Sanctions: Understanding Licensing and Obligations

As the world continues to grapple with the threat of terrorism, governments have implemented targeted financial sanctions to freeze the assets of designated individuals and entities. The Cayman Islands, a major financial hub, has also put in place measures to ensure that its financial institutions are compliant with these sanctions.

Licensing: A Key Component

A licence is a written authorization from the Governor permitting an act otherwise prohibited under the sanctions. These licences can include additional reporting requirements or have time limitations. The overall objective of the licensing system is to minimize the risk of diversion of funds to terrorism while meeting the human rights of designated persons and other third parties.

Common Licensing Grounds

Some common licensing grounds found in the Orders in Council (OIOCs) are:

Basic needs: To meet essential living expenses, such as food, shelter, and clothing.
Legal fees and disbursements: To cover costs associated with legal representation or court proceedings.
Fees or service charges for routine holding or maintenance of frozen funds or economic resources: To cover administrative costs related to holding or maintaining frozen assets.
Satisfaction of prior contractual obligations of the designated person: To fulfill existing financial commitments, such as loan repayments or contractually agreed payments.
Extraordinary expenses: To cover exceptional or unforeseen expenses that may arise, such as medical emergencies.

Applying for a Licence

Any person seeking a licence for the release of funds subject to an “asset freeze” must submit an application to the Governor using the prescribed form. The application must be supported by evidence to demonstrate that all licensing criteria are met. FSPs must provide evidence to support their applications, including information on:

The parties involved in the proposed transaction: To ensure that the transaction is legitimate and not related to terrorism financing.
The ultimate beneficiary: To verify that the funds will be used for a legitimate purpose.
The complete payment route: To track the flow of funds and ensure that they are not being diverted for illicit purposes.
The amount of the proposed transaction: To ensure that the transaction is reasonable and not excessive.

Urgent Applications

In cases where the application is considered urgent, this needs to be clearly stated. The basis of the urgency and supporting evidence establishing a basis for the urgency should be included in the application. However, it’s essential to note that there is no guarantee that the application will be treated urgently, as it’s at the discretion of the competent authority.

Practical Tips

To ensure compliance with financial sanctions legislation, FSPs must:

Screen for full name, date of birth, address, and aliases: Sanctioned parties are known to use false personal information to evade detection.
Understand the capabilities and limits of automated screening systems: Ensure that the system is calibrated to your needs and check the matching criteria is relevant and appropriate.
Use fuzzy matching to improve screening quality: This can help to identify sanctioned parties who may have used variations of their name or address.

Compliance is Key

It’s essential for FSPs to comply with financial sanctions legislation and obtain a licence before engaging in transactions or attempting to transact with designated persons/entities. Failure to do so can result in criminal offences. Employees and clients of FSPs must be clear about the specific permissions contained in the licence as they must be strictly complied with.

By understanding licensing and obligations, financial institutions can ensure compliance with targeted financial sanctions and play a critical role in combating terrorism financing.