Cayman’s inclusion on a ‘greylist’ compiled by the Financial Action Task Force (FATF) should have no adverse consequences for Cayman funds or investors – but it could mean the regulatory authorities, under increased pressure from the FATF will need to flex their muscles to enforce further fines and sanctions, write Geoff Ruddick and Laura McGeever, at Paradigm Governance Partners.
The inclusion of the Cayman Islands on a ‘greylist’, compiled by the Financial Action Task Force (FATF) at the end of February, is harsh given the considerable efforts made by both industry and government since the FATF Mutual Evaluation Report in 2019 to strengthen the regulatory framework and address technical compliance.
But the move could mean the Cayman regulator increases its use of fines as part of the powers bestowed under the Administrative Fines Regime for breaches of laws, regulations and rules (not just those pertaining to Anti-Money Laundering).
In the later part of 2020, we have seen CIMA impose hefty fines and the revocation of business licenses for AML breaches. Furthermore, as of 1 February 2021, the Registrar of Companies began issuing fines to companies which have not complied with the beneficial ownership disclosure requirement under the Companies Act (2021 Revision). To date, 19 administrative fines of $5,000 have been issued to non-compliant companies.
The imposition of this status seems unfair given the significant work that has been done by the Caymans Islands (both industry and government) in recent years to introduce new laws, regulations and guidance to further strengthen the existing regulatory framework specifically around the effectiveness of anti-money laundering, combatting the financing of terrorism and proliferation measures.
It is also worth highlighting the fact that one of the main reasons Cayman has been added to the list is because, as stressed by the FATF President Marcus Pleyer, it is now classed as a major financial centre, thus being confronted with a higher level of risks and threats around money laundering and terrorism financing. As such, commensurate measures are expected by the FATF. In some ways, this status should be regarded as a compliment, highlighting as it does the global financial importance of Cayman as a jurisdiction.
By way of background, the move was made by the FATF in a plenary session on February 25, 2021. The Cayman Islands was included on a list of jurisdictions being monitored for the active resolution of “identified deficiencies” in its regimes for the countering of anti-money laundering, terrorist financing and proliferation financing.
The Cayman Islands was given three action points to help demonstrate the effectiveness of its compliance regimes. By way of context, its work in recent years to update its compliance regimes (with the aim of surpassing global standards) means that it has already satisfied 60 of 63 recommended actions previously prescribed by the Caribbean Financial Action Task Force (CFATF) to strengthen its AML/CFT/CPF (anti-money laundering, combatting the financing of terrorism and proliferation) regime.
In terms of next steps, Cayman now has 15 months to work on the remaining three actions, which relate to the continuing effectiveness of its legal framework, rather than alternatives to its legal framework, in terms of compliance and enforcement in detecting and deterring financial crime. The Cayman Islands Government has stressed the jurisdiction’s commitment to satisfying the plan’s requirements and notes that, in any event, this work was already underway.
The implications of the enhanced monitoring are subtle. The FATF stressed that it “does not call for the application of enhanced due diligence measures” to the Cayman Islands, but it did encourage members to consider the listing in their risk analysis.
This could mean that the US Financial Crimes Enforcement Network and the EU may add the Cayman Islands to their respective advisory and AML high risk lists. This, in turn, could lead to Cayman Islands structures having to provide enhanced due diligence to satisfy stakeholders in other jurisdictions given the grey listing, but that has not happened yet.
Equally, there is no suggestion that the move by the FATF would mean that any direct penalties will be imposed on Cayman Islands structures, and this list is not linked to the EU’s own list of Non-Cooperative Jurisdictions for Tax Purposes.
As previously stated, the FATF is effectively telling the Cayman regulator and authorities to now use the powers it has under its existing legal framework. This will mean they will look to:
- Apply sanctions that are effective, proportionate and dissuasive, and taking administrative penalties and enforcement actions against obliged entities to ensure that breaches are remediated effectively and in a timely manner;
- Impose adequate and effective sanctions in cases where relevant parties (including legal persons) do not file accurate, adequate and up to date beneficial ownership information;
- Demonstrate that they are prosecuting all types of ML in line with the jurisdictions risk profile that such prosecutions are resulting in the application of dissuasive, effective and proportionate sanctions.
It is important to remember that Cayman’s compliance frameworks are already in place to support these action items, and delisting should take place by the October 2022 FATF plenary.
As an industryin Cayman, we have demonstrated technical compliance with global AML rules and as a result are now compliant or largely compliant with 39 out of 40 FATF recommended standards. This is a testament to the introduction of almost 20 pieces of legislation in two years for the industry and its stakeholders to contend with.
It is also worth noting that the Cayman Islands is among the top five-rated jurisdictions with the highest technical compliance with FATF standards, ahead of the UK and well ahead of the US and other financial centers.
Despite this, it seems there remains work to be done to satisfy the FATF. As the global standard-setter the organization seems to want concrete evidence of the imposition of fines and enforcement for AML breaches, money laundering violations and the failure to file beneficial ownership information. In this regard, Cayman may now need to show its teeth and prove that it is willing to get tough.