The Anti-Money Laundering Regulations (2020) ("AMLRs") set out the anti-money laundering ("AML") and countering of terrorist financing ("CFT") compliance obligations for Cayman Islands entities carrying on 'relevant financial business'.
There have been a number of changes to the AMLRs and the AML/CFT Guidance Notes ("Guidance") over recent months for purposes of implementing observations made by the Caribbean Financial Action Task Force ("CFATF") in its Mutual Evaluation Report of the Cayman Islands. The latest changes were gazetted on 5 February 2020.
We discuss below some of the key practical changes and industry consultation with the Cayman Islands Monetary Authority ("CIMA").
Removal of 'Equivalent Jurisdiction List'
Previously, a factor in determining whether it was appropriate to apply simplified due diligence on a given applicant for business was whether they were from a country included on a list published by the Cayman Islands Anti-Money Laundering Steering Group (referred to herein as the "Equivalent Jurisdiction List"). From 5 August 2020, the Equivalent Jurisdiction List will no longer be a factor, and instead, the country of the applicant for business will need to be assessed by the Cayman Islands financial services provider or its AML/CFT service provider as having a low degree of risk of money laundering and terrorist financing. This country risk assessment will need to be recorded on the customer file.
The AMLRs contain provisions setting out what factors should be considered when risk assessing a country or geographic area. Although this change will mean an adjustment to the way KYC is carried out by, or for, Cayman Islands entities, this should not be particularly problematic in terms of who will be assessed as being 'low risk'. It also provides scope for considering countries not on the Equivalent Jurisdiction List, or for re-assessing those that are listed.
Furthermore, the types of person who are potentially subject to simplified due diligence, e.g. government bodies, regulated or listed entities, or pension funds, remains unchanged.
We expect that Cayman Islands financial services providers (or service providers to Cayman Islands entities) will develop their own lists of risk-assessed countries as a tool for use in the risk assessment process, and for the purposes of supporting their risk assessment. It is likely that such lists will be very similar to the current Equivalent Jurisdiction List.
Financial services providers shall continue to have an on-going obligation to monitor the adequacy of previously obtained KYC against current requirements. Accordingly, existing customers should be reviewed in the ordinary course of such on-going monitoring.
Application of 10% Beneficial Ownership Threshold
The AMLRs require identification and verification of beneficial owners of legal persons at a threshold of 10%, unless simplified due diligence is applicable. While it appears that this threshold is the standard to which many countries are moving (particularly for high risk customers), the threshold in many jurisdictions of service providers which carry out AML/CFT functions for Cayman Islands entities continues to be 25%.
Where relying on, or delegating to, a service provider outside of the Cayman Islands for KYC/AML procedures, CIMA had suggested throughout 2019 that the KYC focus could be on 'equivalence of outcomes' in relation to the overseas requirements, which would not include a granular cross-assessment of specific standards.
However, in recent correspondence with industry bodies, CIMA has confirmed that there is no basis for deviating from the statutory beneficial ownership threshold. The Guidance provides that standards no lower than the Cayman Islands must be applied. Under both the AMLRs and Guidance, applying a risk based approach, the degree of verification required for a given investor is still subject to the service provider's assessment.
We understand that CIMA will publish formal guidance on this issue later this year. However, for present purposes, the 10% beneficial ownership threshold should be applied to corporate entities and partnerships1.
A number of overseas administrators had already elected to apply Cayman Islands standards to Cayman Islands funds and that others will do so, now that there is clarity on the point. The jurisdiction's legislation implementing the Common Reporting Standard has also set the 10% threshold for 'controlling persons' for some time.
The foregoing does not necessitate a remediation of all administration agreements which already addressed AML/CFT service provisions. These can be updated in the ordinary course. However, Cayman Islands fund AML compliance officers should ensure that their service providers are applying the Cayman Island beneficial ownership threshold to new investors, and that there is a sensible plan to remediate existing investors as part of the funds' requirements for ongoing monitoring.
Eligible Introducer Requirements
The AMLR provisions dealing with 'eligible introducers' were amended to comply with the FATF recommendations. Specifically, the KYC confirmations provided by an eligible introducer must list the applicant for business being introduced and (for non-natural persons) their beneficial owners.
It should be borne in mind that the scope and purpose of eligible introductions is to streamline KYC at the point of onboarding of customers who have already been vetted by an appropriately regulated party. However, it does not derogate from the recipient financial service providers' ongoing obligations to monitor the relevant customers (and beneficial owners) and to screen them against applicable sanctions lists.
It is also to be noted that a financial services provider is required to periodically test introducers to ensure that they hold the KYC information in accordance with the requirements of the AMLRs. Eligible introductions cannot be relied upon if KYC access is impeded or where there is deficient KYC.
The AMLRs now include specific reference to having procedures for ensuring compliance with targeted financial sanctions obligations applicable in the Cayman Islands and identifying assets subject to applicable targeted financial sanctions. EU and UN applicable sanctions lists are extended to the Cayman Islands by UK statutory instrument. Following Brexit, it is possible that in the future the Cayman Islands will adopt EU sanctions lists directly. In any event, customers of Cayman Islands financial services providers need to be monitored against EU, UK and UN lists. While the US OFAC list and regulations are not directly applicable in the Cayman Islands, they may still be relevant in terms of Cayman Islands entities conducting USD transactions.
Specific References to Countering of Terrorist and Proliferation Financing
A theme of FATF and CFATF mutual evaluations is the importance of CFT and proliferation financing, in addition to AML. CFT and proliferation financing are more focussed in practice as to the destination of funds, whereas AML is focused more on the source of the funds. Accordingly, the policies and procedures of Cayman Islands funds should include a risk assessment of, and mitigation against, AML sanctions, CFT and proliferation financing risks deriving from transactions undertaken on behalf of a fund.
Updates to Guidance
CIMA has issued amendments to the Guidance to address the topics of Assessing Risk and Applying a Risk Based Approach, Counter Proliferation Financing, Targeted Financial Sanctions, Ongoing Monitoring and Virtual Asset Service Providers.
1. The meaning of "beneficial owner" in trusts context is broader.
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