Despite anti-money laundering progress, FATF delisting will take time

The Cayman Islands will not be removed from the Financial Action Task Force’s grey list of countries with significant deficiencies in their anti-money laundering (AML) regimes before June 2023 at the earliest.

Last week’s decision by the FATF nevertheless highlighted Cayman’s progress.

In a statement, the global AML standard setter said Cayman had “taken steps towards improving” its anti-money laundering framework by implementing more effective sanctions for inaccurate or out-of-date beneficial ownership filings. The number of enforcement actions by the Cayman Islands Monetary Authority has no longer been considered an issue since June.

But work on implementing the action plan agreed with the FATF needed to continue.

A remaining strategic deficiency concerns the lack of prosecutions of all money laundering cases in line with Cayman’s risk profile.

Moreover, government will have to demonstrate that such prosecutions lead to “dissuasive, effective and proportionate sanctions” – in other words, guilty pleas or convictions by the Cayman courts that result in an appropriate sentence.

The FATF urged Cayman “to swiftly complete its action plan as all deadlines have now expired and to address the [remaining] strategic deficiency by February 2023”.

That timeline will be difficult to achieve.

Financial Services Minister Andre Ebanks told the Cayman Compass that it cannot be understated how challenging it is to meet the final action item because of the complexity of AML prosecutions that it calls for.

Government has little control over the number of money laundering prosecutions, let alone the number of convictions by an independent judiciary.

“It’s also challenging for the Cayman Islands, because we’re ordinarily the supplier of information to other jurisdictions,” the minister said.

That information is then used in money laundering trials abroad, often because that is where the predicate offence, such as fraud or theft, took place.

The FATF, Ebanks added, wants to see that Cayman, as a sophisticated jurisdiction, can show the global community that it is also able to handle investigating and prosecuting these cases at home.

Money laundering prosecutions take time

Elisabeth Lees, of regulatory compliance firm Claritas Legal, says in relation to an international financial centre like Cayman, the term “risk profile” is a reference specifically to cross-border money laundering.

Lees said the FATF’s decision to leave Cayman on the grey list was not necessarily a surprise, given that money laundering prosecutions are a matter of public record.

At this stage, there is only one large case involving cross-border money laundering going through the court system, and two further cases are pending. However, the ongoing court case demonstrates the capacity of the Cayman Islands to prosecute lengthy, complex and paper-heavy trials, Lees said.

And once cross-border money laundering is successfully prosecuted, the FATF will consider whether the sentence reflects the seriousness of the matter.

It is possible but not clear if one case alone could satisfy the FATF’s view of Cayman’s risk profile, as the organisation has not called for a specific number.

Ebanks said Cayman will provide a progress update again in January in time for the February plenary.

A delisting typically occurs over two FATF plenary meetings, which take place three times a year. Once a plenary announces that sufficient progress has been made, this is followed up with an onsite inspection. It is only after a successful inspection that a jurisdiction is effectively taken off the list.

At the earliest, Cayman can be delisted in the summer of 2023.

No further reputational damage

In addition to the reputational fallout of being under observation for a less-than-stellar AML regime, the FATF listing has directly hit certain securitisation business involving Cayman.

Under European Union law, countries listed by the FATF are automatically placed on the EU list of high-risk third countries for money laundering.

The EU Securitisation Regulation, in turn, bans the use of special purpose vehicles (SPVs) in EU AML-listed countries.

This, for instance, prohibits EU investors from investing in US collateralised loan obligations (CLOs) which tend to use Cayman Islands SPVs.

Some have argued that investors may tolerate a brief FATF listing but perceptions could worsen if the situation is prolonged.

However, Lees, the former national coordinator of Cayman’s AML Steering Group, said she does not believe that Cayman’s reputation will suffer from the continued grey listing.

“The grey list is not a call to action. It is something to be mindful of in terms of risk, which other countries will have already been doing since the initial listing. And one would hope if there’s any change, it may be slightly better,” she said.

“There is only one action remaining. I think that demonstrates tangible progress. I think there is also a realisation that [meeting the requirement for] money laundering prosecutions is difficult, and it is to some extent out of the control of the authorities.”

The former public prosecutor said, since FATF’s Caribbean body, CFATF, released its mutual evaluation report of Cayman’s AML regime in March 2019, Cayman had established the Bureau of Financial Investigations as a dedicated unit to cross-border money laundering. As a result, money laundering investigations are no longer regarded as problematic.

But by their very nature, cross-border cases are complex, and they take time. It is one of the practical effectiveness areas that all jurisdictions have difficulties with, she said.

In fact, the FATF’s own overview of mutual evaluations shows it is the standard with the second highest number of countries showing low effectiveness.

Minister Ebanks noted that a little bit of work is left to do on the investigations side, too, but this was much less onerous than the requirement for AML prosecutions.

Progress points to high AML standards

Government has pointed to the progress it has made in addressing almost all, 62 of the 63, recommendations made by a mutual evaluation report.

Cayman is one of only a handful of countries that comply with all 40 technical criteria, such as appropriate laws and regulations, advocated by the FATF. The one deficiency that remains means Cayman exhibits ‘low effectiveness’ in only one of 11 so-called immediate outcomes that determine the practical effect of the legal framework.

Taken together, this leaves Cayman’s AML regime in much better shape than many countries that are not listed by the FATF.

But the financial services minister said Cayman cannot be compared to Pakistan or Nicaragua, which have been delisted by the FATF in October, because listed countries are at different stages in the process and may not be sophisticated financial centres, like Cayman, which are held to a higher standard.

Lees said that Cayman was never listed for its technical compliance but solely for the effectiveness of its regime, and because it exceeded a threshold for capital flows, it was placed under observation.

The initial 63 recommendations covered all analysed effectiveness areas and three strategic deficiencies that needed to be addressed.

“Once you are placed on the list, it’s a question of showing that you’ve made sufficient progress on each of those actions,” Lees said.

Having only one action left to address puts Cayman in a better position to make its case, she added.

Minister Ebanks said he wanted to be personally involved and contribute to discussions not only at the FATF plenary but also at the technical level to truly demonstrate what the AML standard setter calls “a high-level political commitment”.

He said Cayman’s ability to address all but one of the 63 initial recommendations during the given time-period was “extraordinary” and that positive progress reports, including the next one in January, are the best mechanism to achieve a delisting.