On March 6, 2014 the Council of the European Union imposed financial sanctions, including asset freezes, against certain persons, entities and bodies in view of the situation in Ukraine.1 The Cayman Islands, as a British Overseas Territory, has sanctions legislation enacted by a statutory instrument that is extended from the United Kingdom in this case the Ukraine (Sanctions) (Overseas Territories) Order 2014 which came into force on March 7, 2014, with immediate effect.2
This order freezes the assets of persons who have been identified as responsible for misappropriation of Ukrainian State funds.
The Arab Spring caused an escalation in the issuance of resolutions by the UN Security Council from 2011. Whilst there had been no new sanctions orders for over 12 months until the Ukraine sanctions, there have been many ongoing changes to the designated persons under the sanctions orders for relevant institutions in the Cayman Islands to act upon.
The Ukraine order was issued immediately and applies to:
- Any person in the Cayman Islands
- A British citizen, a British overseas territories citizen, a British overseas citizen, a British subject, a British national (overseas) or a British protected person, ordinarily resident in the Cayman Islands; or
- A body incorporated or constituted under the law of any part of the Cayman Islands
Financial prohibitions are:
- Dealing with funds or economic resources owned or controlled, directly or indirectly, by a designated or listed person, or persons acting on their behalf, or at their direction, or by persons controlled by them, unless authorized by license; and
- Making funds or economic resources available, directly or indirectly, to, or for the benefit of, a designated or listed person unless authorized by license.
The license referred to above, is an authorization issued by the governor, or her delegate, to allow an affected party to continue with certain types of business activity that may be caught by the above-mentioned prohibitions, as long as no funds or economic resources are made available to a designated person. No licenses have been issued to date.
Sanctions orders mandate relevant institutions which are the Cayman Islands Monetary Authority, a Cayman licensed bank and credit unions to report potential breaches of the legislation and/or the identification of a designated or listed person where it is known or suspected that a relevant person is a designated person, or has committed an offence under the sanctions order. Reports are made to the governor as soon as reasonably practicable.
For other financial services providers it has been stated that the Proceeds of Crime Law (POCL) will require reports to be filed which assumes that there are suspicions of money laundering or terrorist financing. In some cases sanctions orders are issued to target known terrorists or governments supporting terrorism. In other cases however, the sanctions are issued because of activity arguably outside of the criminal conduct caught by POCL, for example human rights violations.
In the case of the Ukraine sanctions, the grounds for filing a suspicious activity report according to POCL would be because one identifies a client to be a designated person and that the assets were the proceeds of corruption. All of the 18 persons designated would also show up on most searches of screening software as a politically exposed person (PEP) and so institutions are likely to already be conducting enhanced monitoring of these clients.
The penalties for non-compliance under the sanctions orders are a prison term for two years and/or a fine on conviction on indictment for dealing with, or made available, sanctioned funds or economic resources and up to three months and/or a fine not exceeding £5,000 for failing to report.
Whilst there are defenses available where there is no knowledge and no reasonable cause to suspect that you were dealing with funds or economic resources, the evidential burden will be on the defendant to prove that such knowledge or suspicion did not (or should not) exist. It is suggested that if there is no client monitoring system in place (see below) this will be a heavier burden to discharge.
Further, as the designated persons are all political or politically connected, the foreign bribery provisions under the Cayman Islands Anti-Corruption Law will have been applicable and firms should be evaluate compliance with that law.3
Effectiveness of sanctions and future for Ukraine order
Almost all sanctions orders prescribe a list of designated persons both natural and legal, some prohibit trade with an entire jurisdiction (e.g. Iran).
The effectiveness of EU sanctions has been questioned as with Myanmar (Burma) which was subject to EU sanctions for over 20 years and at some point included close to 2,000 designated persons. The sanctions are acknowledged as having played some part in the political changes in 2012, but every case is different and UN sanctions are more likely to be effective.
For example, as with the specific sanctions applied to a small number of people associated with the former Côte d’Ivoire President Laurent Gbagbo and his wife, who became specially designated nationals (SDNs) together with three of their close associates on basis of allegations that their activities threatened the peace and national reconciliation process in Côte d’Ivoire, namely Gbagbo’s refusal to accept the results of the 2010 run-off election which created a crisis in Côte d’Ivoire. Within a year of sanctions being imposed the International Criminal Court (ICC) charged Gbagbo, with murder, rape, persecution and inhuman acts, crimes allegedly committed as his backers fought brutal battles to keep him in power after the elections.
As noted by Stephen Platt4 and Martin Livingston5, non-U.S. financial service providers need to be concerned with the potential extra-territorial reach of the U.S. sanctions regime enforced by the U.S. Treasury Office of Foreign Assets Control (OFAC).
On March 6 the US president issued an Executive Order Blocking Property of Certain Persons Contributing to the Situation in Ukraine, although at the time of going to press a list of designated persons and entities had not been issued.
Of note, as yet there are no UN sanctions issued against Ukraine although it is investigating and meeting with local authorities to discuss human rights-related measures that can be taken to help de-escalate tensions in the country. Thus at present only the EU members and their territories are subject to the sanctions orders.
The effectiveness of the sanctions is in doubt then although there is obviously a stronger nexus between Ukraine and the EU (than there was with for example Myanmar) and thus it remains to be seen.
Next steps for Cayman financial services providers
The list of designated persons under the Order totals just 18 and all associated with the government that was in power at the time of the protests. Thus financial services providers are faced with a relatively easy task to review client records to ensure none are the newly designated persons.
If clients are matched with designated persons, the next task is to freeze or lock-down the account/relationship. In the case other than money or other assets in an account, FSPs should consider whether the relationship amounts to the holding of or dealing with economic resources.
Thirdly, there is a need to consider whether there is any matter to report either as a suspicious activity report or a report under the Order by CIMA, banks and credit unions.
Where there is a pressing need to act against the order one can seek a license from the governor.
Unfortunately companies and individuals have been burdened with the task of ensuring the effectiveness of sanctions orders, which in some cases are by their nature and given the context destined to be ineffective regardless of the actions of service providers.6 Whilst penalties have been applied only in rare cases it nonetheless increases compliance risk. In the case of the Ukraine sanctions however, the specific list and close nexus with money laundering and foreign bribery regulation makes action and decisions more straightforward.
- 1 Council Regulation (EU) 208/2014
- Extraordinary Gazette No.17, March 14, 2014
- A point of illustration is that Dmytro Firtash was arrested in Austria March 14 for allegedly paying bribes and forming a criminal organization. Firtash was a pro-Russia energy magnate and powerful figure in the deposed Yanukovych regime.
- “Why Sanctions Compliance is an Imperative” Cayman Financial Review issue no.26
- “The Resurgence of Sanctions” CFR issue no. 30
- Giumelli and Ivan “The effectiveness of EU sanctions: An analysis of Iran, Belarus, Syria and Myanmar (Burma)” EPC Issue Paper no.7 November 2013