Proceeds of crime law and the money laundering regulations
Money laundering is the process by which the direct or indirect proceeds of crime are channelled through inancial institutions or other organisations in a way which is intended to conceal their true origin and wnership. If money laundering is carried out successfully, the money or other assets concerned can lose their criminal identity and appear to be legitimate.
Terrorist financing is the process of laundering funds to purchase materials and logistical items to commit errorist acts.
The Proceeds of Crime Law, 2008 replaced the Proceeds of Criminal Conduct Law ("PCCL") on
30 September 2008 and is the primary piece of legislation in the Cayman Islands dealing with anti money laundering and terrorist financing. It applies to all businesses and individuals and is supported by the Money Laundering Regulations (2008 Revision) and Guidance Notes on the
Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands , which were last updated in December 2008. Other relevant AML laws are the Misuse of
Drugs Law (2000 Revision) and the Terrorism Law (2003 Revision).
The changes made towards the end of 2008 to the AML regime in the Cayman Islands were in response to ecommendations from the Caribbean Financial Action Task Force ("CFATF"), an associate member of the Financial Action Task Force ("FATF"). As a result of these changes, the Cayman Islands now rank alongside other major jurisdictions as being in compliance with international AML standards. This memorandum ummarises the main changes that have recently been put in place and provides a summary of the main AML issues dealt with under the Law and the Regulations.
The Law
The Law applies to all businesses and individuals. Its remodelling consolidates and harmonises the Cayman AML regime and incorporates provisions based on the UK Proceeds of Crime Act, 2002 and the Serious Organised Crime and Police Act, 2005.
Defined terms Under the Law, "criminal conduct" is defined as conduct which constitutes an offence in the Cayman Islands, or would have constituted an offence had it been committed in the Islands.
Property (which includes all forms of property) is "criminal property" if it constitutes or represents a person's benefit or interest arising from criminal conduct and a person knows or suspects that it constitutes or represents such a benefit (arising from his or another's criminal conduct).
It is immaterial where or when the criminal conduct took place and the Law applies to property "wherever situated".
The Financial Reporting Authority ("FRA") is the financial intelligence unit within the Cayman Islands responsible for receiving, analysing and disseminating disclosures of information concerning criminal conduct.
The Law refers to nominated officers (senior members of staff) to whom suspicious activity should be disclosed (and who in turn have an obligation to make a suspicious activity report ("SAR") to the FRA).
In practice, these officers are commonly known as money laundering reporting officers ("MLROs") and this is he term used throughout this memorandum. "Schedule 3 countries" are countries approved by the Cayman Islands Monetary Authority ("CIMA") (and listed in Schedule 3 to the Regulations) as having satisfactory anti-money laundering systems in place. Cayman Islands Page 2
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Offences and penalties
There are five main offences under the Law:
1. concealing, disguising, converting, transferring or removing (from the Cayman Islands) criminal
property (section 133);
2. entering into or becoming concerned in an arrangement which the person knows or suspects
facilitates the acquisition, retention, use or control of criminal property (section 134);
3. acquiring, using or having possession of criminal property (section 135);
4. failure, by an employee or MLRO, to disclose to the MLRO or FRA (respectively), knowledge or
suspicion of another person's money laundering. This offence also applies where there are
reasonable grounds for such a disclosure to be made and a person fails to make the required
disclosure (section 136-7); and
5. tipping off – making a disclosure to a third party which is likely to prejudice any investigation arising rom a money laundering disclosure to the FRA (section 139).
The primary defence to the offences outlined at 1-3 above is the making of a SAR to the FRA. Professional legal advisers do not commit an offence if they do not disclose, in the circumstances of 1-4 above, information which is received in privileged circumstances. A statutory privilege defence also applies to certain other professional advisers (accountants, auditors and tax advisers) in respect of the offence outlined at 4 above.
The Law protects whistle blowers and reporting suspicious activity to the FRA will not give rise to any civil iability (legal, administrative or employment-related) and does not constitute a breach of the duty of confidentiality under Cayman Islands law.
The penalties for the offences listed above are:
1. on summary conviction, a fine of up to CI$5,000.00 and/or imprisonment for up to two years; or
2. on conviction on indictment, to imprisonment for up to fourteen years (for offences (1) - (3) above)
or five years (for offences (4) and (5) above) and/or a fine.
Vicarious liability
Employers need to be aware that if a money laundering or reporting offence is proved to have been ommitted with the consent or connivance of, or is attributable to any neglect on the party of a director, manager, secretary or other similar officer of a body corporate (or a person purporting to act in any such capacity) then the person committing the offence AND the body corporate will be guilty of that offence and liable to prosecution.
Similarly, general partners should note that if an offence is committed by a partnership (or other
unincorporated person), then the partner (or unincorporated person) as well as the partnership
(or association) will be guilty of the offence and liable to prosecution.
Key changes to the Law
The Law retains much of the previous PCCL but some new concepts and powers have been introduced.
Some of the new provisions are set out below.
1. Restraint and information gathering powers for the FRA following the making of a SAR (section 4).
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2. A mechanism to recover the proceeds of crime through the civil, rather than the criminal, courts.
Under this regime the Attorney General can issue civil proceedings to recover the proceeds of
unlawful conduct in situations where:
(a) the defendant is not in the Islands;
(b) the defendant is acquitted or confiscation proceedings have failed; or
(c) there is insufficient evidence to pursue criminal charges.
3. Enhanced investigative powers to assist the authorities in the recovery of the proceeds of crime.
The Regulations
Authority and scope
The Regulations supplement the Law and are mandatory. They were last amended in October 2008 and equire those engaged in "relevant financial business" activities, (referred to as financial service providers ("FSPs")) and professional intermediaries, to comply with specific administrative requirements aimed at preventing or detecting money laundering.
Relevant financial business is defined in the Regulations and there is a list of activities that fall within the efinition. It includes banking and insurance business and the business of regulated mutual funds. The additional activities listed in schedule 2 Regulations capture a variety of different businesses and will, in many cases, capture the activity of unregulated funds. Examples of activities that fall outside the scope of relevant financial business include drafting wills and providing legal opinions and legal advice.
The Guidance Notes
The Regulations are supported by the Guidance Notes, which were last issued by CIMA in December 2008.
They are regarded as mandatory by virtue of new regulation 5(4)(a) which states that CIMA can exercise ny of its enforcement powers if there has been any non compliance with the Regulations or any upervisory or regulatory guidance. The Guidance Notes go into some detail to explain what is expected from FSPs in order to comply with their obligations under the Regulations. Consequently, much of the following analysis takes account of the relevant regulation and the corresponding guidance.
Compliance by FSPs
FSPs are required to have various AML procedures in place and failing to do so can lead to a fine of I$5,000.00 on summary conviction or an unlimited fine and imprisonment for two years on indictment.
Whilst it is expected that the nature and scope of vigilance systems will vary according to the size and nature of the FSP, it is imperative that FSPs take their obligations under the Regulations seriously.
Delegation of AML function
FSPs managed by other FSPs (such as a fund) can, subject to certain provisos, delegate their
AML compliance functions (eg the appointment of a compliance officer and MLRO) to a third party,
provided that the third party meets the criteria set out in the Regulations and Guidance Notes.
Summary of key requirements
The Regulations set out four key requirements that FSPs should have in place to ensure compliance.
These are:
1. client identification and verification procedures;
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2. record keeping procedures;
3. internal reporting procedures (eg designating a MLRO to whom suspicious reports are made and
who will have ultimate responsibility to file an SAR if deemed necessary);
4. internal control procedures, which now include designating a person at managerial level to be a
compliance officer with responsibility for ongoing monitoring of clients and ensuring internal
compliance with the AML laws in the Cayman Islands (eg performing internal audit, employee
screening, training and awareness).
These are dealt with in turn below.
Client identification procedures
Scope FSPs are required to take steps to establish satisfactory evidence of the identity of their clients when they are engaged in a business relationship with their clients. The obligation also arises where the FSP is engaged with a client in a:
1. one-off transactions involving CI$15,000.00 or more;
2. any series of linked one-off transactions where the total amount involved is CI$15,000.00 or more;
and
3. any one-off transaction where money laundering or terrorist financing is known or suspected.
If any of the above situations apply, the FSP must obtain due diligence to satisfy itself that the prospective client is who he/she claims to be. This is in respect of both (a) an intermediary acting on behalf of the ultimate applicant for business (eg a law firm in the US who has been instructed by a third party and needs to form a business relationship or conduct a one-off transaction with an FSP in the Cayman Islands in order to carry out those instructions); and (b) the natural person who ultimately owns or controls the applicant for business. FSPs are expected to verify the beneficial owner and fully understand the nature of the respondent's business as well as its ownership and control structure.
Eligible Introducers
Intermediaries who act in the course of business and are regulated by an authority similar to CIMA in a chedule 3 country will usually qualify as "Eligible Introducers" and need only comply with simplified due diligence checks. In addition, the FSP can accept the due diligence checks carried out by an Eligible Introducer in respect of the applicant for business. However, the FSP must satisfy itself that the documentary evidence relied upon by the Eligible Introducer will satisfy the regulatory body in the Schedule 3 country from which the introduction is made. In effect, this means that the FSP must assess the espondent's AML and terrorist financing controls. However, the FSP cannot delegate ultimate responsibility or liability for making appropriate checks on the applicant for business and will still be liable for any failure of the Eligible Introducer to obtain and record satisfactory checks.
When considering whether it is reasonable to rely on a professional intermediary, the FSP's senior
management must take the following into consideration:
1. the intermediary's membership of and good standing with a professional body;
2. pre-existing client relationships and the length of that relationship;
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3. the nature of the intermediary's business and the nature of the business being introduced; and
4. the reputation of the intermediary.
If an Eligible Introducer is unable to provide undertakings of the documents received, then the relationship ust be reassessed. In any event, senior management's reliance on an Eligible Introducer should be regularly reassessed. For example, the Introducer may no longer be regulated in which case further due diligence would be required. Simplified due diligence checks are not permitted in any circumstances where the FSP reasonably believes the situation to be high risk. For example, if a client is found to be, or becomes, a Politically Exposed Person ("PEP") then senior management approval must be obtained before continuing with that relationship.
Ongoing monitoring
FSPs are not expected to carry out identification and verification checks on clients who have already been subjected to due diligence enquiries. However, if there are any doubts over the continued veracity of those checks, or if circumstances have changed, then additional checks must be made. In order to know hether there have been any changes in circumstances and to ensure that collected data remains accurate, FSPs must have systems in place for the periodic, random monitoring of existing records.
Information required from individuals
1. Certified or notarised true copy of passport; driver's licence or identity card.
2. Verification of residential address.
3. Bank or professional reference.
4. An explanation of the source of funds used to set up and capitalise the vehicle.
Information required from companies, partnerships and trusts
1. Certificate of Incorporation or Certificate of Registration.
2. Memorandum and Articles of Association or Partnership Agreement or Trust Deed.
3. Register of Directors and Shareholders or Partnership Register.
4. Due diligence on a majority of the directors and all shareholders holding 10% or more interest in the ompany. Due diligence on the general partner and confirmation that the general partner has full ontrol (otherwise information is also required on at least one limited partner or
authorised signatory with control). Due diligence on the trustee, settler and beneficiaries
(if known).
5. The nature of the business of the company or partnership or trust.
6. An explanation of the source of funds to be used in the transaction.
Requirements for wire transfers
There are separate regulations dealing with wire transfers. They apply to funds of any currency that are ent or received by a payment service provider carrying on business in or from within the Cayman Islands.
Unless the transaction falls within one of the exceptions (relating mainly to debit and credit cards) in ection 17(2) and (3), the payment service provider must forward information that verifies that the payer is the person he claims to be and that the provider is satisfied that the information establishes that fact.
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There are additional provisions dealing with the specific requirements for:
1. transfers of funds within the Islands;
2. batch file transfers;
3. the payment service provider for the payee being able to detect whether key information is
missing in relation to the payer (and what to do if such information is missing); and
4. additional obligations owed by the payment service provider relating to record keeping, situations
where there are technical limitations on the systems used to transfer funds and the relevant
information at the same time; and dealing with enquiries from CIMA.
Record keeping procedures
It is mandatory to keep records of the following:
1. evidence of a client's identity obtained under the FSP's identification procedures, including copies of the evidence itself (eg passports) or systems that enable copies to be obtained;
2. relevant account files and business correspondence; and
3. details of all transactions carried out by that client.
These records must be kept for a minimum of five years following either the termination of the business elationship with that client, or following completion of a one-off transaction (or the last in a series of one-off transactions), whichever is appropriate. In circumstances where the client is believed to have become insolvent and the FSP takes steps to recover any debt payable, then records must be kept for five years rom the date on which those steps to recover payment were first taken.
Internal reporting procedures
FSPs are required to appoint a member of staff at managerial level to be the MLRO. The duties of the LRO include:
1. receiving reports from other members of staff who have themselves received information that
leads them to know or suspect that a client is involved in money laundering or terrorist financing;
2. considering internal reports and other relevant information to determine whether the information does give rise to knowledge or suspicion of money laundering or terrorist financing; and
3. submitting SARs to the FRA whenever appropriate.
The MLRO must have unimpeded access to all relevant support departments, business lines and
information necessary to perform the function.
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Internal control and communication
Internal audit and the compliance officer
The Regulations require FSPs to maintain appropriate systems of internal control and communication for the purposes of forestalling and preventing money laundering and terrorist financing. These will differ from business to business depending on the risk of money laundering and terrorist financing and the size of the FSP. However, all FSPs should lay down clear guidelines, obvious lines of communication and carry out regular reviews of their procedures.
This responsibility (for monitoring and ensuring compliance with the AML laws) falls to the compliance fficer, who must be an employee at managerial level and who may also be the MLRO. This is a new requirement and the Guidance Notes set out the following qualifications and expectations of someone in this position. The compliance officer must:
1. have sufficient skills and experience;
2. report directly to the Board and have sufficient seniority and authority so that the Board reacts to and acts upon recommendations made;
3. report regularly to the Board so that the Board can satisfy itself that it is complying with its statutory obligations;
4. have sufficient resources (personnel and time) as well as unfettered access to all business lines, support departments and information necessary to carry out the role;
5. develop, maintain and report on internal AML systems and controls;
6. ensure regular audits of the AML processes in place;
7. advise the Board on compliance issues; and
8. respond promptly to requests from relevant authorities.
The Guidance Notes also set out a requirement to conduct regular audits to attest to the overall integrity and effectiveness of the systems and controls in place to counter money laundering and terrorist financing.
These include audits to:
1. assess any risks and exposures;
2. assess the adequacy of internal AML policies and procedures, including the process used to
identify suspicious activity;
3. test compliance with AML laws and regulations;
4. test transactions; and
5. assess employees' knowledge of laws and internal polices and procedures and the adequacy of
relevant training programmes.
Additional policies and procedures are required to address specific risks associated with non face to face usiness relationships and transactions eg internet and telephone banking, online share dealing and virtual offices. Similarly, there are regulations governing correspondent banking relationships and, in particular, dealing with "shell" banks (ie financial institutions that do not have a physical presence in any jurisdiction).
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Educating and training employees
Staff must be familiar with the FSP's internal AML policies and procedures as well as the Law, Regulations and other related AML legislation. FSPs are also obliged to provide regular training sessions to their staff to ensure they are able to recognise and deal with suspicious transactions, and new employees should not be involved in day to day operations until they have been given at least a general introduction to the ML laws, internal procedures and their own obligations.
Employee screening
Adequate screening procedures need to be in place to ensure high standards when hiring employees and will vary according to the particular risks associated with the business and the individual positions.
Comment
FSPs need to be fully aware of their responsibilities and obligations under the AML regime of the Cayman Islands. Failing to report knowledge or suspicion of money laundering and failing to have suitable rocedures in place for client/customer identification, record keeping and internal control and ommunication, are serious criminal offences. This is only intended as a general summary of the Law and the Regulations and does not comprise legal advice. We would be pleased to provide specific advice if required.
For further information please refer to your usual contact or:
Cayman Islands
Philip Paschalides, Partner
T: 345 814 4675
E: philip.paschalides@walkersglobal.com
British Virgin Islands
Jack Boldarin, Partner
T: 284 852 2247
E: jack.boldarin@walkersglobal.com
Hong Kong
Andy Randall, Partner
T: 852 2596 3305
E: andy.randall@walkersglobal.com
Singapore
John Rogers, Partner
T: 65 6622 5929
E: john.rogers@walkersglobal.com
London
Antonia Hardy, Partner
T: 44 (0) 207 220 4977
E: atonia.hardy@walkersglobal.com
Linda Martin, Partner
T: 44 (0) 207 220 4990
E: linda.martin@walkersglobal.com
Jersey
James Gaudin, Partner
T: 44 (0) 534 700 788
E: james.gaudin@walkersglobal.com
Dubai
Linda Martin, Partner
T: 44 (0) 207 220 4990
E: linda.martin@walkersglobal.com
Updated: March 2009
