The Cayman Islands, for its reasonably small population, is an extraordinarily philanthropic community, with over 450 churches, sports clubs, charitable organisations and community groups registered with the Cayman Islands Government.
On a completely different spectrum, the Cayman Islands has long been proud of our strong regulatory framework and philosophy of transparency and proactive cooperation with international standards. By working with organisations such as the International Monetary Fund (IMF), the Organisation for Economic Co-operation and Development (OECD) and the Financial Action Task Force (FATF), we have successfully maintained a stable and well-regulated financial system for many years.
How do these two seemly incongruous things fit together?
While the not-for-profits in Cayman are generally considered low-risk, the fact of the matter is that similar organisations are used around the world for nefarious reasons, including financing of terrorism and money laundering.
The Non-Profit Organisations Law, 2017 (or more commonly, the NPO Law) was enacted in the Cayman Islands in accordance with international standards to counter money laundering and terrorist financing.
Are you an NPO?
Under the NPO Law, a variety of entities meet the legal definition of an NPO. An entity is an NPO if it is a company, body of persons or a trust that is established primarily for the promotion of charitable activities or programmes for the public benefit and which solicits contributions from the public within the Cayman Islands or elsewhere. These entities, more typically referred to as charities, fall within scope of the NPO Law.
Risks for NPOs
Due to the nature of work conducted by NPOs, and because they are often run by volunteers and philanthropists, they can be at an increased risk of inadvertently aiding the commission of serious financial crimes including money laundering, terrorist financing, targeted financial sanctions and proliferation financing. Don’t even know what those things are? Here are the definitions:
Terrorist financing is the wilful provision or collection, by any means, directly or indirectly, of funds with the intention that the funds should be used, or in the knowledge that they are to be used, in order to carry out terrorist acts. It also may involve providing support, either through humanitarian aid or finance to a terrorist organisation, individual or family of an individual who has been designated a terrorist.
Targeted Financial Sanctions
Targeted financial sanctions entail the use of financial instruments and institutions to apply coercive pressure on transgressing parties—government officials, elites who support them or members of non-governmental entities—in an effort to change or restrict their behaviour.
What does this mean exactly? When broken down further, these sanctions are ‘targeted’ in the sense that they apply only to a subset of the population—usually the leadership, responsible elites or operationally responsible individuals; they are ‘financial’ in that they involve the use of financial instruments, such as asset freezes, blocking of financial transactions or financial services; and they are ‘sanctions’ in that they are coercive measures applied to effect change or constrain action.
Proliferation financing involves providing funding for the manufacture or use of nuclear, chemical or biological weapons and their means of delivery in contravention of national laws or, where applicable, international obligations.
At-risk NPO Activities
NPOs with connections to entities, other NPOs or individuals based in high-risk jurisdictions are at an increased risk of exposure to the kind of threats discussed above.
NPOs that would be at potential risk of terrorist financing and targeted financial sanctions, in particular, would be those that are involved in humanitarian work involving external third parties and jurisdictions. Think of those organisations that provide missionary work and send funds to support a cause or workers where there is civil war or unrest, or a disease outbreak, for example, or NPOs that provide educational grants to students based in another country, through a third party introducer or referral.
NPOs at risk of proliferation financing could be international organisations with a parent organisation or headquarters based in another country, particularly if the NPO has activities that involve the shipment of goods between countries.
How to Mitigate Risks
So, how does an NPO protect itself, its directors and others it was put in place to serve? The short answer is, there are a number of steps that NPOs can take to ensure good corporate governance and to help stamp out money laundering, terrorist financing and other criminal activity.
Leaders and directors of NPOs, this list of tips is for you. Many of you are likely volunteers and some of you will not have had experience with this kind of thing before, and therefore you are particularly encouraged to take note of these recommendations. These recommendations are not applicable to all NPOs, so we suggest you review your individual exposure risk to determine the best course of action.
- Know your beneficiary or donor. Consult the United Nations Security Council website to conduct due diligence searches on potential beneficiaries, third parties or donors.
- If activities will be carried out in a high-risk jurisdiction, conduct thorough checks of who you’re dealing with including all points in the payment chain and those involved in the project on the ground.
- Establish specific policies and procedures for internal controls related to addressing targeted financial sanctions and terrorist financing risk.
- Ensure there are protocols in place for record retention and documenting of all relevant information related to addressing targeted financial sanctions and terrorist financing risk.
- Oversight and controls related to everything ‘cash’ – raising cash, storing it, using it and transferring it.
- Require dual signatures, conduct impromptu reconciliations and/or enforce threshold authorisations from the board of directors or management committee.
- Be aware of the financial sanctions imposed by the UK and EU. It is recommended that you sign up to receive email alerts for financial sanctions updates from this website. Assess all aspects of your proposed project to identify if any partners, contractors or financial institutions appear on the consolidated list.
- Utilise information associated with the Cayman Islands Targeted Financial Sanctions Regime, which provides useful information on what sanctions are and what actions should be taken if there is a sanction breach.
- Tailor your compliance to address what action should be taken by your organisation if there is a breach.
Following these suggestions is not only important for the reputational health of your organisation, but there could be stiffer penalties for non-compliance as well, including administrative fines and criminal proceedings. Failure to comply with the law could result in an NPO being struck from the Companies Register and the refusal of Government funding in cases where it was previously given. None of these results are good for the charity you are involved in or the people or things you are set up to protect and serve.
The NPO Law was put in place for a reason. It protects the local Cayman community from falling victim to money laundering, terrorist financing, targeted financial sanctions and proliferation financing activities via an NPO. It also further aligns the Cayman Islands with international regulatory standards. This is good for NPOs everywhere in the world and helps curb criminals who intend to cause harm.
A public register of NPOs is available that easily identifies those that are properly registered and in compliance with the NPO Law. Applications to register as an NPO can be completed and filed via the Cayman Business Portal, the General Registry’s 24/7 online tool for local businesses.
If you are involved in an NPO and have any questions about what you need to do to be in compliance with the Law, or if you want to learn more about best practices to avoid falling on the wrong side of the Law or to have your organisation used for harmful reasons, feel free to reach out the General Registry at 949-7900 to discuss your situation with us.