Black Immigrant Daily News
Some stakeholders outside the financial services industry said they wish to learn more about the Financial Services Task Force (“FATF”), the recommendations developed by the FATF (the “FATF Recommendations”) to fight money laundering, terrorist financing, and the financing of proliferation and how relevant measures taken by the FATF may affect the Cayman Islands.
First, the FATF is an inter-governmental body established in 1989 by G7 countries and is based in Paris.
It examines global money laundering techniques and trends and, through the FATF Recommendations, sets out measures that member countries must implement to demonstrate that they are combatting money laundering, terrorist financing, and the financing of proliferation.
In addition to its member countries, the FATF “encourages” other countries to comply with the FATF Recommendations. This is demonstrated by different countries globally by how they have technically and effectively implemented the FATF Recommendations within domestic legislation, regulations, and guidance addressing money laundering, terrorist financing, and the financing of proliferation (the “AML/CFT Regime”).
To determine the extent of this technical and effective compliance with the FATF Recommendations, the FATF assesses (through what has been described as an arbitrary process) member countries and other countries who have committed to implementing the FATF Recommendations. This is done via teams of inspectors, including those from FATF-style regional bodies like the Caribbean Financial Action Task Force.
Following these inspections, reports address strengths and weaknesses in the relevant country’s AML/CFT Regime.
The decision-making body of the FATF, known as the FATF Plenary, will then decide during one of its three meetings per year (usually in February, June, and October) whether or not the relevant country has complied or failed to comply with the FATF Recommendations.
Those that have “strategic deficiencies” are placed on a list of jurisdictions “under increased monitoring” (otherwise known as the “grey list”), or they are named as a “high risk” jurisdiction (otherwise referred to as a “black list”).
How the FATF measures affect Cayman
As to how this affects the Cayman Islands, the FATF Plenary met in October 2022 (the first FATF Plenary under the two-year Singapore Presidency of T. Raja Kumar) and placed the Cayman Islands on the “grey list” following its analysis of the strength of the AML/CFT Regime of the Cayman Islands.
Regarding this, the FATF Plenary said:
Since February 2021, when the Cayman Islands made a high-level political commitment to work with the FATF and CFATF to strengthen the effectiveness of its AML/CFT regime, the Cayman Islands has taken steps towards improving its AML/CFT regime, including by imposing adequate and effective sanctions in cases where relevant parties (including legal persons) do not file accurate, adequate and up-to-date beneficial ownership information in line with those requirements.
The Cayman Islands should continue to work on implementing its action plan to address its strategic deficiencies, including by demonstrating that they are prosecuting all types of money laundering cases in line with the jurisdiction’s risk profile and that such prosecutions are resulting in the application of dissuasive, effective, and proportionate sanctions.
The FATF urges the Cayman Islands to swiftly complete its action plan as all deadlines have now expired and to address the above-mentioned strategic deficiency by February 2023.
Suppose the Cayman Islands does not address the strategic deficiencies noted by the FATF Plenary, including by demonstrating that they are prosecuting all types of money laundering cases in line with the jurisdiction’s risk profile and that such prosecutions are resulting in the application of dissuasive, effective, and proportionate sanctions. In that case, the Cayman Islands may either remain on the grey list or be placed on the blacklist.
The practical significance of the grey list is that those doing business with the Cayman Islands will be “encouraged” to complete additional due diligence procedures on Cayman entities, their directors, and shareholders before entering into a transaction.
If Cayman is placed on the blacklist, those doing business with the Cayman Islands will be “discouraged” from continuing relationships with the Cayman Islands. This ultimately impacts the economy, including the ability to generate revenue and people’s lives.
Steps taken by the Cayman Islands since the FATF Plenary
To confirm what the Cayman Islands has done since the decision of the FATF Plenary in October 2022, Loop News emailed the Minister for Financial Services and the Attorney General of the Cayman Islands on January 18, 2023.
The questions posed by Loop News were as follows:
1. Did the FATF or working group indicate the number of prosecutions of money laundering cases that the Cayman Islands must commence or conclude or obtain convictions in order to satisfy the FATF’s final action point? If yes, please confirm this number.
2. In connection with 1 above, what number of prosecutions would you say have resulted in the application of dissuasive, effective, and proportionate sanctions from October 2022 to date?
3. Did the FATF or working group indicate the types of money laundering cases that the Cayman Islands must commence or conclude or obtain convictions to satisfy the FATF’s final action point? If yes, please confirm the types of money laundering cases (eg linked to the Gambling Act, real estate sector or the crypto space).
4. Did the FATF or working group indicate a dollar value of confiscations or asset freezes that the Cayman Islands must commence or achieve or demonstrate to satisfy the FATF’s final action point? If yes, please confirm the dollar value.
5. In the absence of court convictions for money laundering offences, did the FATF or working group indicate whether arrests or charges or suspicions of money laundering would go towards satisfying the FATF’s final action point? If yes, please confirm the number of arrests or charges or suspected money laundering cases the FATF or working group indicated that would demonstrate progress by the Cayman Islands.
Since Loop News received no response by the time of this article, other areas were researched to understand what progress was made, or is being made, or could be made by the Cayman Islands.
One example of progress concerning the prosecution of money laundering cases is the case of the Queen versus Canover Norbert Watson and Bruce Andrew Blake.
Delivering a verdict on October 28, 2022, the court found Mr Watson guilty of all offences, including under the Proceeds of Crime Law (Mr Blake was found guilty of offences under the Penal Code but not the Proceeds of Crime Law).
In particular, Mr Watson was found guilty on the following counts:
Count 3- transferring criminal property, contrary to section 133 of the Proceeds of Crime Law 2008, whereas it was alleged that Mr Watson transferred criminal property, namely US$600,000 from the account of Forward Sports International Management Inc. in Panama, to the account of the Cayman Islands Football Association (CIFA) , in Grand Cayman, knowing or suspecting it to represent, in whole or in part, the proceeds of crime
Count 4- transferring criminal property, contrary to section 133 of the Proceeds of Crime Law 2008, whereas it was alleged that Mr Watson transferred criminal property, namely US$300,000 from the account of Forward Sports International Management Inc. in Panama, to the account of CIFA in Grand Cayman, knowing or suspecting it to represent, in whole or in part, the proceeds of crime
Count 6- entering an arrangement, contrary to section 134 (1) of the Proceeds of Crime Law 2008, whereas Mr Watson allegedly entered into or became concerned in an arrangement with Blake, which he knew or suspected, facilitated the retention, use or control of criminal property namely US$140,000 by or on behalf of another person
In the eyes of the FATF Plenary, the guilty verdict of Mr Watson could go a long way to demonstrate that the Cayman Islands is prosecuting money laundering offences and is implementing dissuasive, effective, and proportionate sanctions.
Looking beyond the above case, some discussions have taken place within the Cayman Legislature about whether to amend the Gambling Act.
While the proposed amendments appear to address penalties and fines for illegal gambling primarily, the comments by the Commissioner of Police before a Select Committee of the Parliament have been invaluable.
In particular, the Commissioner of Police said that there are “illicit proceeds of illegal gambling” in the Cayman Islands and indicated that the money is further disguised through money laundering, where these bad actors use illegal gambling proceeds to purchase property, vehicles, and small business investments, activities that initially seem legitimate but are procured by criminal proceeds.
Suppose the Cayman Islands increases enforcement under the Gambling Act and prosecutes persons for money laundering offences. In that case, this could also demonstrate to the FATF that the Cayman Islands is seriously prosecuting money laundering offenses.
The Cayman Islands may also have opportunities to demonstrate the strength of its AML/CFT Regime to the FATF before the next FATF Plenary meeting (believed to be scheduled for February 2023), depending on the approach of the Cayman Islands towards risks noted in the national risk assessment.
For example, in relation to virtual assets, FATF Recommendation 15 says that to manage and mitigate the risks emerging from virtual assets, countries should ensure that virtual asset service providers are regulated for AML/CFT purposes and licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations.
While it is understood that the Cayman Islands has complied with the regulatory spirit of FATF Recommendation 15 by passing the Virtual Asset (Service Providers) Act, requiring persons who carry on or purport to carry on virtual asset service in or from within the Cayman Islands to register with the Cayman regulator and to implement measures to prevent the misuse of virtual assets for money laundering and terrorist financing, the Cayman Islands must continue monitoring this area.
Ongoing monitoring by the relevant Cayman regulator is even more critical now since various scandals have arisen overseas regarding virtual assets.
Through this monitoring, if the relevant Cayman regulator can detect whether any bad actors are engaged in the proceeds of crime are holding, or are the beneficial owners of, a significant or controlling interest, or hold a management function in, a virtual asset service provider, and prosecutes them, this could also go far to convince the FATF Plenary to remove the Cayman Islands from the grey list.
Opportunities to detect similar bad actors may also exist in the real estate sector.
In connection with this, Cayman’s national risk assessment said that overall risk related to money laundering is “medium-high” (see details of risk areas below).
In particular, the national risk assessment said:
The real estate sector is regarded as being highly vulnerable to ML/TF abuse, both domestically and internationally.
Access to the real estate sector in the islands is easy due to the ease of ownership, with little restrictions on ownership by international investors.
The involvement of real estate agents and brokers provide money launderers with the impression of respectability and normality, especially in large transactions which is a further step in the ML/TF chain that frustrates detection and investigations.
Again, suppose the relevant Cayman regulator can detect whether any bad actors are engaged in the proceeds of crime in the real estate sector and prosecutes them. In that case, this may be helpful to the FATF Plenary in considering Cayman’s removal from the grey list.
In addition to the risks noted in Cayman’s national risk assessment for the above sectors, the assessment noted that legal advisors in various sectors pose a medium-high risk.
Concerning this, the national risk assessment said:
The inherent vulnerabilities of the legal profession must be seen in the context of the jurisdictional vulnerabilities facing the Cayman Islands. These have been identified as being the risk that the Cayman Islands’ financial system could be used as a conduit for the proceeds of financial crime generally, and fraud, bribery and corruption, tax evasion, and drug trafficking specifically. These threats are usually predicated upon the commission of crimes abroad and the decision to funnel those proceeds through structures, transactions and accounts in the Cayman Islands. The most significant danger for the legal community is the direct participation of firms in that movement of funds through their involvement in such transactions and or the usage of their accounts.
Since the national risk assessment also notes that a “relatively small number of these firms control much of the international legal activity as they are multi-jurisdictional and have great reach in bringing business to the Islands,” it may be the case that Cayman regulators and the FATF may place a focus not just on local activities but also on international activities connected to local firms. This is particularly important due to the “significant volume of complex cross-border transactions, involvement with unregulated products and entities” referred to in the national risk assessment.
If the relevant Cayman regulator can detect whether any bad actors are engaged in the proceeds of crime are holding, or are the beneficial owners of, a significant or controlling interest in any legal structure and prosecutes them, the FATF Plenary may view this as a positive step towards the prosecutions for money laundering offences that the FATF Plenary noted in October 2022 that it would like to see before removing the Cayman Islands from the grey list.
In taking this step, though, the relevant Cayman regulator may also wish to consider whether any risks are posed to the country’s AML/CFT Regime where some individuals overseas advise clients on Cayman Islands law overseas and assist with complex legal structures without ever having being admitted to practice Cayman Islands law in the Cayman Islands and without ever possessing a Cayman Islands legal practice certificate.
Cayman’s chances at the next FATF Plenary
Considering all of the foregoing, the outcome for the Cayman Islands at the next FATF Plenary may depend on what steps the Cayman Islands has taken since the October 2022 Plenary to demonstrate that the Cayman Islands has implemented its action plan to address its strategic deficiencies, including showing that they are prosecuting all types of money laundering cases in line with the jurisdiction’s risk profile (any such prosecutions must also result in the application of dissuasive, effective, and proportionate sanctions).
If the view of the next FATF Plenary is positive for the Cayman Islands, the Cayman Islands could find itself coming off the grey list this year.