Compliance in the Cayman Islands

Occasionally referred to as ‘the islands that time forgot’, the Cayman Islands have come a long way from the use of smoke-pots to ward away mosquitoes. Cayman’s financial industry has grown tremendously since its first bank opened some 55 years ago; despite its youth it is the fifth largest financial centre in the world, home to 281 banks; 159 active trust licenses; 793 insurance companies (plus 141 other insurance licensees); 9,413 mutual funds; and 152 mutual fund administrators.¹

The Cayman AML Framework

Within 20 years of its first bank’s opening in the Cayman Islands, The Misuse of Drugs Law was introduced. Incorporated into this law is the power to seize and confiscate drug trafficking money and laundered property and assets. As far back as 1990, the Cayman Islands Bankers Association (CIBA) issued a Code of Practice, and CIBA’s member banks had to abide by that code. Among other things, the Code of Practice required that banks conducted a level of due diligence to ensure that they knew their customers (including beneficial owners) and educated their staff in identifying and preventing money laundering in banks. In 1996, Cayman implemented the Proceeds of Criminal Conduct Law, extending its money laundering legislation to cover all serious crimes. Cayman was one of the first countries in the region to extend its money laundering legislation to that degree.

Although CIBA’s Code of Practice was in place for CIBA members and robust due diligence requirements were in place for some other parts of the financial sector (e.g. captive insurance), in 2000 the Financial Action Task Force (FATF) listed Cayman in its first list of Non-Cooperative Countries and Territories (NCCT). One of the reasons for the listing included the lack of legislative ‘teeth’ relating to the practices being followed in the industry and few prosecutions under the existing legislation. Shortly after being black-listed, Cayman enacted a series of laws and was one of very few jurisdictions to enforce a legal requirement for all financial institutions to complete retrospective due diligence (bringing all client relationships’ due diligence up to modern day standards, regardless of when the relationship began). Also during 2000, the Cayman Islands Compliance Association (CICA) was established to provide a forum for AML and compliance education, information sharing and training across Cayman’s financial sector. (CICA was one of the first compliance associations established in the Caribbean, and is an active participant and organiser of the Caribbean Regional Compliance Association, which held its 4th conference in the Bahamas during November 2007.)

In 2001, Cayman was removed from the NCCT list. During the same quarter of 2001, the Guidance Notes on the Prevention and Detection of Money Laundering in the Cayman Islands (GN) were prepared and issued by the Cayman Islands Monetary Authority (CIMA) in conjunction with Cayman’s industry associations representing the financial sector. Each of the associations participating in the GN provides different forms of AML training for their members. In 2003, CICA released a PC-based AML training programme to assist its members in training their employees and, every year since it was formed, CICA holds a number of sessions aimed at improving members’ knowledge and skills. CIBA holds introductory half-day sessions throughout the year for staff of member banks (all new bankers are expected to attend at least the half-day sessions); and this year CIBA introduced a full day AML/CFT workshop for more senior bankers. The 2007 numbers were impressive: 286 bank employees attended AML courses sponsored by CIBA; approximately 10% of Cayman’s banking industry!

In 2003, the Terrorism Law was enacted, and although a number of terrorist offences are similar to money laundering offences, terrorism has now been defined in law as a money laundering offence. From a legislative perspective, there is likely to be a blending in the not too distant future of the three laws (and supporting regulations), which deal with money laundering and terrorism (i.e. The Misuse of Drugs Law, The Proceeds of Criminal Conduct Law and The Terrorism Law).

The Proceeds of Criminal Conduct Law and the Terrorism Law set out offences of ‘failure to report’. Belief, knowledge or suspicion of money laundering (which includes terrorist financing) obtained through one’s trade, profession, business or employment must to be reported to Cayman’s Financial Reporting Authority (Cayman’s Financial Intelligence Unit). Each financial institution is required to appoint a person (‘the appropriate person’ or Money Laundering Reporting Officer) and establish policies and procedures for internally reporting suspicions. The Money Laundering Reporting Officer is generally charged with evaluating the internal reports, and disclosing to the Financial Reporting Authority in accordance with the relevant law.

Cayman’s Participation in Mutual Evaluations

The Cayman Islands is a founding member of the Caribbean Financial Action Task Force (CFATF), a FATF-style body of 30 countries in the Caribbean. The CFATF was established in the early 1990s when its members agreed to implement international standards to address money laundering in the region (with subsequent inclusion of combating terrorist financing). The CFATF conducts peer evaluations of its members; and in 1995 and 2002, Cayman was reviewed and reported to be committed to implementing international standards for AML and combating the financing of terrorism (CFT).

In 2005, the International Monetary Fund (IMF) released its assessment of Cayman’s supervision and regulation of the financial sector. The report was based on information gleaned from the IMF’s visit during 2003. Among the IMF’s comments was the following observation: ‘The Cayman Islands financial industry and regulators have developed an intense awareness of the measures required to combat money laundering and the financing of terrorism, as a result of legal reforms and improved supervisory procedures since 2000. There is an effective regime to implement these procedures and good evidence of a developed compliance culture.² ‘Whilst complementing Cayman overall, the IMF made certain specific criticisms of the jurisdiction and recommended a number of improvements for Cayman’s supervisory, regulatory and AML regimes.

In 2007, the CFATF conducted a third assessment of Cayman’s AML and CFT regime, using the FATF’s AML/CFT methodology (updated as of February 2007³⁾. A key conclusion of the report was: ‘In terms of the AML/CFT compliance culture in the Cayman Islands, it was evident to the assessors that the country in general and the financial service providers in particular all have a keen sense of awareness of AML/CFT issues. Additionally, the financial service providers displayed a healthy compliance culture, based on an appreciation of the reputation risk of AML/CFT for the jurisdiction. The strong compliance culture was also demonstrated by the financial service providers’ pro-active cooperation with the authorities in implementing AML/CFT measures’.⁴ Cayman was rated largely compliant or compliant with 32 of the 40 recommendations and six of the nine special recommendations.

The Numbers Game

One must take care when comparing numbers among jurisdictions, particularly when the evaluations are conducted in different time periods. While the methodology for the four evaluations summarised below was that of 2004, the methodology has been updated several times since Switzerland was evaluated. Furthermore, each country’s legislation and supervision continue to evolve, whether in response to an evaluation’s recommendations, money laundering or terrorist typologies, or for other reasons such as practicalities of implementation. This latest evaluation of the Cayman Islands highlights that, while there is still room for improvement, Cayman appears to be holding its own in the fight against money laundering and terrorist financing, particularly given the youth of its financial sector.

Conclusion

In many cases, it is more difficult to open a bank account, establish a trust or company, or purchase real estate or an annuity in the Cayman Islands than it is in many other jurisdictions. Although there is some latitude because Cayman’s supervision is not rules-based, someone seeking services from a Cayman Islands financial services provider should expect to be asked questions about the reason for a structure and the reason for selecting the Cayman Islands; and they should know that various proofs of identification and references will be requested and subsequently verified.

While the Cayman Islands are very nice to visit, we only welcome those of you who intend to bring and maintain legitimate business to and within its shores. Yes, we have had our share of reputational damage based on the actions of some of the islands’ clients, but we are no different in that respect from some of our neighbours (often where the problems started). And we continue to do our part in improving our knowledge and expertise along with our regulatory, supervisory and AML/CFT framework.