Money laundering regulations amended

The Third Schedule of the Money Laundering Regulations (2010 Revision) has been amended to include India and the People’s Republic of China, after approval by Cabinet.

Countries named in the Third Schedule of the Law have laws and regulations in place that are considered to be equivalent to those of the Cayman Islands, in terms of the identity documentation required from anyone who seeks to carry out business or one-off transactions in Cayman.

In practice the list of schedule 3 countries minimises the duplicate due diligence and collection of identity documentation from new and potential clients by Cayman Islands-based financial services providers.

For example, it allows financial services providers in Cayman to accept potential clients from listed countries, if they are regulated by an overseas regulatory authority.

In addition, placing India and China on the list of approved countries allows Cayman based financial institutions to accept client introductions from service providers in those countries. In these cases the typical know your customer due diligence procedures for a potential client can be left to financial institutions and professional intermediaries in the listed countries, if these are willing to certify that they have satisfactory evidence of the identity of an introduced client on file and are willing to share it on request.

The amendment to include China and India in the list of approved countries comes two months after CIMA announced a review of its anti money laundering regulations. The review was prompted by findings of the US Senate Subcommittee on Investigations indicating deficient anti money laundering procedures at a Mexican subsidiary of HSBC involving Cayman Islands bank accounts.

A report by the subcommittee released in July accused HSBC Mexico SA of major anti money laundering and compliance weaknesses at its Cayman Islands branch, which allowed organised crime to launder criminal proceeds. The subcommittee noted a large number of high risk transactions involving US dollar accounts held by Mexican residents for whom HSBC Mexico SA only had incomplete or missing customer records.

HSBC Mexico SA, a class B banking licence holder in the Cayman Islands, operated the accounts from Mexico under the supervision of Mexican banking regulators. Mexico is listed in schedule 3 of the Cayman Islands Money Laundering Regulations.

CIMA’s Managing Director Cindy Scotland said at the time that apart from the investigations into the actions of the Cayman Islands branch, CIMA would also review the relevant sections of the Money Laundering Regulations and Guidance Notes and conduct a complete review of its regulatory framework including the home host relationship, meaning the relationship between the regulators of HSBC Mexico SA and CIMA.

Meanwhile, new academic research has put into question the global effectiveness of “know your customer” rules.

In September, the Centre for Governance and Public Policy at Griffith University in Australia issued a report on the ability to form shell companies with insufficient identity documentation around the world.

Shell companies for which the owners are untraceable can be abused for money laundering and are an important focus area for anti money laundering measures.

The authors based their evidence on more than 7,400 e-mail solicitations to more than 3,700 corporate service providers that incorporate and sell shell companies in 182 countries to determine what kind of identity documentation, if any, was required in practice to form a shell company.

The report “Global Shell Games: Testing Money Launderers” and Terrorist Financiers’ Access to Shell Companies’ found that all of the approached service providers in the Cayman Islands were fully compliant with relevant anti money laundering requirements, based on Financial Action Task Force rules. Cayman, however, was one of only eight countries where service providers were fully compliant.

Meanwhile, developed countries such as the United Kingdom, Australia, Canada and the United States, all countries listed in schedule 3 of the Cayman Islands Money Laundering Regulations, ranked near the bottom of the compliance list.

The authors of the study employed a dodgy shopping count, indicating how many service providers would have to be approached on average in a country to form an untraceable shell company.

India had a dodgy shopping count in the 40s, whereas China had a dodgy shopping count in the teens, which means it would take about 10 to 20 attempts to set up a shell company with no or incomplete identity documentation.

The study found it is more than three times harder to obtain an untraceable shell company in tax havens than in developed countries.

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