Cayman Islands lawmakers approved legislation Wednesday that will register and regulate nonprofit organizations, in a bid to prevent such groups potentially being used as cover for illegal activities such as money laundering or terrorist financing.

Financial Services Minister Wayne Panton, who led the latest effort to implement the Non-Profit Organisations Bill, said there were no instances reported locally in which charities were used to such an end. However, Mr. Panton said the legislation was needed to bolster Cayman’s defenses against those types of practices ahead of a mid-2017 review of the jurisdiction by the Caribbean Financial Action Task Force.

“I am particularly determined that we do not fail the upcoming CFATF assessment,” Mr. Panton said Wednesday night. “That [failure] would have real consequences.”

The bill, which started as the Charities Bill in 2010, seeks to deal with monitoring nonprofits through audits and the regulation of those organizations via government registration.

It passed a second reading in the Legislative Assembly on Wednesday night after a few hours of debate. The third and final reading, largely a formality in the legislative process, is expected later in the meeting.

The legislation defines a nonprofit as any organization seeking public contributions as its primary purpose for philanthropic activities. The bill does not apply to charitable or voluntary organizations that are already regulated by a government entity, trusts that are registered under the Banks and Trust Companies Law, and any other entities that are exempt through an order of Cabinet.

Entities with gross annual revenues of at least $250,000 that remit at least 30 percent of those earnings overseas must have their financial statements reviewed by an accountant and report the results to government. Those that receive under $250,000 per year may still be reviewed on a case-by-case basis.

The exemption powers granted to Cabinet under the bill are a major concern for Bodden Town MLA Alva Suckoo, a former government backbench lawmaker who left the Progressives party at the end of last year.

“[This bill] gives Cabinet the authority to override the regulatory body that’s created within the law,” Mr. Suckoo said. “Cabinet can effectively pardon [a] nonprofit entity if they break the law. This law allows Cabinet to become judge and jury. It’s dangerous.”

Before the Legislative Assembly on Wednesday, Mr. Suckoo said he still has those concerns. However, he acknowledged, “This legislation is important and significant in terms of boosting our reputation. I do understand the need to regulate and monitor nonprofit organizations.”

Attorney General Samuel Bulgin said Wednesday that the process to approve regulation of nonprofits and trust companies began in 2006 with a review by the Law Reform Commission.

Earlier attempts at the bill led to concerns among local charities and churches that such regulatory efforts might bring an “end to goodwill” in the Cayman Islands.

George Town MLA Winston Connolly said some charity organizations are still worried about aspects of the bill that limit charitable giving.

“The concern is, will it limit the … amount of money organizations bring in?” Mr. Connolly said.

Mr. Panton argued that while other versions of the bill might have been considered controversial, the latest draft is “far less onerous.”

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