Cayman Islands revised anti-money laundering regulation – One year on

By Matthew Queree, Indos Financial Limited

Published: 27 September 2019

On 30th September 2018, the Cayman Islands introduced revised anti-money laundering and counter terrorist financing legislation. This AML legislation was in response to Financial Action Task Force (FATF) recommendations to combat money laundering and terrorist financing and formed part of a wider overhaul of financial regulation to protect the integrity and reputation of the Cayman Islands. As the first anniversary of the new legislation approaches, we review how the industry has responded and what changes may lie ahead.

Approaches to compliance

A key requirement of the legislation was for all funds that conduct “relevant financial business” in the Cayman Islands to appoint an AML Compliance Officer, Money Laundering Reporting Officer and a Deputy MLRO.  These roles could be outsourced to individuals outside the Cayman Islands, but strict standards were set out requiring individuals to be independent of the fund, experienced and able to dedicate sufficient time to the duties. 

A variety of approaches to compliance have been taken. Some funds have looked to their managers to perform the roles in-house, although this has generally been dependent on the ability of the individuals to dedicate sufficient time to discharge the obligations. Many funds appointed their existing administrator to perform the roles, partly due to the ease of the transition to meet the new requirements and the ability to leverage the existing AML processes in place. However, several fund administrators decided not to provide the service. The final approach taken has been to appoint a third-party service provider that is independent of the fund, the manager and the fund administrator. 

Unexpected value

Many industry participants were initially sceptical of the value that would be derived from the new requirements. This was especially the case for funds that already appoint a third-party administrator to conduct investor AML checks. Fund directors and managers comment that the legislation has, in some instances, added more comfort and value that they had been expecting. This feedback is however dependent on the firms and models employed, since some AML providers are reported to have been relying heavily on confirmations from the fund administrator that procedures are being carried out, whereas others have been more thorough, reviewing procedures, transactions and investors themselves.  

Independence and capacity

Echoing other areas in the funds industry, there has been growing demand amongst fund boards for independent oversight and review in order to add value to this mandatory AML requirement. Notably, some boards have questioned the independence of fund administrators when fulfilling the MLRO functions, and the robustness of a model whereby the fund administrator is monitoring its own activities. Fund boards are also starting to reflect on the capacity and the ability for MLRO officers to adequately discharge their duties when they are appointed by numerous funds. 

Strong AML practices but weaknesses exist

As an independent CIMA MLRO service provider, INDOS has conducted reviews across a range of fund administrators and managers and notes the high standards applied to AML processes. Despite these high standards, several issues have been identified that highlight the need for continued scrutiny. Examples include Politically Exposed Persons (PEPs) not previously identified by the fund administrator; insufficient AML / CDD being undertaken on PEPs and high-risk investors; investor due diligence certifications not completed to standard; weaknesses around testing of eligible introducers and some breaches of an administrator’s own AML and customer due diligence policies and processes.

Seeking Clarity

Despite being one year old, there are some areas where further guidance from the Cayman Islands regulator, CIMA, would be welcome.  These include where reliance is placed on AML regimes in operation in third countries that have less strict standards and material gaps in policy compared to Cayman Islands requirements, for example Cayman Islands 10% beneficial owner identification threshold compared to wider international standards of 25%.

Adoption of Cayman Islands Standards

Due to the outsourced nature of operations for the majority of Cayman Islands domiciled funds, the introduction of the AML legislation created a conflict in compliance standards between those set out in the CIMA AML regulations and those imposed by regulators in the jurisdiction of the fund administrator. 

Initially, many administrators operating outside the Cayman Islands continued to rely upon the domestic compliance standards set out by their respective regulators, regardless of whether those standards were less stringent than those set out by the AML Legislation. Despite the difference in standards, the administrators continued to rely upon the “Equivalent Jurisdiction” status rather than uplift existing policies and change processes to accommodate. However, as the one-year anniversary approaches we are starting to see a number of administrators review and enhance their AML and compliance policies to meet the Cayman Islands standards.  

CIMA – Additional AML / CFT Reporting

In March, the FATF issued a report on the Cayman Islands anti-money laundering and counter-terrorist financing measures whereby the Cayman Islands regulator, CIMA, was both commended for its efforts and highly regulated regime but also criticised for deficiencies in how rules and regulations are being followed in practice. One area that came under criticism was the potential exploitation of entities registered as ‘Excluded Persons’ under CIMA’s Securities Investment Business Law (2019 Revision) (SIBL). CIMA has recently looked to address this by requesting all SIBL Excluded Persons to complete two AML/CFT reporting forms, providing information on the clients and activities of SIBL entities, together with their compliance systems and controls.

The granularity of the forms, which includes key data points such as client and customer risk, copies of policies and procedures, staff training requirements and AML controls clearly shows the level of the information CIMA is looking to collate in order to address the FATF findings and create a robust compliance framework. As the Cayman Islands remains under the spotlight as a member FATF jurisdiction, it is expected that CIMA will continue to perform data gathering and compliance monitoring around AML practices. 

Looking forward

The Cayman Islands efforts to combat money laundering and terrorist financing are commendable and set a high standard for compliance and regulation. However, following FATF’s mutual evaluation in March 2019, enforcement is likely to become a hot topic in the future. As a result, firms and funds that are not compliant with the AML legislation, should expect greater scrutiny and there is likely to be an increase in enforcement proceedings to address the concerns raised by the FATF.