Contents

Executive Summary

Introduction

1 Why was the DAML Regime introduced

2 Overview of the Regime

3 When to File a DAML

4 Practical Guidance for Firms

5 Tipping Off and Internal Controls

6 Crypto and Virtual Asset Considerations

7 Interaction Between Multiple Parties

8 Consultation and Next Steps

9 Conclusion

10 Appendix 1 – Q&A

Executive Summary

As of 2 January 2025, the Cayman Islands has implemented a Defence Against Money Laundering (DAML) regime, granting the Financial Reporting Authority (FRA) the power to delay or refuse consent for transactions suspected to involve criminal property. This new regime forms a key part of the jurisdiction’s alignment with updated Financial Action Task Force (FATF) standards, particularly in advance of the upcoming fifth round of mutual evaluations.

The DAML regime introduces a formal process requiring entities to request consent from the FRA before proceeding with certain transactions, where there is a suspicion that the property involved is criminal and that the action could constitute a money laundering offence. The process mirrors the UK’s POCA model and includes a 7-working-day notice period and a 30-calendar-day moratorium where consent is refused.

The obligation to file a DAML applies to any person or institution who:

• Suspects property is criminal property;
• Intends to undertake a transaction or activity involving that property; and
• Could commit an offence under Sections 133–135 of the Proceeds of Crime Act if they proceed without consent.

Key points addressed in this briefing include:

• The structure and legal basis of the DAML regime;
• When and how to file a DAML;
• Common questions raised by industry regarding fees, tipping off, client communication, and decision-making;
• Specific considerations for crypto and virtual asset transactions;
• The importance of documentation and internal controls;
• The role of the Cayman Islands Compliance Association (CICA) in the regulatory consultation process.

This update is intended to support compliance officers, MLROs, legal teams, and senior management in understanding and implementing the DAML regime effectively. Firms are encouraged to review their policies, train relevant staff, and prepare for the formal publication of supporting regulations in the coming weeks.

Introduction

As of 2 January 2025, the Cayman Islands has implemented a new DAML regime, marking a significant step in the jurisdiction’s alignment with evolving international anti-money laundering (AML) standards. The regime grants the FRA powers to delay or refuse consent to certain transactions where there is a suspicion that the transaction involves criminal property. This is intended to give law enforcement sufficient time to intervene, potentially restrain or freeze the assets, and begin investigations.

The regime affects a wide range of financial institutions, designated non-financial businesses and professions (DNFBPs), professional service providers, and virtual asset service providers (VASPs), who may be handling assets on behalf of clients or conducting transactions that expose them to money laundering risk.

This briefing outlines the structure of the regime, its legal basis, practical implications, treatment of crypto-related matters, and guidance on how institutions should respond and prepare.

1 Why was the DAML Regime introduced

The introduction of the DAML regime is largely a response to changes in the international AML landscape, particularly updates to the methodology of the Financial Action Task Force (FATF), the global standard-setter in this area.

In preparation for its upcoming fifth round mutual evaluation by the FATF, the Cayman Islands has taken steps to demonstrate its compliance with enhanced requirements. Under Recommendation 4 (which relates to the freezing, seizure, and confiscation of criminal assets), the FATF now expects jurisdictions to meet significantly more detailed criteria than in the previous round of evaluations. For example, Recommendation 4 previously consisted of four core criteria; it now includes thirteen, including the ability of a Financial Intelligence Unit (FIU) or competent authority to suspend or refuse consent to transactions involving suspected criminal property.

The DAML regime helps satisfy this requirement by introducing formalised procedures that delay transactions to allow for investigation and restraint actions where needed. The model adopted closely follows the UK’s Proceeds of Crime Act (POCA), which has operated a similar consent-based regime for more than 20 years.

2 Overview of the Regime

The DAML regime took effect on 2 January 2025, with regulations expected imminently. However, the regime is already operational based on existing legislative provisions and an advisory issued by the FRA, which outlines how firms should proceed.

The regime introduces the concept of a Suspicious Activity Report (SAR) that includes a DAML request. When a person or entity suspects that property they are dealing with may be criminal property and that an action they intend to take could amount to a money laundering offence, they must seek the consent of the FRA before proceeding. This provides a statutory defense against prosecution for that act, provided that proper procedure is followed.

The structure is as follows:

• Notice Period: 7 working days, starting the day after the SAR is submitted.
• Moratorium Period: If the FRA refuses consent within the notice period, a 30-calendar-day moratorium begins (starting the day after refusal). During this time, the transaction cannot proceed.
• Extension: Law enforcement may apply to the court for an extension of the moratorium period under certain conditions.

While the FRA has the discretion to grant or refuse consent, extensions to the moratorium period require judicial oversight, ensuring proportionality and legal scrutiny where longer delays are needed.

3 When to File a DAML

The obligation to file a DAML arises when three conditions are met:

1. You know or suspect that property is criminal property;
2. You plan to undertake an action (such as a transfer, payment, or distribution) in connection with that property;
3. That action could amount to an offence under Sections 133, 134, or 135 of the Proceeds of Crime Act (POCA).

These offences include:

• Section 133: Concealing, disguising, converting, or transferring criminal property.
• Section 134: Entering into arrangements to facilitate the acquisition, retention, use, or control of criminal property.
• Section 135: Acquisition, use, or possession of criminal property.

Where these conditions are not met — for instance, if there is no proposed transaction — a standard SAR without a DAML may be sufficient. However, where there is any doubt and a proposed action could constitute a money laundering offence, it is safer to seek a defense via the DAML route.

Filing a DAML is particularly important in the following scenarios:

• Redeeming investments or repatriating funds to clients suspected of criminal activity.
• Distributing assets in a liquidation where one of the recipients is under suspicion.
• Receiving fees from entities or individuals suspected to hold criminal property.
• Holding or acting as signatory for accounts where criminal property may be present.

4 Practical Guidance for Firms

The implementation of the regime creates operational and compliance challenges, particularly in ambiguous or fast-moving cases. Based on recent guidance and discussions with industry, firms are advised to:

• Review internal policies and procedures: Ensure clear escalation protocols and distinguish when a SAR must include a DAML.
• Train relevant staff: Front-line staff and compliance officers should be aware of what can and cannot be said to clients, especially in potential tipping-off scenarios.
• Document rationale: When deciding whether to include a DAML in a SAR, document the reasoning clearly. While there is currently no legal safe harbour for MLROs, good recordkeeping will weigh heavily in any future review.
• Monitor timelines: Be aware of the statutory timeframes. If consent is refused, the moratorium period begins automatically. Processes should be in place to track these periods and act accordingly.
• Engage law enforcement where relevant: The FRA will only refuse consent if law enforcement is prepared to act. In appropriate cases, early engagement may assist in aligning expectations.

In low-value or low-risk cases, the FRA may issue deemed consent or process the request quickly. However, this does not remove the obligation to file if the legal test is met.

5 Tipping Off and Internal Controls

Concerns were raised during recent industry discussions about how to handle transactions internally once a SAR (with or without a DAML) is filed, particularly in relation to tipping off offences.

The current view is as follows:

• Internally restricting access to an account, placing a marker, or directing activity to compliance does not in itself constitute tipping off, as long as no explicit reference is made to a SAR.
• Firms should develop internal scripts and protocols that explain restrictions in operational or policy-based language (e.g., “account under internal review”).
• Staff should be trained not to refer to compliance reviews in a way that implies criminal suspicion or reporting to authorities.
• A cautious, well-controlled approach that avoids alerting the client while ensuring suspicious transactions are paused is key.

It was noted that no prosecutions for tipping off have occurred in the Cayman Islands to date, but firms should remain vigilant and risk-based in their approach.

6 Crypto and Virtual Asset Considerations

The DAML regime applies equally to virtual assets and service providers in the crypto sector. While the legal framework does not differentiate between asset classes, the nature of blockchain-based assets introduces unique challenges:

• Firms may receive alerts (e.g., from blockchain analytics providers) linking past transactions to criminal activity after significant delays.
• A SAR or DAML should still be filed as soon as the suspicion arises, not retrospectively.
• Wallets associated with criminal property, even if currently holding unrelated assets, may require careful review and potentially the filing of a DAML.
• Liquidators and fund administrators should consider seeking specific consent where they intend to distribute assets that may be linked to wallets flagged for suspicious activity.

In all cases, the rationale for any decision — whether to file a DAML or not — should be carefully documented and supportable if later scrutinised.

The regulator has acknowledged the time lags and limitations of some blockchain analytics tools but also suggested that firms evaluate the adequacy of these tools and their procedures in light of these limitations.

7 Interaction Between Multiple Parties

In the investment fund and corporate services context, questions were raised about whether an administrator and a fund need to file separate SARs or DAMLs. The position is that:

• Each reporting entity is independently responsible for assessing and filing where appropriate.
• Consent issued to one party does not automatically apply to another, even where the facts are the same.
• Cooperation between compliance officers in different entities (e.g., between a fund and its administrator) is encouraged to ensure consistency and avoid duplication.

8 Consultation and Next Steps

The regulations underpinning the regime are expected to be circulated shortly for public consultation. The Cayman Islands Compliance Association (CICA) will be collecting and consolidating industry feedback. All regulated firms are encouraged to review the regulations once released and consider submitting input through CICA.

In the meantime, the FRA will begin publishing data in its annual reports on the volume of SARs, DAMLs, refusals, and restraint outcomes, as part of broader transparency efforts and FATF mutual evaluation readiness.

9 Conclusion

The DAML regime represents a significant development in Cayman’s AML framework. While the legal obligations are now more formalised, the underlying responsibilities remain consistent with sound compliance practice: act where you suspect criminal property, do not proceed with risky transactions without consent, and document your rationale.

Firms that operate with a structured, well-documented, and cautious approach will be best placed to navigate this evolving landscape. Ongoing staff training, internal alignment, and industry engagement will be essential in the months ahead.

For further guidance or clarification, firms are encouraged to consult with legal counsel or reach out to the Cayman Islands Compliance Association as regulatory updates are released

10 Appendix 1 – Q&A

🔹Understanding the DAML Regime

1. Question: What’s the difference between a SAR and a DAML? Response: A DAML is a type of SAR. Specifically, it’s a SAR that requests consent from the FRA to proceed with an act that could otherwise be a money laundering offence under Sections 133, 134, or 135 of POCA. Not all SARs require a DAML; if there’s no suspected criminal property or proposed transaction/activity, then a DAML is not necessary.

2. Question: If there’s an existing business relationship and I file a SAR, should it always include a DAML? Response: It depends on whether you suspect that the client holds criminal property and whether your actions could amount to an offence. If you’re merely reporting a suspicion without intending to act (e.g., no transaction), a DAML may not be required. But if you plan to do something like transfer funds, you likely need a DAML.

🔹 Consent, Transactions & Timing

3. Question: What happens if you file a SAR and then discover later that a transaction occurred before the SAR was assessed? Response: There’s no retroactive DAML. If a transaction occurred before suspicion was formed or before you filed the SAR, you can’t seek a DAML for that. However, you may have committed an offence if you transacted after suspicion was formed and without consent.

4. Question: If I’m a director or authorised signatory and there is adverse information on a client, do I need to file a DAML? Response: Yes, possibly. If you are in possession or control of property suspected to be criminal, even without initiating a transaction, this could fall under Section 135. You should consider whether your role puts you in possession and whether you need to seek a defence.

5. Question: Can you file a DAML even if there’s no transaction proposed—just intent to exit a relationship? Response: Exiting a relationship is a business decision and doesn’t require consent. However, if exiting involves transferring assets, and you suspect those are criminal property, you need a DAML to move them.

🔹 Fees, Possession & Use

6. Question: Can I continue receiving fees from a client I’ve filed a SAR on? Response: It depends on whether the fees are derived from criminal property. If you’re being paid from an account tied to criminal property, and you suspect it, you may need to request a defence. Each case is fact-specific.

🔹 Process, Resources & Urgency

7. Question: How does the FRA handle urgent DAML requests? Response: If a request is clearly urgent and well justified, the FRA can fast-track it. However, overusing “urgency” undermines the process, and if everything is urgent, nothing is.

8. Question: What happens if FRA Director is unavailable? Response: An acting director is trained and briefed on all DAML scenarios. They meet regularly and can issue consent or refusals in one’s absence.

🔹 Grey Areas & Legal Interpretation

9. Question: What about assets from cannabis investments or gambling winnings—are these criminal property under POCA? Response: POCA requires dual criminality—i.e., if it’s legal in the originating jurisdiction but would be illegal in Cayman, it could still be considered criminal property. The law is not perfectly clear, this is a developing area.

10. Question: If I reasonably file a SAR but don’t request a DAML, is there any safe harbour? Response: There is no legal safe harbour. However, it is encouraged to document your rationale clearly. It could help if your decision is ever reviewed by the FRA, regulators, or enforcement.

11. Question: Should we log our rationale when deciding not to file a DAML? Response: Yes. Institutions should create internal logs to document their reasoning for filing a SAR without a DAML, similar to the documentation done for deciding whether to escalate internal SARs externally.

🔹 Foreign & Cross-Jurisdictional Issues

12. Question: If foreign law enforcement tells us not to exit a relationship, how do we handle that? Response: FRA may issue a consent letter to continue the relationship so that it doesn’t prejudice a foreign investigation. However, these cases are dealt with on a case-by-case basis, and local law enforcement may or may not get involved.

13. Question: If consent was granted for a DAML due to an investigation, but the investigation is now closed, do we need to notify the FRA? Response: Yes, the FRA would want to be informed. FRA is working on better cross-jurisdictional coordination to handle such scenarios consistently and fairly.

🔹 Systemic Risk & Tipping Off

14. Question: Can we put markers on accounts or restrict activity without tipping off staff or clients? Response: Yes. Internally, it’s acceptable to place flags or refer matters to compliance without explicitly stating the reason. Institutions must function, and internal coordination is necessary, even if the law on tipping off is imperfect.

15. Question: Can staff override account blocks or markers? What if they process a transaction after a SAR is filed? Response: Institutions should have controls in place, but if someone acts against compliance flags, that could become a regulatory or HR matter. Filing the SAR and documenting your actions is your defence.