Caribbean IFCs Complete AML Endurance Challenge

While issues remain for the Caribbean, with the BVI and Bahamas still deemed non-cooperative by the EU, there is clearly some light at the end of the tunnel, with all four main Caribbean jurisdictions now essentially cleared by the FATF. Questions regarding economic substance persist for the Bahamas, while the BVI must address its level of compliance with the OECD’s standards of information exchange to make progress with the EU. However, the pronouncement by the FATF that Cayman has satisfied the final outstanding Recommended Action that makes it eligible for delisting is perhaps worth more in substance than in words. It demonstrates that what has been at times a painful path of dialogue and engagement with standard-setting officials to comply at all costs has been the right one. Although there have been setbacks and disappointment along the way, there are positive developments, and the leading Caribbean IFCs stand on the threshold of a new era of AML compliance and a potential level playing field with G7 and OECD nations as well as the UK’s Crown Dependencies.

The possibility still exists, of course, of a politically motivated sting in the tail, in similar fashion to Cayman’s return to the EU blacklist on the back of a revised methodology by the EU Council. Having previously been considered compliant, that move by the European Commission in 2022 can perhaps be seen as the biggest shift of the goalposts in this saga to date. However, taking the FATF’s words in good faith, that no further measures other than those already identified in the Cayman Islands’ AML Action Plan will be required for its removal from the grey list other than the onsite visit, suggests this episode is nearing a resolution for Caribbean IFCs from an AML standpoint. Going forward should be more a case of fine-tuning legislation to keep up with changing developments, such as the expansion of crypto markets, rather than taking remedial action amid ongoing sanctions. In that vein, there have been a number of important legislative and regulatory changes over the past 12 months in each of Bermuda, Bahamas, the BVI and the Cayman Islands, to further enhance AML/CFT regimes.

One area where AML/CFT standards certainly must be addressed, both on and offshore, is the framework for virtual assets and virtual asset service providers (VASPs). Just last month, the FATF issued a report on country wide compliance with its AML standards for virtual assets, calling on all countries to make progress, after its survey showed the vast majority of jurisdictions are still not fully compliant with its recommendations. This includes jurisdictions not conducting any form of risk assessment for virtual assets and assessments seen as inadequate. With all the major Caribbean IFCs still cementing a regulatory framework for virtual assets, this will remain a key focus for governments and regulators in the region. Crucially, the Bahamas, Bermuda, BVI and the Cayman Islands, have all taken steps over the past 12 months to implement the FATF’s Travel Rule for virtual assets, which requires relevant originator and beneficiary information to be shared by VASPs, just as would be done for regular wire transfers to prevent criminals exploiting loopholes in the system. Responsible digital asset ecosystems in the Caribbean, such as Bermuda which has been highlighted in recent news reports, are also seeing more interest from a domicile perspective, against the backdrop of concerted regulatory action by the SEC in the US.

In addition to the enhanced due diligence requirements that have been needed, it has been in the structured finance market where the impact of Cayman’s place on the EU list of high risk third countries has been felt the most. This also sparked a new round of competition between IFCs as EU investors have been blocked from investing in securitisation transactions with issuing vehicles domiciled in the Cayman Islands. Bermuda has been a key beneficiary of this situation, by virtue of its similarly stable political climate, highly respected legal system, and similar depth of quality professionals and infrastructure, as law firms have rerouted transactions through there. A significant slice of business has, however, been lost from the Caribbean as a result of the EU blacklist, with Crown Dependency Jersey taking advantage. Assuming the EU does eventually whitelist the Cayman Islands, it will be interesting to see whether this business does immediately return, or if it will indeed settle in the Channel Islands. On a broader scale, there is also the hope that a clean slate from these authorities can eventually reverse more entrenched negative perceptions of the Caribbean region.

Notably, in 2020 the Bahamas was one of the first jurisdictions to achieve full compliance with the FATF’s forty recommendations for combatting money laundering and terrorism financing, which it did ahead of many European nations. The current picture remains one of strong compliance from an AML perspective. Elsewhere across the Caribbean, there have been instances of legislative amendments aimed at enhancing regimes for the provision of beneficial ownership information. This has worked to progress the satisfaction of various FATF criteria or recommended actions relating to AML supervision, and have increased powers for regulators to issue effective sanctions for breaches of AML regulations. Bermuda, for example, recently issued a policy consultation for a requirement that every legal person incorporated under a Private Act must now register with the ROC and comply with provisions of the Companies Act. This policy change would allow the capture of more accurate beneficial ownership information from a gap identified by the CFATF in the effectiveness of Bermuda’s regime.

In the Cayman Islands there have also been amendments to bring partnerships into the scope of CIMA’s sanctions regime, and powers for CIMA to apply proportionate and dissuasive sanctions to all types of legal persons under its supervision, including exempted limited partnerships and limited liability partnerships, alongside further industry consultation on beneficial ownership transparency. One aim of this consultation has been to put the brakes on moves towards a register of beneficial ownership information, after a European Court of Justice ruling cast doubt on the ability of EU countries to require such information, although public registers are still expected to eventually be the industry standard.

The Bermuda Monetary Authority also identified in its 2023 roadmap and business plan the need to build on its successful AML compliance record, notably by strengthening its approach to the use and collection of data. Such data, which is collected as part of the annual supervision programme, can be used to greater effect through innovation, the BMA said, in relation to automating routine processes and extending automation to new areas. Meanwhile from a regulatory perspective, much of the focus in the BVI this year has been on evaluations from both the IMF and the CFATF, with the plenary discussions timetabled for November of this year. The BVI government has said these inspections present a welcome opportunity to showcase the significant progress made in strengthening its AML/CFT regime over the last few years, having last been assessed by the CFATF in 2008.

In the Cayman Islands, where efforts have been more focused on resolving outstanding issues with the FATF, the legislative and regulatory developments over the past 12 months have been quite significant. Cayman also published a revised version of its AML Regulations in 2023, which effectively consolidated a number of prior amendments, including issues related to virtual asset transfers and specific requirements for country AML/CFT risk assessments.

CIMA has also looked to highlight its activity in exercising its supervision powers, as it continued to work towards becoming eligible for delisting. With the recent publication of its latest AML/CFT Activity Report, CIMA has demonstrated evidence of a major increase in the number of administrative fines that have been issued. With a greater number of entities also falling under its supervision for AML purposes, there has also been greater awareness in the local business community about the AML risks and compliance requirements for companies in sectors such as real estate. The report also showed how CIMA has stepped up the pace of onsite inspections of regulated entities, as well as the number of requirements issued and follow-up inspections undertaken.

In the months and years to come, as AML standards continue to evolve further, we can expect continued efforts from the Caribbean IFCs to meet - and where possible exceed - these requirements. Going forward, the regional industry will welcome governments and officials addressing such issues from a position of greater strength based on better appreciation by global standard setters.

Paul Byles
Paul Byles is Director of FTS, a Cayman Islands compliance and management consulting firm and founder of the Cayman Islands Financial Services Institute. He also serves as an independent director and consultant to financial services firms. He is an economist and former regulator who has worked in the offshore sector for over 25 years. He is author of the books ‘Inside Offshore’ and 'Introduction to Offshore Financial Services: A BVI text'.