Suspicious Activity Reports – which are required by law when a business suspects a customer or potential customer is trying to launder money – fell for the third straight year, the Financial Reporting Authority 2006/07 Annual Report states.
FRA Director Lindsey Cacho believes the reason for the decline is the vigilance of Cayman’s financial services industry.
‘I believe the level of cases has reached its plateau,’ he said last week.
SARs have dropped from 282 in 2003/04, the FRA’s first reporting year, to 244 in ’04/’05; to 221 in ’05/’06; and to 219 in ’06/’07.
The vast majority of SARs are about foreign nationals. Only 15 of the people or companies, which were the subjects of SARs, were from the Cayman Islands. By far the most SARs made here are about residents of the United States, with 65 such reports in 2006/07. However, there were SARs made on subjects from 59 different countries over the course of the reporting year.
Many SARs are also initiated off-island by foreign agencies. For instance, an increased number of SARs were filed here concerning insider trading.
The FRA’s Fred Heard said the insider trading cases were mostly filed by the US Securities and Exchange Commission about people who are not from Cayman.
‘The person isn’t here, but the account is here,’ he said.
One of the things the FRA did during the reporting year was to issue a pamphlet for retailers of high value goods to highlight the vulnerabilities of these retailers to those trying to launder money or finance terrorism. The pamphlet was distributed by the Chamber of Commerce early last year.
High-value goods like precious stones and metals, boats and even high-end cars have become an avenue to launder money in some parts of the world, Mr. Cacho said.
‘Due to the fact there has been increased vigilance in the financial industry, crooks are looking to these high value goods,’ he said. ‘We haven’t seen any of this taking place here; it’s more of a proactive step on our part.’
Mr. Heard said the FRA stays in close contact with its counterparts in other countries about what the trends are in money laundering are.
‘We’re not likely to see [a new type of money laundering] here first,’ he said. ‘It’s more likely to surface in the US or Europe.’
One of the trends seen in Cayman is SARs due to declined business, usually because of an individual’s unwillingness to comply with a financial service provider’s basic know-your-customer requirements.
‘In some cases, elaborate explanations as to the source of funds involving individuals and foreign governments reflect the suspicious activity that triggered the SAR,’ the report states.
Mr. Heard expanded on the issue during an interviewed last week.
‘Perhaps the report should have said ‘elaborate and humorous explanations’,’ he said. ‘One person said his funds would be coming from a secret foreign government contract. Another person said he was a consultant to the U.S. Treasury and was designing algorithms for money transfers.’
Sometimes these people claim they will be moving up to billions of dollars through the accounts.
Mr. Heard said he thought these kinds of ‘James Bond’ intrigue SARs would disappear with the strict compliance regime in Cayman, but they have not.
‘Maybe these people are watching too many Hollywood stories,’ he said. ‘Most of them are probably just pretending to be high rollers.’
Usually after a couple of days of having their business turned down by Cayman’s financial institutions because of the strict know-your-customer guidelines, these people usually just end up cutting their stay in Cayman short and leaving.
However, if the FRA gets an SAR before these people leave the country, it will do research to see who they are and then go to speak to them, Mr. Heard said.
Cayman’s financial service provides, retailers of high value goods, and even real estate agents, are required by law to file a SAR if they suspect money laundering or something else illegal with a financial transaction.
For instance, the financial service providers are instructed to look for sudden drastic changes in the way an account is use. Retailers of high value goods are told to look for transactions made in cash and other suspicious aspects of a transaction.
With regard to the latter, Mr. Heard said the Cayman Islands was not actually very conducive as a place for laundering money with the purchase of high value goods, but the FRA wanted to be vigilant nonetheless.