Cayman Islands
Report on the Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism

This paper focuses on observance of standards and codes on the Financial Action Task Force (FATF) recommendations for antimoney laundering and combating the financing of terrorism (AML/CFT) for the Cayman Islands. The assessment reveals that the Cayman Islands’s legal framework for combating money laundering and terrorism financing is comprehensive. All designated categories of offences enumerated in the FATF 40 Recommendations are predicate offences under the Cayman law. The criminalization of FT is in accordance with FATF requirements. The confiscation regime meets most standards and is effective.

Abstract

This paper focuses on observance of standards and codes on the Financial Action Task Force (FATF) recommendations for antimoney laundering and combating the financing of terrorism (AML/CFT) for the Cayman Islands. The assessment reveals that the Cayman Islands’s legal framework for combating money laundering and terrorism financing is comprehensive. All designated categories of offences enumerated in the FATF 40 Recommendations are predicate offences under the Cayman law. The criminalization of FT is in accordance with FATF requirements. The confiscation regime meets most standards and is effective.

A. Introduction

1. This Report on the Observance of Standards and Codes for the FATF 40 Recommendations for Anti-Money Laundering (AML) and 9 Special Recommendations on Combating the Financing of Terrorism (CFT) was prepared by Mrs. Maurene Simms (financial expert from the Bank of Jamaica, Jamaica), Mr. Garvin Gaskin (legal expert from the Attorney General Chambers of The Bahamas), Inspector William Malone (law enforcement expert from the Royal Canadian Mounted Police, Canada), Mr. Michael Vallely (financial expert from the Financial Crimes Enforcement Network, USA), and Mr. Roger Hernandez from the Caribbean Financial Action Task Force (CFATF) Secretariat. The report provides a summary of the anti-money laundering/combating the financing of terrorism (AML/CFT) measures in place in Cayman Islands and of the level of compliance with the FATF 40+9 Recommendations, and contains recommendations on how the AML/CFT system could be strengthened. The assessment is based on the information available at the time of the mission from June 4–15, 2007, and was conducted using the 2004 Assessment Methodology. The Mutual Evaluation Report on which this document is based was adopted by the CFATF Plenary held during November 19–23, 2007. The views expressed here, as well as in the detailed assessment report, are those of the CFATF and do not necessarily reflect the views of the Government of Cayman Islands or the Executive Board of the International Monetary Fund.

B. Key Findings

2. The Cayman Islands’ legal framework for combating money laundering (ML) and terrorism financing (FT) is comprehensive. All designated categories of offences enumerated in the FATF 40 Recommendations are predicate offences under Cayman law. The criminalization of FT is in accordance with FATF requirements. The confiscation regime meets most standards and is effective. There are no specific provisions for asset tracing but these are to be incorporated in proposed revised legislation.

3. The Cayman Islands’ financial intelligence unit, the Financial Reporting Authority (FRA), is effective and is a focal point of the AML/CFT regime. It was admitted to the Egmont Group in 2001. The law enforcement and prosecutorial authorities are adequately empowered and competent to investigate and prosecute ML and terrorism financing offences. Requirements for a combined declaratory and disclosure system for the cross-border movement of cash and negotiable monetary instruments have been recently introduced.

4. The preventive system for financial institutions incorporates most of the FATF Recommendations and applies to a range of financial institutions and most of the designated non-financial businesses and professions (DNFBPs) as defined by the FATF. While there are measures in place to deal with customer due diligence (CDD) requirements, a number have not been enacted legislatively as required by the FATF standards. Record-keeping, monitoring and reporting requirements are comprehensive. Legislative requirements for wire transfers enacted in June 2007 are compliant with SR VII but not enforceable until January 1, 2008.

5. There is a strong compliance culture in the Cayman Islands. Most suspicious activity reports (SARs) are submitted by banks and 10 percent by lawyers. There is one supervisory authority, responsible for all financial institutions as defined by the FATF. Supervision is comprehensive but some constraints are posed by inadequate quantity of human resources. All DNFBPs are included in the AML/CFT framework except for casinos which are prohibited and, at the time of the on-site visit, dealers in precious metals and precious stones. DNFBPs are subject to the same AML/CFT requirements as financial institutions and deficiencies noted with regard to these requirements are also applicable to DNFBPs.

6. The provision of corporate and trust services are regulated activities subject to the AML/CFT requirements. Supervisory, law enforcement and judicial authorities have power to readily access information on beneficial ownership and trusts from financial and trust service providers. While the Cayman Islands has a system for licensing and registering nonprofit organizations (NPOs) there is no agency responsible for ongoing monitoring.

7. There is a high degree of co-operation among competent authorities in the Cayman Islands in operational matters related to AML/CFT. A wide range of mutual legal assistance is available in criminal matters. Money laundering, terrorist financing and terrorism offences are extraditable offences. In general, law enforcement, the FRA and supervisors can engage in a wide range of international cooperation.

C. Legal Systems and Related Institutional Measures

8. Money laundering has been criminalized in the Cayman Islands under the Misuse of Drugs Law (MDL) and the Proceeds of Criminal Conduct Law (PCCL) in accordance with the Vienna and the Palermo Conventions, save in one minor technical aspect in relation to the former, which does not impact effectiveness. The Cayman Islands largely applies the threshold approach with regard to predicate offences to ML and incorporates all designated categories of offences mainly in the Penal Code. Extraterritorial and appropriate ancillary offences are covered in domestic legislation and criminal liability extends to legal persons. There have been five ML prosecutions in the Cayman Islands since 2003.

9. Terrorist financing is criminalized under the Terrorism (United Nations Measures) (Overseas Territories) Order, 2001 (TUNMOTO) and the Terrorism Law (TL). TUNMOTO was made pursuant to UNSCR 1373 and extended by the UK to all its overseas territories. The TL is domestic legislation criminalizing terrorism and FT, in accordance with the UN Convention on the Suppression of the Financing of Terrorism. Terrorist financing offences are indictable and therefore predicate offences for ML. There have been no FT investigations or prosecutions in the Cayman Islands to date. The authorities indicate that this is due to absence of cause.

10. The system for the confiscation, freezing and seizure of the proceeds of crime is comprehensive and meets most of the standards. While the police may obtain production orders for purposes of investigation and treatment of confidential information, there are no specific asset-tracing provisions. These will be provided for in a proposed revision/consolidation of the PCCL and the MDL. The regime for the freezing of funds used for FT complements the ML system in its compliance with FATF requirements. While lists promulgated by the UN Sanctions Committee and other competent authorities are legally recognized, there is no provision under Cayman Islands law for listings of terrorists/terrorist organizations to be promulgated domestically, on an independent basis, except as may be potentially accommodated under the general regulation-making power of the TL. While there have been no restraints or confiscation in relation to FT, the ML confiscation system has been very effective.

11. The FRA, the Cayman Islands’ financial intelligence unit, is a statutory agency within the government’s Portfolio of Legal Affairs and subject to the oversight of the Anti-Money Laundering Steering Group (AMLSG). The structure accords sufficient operational autonomy and allows the FRA to carry out its statutory mandate effectively. The FRA is an administrative/civilian entity responsible for receiving, analyzing and disseminating SARs. The FRA has adequate powers to obtain information and direct access to a number of government and public databases. The FRA’s relationship with reporting entities is excellent. While the FRA issues an annual report, it has not to date developed any sort of comprehensive typologies and/or trend analysis for the report.

12. The Cayman Islands has designated authorities to investigate and prosecute ML and FT offences and has equipped them with the necessary powers. The Financial Crime Unit (FCU) of the Royal Cayman Islands Police (RCIP) has the remit for criminal investigations of all offences related to financial crime including ML and FT. The Legal Department of the Portfolio of Legal Affairs has the responsibility for the prosecution of these and all other criminal offences. The work of the FCU is complemented by the Joint Intelligence Unit (JIU) which consists of officers from the RCIP, Customs and Immigration. The primary function of the JIU is to gather and disseminate intelligence to both domestic and international law enforcement agencies to facilitate criminal investigations. The various agencies appear to be adequately structured, funded and resourced to effectively carry out their functions.

13. As of August 10, 2007, the Cayman Islands enacted the Customs (Money Declarations and Disclosures) Regulations, 2007. These regulations establish the legal framework for a mandatory declaratory system for the cross-border movement of cash that is inbound and a disclosure system for money that is outbound, and imposes requirements for compliance with SR IX. The system is to be implemented by the Customs Service of the Cayman Islands. As these measures were implemented within the two-month period after the on-site visit, the effectiveness of the system cannot be assessed. The Custom Service plays a vital role in collecting revenue for the government treasury and works in a cooperative manner with local competent authorities and international counterparts. At the time of the on-site visit, it was apparent that the Customs Service was operating with insufficient financial and human resources.

D. Preventive Measures – Financial Institutions

14. The application of the AML/CFT measures to the financial system and the DNFBPs in the Cayman Islands is not based on risk in the manner contemplated in the FATF 40 Recommendations. Simplified CDD measures are only permitted in circumstances defined in the Money Laundering Regulations (MLR) and the Guidance Notes (GNs). The preventive system and other AML/CFT requirements apply to a range of financial institutions and most of the DNFBPs as defined by the FATF. While there are measures in place to deal with most CDD requirements, a number have been implemented through guidance rather than enacted legislatively as required by the FATF standards. There is no requirement to verify that a person acting on behalf of a legal person or arrangement is so authorized, and to identify and verify the identity of that person. Financial institutions are not required to routinely ensure that CDD documentation and data are kept up-to-date and there is no express requirement for simplified CDD measures to be unacceptable in higher risk scenarios.

15. There are no specific provisions dealing with correspondent banking, albeit that the activity is limited. Provisions are in place with regard to the risks associated with non-face to face business and misuse of technological developments. Although financial institutions may rely on third parties to introduce business, requirements for immediate information on elements of the CDD process, and the regulation and supervision of the introducer, are not as extensive as required by the FATF standards.

16. There are no impediments to competent authorities’ access to information in the course of their duties. Recordkeeping requirements meet most of the standards but legislative requirements for wire transfers which fully comply with SR VII enacted in June 2007 (without a de minimis limit) do not become enforceable until January 1, 2008. There are obligations to monitor complex, unusual large transactions or unusual patterns of transactions, and a requirement to keep the findings of enquiries of these transactions available for competent authorities and auditors. However, the five- year retention period required by Recommendation 21 is not specified.

17. The SAR reporting obligation is sound and has no de minimis limits. While there is no explicit requirement regarding reporting attempted suspicious transactions, attempted offences are inherently provided for by virtue of the relevant definition under the Interpretation Law. There is no clear guidance in the GNs with regard to the treatment of attempted suspicious transactions or the consequences of non-reporting. While there are provisions against “tipping off”, they do not cover the filing of SARs for drug- related ML, only applications for production orders or search warrants. This will be dealt with in the proposed revision/consolidation of the PCCL and the MDL.

18. Requirements for internal controls, compliance and audit meet most of the standards. The requirements for audit and the appointment of the AML/CFT compliance officer are not specific enough for the FATF requirements. There is no requirement for financial institutions to put in place screening procedures to ensure high standards when hiring employees. Obligations for ensuring that overseas branches, subsidiaries, agencies and representatives offices observe AML standards equivalent to Cayman Islands were recently issued. The establishment of shell banks in the Cayman Islands was prohibited since 2001 with the introduction of legislated requirements for physical presence. However, financial institutions are not prohibited from having relationships with such banks or with respondent banks that do.

19. The Cayman Islands Monetary Authority (CIMA) is the sole regulator of the financial sector in the Cayman Islands responsible for all financial institutions operating under the regulatory laws including money service businesses. CIMA is also responsible for ongoing supervision of compliance with AML/CFT obligations. CIMA’s supervisory regime is comprehensive and incorporates on-site and off-site functions utilizing a risk-based supervisory approach and techniques. The various regulatory laws provide for licensing, on–site inspections, fit and proper criteria and access to information in accordance with FATF standards. Although staff is competent, experienced and well-trained, some constraints are posed by their number. CIMA’s powers of enforcement and sanction are broad but limited in relation to the GNs since specific requirements for FT are not fully incorporated in the GNs. The GNs do not incorporate guidance for dealers in precious metals and precious stones

E. Preventive Measures – Designated Non-Financial Businesses and Professions

20. The range of DNFBPs covered by the AML/CFT framework in the Cayman Islands includes most of the FATF categories. The types of DNFBPs that are not covered are casinos which are prohibited and, at the time of the onsite visit, dealers in precious metals and precious stones. On August 10, 2007, dealers in precious metals and precious stones were brought under the AML/CFT regime but were granted a transitional grace period from criminal sanctions until January 1, 2008. The covered DNFBPs are subject to the same requirements as financial institutions to identify customers, keep records, monitor transactions, and report suspicious transactions to the FRA. Deficiencies already noted with regard to these requirements for financial institutions are also applicable to the DNFBPs.

21. While CIMA’s AML/CFT supervisory program under the regulatory laws is extensive, covering most of the DNFBPs, it does not include real estate agents, brokers and real estate activities of lawyers. The real estate sector’s interests are represented primarily by the Cayman Islands Real Estate Brokers Association (CIREBA). CIREBA functions as an informal self-regulatory organization (SRO) in relation to AML/CFT matters. It has retained a consultant to conduct AML/CFT audit of its members and developed a model AML compliance manual. The Cayman Islands has extended the suspicious reporting obligation to all persons, businesses and professions operating in the jurisdiction, not just financial institutions and DNFBP’s. The FRA has advised retailers of high value goods about their reporting obligations.

F. Legal Persons and Arrangements & Non-Profit Organizations

22. While the Cayman Islands has a system of central registration for companies, the information maintained does not include beneficial ownership data except in respect of ordinary (i.e. domestic) companies. Beneficial ownership is maintained by company service providers, who account for 92 percent of company registrations. All financial service providers are required to maintain beneficial ownership information on their customers. Provision of corporate services is a regulated activity which is governed by the MLR and therefore subject to CDD, record-keeping and other requirements. Specific guidance is also provided for corporate service providers in the GNs regarding the required due diligence on companies. CIMA, law enforcement and judicial authorities all have power to readily access beneficial ownership information from financial service providers when necessary.

23. There is no central filing requirement for trusts and no register of all trusts in the Cayman Islands, except in relation to exempted trusts. Provision of trust services is a regulated activity which is governed by the MLR and therefore subject to CDD, record-keeping and other requirements. Specific guidance is also provided for trust service providers in the GNs regarding the required due diligence on settlors, settled assets, and beneficiaries. Information on trusts maintained by licensed trust service providers can be readily accessed by the investigative and examination powers of the regulatory and law enforcement authorities under the relevant statutes.

24. The Cayman Islands has a system for licensing and registering NPOs. This system, while allowing for initial due diligence at the time of licensing, does not have an agency responsible for ongoing monitoring. No competent authority has undertaken any formal outreach efforts to the NPO sector regarding AML/CFT requirements or best practices. Competent authorities are presently developing outreach measures for the sector and considering the designation of appropriate points of contact and procedures to respond to any international requests for information regarding NPOs that may be suspected of FT or other forms of terrorist support.

G. National and International Co-operation

25. There is a high degree of co-operation among competent authorities in the Cayman Islands in operational matters related to AML/CFT. This co-operation also extends to policy issues which are subject to the oversight of the AMLSG. The AMLSG promotes effective collaboration between regulators and law enforcement agencies, monitors interaction and cooperation with overseas FIUs and review and discusses proposed AML/CFT amendments. The Cayman Islands has substantially implemented the Vienna, Palermo and the Terrorist Financing Conventions and the provisions of S/RES 1267(1999) and S/RES/1373 (2001). While the Vienna Convention has been extended to the Cayman Islands by the UK, the Palermo and the Terrorist Financing Conventions have not.

26. A wide range of mutual legal assistance is available including at investigative stages in criminal matters. While dual criminality is a condition, technical differences in categorizing and denominating an offence do not pose an impediment. Pure fiscal matters are dealt with under the Tax Information Authority Law. Arrangements for coordinating seizure and confiscation actions with other countries can be put in place. While there is no formal asset forfeiture fund, seized funds are paid into general revenue and then segregated internally to be applied to AML and anti-narcotics purposes. The provisions for mutual assistance do not include facilitating the voluntary appearance of persons not in lawful custody for the purpose of providing information or testimony to the requesting country.

27. Money laundering, terrorist financing and terrorism offences are extraditable offences. The Cayman Islands is able to extradite its own nationals to other states. While dual criminality is required for extradition, technical differences in offence taxonomy do not pose an impediment. There have been only two extradition requests, both in 2005, which were granted.

28. In general law enforcement, the FRA and supervisors can engage in a wide range of international cooperation. Cayman Island authorities attempt to render assistance to foreign authorities as expeditiously as possible. As a matter of practice, foreign agencies must disclose the nature and purpose of their inquiries. The Cayman Islands appears to have adequate safeguards and controls to ensure that information received by competent authorities is used only in an authorized manner.

H. Other Issues

29. On the whole, competent authorities appear to be adequately resourced and structured to effectively perform their functions. However, staff levels at CIMA appear to pose some constraints. HM Customs also appears to have insufficient human resources to effectively carry out all its functions.

30. The extent of statistics maintained by the various authorities is appropriate and relevant to their functions. However, the Customs Service does not yet maintain statistics on the cross-border transportation of currency and bearer monetary instruments, due to recent implementation of SR IX. Additionally, detailed statistics on the number of requests for assistance made by domestic law enforcement authorities and supervisors are not maintained.

Summary Table of Observance and Key Recommendations

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Compliant (C): the Recommendation is fully observed with respect to all essential criteria. Largely compliant (LC): there are only minor shortcomings, with a large majority of the essential criteria being fully met. Partially compliant (PC): the country has taken some substantive action and complies with some of the essential criteria. Non-compliant (NC): there are major shortcomings, with a large majority of the essential criteria not being met. Not applicable (NA): a requirement or part of a requirement does not apply, due to the structural, legal or institutional features of a country.

I. Authorities’ Response

The Cayman Islands is appreciative of the thorough 3rd-round evaluation performed by the CFATF assessors. Since receipt of the resultant evaluation report, and as formally reported to the CFATF May 2008 and November 2008 Plenaries, the Cayman Islands has fast-tracked implementation of the assessors’ recommendations as reproduced in the Summary Table of this ROSC by making the necessary changes to primary legislation (the Proceeds of Crime Law, 2008, enacted in June 2008 and brought into force in August 2008 in replacement of the former Proceeds of Criminal Conduct Law); to the Money Laundering Regulations (2008 Revision) (the Money Laundering (Amendment) Regulations, 2008, brought into force in October 2008); and to the Cayman Islands’ ‘other enforceable means’, the Guidance Notes (amendments effected during the 4th quarter of 2008). Through this and administrative actions, the Cayman Islands has therefore substantially implemented the assessors’ recommendations and is due to report back to the November 2009 CFATF Plenary on minor items outstanding.

In addition, in June 2008 the Cayman Islands upgraded its anti-corruption regime by way of the Anti-Corruption Law, 2008. This Law fully implements the OECD Convention on Combating Bribery of Foreign Public Officials in International Business Transactions and the UN Convention against Corruption.

Cayman Islands: Report on the Observance of Standards and Codes—FATF Recommendations for Anti-Money Laundering and Combating the Financing of Terrorism
Author: International Monetary Fund