Jeremy Durston, counsel in Campbells’ litigation, insolvency and restructuring group, gives an overview of the administrative fine regime in the Cayman Islands and discusses a significant recent case, touching on the interpretation of the Anti-Money Laundering Regulations.
Enforcement of the various regulatory acts and regulations, and in particular the imposition of administrative fines for breaches of the Anti-Money Laundering Regulations (AMLRs), have been on the rise in the Cayman Islands for at least the past three years. In particular, the jurisdiction has seen an increase in not only the number of fines issued by the Cayman Islands Monetary Authority (CIMA), but also the quantum of those fines.
CIMA, which regulates all financial service providers (FSPs) in the jurisdiction, was first granted the statutory power to issue administrative fines in December 2017. Since at least February 2021 CIMA has issued an increasing number of fines ranging in value from tens of thousands of US dollars to in excess of five million. These fines have been issued to all manner of FSPs, from small service providers to some of the biggest players in the market, making the regime relevant to all entities and clients regardless of their size or type of licence.
Broadly speaking, CIMA has the power to impose administrative fines for breaches of the Monetary Authority Act (2020 Revision), various other regulatory acts, and/or the AMLRs. Breaches fall into one of three categories:
i) minor – for which the fine is fixed at KYD5,000 (where KYD1 is approximately USD1.20);
ii) serious – for which the fine is a maximum of KYD50,000 for an individual and KYD100,000 for a body corporate; or
iii) very serious – for which the maximum fine is KYD100,000 for an individual and KYD1 million for a body corporate (these maximum sums are for each breach, so if an individual or body corporate has committed multiple breaches, the fines can be significant).
Determination of Fines
Role of the Oversight Committee
However, before CIMA can issue a fine it must first take various steps.
Once a breach has been identified, CIMA appoints a team to investigate the breach. Once that investigation is complete the team issues its report to the managing director of CIMA who then convenes an Oversight Committee to consider all the relevant facts, information and evidence to determine whether there are sufficient grounds for issuing a breach notice. In carrying out its deliberations the Oversight Committee will consider, among other things, whether there was a breach, whether a fine (or other enforcement action) is appropriate and, if relevant, the amount of the fine. If those criteria are met, CIMA will issue a breach notice which then affords the person/body corporate with 30 days to make written representations to CIMA with respect to the alleged breach, the quantum of the fine, or both.
It is at this stage that taking early, Cayman Islands legal advice is imperative because there are numerous arguments available to FSPs with respect to, among other things, the statutory interpretation and application of the AMLRs and the quantum of the proposed fine. Furthermore, should a fine ultimately be issued, the written representations will (or should) form the basis of the FSP’s grounds of appeal and it important that those two documents are consistent with each other.
Role of the Management Committee and Executive Committee
Once the written representations are received the Oversight Committee will review them and consider whether it still holds the belief that a breach was committed. If it does, then a recommendation will be made to the Management Committee of CIMA, which will include the Oversight Committee’s findings and the recommended fine. Thereafter, the Management Committee will make a final determination (for fines under KYD500,000) or, if the recommended fine is greater than that, it will make a recommendation to the Executive Committee of CIMA’s Board. Once a final determination has been made, either the Management Committee or the Executive Committee will issue a fine notice.
Right to Appeal
The Cayman Islands Constitution Order 2009 provides that everyone has the right to a fair and public hearing by an independent and impartial court. Likewise, every decision and act of public officials must be lawful, rational, proportionate and procedurally fair. As such, pursuant to the Monetary Authority (Administrative Fines) Regulations (2022 Revision) a person or entity who has been fined has the right to appeal to the Grand Court of the Cayman Islands within 30 days of receiving the fine notice. This statutory right is imperative in ensuring that the whole fines regime is transparent, fair and equally applied to all FSPs.
Most recently, in a judgment dated 30 March 2023 (Maples Corporate Services Limited; Maples FS Limited v Cayman Islands Monetary Authority Cause No: GC 20 of 2021) the Grand Court considered the interpretation of regulation 12 of the AMLRs in the context of administrative fines. In a lengthy judgment, Mr Justice Kawaley held that CIMA had, among other things, applied an “absolutist”, “overly prescriptive” and “rigid” approach to its interpretation of the relevant provisions.
Overall, there were seven issues between the parties but for the purposes of this piece they can be broadly summarised as follows:
- Are FSPs required to obtain third-party verification of information they already hold in relation to their clients’ nature and purpose of business?
- Are FSPs required to verify all authorised signatories on bank accounts in relation to transactions where the FSP was not involved?
- Are FSPs required to scrutinise transactions between their clients and third parties, where the FSP has no involvement and, if so, are they required to collect or update customer due diligence in light of that review?
- Are FSPs required to obtain documentary evidence to establish source of wealth/source of funds for monies received from low-risk clients where those monies are, for example, to pay the FSP’s invoices?
- Is it proportionate for CIMA to require the appellants to remediate a large book of business within three months?
In a well-reasoned judgment, Mr Justice Kawaley found, on the facts of that case, for the appellants on all substantive issues subject to the appeal. Importantly, the judgment not only upholds the rule of law in the Cayman Islands but also specifically recognises and endorses the risk-based approach (catered for in the AMLRs themselves) which FSPs should employ when applying the requirements of the AMLRs to their policies, procedures and individual clients. It also recognises and reinforces the concept that FSPs are best placed to assess risk, rate their clients, and take prudent but tailored measures to combat money laundering and terrorist financing.
This article was first published on www.chambers.com.