The Financial Conduct Authority has listed the Cayman Islands as a high risk country for financial crime.
The financial services regulator and watchdog in the U.K. said the “high risk country list” categorizes countries according to the risk they pose to the FCA’s financial crime objectives linked to tackling money laundering, sanction systems, terrorist financing, and bribery and corruption.
The new 95-country list, which was published on July 18, features the likes of Afghanistan, Colombia, Iran, Iraq, Kosovo and Ukraine but does not include any Western European countries, the United States or other offshore financial centers.
However, the so-called BRIC countries – Brazil, China, India and Russia – are considered high risk.
Wayne Panton, minister for Financial Services, said Thursday that “government is astounded that the U.K. would put Cayman on the list, as both Cayman and the U.K. have been rated equally in the OECD’s 2013 Global Forum on Transparency and Exchange of Information for Tax Purposes rankings.”
Cayman also ranked higher than most of the G8 countries, he added.
“Furthermore, there are areas in which Cayman has been ahead of the U.K. for more than a decade – for example, collection of KYC information on legal structures.”
The minister added that government questions the FCA’s motive for including Cayman on the list, particularly in light of consistent third-party acknowledgements of the robustness of Cayman’s regime.
“It defies logic and the facts.”
Minister Panton said that although the list is not a “black list,” it does have reputational implications. In addition to the reputational problems the list might create, it has practical consequences for firms regulated by the Financial Conduct Authority.
Financial institutions in the U.K. are required to develop their own country risk categories based on publicly available information as part of their anti-money laundering regime.
The previously non-public FCA list is used to evaluate firms’ anti-money laundering compliance, especially by the regulator’s financial crime team during supervisory visits when business relationships with a high risk country as well as other risk ratings are the main focus.
The authority decided to make its high risk country list public following complaints that FCA-regulated entities would be assessed against a standard they have no access to. The publication of the list may therefore lead U.K. financial firms to up their country rating of the Cayman Islands to high risk for anti-money laundering purposes, even if their own assessment classes Cayman differently.
The U.K. regulator says countries are periodically assessed using publicly available information from sanctions lists, high risk country lists published by international anti-money laundering bodies such as the Financial Action Task Force and MoneyVal, Transparency International’s Corruption Perception Index and U.K. government analyses of international human rights conditions and business risks. The assessment also considers the size of a country’s economy or financial markets, the successor of the Financial Services Authority noted on its website.
A review of the publicly available sources named by the FCA does not make it immediately apparent why Cayman is ranked among the risky countries.
The U.K. list of financial sanctions targets includes only two Cayman-based entities, both affiliated with Iran, while it names numerous organizations and individuals from the U.K. and the U.S.
Cayman is not on the list of high risk or uncooperative jurisdictions for money laundering published by the Financial Action Task Force. As a member of the Caribbean Financial Action Task Force, Cayman was not assessed by the Committee of Experts on the Evaluation of Anti-Money Laundering Measures and the Financing of Terrorism (MoneyVal) as this organization covers European countries.
Transparency International has not assessed the Cayman Islands for the organization’s Corruption Perception Index, nor is Cayman one of the countries of concern for the FCO in terms of human rights. And the U.K. government’s overseas business risk web pages contain no analysis of the Cayman Islands either.
Gonzalo Jalles, CEO of Cayman Finance, was critical of the fact that the methodology used by the FCA for its rating has not been published and is likely to be flawed.
He said, “The only way the Cayman Islands could end up on the FCA’s high risk country list is through the pure size of its financial sector and by giving it the highest risk rating when no information is available, as in the case of the corruption perception index.”
But the size of the financial sector should not be used arbitrarily as a sign of high risk, he added. “If anything, most recent research shows that size is an indication that you are properly regulated.”
At the same time, Cayman is not included in many other indices because as a jurisdiction it is too small and the information is not available or is difficult to compare.
Cayman compliance consultant Lisa Bowyer added, “Cayman scores highest most likely because of the reported size of its financial industry and the lack of enforcement actions. It is just a matter of statistics. The Basel Institute ranked Cayman as in the top ten in the world for its AML laws and regulation and so Cayman cannot be being ranked as high risk for having a weak regime.”
The Cayman Islands government had written to the FCA on July 8 to officially request the explanation of the methodology used or an immediate correction before the list was made public.
However, in a response dated Aug. 12, the FCA rebuffed the ministry, stating it concluded the Cayman Islands should remain on the list.
Mr. Panton said that having “received the FCA’s disingenuous response,” government will consider all available options, including judicial review, which will seek to reverse the FCA’s decision to include Cayman on the list.