On 30th September 2018, the Cayman Islands introduced revised anti-money laundering and counter terrorist financing legislation. This AML legislation was in response to Financial Action Task Force (FATF) recommendations to combat money laundering and terrorist financing and formed part of a wider overhaul of financial regulation to protect the integrity and reputation of the Cayman Islands. As the first anniversary of the new legislation approaches, we review how the industry has responded and what changes may lie ahead.
Approaches to compliance
A key requirement of the legislation was for all funds that conduct “relevant financial business” in the Cayman Islands to appoint an AML Compliance Officer, Money Laundering Reporting Officer and a Deputy MLRO. These roles could be outsourced to individuals outside the Cayman Islands but strict standards were set out requiring individuals to be independent of the fund, experienced and able to dedicate sufficient time to the duties.
A variety of approaches to compliance have been taken. Some managers have looked to perform the roles in-house, although this has generally been dependent on the ability of the individuals to dedicate sufficient time to discharge the obligations. Many funds appointed their existing administrator to perform the roles, partly due to the ease of the transition to meet the new requirements and leverage the existing AML processes in place. However, only some fund administrators are providing the service, with several leading global fund administrators deciding not to do so. The final approach taken has been to appoint a third-party service provider that is independent of the fund, the manager and the fund administrator.
Many industry participants were initially sceptical of the value that would be derived from the new requirements. This was especially the case for funds that already appoint a third-party administrator to conduct investor AML checks. Fund directors and managers comment that the legislation has, in some instances, added more comfort and value that they had been expecting. This feedback is however dependent on the firms and models employed, since some AML providers are reported to have been relying heavily on confirmations from fund administrators that procedures are being carried out, whereas others have been more thorough, reviewing procedures, transactions and investors themselves.
Independence and capacity
Echoing other areas in the funds industry there has been growing demand amongst fund boards for independent oversight and review in order to add value to this mandatory AML requirement. Notably, some boards have questioned the independence of fund administrators when fulfilling the MLRO functions, and the robustness of a model whereby the fund administrator is monitoring its own activities. Fund boards are also starting to reflect on the capacity and the ability for MLRO officers to adequately discharge their duties when they are appointed by numerous funds.
Strong AML practices but weaknesses exist
As an independent CIMA MLRO service provider, INDOS has conducted reviews across a range of fund administrators and managers and notes the high standards applied to AML processes. Despite these high standards, INDOS has identified several issues that highlight the need for continued scrutiny. Examples include Politically Exposed Persons (PEPs) not previously identified by the fund administrator; insufficient AML / CDD being undertaken on PEPs and high-risk investors; investor due diligence certifications not completed to standard; weaknesses around testing of eligible introducers and some breaches of administrator AML and customer due diligence policies and processes.
Despite being one year old, there are some areas where further guidance from the Cayman Islands regulator, CIMA, would be welcome. These include where reliance is placed on AML regimes in operation in third countries that have less strict standards and material gaps in policy compared to Cayman Islands requirements, for example Cayman Islands 10% beneficial owner identification threshold compared to wider international standards of 25%.
The Cayman Islands efforts to combat money laundering and terrorist financing are commendable and set a high standard for compliance and regulation. However, enforcement is likely to become a hot topic in the future following FATF’s mutual evaluation in March 2019, whereby the Cayman Islands regulator, CIMA, was both commended for its efforts and highly regulated regime but also criticised for deficiencies in how rules and regulations are being followed in practice.
As a result, firms and funds that are not compliant with the AML legislation, should expect greater scrutiny and there is likely to be an increase in enforcement proceedings to address the concerns raised by the FATF.
(Published first by HFMWeek on 25th July 2019)