By Dan Harris
The move to the United Arab Emirates by investment managers of Cayman investment funds has not escaped the notice of the entire fund industry. The focus has been on what this means for investment management firms and their personnel, rather than what it may mean for Cayman.
Some compliance outfits and onshore law firms, who are expected to act in the interests of their clients, are acting more like sheepdogs. Enjoying their new revenue stream, they are encouraging the herd to move in a certain direction, to pastures fresh where the petrodollars grow.
Industry bodies, supposedly in the business of promoting the industry, are acting more like holiday reps, unashamedly promoting the location. They are even using brochures. Somewhere along the way, it has been forgotten that hedge funds are in the business of measuring risk because they are risk averse.
The UAE’s business-friendly environment, perhaps a little too well-oiled and hungry, is also an entry point for terror dollars. Several reports have shined a light on how Iran’s Islamic Revolutionary Guard Corps (IRGC) is using front companies in the UAE to finance its programme of terror.
It is difficult to imagine a more obvious case for a UAE company to be compulsorily struck off by the UAE authorities in the public interest, or for their directors to be disqualified. Such powers exist and would be expected to be used in any jurisdiction privileging integrity over rapid growth.
Yet UAE companies publicly alleged to be such front companies remain on the register and the directors have not been disqualified.
Cayman’s reputation as a financial jurisdiction willing to embrace the highest international standards in the fight against money laundering and terror financing is not in doubt. What can sometimes be overlooked, however, is that its hard-fought reputation does not begin and end with enacting state-of-the-art legislation, enforced by the regulator. Cayman’s reputation is carried by every company it hosts.
Malign actors
Where a Cayman fund is unwittingly involved in accepting IRGC money (the UAE companies conceal the true actors), paying redemption proceeds completes the circle of financing. Once released, that money is weaponised, and innocents are murdered. The resultant media coverage would predictably be on Cayman as the host jurisdiction of that company.
Recall the 1991 collapse of the Bank of Credit and Commerce International, launderer-in-chief to the Abu Nidal terror organisation amongst other malign actors. Registered in Luxembourg, BCCI had holding companies in Cayman and operated in the UK. It was Cayman that appeared in every newspaper article.
Standardised (and often automated) processes of checking the names of prospective investors against lists of bad actors is no substitute for analysis, particularly if prospective investors actively conceal the identity of the true actors that lurk behind them.
Administrators and independent boards must return to old fashioned probity and common sense. This often requires an experienced head, rather than a junior functionary. They must consider any red flags and ask themselves whether the investor’s narrative really adds up. Existing investors, insurers and auditors expect nothing less.
At the regulatory level, while the investment managers are regulated, it is the Cayman regulator that is the lead supervisor of the fund vehicle. It is vital that it is able to effectively supervise the funds and satisfy itself as to what is really going on.
Cayman has shown global leadership by signing cooperation agreements (known as memoranda of understanding) with many foreign regulators, including the Abu Dhabi Global Market FSRA and the Dubai DFSA. This gives Cayman the opportunity to ask what is being done about these front companies and, in so doing, protect its own reputation.
After all, the role of financial regulators is not simply to enforce regulations and censure those breaching them; it is also prophylactic. This is particularly important in the context of terror financing because prevention is the only option. Acts of terrorism cannot be cured after the event. The first line of defence to Iranian terrorism is not an air defence system; it is financial regulators. They have the power to seek out those who facilitate the financing which ultimately puts missiles in the air.
Dan Harris is a partner at Chancery Advisors law firm in London.
Related Videos
