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Sanctions on Russia make waves offshore

Author: ICAEW Insights

Published: 30 Mar 2022

The minimum threshold for company ownership is a potential Achilles’ heel as the evolving sanctions landscape is upping the ante on firms’ client verification processes.

An asset recovery expert based in the Cayman Islands says Russians on the sanctions list may be flying under the UK’s regulatory radar because they don’t meet the minimum threshold for company ownership.

Most countries, including the UK, use the ownership threshold based on the Financial Action Task Force's recommendations, where only individuals who own more than 25% of a company are considered beneficial owners. In the Cayman Islands, the beneficial owner threshold falls to a 10% minimum.

Angela Barkhouse is Cross Border Asset Recovery Group Lead for Quantuma based in the Cayman Islands, working on complex investigation and asset recovery matters to locate and repatriate the proceeds of fraud and corruption concealed in foreign jurisdictions. “It might be surprising to hear, but the Cayman Islands have a fairly onerous KYC/AML regime requiring the identification and verification of beneficial owners of legal persons at a threshold of only 10% of ownership,” Barkhouse says. 

Despite the 25% threshold for service providers in many jurisdictions including the UK, the Cayman Islands Monetary Authority has made clear that there is no basis for deviating from the statutory 10% threshold. “In the current situation, that could be a bit of a worry. Bearing in mind the amount of Russian wealth in London and the threshold of 25%, there could be a risk that some organisations may not entirely know who their clients are,” Barkhouse says.

The Cayman Islands government has also announced that it intends to introduce a public register of beneficial ownership of all financial entities domiciled by 2023. There are both lawful and unlawful reasons for wanting to separate the legal and beneficial owners of something. Nonetheless, registers of beneficial ownership provide transparency and play an important role in the fight against corruption, tax evasion and money laundering.

Meanwhile, Barkhouse warns that the constantly evolving sanctions landscape is upping the ante on firms’ client verification processes. “It comes down to having a sufficient compliance regime where your firm is able to centrally monitor in real time who you’re dealing with,” she explains.

“It’s no secret offshore that the Russians favour Cyprus and the British Virgin Islands, so I would expect that those jurisdictions will currently be making sure that their Ultimate Beneficial Owner information is up to date and that they’re not suddenly in breach.”

Barkhouse says the increased scrutiny will involve a tightening of processes to avoid future problems: “You don’t want to find you’re dealing with a shell company or intermediary where in fact the funds are coming from a sanctioned entity or individual. That is about looking at the transaction process and making sure you know who you’re really dealing with.” Firms will have to look back over their clients, who they are and where they are based, and this should be in addition to already substantial AML/KYC identity verification procedures.”

The strict AML regime in the Cayman Islands means that firms must comply with sanctions notices that are sent out by the local regulatory authority. “You have to advise if you have any work or clients in relation to those entities. The first thing you do when you take on new clients is a cross check with the sanctions lists to make sure you are able to work with them,” Barkhouse explains.

However, the way that firms are approaching sanctions varies from firm to firm, Barkhouse says. “Some firms are simply saying we can’t work with you anymore and you’ll have to find other professional services firms. Others will likely notify the regulatory authority that they have you as a client, but there may be a holding pattern. For example, firms may have to seek special licences to allow specific transactions, or prevent ongoing legal disputes being unfairly affected by new sanctions,” Barkhouse says.

“People don’t like the word insolvency, but if you’re working for an entity that is sanctioned, you don’t want to completely drain a viable entity of cash and wind it down unnecessarily, causing unemployment and financial insecurity,” Barkhouse says. “Instead, I would suggest seeking court sanction to put it into some kind of provisional liquidation or receivership situation so you’re effectively preserving the ring until a resolution can be found.”

Barkhouse’s advice is not to panic. “The regulatory authorities will be aware of the potential legal and regulatory issues now affecting companies who are seeking to comply with new sanctions. My advice is to look at your data, look at your KYC, dig down deeper than 25% if that’s your threshold so you can satisfy yourself, report any issues to the relevant authorities as soon as possible, and have real-time monitoring of your compliance procedures in place going forward.”

For more information around anti-money laundering and the sanctions on Russia, watch ICAEW’s AML bites - sanctions. Readers should also visit: Money laundering and how to spot it. 

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