Cayman on EU’s preliminary AML high-risk list

(CMR) The European Commission could add the Cayman Islands to the final list of countries with strategic deficiencies in their anti-money laundering/know your customers (AML/KYC) regimes after Cayman was listed in a  draft regulation adopted by the EU Commission earlier this month.

The EU is expected to finalize its list within a few weeks.

Article 4 of the EU Securitisation Regulation provides that securitization SPEs may not be established in any country on that list. Under this regulation, EU investors would be advised not to invest in Cayman-domiciled securitization vehicles while the country is on the list.

This could see sponsors and managers of collateralized loan obligations (CLOs) considering alternative jurisdictions for new CLOs.

Meantime, the Cayman Islands government said it is working to address the remaining AML issues to be removed from the list of jurisdictions the FATF is monitoring for AML effectiveness. It is also working to be removed from the expected listing by the EU, as a non-EU country considered to be at high risk for AML.

The FATF sets the global regulatory standard for AML (anti-money laundering, countering the financing of terrorism, and countering proliferation financing). In March 2019, the Caribbean Financial Action Task Force, which provides regional support for the FATF, recommended 63 actions for the Cayman Islands to complete to strengthen its regime further. By February 2021, the Cayman Islands had completed 60 of these actions; however, the FATF placed it on its monitoring list and gave it an action plan to complete the remaining three items.

During its October 2021 plenary, the FATF acknowledged the Cayman Islands' progress in completing the plan.

In December 2021, in their respective 2022/23 budget contributions, Attorney General the Hon. Samuel Bulgin, QC; and Minister of Financial Services the Hon. André Ebanks explained the link between the FATF and EU lists: When the FATF lists a country, the EU automatically will add it to theirs.

The Attorney General oversees the Islands' AML regime as Chair of the Cayman Islands Anti-Money Laundering Steering Group. The Ministry of Financial Services and Commerce is the group's Deputy Chair, as it has Governmental responsibility for financial services, the industry that primarily implements the AML standard.

Under the Alternative Investment Fund Managers Directive (AIFMD), an EU listing currently would not affect Cayman Islands investment funds from being marketed in the EU. However, the Cayman Islands Government is aware of the EU's proposed AIFMD amendments which, if enacted as expected in 2024, would prevent Cayman Islands funds from being marketed in the EU.

At this time, EU listing will, in accordance with the EU Securitisation Regulation enacted in 2021, prohibit EU financial institutions from using Cayman Islands entities for securitizations. Minister Ebanks is in direct contact with the Cayman Islands' leading industry practitioners in this sub-sector to provide relevant updates and guidance.

An EU listing also will require EU financial institutions to conduct enhanced due diligence on business relationships and transactions involving non-EU-listed jurisdictions. This may include obtaining additional information on customers, beneficial owners, and the source of funds and wealth; and selecting patterns of transactions that need further examination.

To be delisted by the EU, any actions it may add on top of the FATF action plan would need to be completed. However, a FATF delisting should substantially, if not fully, assist with an EU delisting.

The FATF plan required the Cayman Islands to demonstrate effective and dissuasive sanctions for AML breaches, and also for beneficial ownership filing breaches, by January this year; and to demonstrate AML prosecutions by this May. While it does not affect the FATF delisting, the Cayman Islands also is now either ‘compliant' or ‘largely compliant' with all 40 FATF Recommendations.

Unlike an EU listing, the FATF does not prescribe sanctions against jurisdictions on its list.

To determine the timeline, and any necessary additional actions, for an EU delisting, Minister Ebanks and Ministry officials continue to engage with EU officials, including those they met either face-to-face or virtually in November and December 2021.