The Cayman Islands Monetary Authority (CIMA) recently issued new guidelines on the implementation of the Islands' money laundering legislation. The legislation is contained principally in the Misuse of Drugs Law (2000 Revision) and the Proceeds of Criminal Conduct Law (2001 Revision) (the PCCL). These statutes create a number of offences in relation to activities involved in laundering the proceeds of crime.
When the PCCL was enacted in 1996, it empowered the Governor–in-Council to issue a code of practice for the purpose of giving practical guidance on the application of the Law. The Code did not take the form of direct or subsidiary legislation. However, in July 2000, the PCCL was amended to enable subsidiary legislation to be issued in the form of binding regulations. The Money Laundering Regulations were issued in September 2000. The Code and the Regulations co-existed and overlapped (in some cases in a manner that needed clarification) until April 26 2001 when the Guidance Notes were issued by CIMA and local professional associations to supercede the Code (which has now been withdrawn).
The Money Laundering Regulations 2000 were made by the governor-in-council pursuant to powers conferred by section 19A of the PCCL, and therefore have the force of law. The Guidance Notes, in contrast, have been issued by CIMA jointly with a number of professional associations. They are not legally binding in the same way that the Regulations are. Nevertheless, financial services providers who are governed by the Guidance Notes need to take them into account. This is because in determining whether or not a person has complied with any of the requirements of the Regulations, the courts of the Cayman Islands must take into account any relevant supervisory or regulatory guidance which applies to that person (Reg. 5(3)(a)), and compliance with the Guidance Notes is a defence to a prosecution brought under the Regulations. In addition, the Guidance Notes make it clear that CIMA will monitor compliance of the Regulations and observance of the Guidance Notes. If the Guidance Notes are not being observed, the relevant person may be vulnerable to a regulatory sanction from CIMA under the applicable regulatory laws.
The Regulations apply to anyone carrying out "relevant financial business". What constitutes "relevant financial business" is set out in section 4 of the Regulations and includes:
- banking or trust business;
- acceptance by a building society of deposits;
- business carried on by a cooperative society;
- insurance business;
- mutual fund administration or the business of a regulated mutual fund;
- the business of company management services; and
- activities which are listed within schedule 2 of the Regulations (broadly speaking, financial services).
The Regulations require that a person who is carrying on relevant financial business in the Cayman Islands must ensure that they: (i) identify their client; (ii) maintain record–keeping procedures in accordance with the Regulations; (iii) maintain internal reporting procedures in accordance with the Regulations; and (iv) maintain other procedures of internal control and communication as are appropriate for forestalling and preventing money laundering.
Of these requirements, the verification of identity is likely to be of particular interest to potential investors and their financial advisers. The Regulations require that a person carrying on relevant financial business in the Cayman Islands obtains satisfactory evidence of the identity of what is termed the "applicant for business" when any transaction is to be carried out or business relationship is to be formed. What constitutes satisfactory evidence of identity is not definitively set out in the Regulations. However, the Guidance Notes provide, in some detail, the information appropriate to establish the identity of an applicant for business, whether the applicant is an individual, a corporation, a partnership, a trust or fiduciary client.
Where the applicant for business is or appears to be acting on behalf of an underlying principal, regulation 9 of the Regulations requires reasonable measures to be taken for verifying the identity of all underlying principals, not just the applicant for business, unless the applicant for business is an overseas financial institution regulated in a country listed in schedule 3 of the Regulations. This means that regulated financial institutions in most FATF member countries are able to act as intermediary applicants for business on behalf of, or for the benefit of, their own underlying clients without the Cayman Islands financial services provider having itself separately to identify and verify those underlying clients. This applies provided the intermediary client confirms to the Cayman Islands financial services provider that it will have verified, and will maintain verification of, the identify of its underlying clients in accordance with its own procedures.
As a general rule, every applicant for business must provide satisfactory evidence of their identity direct to the financial service provider. However, the Guidance Notes acknowledge that the requirements of the Regulations could in some cases involve unnecessary duplication, or be commercially onerous and of no real assistance in the identification of or the subsequent investigation into money laundering. As a consequence, the Regulations and Guidance Notes contain various exemptions, exceptions and accelerated procedures. It remains to be seen how useful these exemptions will be in practice.
Business relationships already existing at the time of the introduction of the Regulations, on September 1 2000, were exempt from the requirements of client identity verification. However, the Regulations (and the Guidance Notes) are being amended to require that all business relationships existing on September 1 2000 but which were formed before September 1 2000 be subjected to the client identity verification process by December 31 2002. An extension of six months beyond that date may be granted by the Executive Council of the Cayman Islands on request.