Freezing in the sunshine

Many of us are already aware that it is an offense under the Terrorism Law (2015 Revision), as amended, to provide or to make available funds, financial services or economic resources to a person who is involved in, or is facilitating, terrorist activities whether committed in or outside of the Cayman Islands.

However, the law now imposes an obligation that few may be aware of and even fewer are currently set up to implement.

OLD: a person shall not deal with funds or economic resources owned, held or controlled by a designated person ….

NEW: a person shall freeze, without delay, funds or economic resources owned, held or controlled by a designated person ….

The obligation to “freeze, without delay” arises where the first-mentioned person knows, or has reasonable cause to suspect, that a designated person is transferring, converting, disposing, moving or otherwise using such funds, or is exchanging or using economic resources to barter for goods or services.

A “designated person” means a person designated by the governor for the purposes of “Terrorist Asset-Freezing” under Schedule 4A of the Law. Such person can be a human or a legal person, and the main purpose of the new requirement is to cut off the flow of funds and resources to terrorists and terrorist organizations. “Freeze” is defined in the Law as meaning “to prohibit the transfer, conversion, disposition, movement or use of any funds or economic resources that are owned or controlled by a designated person.”

All businesses operating in and from the Cayman Islands, along with their owners and management, should pause to reflect on the implications of this legislative development. No longer will the obligation to isolate suspicious funds and economic resources be brushed off as a problem solely for the banking institutions in the Cayman Islands, the amendment makes it mandatory for all persons to comply.

What this means is that all businesses, big or small that provide a service or product and handle or control client assets, must acquire a clear understanding of the particular risks to money laundering and terrorist financing that their operations face. They must also implement the appropriate and legally required counter – measures to such risks. Some risks may be unique, depending on the business, however, awareness is the first step in the process of appreciating where a vulnerability may lie, and being prepared to respond in accordance with the law.

This new obligation is significant, and it is required to ensure that the Cayman Islands meets the international standards recommended by the Financial Action Task Force for countering the financing of terrorism, the financing of proliferation and money laundering.  The methodology outlined by the FATF specifically states that “countries should require all natural and legal persons within the country to freeze without delay and without prior notice, the funds or other assets of designated persons and entities.”

So when does the obligation kick in? Although the amendment is legally in force, this new obligation to “… freeze without delay funds or economic resources owned, held or controlled by a designated person…” will not kick in until such time as the governor or a duly appointed delegate of the governor, makes a designation pursuant to the Law and the designated person is made known to the public, through publication.

The governor, or the governor’s duly appointed delegate, is first required to designate a person as being involved in terrorist activities. Such designation can be interim or final, and in each case, the law provides a mechanism for the duration of the designation to be extended, varied or revoked.

Designations for the purpose of asset freezing, may be made “… if the United Nations Security Council has advised that measures should be taken…because of the risk of terrorist activities being carried on…”. The governor may also make a designation once an informed determination is made pursuant to the Law, or as required by Overseas Territories Orders with applicability to the Cayman Islands.

Notification of designations will be published in the Cayman Islands Gazette, save in very specific circumstances. Once published, businesses operating in and from the Cayman Islands will be deemed to have received notice, and will be required to comply with the obligations arising under applicable law and regulations, including, the obligation to freeze assets without delay.

Under normal circumstances, the governor must notify the designated person and publish notice of such designation in the Gazette. However, in certain circumstances, e.g., where it is determined to be a matter of national security, where it is in the interest of justice or where the person to be designated is younger than 18 years old, the governor is not bound to publish the notice in the Gazette. Only the persons determined to have a need to know, will be informed.

If businesses have not already done so, now would be a good time for financial businesses and designated non-financial businesses and professions (DNFBPs) operating in and from the Cayman Islands, along with their governing bodies, to conduct a thorough review of compliance policies and procedures to ensure, among other things, that they are equipped to comply with and respond at short notice to, an interim or final designation of a person, under the law. Specifically, businesses must ensure that mechanisms are in place to identify and thereafter to freeze without delay, any funds or economic resources held or controlled on behalf of a designated person.

Because of the jurisdiction’s role in the offshore financial arena, all businesses regulated and unregulated (including law firms, real estate agents, trust companies, fund administrators, corporate services providers, their boards of directors and respective compliance officers) should familiarize themselves, not only with this particular development, but generally with the requirements of the law. Contravention of the Terrorism Law without lawful excuse, attracts criminal sanction.

Governing bodies of businesses authorized and regulated by the Cayman Islands Monetary Authority, bear the ultimate responsibility for the operations of their entities even where functions are outsourced or delegated. They should note that breaches of the Law could ultimately lead to the dreaded determination that persons are not “fit and proper” to hold a position of controller. When the changes to the Monetary Authority Law (2016 Revision) come into force, there is the further possibility that such breach could attract an administrative fine from the Monetary Authority.

Undoubtedly, implementation of this requirement in the Terrorism Law is an important element in the jurisdiction’s response to countering terrorism and the restricting the financing of terrorist activities. However, in an island nation of this size, that prides itself on a personal touch, some concern for personal safety and legal protections will undoubtedly be raised.