The Cayman Islands Monetary Authority has sent letters to securities and investment businesses registered as excluded persons, demanding they obtain within 30 days an auditor’s report on their anti-money laundering (AML) systems and procedures for compliance with Cayman’s AML regulations.

Panelists at the Fund Focus conference organized by law firm Campbells last week revealed details of the letters and their relatively onerous requirements.

According to the correspondence circulated by CIMA, excluded persons will need to obtain the anti-money laundering audit report from an independent, accredited institution within a jurisdiction that is listed as having AML frameworks equivalent to Cayman’s. The reports required by the regulator must certify that a company’s operations comply with the regulations and the company and directors are conducting business in a fit and proper manner.

Excluded persons are entities that are exempt from holding a license to conduct securities investment business under the Securities Investment Business Law. The exempted persons regime is designed to be less burdensome for financial service providers who exclusively serve sophisticated or high-net-worth investors, because those investors can personally carry out the necessary due diligence that is otherwise undertaken by CIMA with respect to licensed entities.

While there is not much difference from a reputational standpoint between regulated and registered securities businesses, CIMA has full regulatory, supervisory and enforcement powers over regulated entities, who must be audited and meet certain requirements, whereas excluded persons must not.

Although excluded persons were always subject to anti-money laundering and combating terrorism financing regulations, the new obligations are tightening up the somewhat laissez-faire excluded persons regime.

Kareem Robinson, associate director at Vistra Cayman, said, unrelated to his time as a regulator with CIMA, he believes that the regulator appreciates that Cayman’s approximately 3,000 excluded persons create some level of risk and reputational exposure.

He said, to combat this level of exposure, the authority decided to reach out to excluded persons to ensure that they do what is necessary under the anti-money laundering regulations and to make sure that they understand that their approach to anti-money laundering and know-your-client procedures should be no less onerous than that of regulated securities businesses.

CIMA requires, in particular, that the AML audit report assesses the adequacy of operations, internal policies and procedures, and risk controls; the adequacy of know-your-client procedures and client onboarding; the company’s use of eligible introducers; and the company’s monitoring and reporting procedures, including a review of the suspicious activity reporting log.

The report should also touch on record keeping, AML training, internal audits and sample tests of transactions, as well as assess the company’s marketing material for false or misleading information.

It is not clear when CIMA sent the letters, but excluded persons had 30 days to obtain and provide the report to the regulator.

According to Campbells Partner Simon Thomas, Cayman’s advanced AML regime raises some concern that it could lead to a competitive disadvantage in terms of cost, for example, compared to the British Virgin Islands, which does not require AML certifications and which has not included closed-ended funds in the scope of its regulations.

However, Amber Ramsey, executive director at fund governance services provider DMS, noted that the BVI was not a competitive threat in the funds space, while Mr. Robinson added that the heightened level of regulation would eventually be applied regionwide under the umbrella of the Caribbean Financial Action Task Force.

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