Critical evaluation prompts renewed anti-money laundering push

As money laundering investigations involving illicit funds from Eastern Europe are expanded to banks in several European countries, including Sweden’s Swedbank, Cayman is grappling with the findings of the Caribbean Financial Action Task Force’s evaluation of its anti-money laundering regime. - Photo: Bloomberg

It had been Cayman’s worst kept secret for months. When the Caribbean Financial Action Task Force eventually published its evaluation of the islands’ anti-money laundering regime in March, few were surprised by the criticism.

After all, not all the planned legislative and regulatory changes had taken effect by the time the CFATF inspection took place in December 2017. The extent of the criticism raised a few eyebrows, however.

Given that the focus of the evaluation was on the practical effectiveness of the anti-money laundering framework, it was not astonishing that the evaluation identified gaps resulting from the late implementation of laws and supervisory functions.

But some industry professionals noted that it was surprising how the report made very technical findings, for example, about the wording of Cayman’s Anti-Money Laundering Regulations.

Others said the reports criticism was warranted in some areas but not universally.

“The findings seem a bit harsh in some areas but fair in others,” said Paul Byles, director of FTS, a regulatory and management consulting firm.

The relatively lower compliance ratings for awareness of terrorism financing and proliferation financing, for instance, seemed “harsh”, he said, given the typical inclusion of those topics in many local anti-money laundering and countering terrorism financing seminars.

The report implied that the size of Cayman’s banking sector, based on assets and liabilities reported to the Bank of International Settlements, demanded a more extensive risk assessment.

This was equally “harsh”, Byles said, because the majority of these assets relate to interbank activity, mostly with banks regulated in equivalent jurisdictions, rather than transactions between banks and their customers.

On the other hand, the national risk assessment was criticised for essentially not going far enough in certain areas. “And some sectors, which are relatively newly regulated were found to require additional training or supervision, which was a fair finding,” the compliance consultant added.

The CFATF report laid some blame on the national risk assessment, conducted in 2015, stating that, it had not focused enough on international money laundering and terrorism financing threats in light of Cayman’s role as an international financial centre.

The national risk assessment responds to the first of 40 Financial Action Task Force recommendations, which states countries should identify and analyse the risks they face from money laundering and terrorist financing and take action to mitigate them.

The assessment is the foundation for a risk-based approach that ensures mitigation and prevention measures are appropriate.

Industry insiders said much work was done to conduct the national risk assessment exercise using the World Bank methodology, but the main problem was that it was not published in a meaningful or helpful way.

Another circular problem with the exercise was the lack of data, largely due to gaps in supervision that could have informed the risk assessment. The risk assessment was needed to determine the supervisory approach, but this required data, which could only result from the supervision of industry participants.

The global standard-setting body in anti-money laundering found that the risk assessment provided a “fair level” of understanding but criticised that it did not contain an assessment of legal persons or arrangements.

Byles said the risk assessment was “not that far off”. Traditionally, Cayman’s approach had been to subject entities carrying out relevant financial business to the country’s anti-money laundering regime.

“This does not necessarily include all legal persons as many won’t be carrying out any relevant financial business at all,” he said. “Obviously, if this is what is now required as part of a more comprehensive risk assessment methodology, we now need to assess the implications and do what’s required to ensure that we comply with any global standards being applied to such entities, if such a standard exists.”

Lack of investigations and prosecutions

A common issue highlighted by the assessments of anti-money laundering regimes in other jurisdictions, as well as Cayman, is the lack of criminal investigations and prosecutions in the space.

If money laundering offences are investigated or prosecuted, it almost always involves minor domestic predicate offences, the report found. As a result, the assets that are seized in these cases are “modest” and there could be greater use of civil forfeiture, the CFATF concluded.

Despite the resources available to the Royal Cayman Islands Police Service (RCIPS) and the Office of the Director of Public Prosecutions, “large and complex financial investigations and prosecutions have not been identified, or pursued, and there is limited focus on stand-alone [money laundering] cases and foreign generated predicate offences”, the report said, adding that there remain fundamental challenges in how the jurisdiction identifies instances of money laundering and terrorism financing for investigation.

Responding to the CFATF findings, the Office of the Director of Public Prosecutions said, “Cayman is becoming more proactive in monitoring activity relating to financial crime and, in particular, the development of intelligence that can lead to more effective investigations and prosecutions.”

There are a number of investigative agencies involved in this process, including the RCIPS, which is now working with the City of London’s Economic Crime Unit to further strengthen its ability to handle complex investigations.

“The ODPP will imminently be appointing an additional specialist prosecutor, in order to ensure that appropriate advice and assistance is provided to investigators as and when required, and to assist with the conduct of subsequent court proceedings,” the statement said. “Complementing this initiative, further specialist training programmes will be provided to prosecutors and investigators, in co-ordination with the Financial Reporting Agency and the Financial Crimes Unit of the RCIPS.”

The RCIPS, in a statement, equally emphasised that greater proactive monitoring of signs of money laundering is required, as well as developing these indicators into useful intelligence that can lead to stronger investigations and prosecutions.

“Cayman is already taking steps to further ensure effective AML monitoring, and this includes the partnership between the City of London’s Economic Crime Unit and the RCIPS.”

In April, two Economic Crime Unit experts visited Grand Cayman to assess the RCIPS’s approach to complex international money laundering and terrorist financing investigations, and to help develop the local capacity for these investigations.

“ECU secondments are also under discussion, and the secondments would assist with the RCIPS’s investigative capacity,” the police said.

Fines

While industry practitioners said they are seeing a keen approach by CIMA to enforce provisions in the anti-money laundering guidance, the potential for that to succeed in a prosecution is very low.

Because many firms are challenging CIMA’s findings using legal advisors, the main source of cases for prosecutions is reduced.

The regulator’s administrative fines regime was meant to supplement the prosecution process. However, in contrast to the United States where regulatory fines become public, CIMA does not need to publish details of the fines it imposes under the law.

How many fines CIMA has imposed is not clear but some practitioners argue that more fines may have been able to demonstrate effectiveness more readily, despite the lack of prosecutions.

Financial Reporting Authority

The Financial Reporting Authority, which is Cayman’s financial intelligence unit responsible for analysing suspicious activity reports and providing information to local and international law enforcement also received significant CFATF criticism.

Cayman’s evaluation report said the authority does not have the tools to assist investigative authorities in the identification of cases, nor does it have access to wider relevant information.

As a result, disclosures by the Financial Reporting Authority are hardly used to supplement initiate or supplement investigations.

Earlier this year, Financial Reporting Authority Director Robert Berry told the Public Accounts Committee that his department needed more staff. The authority received 938 suspicious activity reports last year – about a 50% increase over the 601 reports it received in the previous year – and the backlog of cases that had not been dealt with is growing.

The Cayman Islands government responded to the report’s finding by appointing a dedicated task force, made up of the premier, the attorney general, the deputy governor, and the ministers for financial services, commerce and finance, to oversee the implementation of a “comprehensive action plan”.

The task force will coordinate the implementation of the plan and lead the several initiatives with the aim of remedying the identified shortcomings within a year.

“The Cayman Islands remain fully committed to upholding the highest global standards on money laundering and terrorist financing,” Premier Alden McLaughlin said. “Our anti-money laundering and counter-financial terrorism action plan will send a clear signal that we intend to maintain those standards.”

“Work is already underway to improve information gathering, more rigorously monitor financial activity and enhance enforcement including the confiscation of assets,” he added.

Supervision

Some of the measures focus on plugging supervisory gaps.

Earlier this month the Department of Commerce and Investment introduced four new board policies to establish more effective anti-money laundering regulation as the de facto supervisor of designated non-financial businesses and professions, which include real estate agents and precious metal dealers.

Other supervisory authorities to introduce changes are CIMA and the Legal Practitioners Association, with the legal profession becoming subject to further supervision.

The Cayman Islands Institute of Professional Accountants became AML supervisory authority for accounting firms in December 2017. As such, it is tasked with registering all accounting firms, monitoring for compliance, and issuing guidance, directives and procedures.

Any firm that provides accounting services, including bookkeeping, payroll, accounts preparation, tax advisory or tax compliance services must register with the Cayman Islands Institute of Professional Accountants by May 30.

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