The Cayman Islands, a self-governing British Overseas Territory in the Caribbean Sea has a reputation for being a major international financial centre. During the pandemic, it was the third largest international investor in U.S securities. It has branches of 40 of the world’s 50 largest banks, and ranks in the top 20 countries internationally in terms of value of liabilities and assets booked.
The Island nation is also known for its regulatory flexibility- a potent cocktail of strict secrecy laws, scant regulation and tax exemptions. All these factors, combined with its proximity to the United States, makes the Cayman Islands particularly vulnerable to the depredations of money laundering activities. The Basel AML index, published by the Basel Institute of Governance ranks the Cayman Islands as fifth among all countries with high AML risk.
In this blog piece, we will trace this tiny island nation’s journey as it tries to improve its AML regime and bring it in line with global standards.
A History of Money Laundering in the Cayman Islands
One of the earliest case of money laundering involving the Cayman Islands was the Bank of Credits and Commerce International scandal in 1991. Investigations revealed that the bank, headquartered in Cayman Islands and Luxembourg, was at the centre of a massive money laundering operation, using the Island’s opaque confidentiality laws to create a maze of shell companies. In 1996, in what is known as the Russo Cable case, a sting operation by the FBI implicated a bank in the Cayman Islands for being part of a conspiracy for laundering the proceeds of a large scale fraud in the sale of cable television converters and descramblers in the United States.
From the 90s onwards, the Cayman Islands were at the heart of several AML prosecutions in the United States and worldwide.
The FATF and the Cayman Islands
In June 2001, the FATF placed the Cayman Islands in its list of non-cooperative jurisdictions, after finding that it did not have any legal requirements for customer identification and record keeping, and it lacked a mandatory regime for reporting of suspicious transactions. The global watchdog’s rebuke spurred the Cayman Islands to improve their AML situation in the coming years. The FATF’s Mutual Evaluation Report for the Cayman Islands in November 2007 noted that Suspicious Activity Reports of AML were reducing by an average of 7% over the last three years. The evaluation rated the Cayman Islands ‘compliant’ or ‘largely compliant’ with 33 out of the 40 FATF AML recommendations- the problem areas mainly being shell banks and customer due diligence.
In response, the Cayman Islands revised its AML/CFT laws by introducing the Proceed of Crimes Law in June 2008, and bringing in the Money Laundering (Amendment) Regulations in 2008. However, the loopholes in its AML regime were still being exploited by unscrupulous entities. For instance, in 2012, the Mexican branch of the British bank HSBC had to close around 20,000 of its offshore accounts valued at $ 675 million in the Cayman Islands, after a US senate investigation revealed that the accounts were used to launder proceeds of organized crime.
In March 2019, the FATF published its MER on the Cayman Islands where it commended the Cayman Islands Monetary Authority for its regulatory efforts, but also highlighted some areas of concern. One area that was criticized by the MER was the potential exploitation of entities registered as ‘Excluded Persons’ under CIMA’s Securities Investment Business Law (SIBL). It also pointed out problems with the transparency regime surrounding information on beneficial ownership. Overall, it found that the Cayman Islands were Compliant or Largely Compliant for twenty seven out of the forty FATF recommendations, with no ‘Non-Compliant’ ratings.
The FATF report, along with growing global pressure against its still robust financial secrecy regime, made the Cayman Islands commit to advancing legislation to introduce public registers of beneficial ownership information by 2023.
Running into Troubled Waters with the FATF and EU
However, despite its commitment, the actual implementation of its AML policies was still not up to mark. In February 2021, the FATF placed the Cayman Islands on its ‘Grey List’ for jurisdictions under increased monitoring for AML practices. The FATF President at a press conference said that the Cayman Islands must improve its practice of sanctioning financial institutions for AML breaches, and penalize those who do not give accurate up-to-date beneficial ownership information.
One direct fallout of the FATF grey listing is that the European Commission, in January 2022, indicated that it will be adding the Cayman Islands to its list of high-risk jurisdictions for money laundering. This will prohibit EU financial institutions from using entities in the Cayman Islands for securitisation. It will also require EU financial institutions to conduct enhanced due diligence on business relationships and transactions involving entities in the Cayman Islands.
In response to the blacklisting by the European Commission and its significant consequences, the Cayman Islands has doubled down on its commitment to address all the AML issues flagged by the FATF when it added it to its grey-list. The two key areas that will need to be worked on with urgency are 1) imposing adequate sanctions for not filing accurate and up-to-date beneficial ownership information, and 2) successfully prosecuting all types of money laundering cases in line with the jurisdiction’s risk profile. The months ahead will be crucial in its struggle to reclaim its seat of legitimacy in the global AML efforts, monitored by the FATF.