The Sanctions Regime in the Cayman Islands: an Overview

Two main trends have developed in the Cayman Islands sanctions space in the last two years, beginning in early 2022. The first is the significant ongoing expansion of the sanctions regime as it relates to Russia and, more recently, Belarus, following Russia’s invasion of Ukraine in February 2022. The second is a corresponding increase in the tools available to manage and mitigate the impact of these expanded sanctions on innocent third parties who have been affected by them.

These trends have led to several significant developments in Cayman Islands sanctions, which began in late 2022 and are expected to continue for the foreseeable future. The most significant of these developments have been the issuance of several general licences by the Governor of the Cayman Islands and the application of sanctions to persons who have not been specifically designated.

Recent Trends in Cayman Islands Sanctions

Expansion of the scope of sanctions

Russia’s invasion of Ukraine in February 2022 triggered a massive expansion of sanctions worldwide, and the Cayman Islands has been no exception. From an initial designation of seven oligarchs identified as having links to the Russian government or military in March 2022, there are now 1,707 individuals and 334 entities included in the applicable list of designated persons. The Cayman Islands sanctions regime imposes sanctions on any entity owned or controlled, directly or indirectly, by a designated person, and on any person (whether an individual or entity) who would be expected to act in accordance with a designated person’s wishes (including, for example, close relatives, close associates and business partners). As a result, a large number of entities are now subject to Cayman Islands sanctions.

In addition to the expansion of the number of persons who are targeted by the Cayman Islands sanctions regime, the sanctions imposed by that regime have also expanded significantly. The sanctions Regulations relating to Russia were initially in a largely standard form, which imposed an asset freeze on designated persons, restricted the import or export of specified restricted, dual-use and energy-related goods, and restricted the activities of specified categories of ships. However, as a result of a number of amendments since early 2022, the sanctions regime relating to Russia now also targets:

• persons connected with Russia (whether or not they are designated);
• investments in relation to Russia (whether or not a designated person is involved);
• the provision of professional and business services (including trust, accounting, legal, consulting and other services);
• director disqualification;
• aircraft;
• luxury goods;
• iron and steel products (including those proceeded in a third country);
• metals (including separate regulations relating to gold, processed gold and gold jewellery);
• interception and monitoring services;
• jet fuel and fuel additives;
• revenue-generating goods;
• products originating from occupied territory of Ukraine;
• oil and oil products, including maritime transport thereof;
• diamonds and diamond jewellery;
• coal and coal products;
• liquefied natural gas; and
• internet services.

The combination of the significant increase in the number of designated persons and the significant expansion of the scope of the Russia sanctions has meant that vastly more investments, assets, entities and transactions are now caught or potentially caught by the Cayman Islands sanctions regime.

Expansion of the scope of sanctions management tools

However, with this expansion of the impact of sanctions has come a corresponding increase in the tools available to investors, service providers, entities and regulators in order to manage the impact of the expanded sanctions regime on those who are not its direct targets.

Initially, the Russia sanctions regime had a limited number of general exceptions, and limited grounds upon which the Governor of the Cayman Islands could issue a licence to allow conduct that would otherwise breach the sanctions regime. Those exceptions primarily related to obligations that had existed prior to a person being designated, and the most relevant ground for issuing a licence was where doing so was necessary in order to provide for the basic needs of a designated person (including a designated entity). The limited availability of exceptions to the sanctions regime reflected that, at the time, the impact of the sanctions regime was intended to be, and mostly was, limited to designated persons, their close associates and entities controlled by them.

However, as the sanctions regime and its impacts expanded, it was recognised that additional exceptions and additional grounds for the issuance of sanctions licences were needed in order to limit the impact of sanctions on unintended targets. As a result, new exceptions have been provided for:

• actions that are required to comply with statutory or regulatory requirements (eg, the completion of annual audits by investment funds);
• the trading of securities issued by a person connected with Russia, which were admitted to trading on a regulated market prior to the imposition of the relevant prohibition;
• the provision of technical assistance where required to protect safety or the lives on board an aircraft or ship;
• actions done for the official purposes of a diplomatic mission or consular post in Russia, or of an international organisation enjoying immunities in accordance with international law;
• the provision of expert evidence before administrative agencies, courts or other official tribunals, or in arbitral or mediation proceedings;
• providing legal advice as to whether any act or proposed act would breach the sanctions regime;
• actions taken in dealing with an emergency (meaning the urgent prevention or mitigation of an event likely to have a serious and significant impact on human health or safety, infrastructure or the environment); and
• allowing the removal of an aircraft or vessel to Russia, provided that the removal is not for the purpose of a transfer of ownership or a change of operator.

Additional grounds for the Governor to issue a sanctions licence have also been provided, to enable:

• actions to be done in connection with humanitarian assistance activity;
• the provision of medical goods or services for the benefit of the civilian population of a company, including the import, export or use of medical goods;
• the production or distribution of food for the benefit of the civilian population of a country;
• Cayman Islands entities to divest themselves of assets located in Russia, or to buy out investments in themselves held by the government of Russia or a designated person (provided the funds for the buyout are transferred to a frozen bank account);
• actions to be taken by or on behalf of a financial authority for the purposes of its functions;
• the processing of payments in connection with a licence issued for a different specified purpose;
• the financial stability of the Cayman Islands; and
• the safety and soundness of a supervised Cayman Islands firm.

The combination of these additional general exceptions to the sanctions regime and the addition grounds on which the Governor can issue a sanctions licence (including a general licence) has significantly increased the ability of innocent parties to take steps to extract themselves from investments, assets and relationships that are targeted by the sanctions regime.

While Russia’s invasion of Ukraine remains ongoing, the expansion of the scope and targets of the sanctions regime and the corresponding expansion of the tools available to mitigate the impact of sanctions on persons who are not its intended targets are expected to continue.

Significant Developments in Cayman Islands Sanctions

The most significant recent developments in the Cayman Islands sanctions space stem directly from the two trends set out above. The first of these developments is the issuance by the Governor of the Cayman Islands of five General Licences, which allow specified persons to take actions which would otherwise breach the sanctions regime, and the second is the expansion of the sanctions regime in July 2022 to include non-designated persons, which was an otherwise unprecedented step from a sanctions perspective.

General licences

Beginning in October 2022, the Governor of the Cayman Islands has now issued five general licences, which allow specified conduct that would otherwise be prohibited by the sanctions regime, in order to ameliorate unintended consequences of that regime for persons who are not its intended targets.

The first and most significant of these general licences was issued to allow Cayman Islands investment funds that were themselves frozen because they were owned or controlled directly or indirectly by a designated person to:

• redeem the investments of non-designated investors, so that they did not remain trapped in the frozen fund; and
• make payments for the funds’ basic needs, including insurance premiums, audit and accounting fees, corporate and regulatory fees, registered office fees, directors' fees, professional service providers’ fees and other reasonable routine expenses, to make payments of reasonable fees and charges arising from the routine holding and maintenance of their frozen assets, and to make payment of reasonable fees and expenses for legal services.

This licence also specifically provides that service providers will not breach the sanctions regime by receiving any of these fees.

This licence was issued in order to ameliorate the otherwise harsh effects of the sanctions regime on:

• non-designated investors in Cayman Islands funds, whose investments would otherwise have been frozen for an indeterminate period of time (in the case of some funds, now over two years);
• members of the Cayman Islands funds industry, including fund managers, registered office providers, auditors and attorneys, whose only choices in the absence of the licence would have been to resign or to provide services for no fees (as providing services on credit would breach the asset freeze regulations); and
• the funds themselves, where failure to pay the required regulatory fees would ultimately have led to the funds being deregistered and then dissolved, and their assets passing to the Cayman Islands government.

Subsequent sanctions licences have been granted to allow:

• providers of trust services to designated persons to take actions to terminate those services;
• attorneys and law firms to provide legal services to designated persons, and designated persons to make payments of legal fees, subject to certain caps on the total fees and the hourly rates of the attorneys providing the legal services; and
• the supply or delivery of Russian oil below specified price caps (in line with similar global price caps).

The purpose of the first of these is, like the funds licence, to avoid trapping trust services providers in a situation where they cannot provide services but also cannot take any steps to terminate their obligations to provide them.

The purpose of the second of these licences is to enable attorneys to act for designated persons, in order to avoid circumstances where either:

• litigation or transactions where a designated person is a party must be stayed (paused) while that person remains designated, to the detriment of all other parties to the litigation or transaction; or
• designated persons are unable to bring or defend claims, with the possible results that claims they may have will become time-barred, or that they will be subject to summary judgment against them, without the merits or justice of those claims being determined.

As far as is known, no further general licenses are planned or proposed, but the Governor is expected to continue to issue general licences as and when necessary as the sanctions regime continues to develop.

Expansion of sanctions prohibitions to non-designated persons

The second and by far most significant recent development in the Cayman Islands sanctions regime was the extension of sanctions in relation to Russia to persons who are not specifically designated.

Beginning in July 2022, provisions were added to the Russia sanctions regulations prohibiting specified conduct in relation to “persons connected with Russia”. Under these regulations, a person is connected with Russia if they are an individual or association or combination of individuals ordinarily resident in Russia, an individual or association of individuals located in Russia, or an entity that is incorporated or constituted under the laws of Russia, or that is domiciled in Russia.

These regulations therefore apply to:

• all individuals resident in Russia;
• all individuals located in Russia (whether or not they reside there); and
• all Russian companies.

The number of persons caught by these regulations is therefore significantly greater than the number who are specifically designated. The breadth of these definitions has resulted in a significant expansion of the Cayman Islands sanctions regime in relation to Russia, and in the prohibition of many transactions even where no designated person is involved or might benefit.

Transactions that may, be prohibited under these provisions, depending on their circumstances and on whether any exceptions apply, include:

• dealing with transferable securities or money market instruments issued by a person connected with Russia;
• making a loan or granting a credit to a person connected with Russia;
• directly or indirectly acquiring any ownership interest in land in Russia, or any ownership interest in or control over any entity connected with Russia;
• establishing any joint venture with a person connected with Russia;
• directly or indirectly acquiring any ownership interest in or control over an entity that is not connected with Russia, for the purpose of making funds or economic resources available for the benefit of any person connected with Russia (including any entity controlled, directly or indirectly, by any person connected with Russia);
• providing investment services related to any of the acquisitions set out above;
• providing trust, insurance or reinsurance, accounting, advertising, architectural, auditing, business and management consulting, engineering, IT consultancy and design, or public relations services to any person connected with Russia;
• making restricted, energy-related, luxury or other specified kinds of goods, or specified technology or jet fuel available to any person connected with Russia;
• providing technical assistance, financial services or brokering services relating to any of the goods, technology or jet fuel specified above to a person connected with Russia;
• supplying banknotes or making banknotes available to a person connected with Russia; or
• providing port access to any ship owned, controlled, chartered or operated by persons connected with Russia.

In addition, under these regulations, the Cayman Islands may detain any ship owned, controlled, chartered or operated by persons connected with Russia and must not register any ship that appears to be owned, controlled, chartered or operated by persons connected with Russia. Any aircraft owned, chartered or operated by a person connected with Russia may not overfly or land in the Cayman Islands.

These prohibitions go far beyond freezing the assets of designated persons, and represent a major change in the Cayman Islands sanctions regime. It remains to be seen whether there will be any further such expansions of the sanctions regime or further prohibitions in relation to persons connected with Russia, although, as set out above, the recent trend has been continued extension of the sanctions regime to new targets.