FATF inspections will bring new compliance challenges

The Financial Action Task Force, the inter-governmental body that develops policies to combat money laundering and terrorist financing, is preparing a round of unprecedented on-site inspections to assess worldwide compliance with its rigid set of 40 new rules. William Gilmore, emeritus professor of international criminal law at the University of Edinburgh and a board member of the Cayman Islands Monetary Authority since 2006, told a packed room at the Grand Court lecture series last month that to comply with the new Revised Standards self-assessment will be key.  


The regulations, agreed after a year of wrangling among the task force’s 34 members and 180 jurisdictions, regard strategic – and tightly structured – self-examinations demonstrating effective “in-country” campaigns against money laundering and terrorist financing. 

For the first time, those rules also are devoted to financing of weapons of mass destruction; tax crimes as predicate offenses to money laundering and smuggling; improved transparency to make it harder for criminals and terrorists to conceal their identities; official corruption and the treatment of what is called “politically exposed persons,” including politicians, both elected and unelected; better exchange of information between international and local authorities; joint investigations to trace, freeze and seize illegal assets; confiscation of proceeds of criminal activity; and the role of law-enforcement and financial intelligence units in prosecuting money laundering. 

Gilmore variously promised that assessing and certifying compliance with FATF “revised recommendations” would be “deep and intrusive,” would “explicitly place the onus on the country concerned to demonstrate the effectiveness of its system,” and were likely to place “a heavy burden on both the assessors and the evaluated country.” 

The process, he warned, was likely to prove “complex,” “demanding” and “time-consuming.”  

For administrators and enforcement agencies charged with looking after financial probity in their own jurisdictions, the prospect is daunting. Visiting inspection teams will not only comprise officials from the task force, but also from its regional affiliates – the 30-member Caribbean FATF, in the case of Cayman – and from the World Bank and the International Monetary Fund. 

And what they will assess, explicitly, is new: most importantly, how credible and thorough is the self-conducted “national risk assessment” that FATF is demanding from each jurisdiction, in addition to the usual enforcement of conventions against money laundering and terrorist financing. 

“What is new,” Mr. Gilmore said, “is that the understanding of risks and the taking of measures to mitigate those risks have now become, in effect, the fundamental building blocks for national [anti-money laundering] systems.” 

He drew attention in particular to police and financial intelligence units in the struggle, saying the FATF had “more stringent expectations” of those agencies. 

“Major emphasis is now placed on the establishment of proactive financial investigations in all cases related to major proceeds-generating offences, not just those in which money-laundering conduct is in issue.” 

Failure to qualify, he said, would be public notification of noncompliance, a sort of “blacklist” comparable to that of the 2008-2009 crackdown on Tax Exchange Information Agreements, in which FATF and the Organisation for Economic Cooperation and Development required that every jurisdiction have a minimum of 12 treaties to gain certification as consistent with international standards. 


Local reaction  

At a local level, the prospect of FATF inspections elicited a range of reactions from both the public and private sectors. 

Gonzalo Jalles, CEO of Cayman Finance, said gaining FATF approval was likely to be prolonged and that it must be ongoing.  

Because the jurisdiction had gained good marks for its anti-money laundering efforts in the past, it was poised to retain them in the future – but not without a struggle. 

“The challenge is that FATF has built its regulations around countries with direct taxation, so we are never going to be able to comply. We are ahead of many other countries, though. We are ahead of France,” and they were the ones complaining, he said. 

“We enforce tax actions, but we have not confiscated money because of tax matters. We are confident there is very little money laundering in Cayman. Have you opened a bank account? The amount of due diligence we do is not done in most countries. We have already done a lot of the ‘heavy lifting,’” he said. 

Compliance efforts would be expensive, he said, but globally necessary. Cayman could and would gain FATF approval “as long as we have a level playing field.” 

Undeniably, the territory has developed a keen sense of suspicion as European and North American jurisdictions periodically threaten offshore financial centers, depending on domestic political convenience. A “level playing field,” placing everyone on par, often seems a futile hope. 

“Sometimes we feel like we can never win,” said Jalles. “If there are too many reports, people wonder what’s going on. If there are too few reports, they say we don’t have effective enforcement. 

“This is going to take a lot of work and a lot of staying on top of. The Cayman Islands is strict, but we are still fighting that Hollywood drive-by shooting,” he says, referring to the 1993 film The Firm. 

Tim Ridley, former chairman of the Cayman Islands Monetary Authority, is unsure how effective the new FATF inspections will be. 

“The FATF team inspects and ticks all the legal-compliance boxes. But if we don’t prosecute and jail enough money launderers, we face the criticism that we are not effectively implementing the regime. We have worked very hard and successfully to create a good clean [environment] by deterring the bad guys, but the result is that there is not enough demonstrated enforcement action. 

This process can be manipulated to a ‘lose-lose’ result,” he said.  

“There is a serious risk of a quota system, i.e. that FATF may say we want to see money-laundering convictions of 50 people per year to show effective implementation. 

“So we sweep up some low-hanging fruit, little guys, and confiscate $50,000 – just to meet the quota, and at considerable resource cost to government. 

“We must assume,” Ridley said, “that the FATF teams will ask detailed questions of the RCIPS, the attorney general, the director of public prosecutions, the FRA [Financial Reporting Authority] and CIMA focusing on the level of investigations, cross-border assistance, prosecutions, convictions and asset forfeitures there have been.  

“I seriously doubt the FATF will find anything much wrong with the legal and regulatory regimes here, but I am very concerned that we have a real perception problem to handle: How do we deal with the criticism?”  

He worries about the likely conversations with overseas inspectors: “Cayman has $1.5 trillion in bank deposits and between $2.2 trillion and $2.5 trillion in hedge fund assets – and in recent years you have jailed very few people and confiscated insignificant assets?” 

Assessors must appreciate how the system functions, he said. 

“We must ensure FATF teams understand the nature of our business. Very little of this money is actually in Cayman. Further, if, and to what extent, there is criminal activity in connection with it, the offenders are not in Cayman, and thus actual enforcement is typically executed elsewhere with Cayman’s role being limited to providing information,” 
Ridley said. 

The Financial Reporting Authority’s 2011/2012 annual report bears out Ridley’s assessment, saying “the international scope of the Cayman Islands’ financial-services industry is reflected in the wide range of subjects’ countries reported,” listing 77 countries from which information and requests for information emanated.  


Technical compliance and effectiveness  

Gilmore said the task force’s on-site inspections, tentatively scheduled to start in May 2014, would be two-pronged: technical compliance and effectiveness. 

The first, he said, would address compliance with each of the task force’s recommendations, ranking them from a top “C” – “Compliant: There are no shortcomings” – to a low “NC.”  

The second he called the task force’s “most significant innovation,” comprising “the major focus of the evaluation team during its in-country visit,” warning that it would not rely on “ticking boxes,” among Ridley’s fears. 

In sharp contrast, Gilmore said, the yardstick would rely on personal, almost anecdotal, judgments, “based on a fundamentally different approach to assessing technical compliance with the recommendations. It does not involve checking whether specific requirements are met or that all elements of a given recommendation are in place.” 

Instead, he said, inspectors would engage in the “highly intrusive process” of looking at not only the main features of AML and CTF systems, but would also probe core issues, seeking “examples of the types and sources of information that could support the conclusions on core issues, and examples of the specific factors that could support the conclusions on core issues.” 

And if evidence is not made available, he said, “assessors can only conclude that the system is not effective.” 

Inspectors were encouraged to be skeptical, Gilmore said. 

Teams “should not uncritically accept a country’s risk assessment as correct and need not follow all its conclusions,” he said. “Assessors should consider the rigor of the processes and procedures employed and the internal consistency of the assessment. They should take a common-sense approach to whether the results are reasonable.” 

Chief among local agencies to be queried by the inspectors will be the Anti-Money Laundering Steering Group, chaired by the attorney general, and the Anti-Corruption Commission, headed by the police commissioner, who is also a member of the steering group. 

Sharing responsibility with the chairman and the commissioner are Financial Secretary Kenneth Jefferson, deputy chair; the acting collector of customs, rotating monthly since last year’s retirement of Carlton Powery; Managing Director of the Monetary Authority Cindy Scotland; Solicitor General Jacqueline Wilson; Director of Public Prosecutions Cheryll Richards; and FRA Director Lindsey Cacho as executive secretary. 

“This group will oversee and coordinate the ‘heavy lifting’ required by the FATF,” according to a statement from the attorney general, who will appoint “a dedicated Anti-Money Laundering Unit” within his Chambers. 

Recognizing the demands described by Gilmore, the new unit “will be coordinating the effort to, inter alia, address the Islands’ assessment and management of the AML relevant risks … and to address the need for appropriate national cooperation and coordination… 

“One of its first orders of business is to formulate and coordinate a AML/combating Terrorist Financing National Risk Assessment,” the statement said, accounting for FATF’s “more ‘risk-based’ approach to AML and terrorist-financing issues.” 

Because Cayman already boasted good compliance with the organization’s previous demands, however, the attorney general contemplates little more than “tweaking” its AML and CTF framework. 

“As reflected in the last mutual evaluation report on Cayman, the jurisdiction already has one of the highest levels of compliance with these international standards,” the statement said, while conceding that the new inspections were likely to require significant efforts. 

“This will be very time consuming and will require the full cooperation and participation with all public- and private-sector stakeholders. However, we are confident that the National Risk Assessment as well as any other necessary actions will be completed in good time in preparation for the next round of mutual evaluation of the jurisdiction, perhaps late 2014 or early 2015.” 

In fact, the task force has set no date for its Cayman tour.   

“Within the FATF,” Gilmore said, “work will commence in the coming months on Spain and then Norway.” Initial on-site visits are expected in May 2014, while the Spanish report will be discussed in a FATF plenary meeting “towards the end of next year.” 

Both the Spain and Norway reports, in fact, were likely to serve as templates for subsequent investigations. 

“Those initial reports will be of great interest not least in what they reveal about the structure and detail of the reports and, importantly, on the approach taken in practice to the allocation of effectiveness ratings. 

“By that time also it is hoped that the FATF will have clarified the manner in which the outcome … will impact on the process of identifying high-risk and non-cooperative jurisdictions,” he said, anticipating careful discussion “on this very important and sensitive issue at the FATF meeting in October.” 

The subject of confiscations, said the attorney general, were a matter for the director of public prosecutions, and usually followed a conviction “on a relevant offence, e.g. money laundering,” although the statement cited a “legislative framework for civil forfeiture/confiscation, which is not necessarily conviction based,” leaving open questions of administrative seizures. 

While no one can predict the scope of enforcement efforts and confiscations between now and the task force’s late 2014/early 2015 inspections, the FRA, which will directly face the inspection teams, addressed the record in its last annual report. 

Describing its chief objective “to serve the Cayman Islands by participating in the international effort to deter and counter money-laundering and the financing of terrorism,” Cacho reported the authority had received 406 cases in 2011/12, completing 321, while another 85 were “still in progress at various stages,” comparing favorably with 353 cases in 2010/2011 and 358 in 2009/2010, most of which were reported directly to the RCIP.  

Of the 2011/12 cases reported, only 24 regarded money laundering, however. Nonetheless, at only 6 percent of the total, the FRA said the number was consistent with previous years and “an ever-growing concern in the financial industry for transparency and heightened due diligence, particularly on politically exposed persons.” 

Finally, Gilmore said, he expected challenges to vary significantly from jurisdiction to jurisdiction. “Nearly all countries are faced with the challenge of producing for the first time a robust and comprehensive national risk assessment,” he said, allotting sufficient time both to glean and share lessons and make appropriate changes.  

“It is fair to say that governments around the world are currently considering their position and action is being taken by many to adjust their laws, practices and procedures in an effort to comply with the new minimum standards in this sphere,” Mr. Gilmore said, while conceding that “it will take time to identify areas of weakness, to put in place changes designed to improve performance, and for such improvements to manifest themselves in practice. 

“The stakes for all countries remain high. The need for a continued focus on these issues is, I trust, clear,” he said. 


William Gilmore