opposite of reality. The ability of the media to affect people’s perception in this way is sometimes referred to as the “Grisham” effect. The negative perception is so immediate that the moment that a character on a tv show mentions a wire transfer, the media influenced thoughts are directed to accounts held in false names and buildings full of cash. In contrast, the script of the Regulations (which movie producers don’t read) categorically state that a person carrying out relevant financial business shall not keep anonymous accounts or accounts in fictitious names. It is important for hedge fund clients and investors to know this difference. This way, the Cayman Islands will continue to thrive as a global destination for hedge funds and legitimate business.
About the Author
Alric Lindsay is a Cayman Islands corporate/funds lawyer and an independent fund director approved by the Cayman Islands Monetary Authority and licensed under The Directors’ Registration and Licensing Law. Alric also acts as voluntary liquidator to Cayman Islands entities. Alric can be contacted at firstname.lastname@example.org