Several jurisdictions have imposed sanctions regimes against Belarus and Russia stemming from Russia’s February invasion of Ukraine. These sanctions have prompted questions from Cayman Islands firms regarding the appropriate processes and due diligence required to stay in line with these regimes.

As such, CIIPA recently surveyed firms conducting relevant financial business in the Cayman Islands in the interest of learning more about their concerns and to assist as much as possible.

The following – which is not intended to serve as legal advice – was presented recently to Cayman-based Anti-Money Laundering Compliance Officers of accounting firms conducting relevant financial business.

Jump to subject: 

• Multiple Bodies

• Action Required

• Resources

• Legal Advice

• Using Commercial Compliance Systems

• Insolvency 

• Accounting Services Ban

Subject: Multiple Bodies

Respondent: There are now a range of bodies imposing sanctions, and there is no consistency between these. So whilst a person may be sanctioned by the EU, neither the US or the UK have imposed sanctions yet; is there still a reporting requirement if you have a positive match?

CIIPA: The short answer is no since the Cayman Islands’ Financial Reporting Authority (FRA) largely receives orders from UK sanctions list.

Firms should, however, consider whether other sanctions regimes apply to them and should revaluate the risk in the event that sanctions risk increases even where there is no obligation to freeze and report. All firms are encouraged to ensure they comply with every sanctions order that may be applicable to it and manage that with their legal and contractual risks to any particular client.

Subject: Action Required

Respondent: Many of the sanctions have thresholds or are specific to certain activities (i.e. the person must have control), or the sanction order only relates to certain activities. If the match is positive yet doesn’t meet the thresholds/activities test, should this still be reported and frozen?

CIIPA: No, since the obligation to report stems from Cayman Orders, which stem from UK sanctions.

Firms should, however, revaluate the risk in the event that sanctions risk increases even where there is no obligation to freeze and report.

A firm may a connection with a sanctioned person/entity but the activity the person/entity is sanctioned for doesn’t affect the service the firm is providing. Firms should still revaluate the risk because of the close connection to the sanctioned person/entity. Regardless of the service being provided, the risk is elevated and it’s possible the sanctions order will be extended in its scope or threshold. 

Subject: Resources

Respondent: The current situation of constantly updating sanctioned persons/entities lists is putting a strain on our ability to be able to manage and review the updates. What can we do?

CIIPA: This is a resource-related question and underscores the importance of a risk-based approach. This spike in the need for attention to sanctions obligations may justify you temporarily putting down the tools in one kind of process (risk-based approach to AML/TF/PF due diligence) in order to address sanctions compliance that has now become a priority.

Firms are also reminded to review their compliance management systems to ensure they are accurate and timely, particularly if a firm relies on commercial systems or does not conduct manual daily checks. 

Subject: Legal Advice

Respondent: We have not been impacted greatly by the UK sanctions regime at this point and we continue to monitor the situation. We believe there is enough information provided by the Financial Reporting Authority as a starting point including information on the Compliance Reporting Form and License Application and makes it clear that legal advice would be required in order to ensure any freezing of assets and the reporting of such is done correctly. We think the legal advice part is crucial in the process especially for complicated scenarios such as liquidations.

CIIPA: Taking legal advice is going to be important and necessary in some cases. There is a cost associated with that but it’s not as great a cost as would be incurred if a firm finds it has been carrying on doing business with – or it doesn’t freeze and report the assets of -- a sanctioned person or entity.

Subject: Using Commercial Compliance Systems

Respondent: We request clarification on whether we are doing enough to stay on top of sanctions when we rely on World-Check and the notifications from the FRA. We place reliance on World-Check for the identification of sanctioned parties by performing ongoing screening. As a service provider World-Check has indicated that they update their lists as sanctions are published, usually within 24/48 hours as applicable. In addition, we are subscribed to receive sanctions notifications from the Cayman FRA. The on-going screening within World Check captures and alerts us of any of the parties we deal with being sanctioned. Given the use of this tool is there an expectation of any additional measures we should be taking to ensure we are not transacting with a sanctioned party?

CIIPA: The legal obligation is to freeze and report immediately and, again, it comes down to a risk-based approach and the timeliness of scrubbing. Commercial compliance systems like World-Check can take between 24-48 hours to update databases. So the recommendation would be to monitor the FRA for additions to the sanctions regimes, conduct daily scrubs and have a specific review process in place to conduct a manual crosscheck or place a freeze all assets until you know a compliance system has been updated.

Subject: Insolvency

Respondent: …….specific to IPs covering, amongst other things: what sanctions are, what they mean, where do you find them listed, what is your responsibility, who do you report to, what to do when you identify a sanctions entity/individual, what to say to said entity/individual when holding/freezing their assets etc.

CIIPA: Elements regarding sanctions definition, meaning, responsibilities and reporting protocols don’t differ for insolvency practitioners. 

Important resources that can help answer many of these questions can be found on the CIIPA website, under the Russia and Belarus sanctions resources page found here. 

Respondent: It would be helpful to receive guidance for IPs drawing fees arising from the management of frozen assets or those which cannot be distributed to a sanctioned party. Should such monies be held indefinitely pending the lifting of sanctions (if/when that occurs)? For Court appointments it seems reasonable to seek the Court’s permission or directions but for non-Court appointments, what it is the position? Also, if an IP is not permitted to draw fees from assets which cannot be distributed, is there guidance on whether the Cayman Financial Secretary would be open to taking custody of those monies until such time as they can be released (akin to the process for undistributed assets)?

CIIPA: CIIPA has not issued any AML guidance specifically for insolvency practitioners. CIIPA has, however, put on its AML Resources page links to guidance and sanctions compliance for accountants specifically. The UK recently issued the insolvency practitioners AML guidance that has been approved by Parliament.

Cayman is specific, however, and not the same as the UK.

Subject: Accounting Services Ban

Respondent: With regards to the accountancy and consulting services export ban that was announced by the UK Treasury but not yet published, what is the current expectation for accountants given this has been announced by the UK but not regulations/guidance has been published to date?

The US recently ordered US persons are not allowed to carry out accounting work for Russian citizens or entities in Russia. Could Cayman-based firms possibly be impacted by the United States’ ban on providing accounting services in Russia if firms are billing or receiving funds from those entities in USD? Also, because the EU has also put similar measures in place and a UK order seems imminent, are accounting services providers in Cayman, going to be directly impacted because of the type of service offerings that we have in place?

CIIPA: It is expected the UK's measures -- along with additional prohibitions -- are scheduled to be laid on 19 July, although there is no timetable as to when the amendments will be extended to Overseas Territories.

It will depend on the framework in which that order has been made. If the order is made under the same legislation through which we get the sanctions orders, then it would apply to Cayman. If not, then it’s likely a matter for the Cayman Islands Government to decide whether Cayman-based service providers should follow suit.

Similar in scope to the US orders, the EU recently banned bookkeeping, audit, tax advice and accounting services, business and management consulting as well as public relations services to the Russian government and Russian Companies.

Firms are again encouraged to take a risk-based approach and consider Russia as a high-risk jurisdiction now because there is an increased sanctions entities from that jurisdiction may be or may soon be designated persons/entities.