The National Risk Assessment: AML risk under the microscope

The Cayman Islands is currently undergoing its first National Money Laundering/Terrorist Financing (ML/TF) Risk Assessment, but what does this really mean for the jurisdiction and for the future development of our financial services sector?  

The genesis of this assessment comes from the Financial Action Task Force’s (FATF) 40 Recommendations on International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation issued in 2012. The FATF is an inter-governmental body established in 1989.  

Its mandate is to set standards and to promote effective implementation of legal, regulatory and operational measures for combating money laundering, terrorist financing and the financing of proliferation, as well as other related threats to the integrity of the international financial system.  

This is achieved by FATF member countries and other countries like Cayman which follow regional standards (Caribbean Financial Action Task Force), adopting these standards and adhering to the recommendations issued. The first recommendation – and a good starting point for this analysis – is that countries should identify, assess and understand the money laundering and terrorist financing risks that exist in their countries and should take action to coordinate efforts to assess these risks.  

As this is a completely new global process, introducing a new methodology for assessments, it is being undertaken for the first time at a national level by many countries that adhere to these international standards, both large industrial nations and smaller offshore centers like Cayman. 

In preparation for this exercise, in March the Cayman Islands government established the new Anti-Money Laundering Unit, headed by Francis Arana, the former deputy head of policy and development at the Cayman Islands Monetary Authority, which falls under the remit of the Attorney General’s Office.  

The Anti-Money Laundering Unit will have oversight of the assessment that is being conducted, with technical assistance from the World Bank, which the Cayman Islands government has engaged to assist with our first assessment. 

The objective and the whole basis of a National Risk Assessment is to ensure that measures to prevent or mitigate money laundering and terrorist financing are proportionate with the risks that have been identified. 

A risk-based approach, through a risk assessment, is an essential foundation in allocating AML/CFT resources efficiently to the perceived threats. Importantly, there should be sufficient breadth and depth devoted to potential threats and vulnerabilities, as well as to their consequences. It is worth noting that ML/TF risks are inherently difficult to describe or to measure in quantifiable or numerical terms. Therefore, a risk assessment will involve making judgements about these perceived issues. 

 

The assessment in practice  

The National Risk Assessment is the forum in which jurisdictions will demonstrate that these issues have been considered, and therefore ensure that exposure to these elements are limited. Jurisdictions should consider the capacity and AML/CFT-relevant experience of particular sectors and industries, because in order to properly assess the risks, it is important to identify certain key components where such vulnerabilities may exist.  

Risk is not static, but is a constantly changing metric. More significant areas of vulnerability can be found where it has been determined that certain customers, countries or geographic areas, products, services or transactions may pose a higher threat to the financial system for ML or TF.  

It is important to point out that the risk approach for money laundering and terrorist financing, while intrinsically linked, can actually vary significantly since the mechanisms for detecting them are quite different.  

While the focus on TF aims to prevent such acts of terrorism from taking place in the future, authorities looking to combat money laundering are usually dealing with criminal activity that has already happened. Essentially, private sector involvement can be extremely valuable to this process, in order to help build up a complete picture of the national ML/TF risks. 

 

Impact on Cayman  

Any jurisdiction that expects to be at the forefront of international financial services should ensure that risks are identified and assessed and that action is taken to mitigate issues regarding money laundering and terrorist financing.  

This applies equally to financial institutions and Designated Non-Financial Businesses and Professionals (DNFBPs), such as money remittance service providers, jewelry stores and real estate agents – where such risks are inherent to their businesses. 

This means that there must be policies, controls and procedures in place, not only at a national level, but also within the various industries and sectors that enable the management and effective mitigation of risks that have been identified.  

Additionally, systems need to be installed to monitor the implementation of those controls and to enhance them, if necessary. It is useful if the process is as inclusive and co-operative as possible. 

Generally speaking, financial institutions and DNFBPs may have valuable information on the structure, organization and size of sectors, as well as their customers and the characteristics of particular financial products. This information will be most helpful in order to determine the level of risk presented and to assist in identifying vulnerabilities. Often the DNFBPs themselves are not regulated, and so can be perceived to be a higher threat to the financial system as a potential way for funds to enter the system.  

Interestingly, the FATF has not specified a particular period of time when these risk assessments should next take place – for example, whether they should occur every three to five years. Instead, they are seen as being part of an evolutionary process. 

Everyone in Cayman can benefit from the National Risk Assessment. While traditionally seen as relevant only to the financial industry and parties regulated by CIMA, AML/CFT transcends that notion and is at the heart of any financial transaction. Anywhere there is movement of money, there is a perceived threat, and the aim is to prevent criminals from using the financial system to move their ill-gotten gains.  

At such an early stage in the FATF’s global program, only a limited number of countries have completed the National Risk Assessment to date, but with the assessment drawn from the first recommendation in their series of 40, there is little doubt it will become a vital contributor to the global AML/CFT effort. 

  

Sandra Edun-Watler is head of compliance (Caribbean) for Walkers, with responsibility for the firm’s Cayman and BVI offices. She is an attorney-at-law with expertise in all aspects of regulatory law and is the current president of the Cayman Islands Compliance Association.  

Sandra-Edun

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