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CFATF: Cayman Islands at Risk for Fraud, Tax Evasion and Trafficking

 

An assessment of the state of money laundering (ML) measures in the Cayman Islands finds there is a significant threat from foreign fraud, evasion of foreign taxes by non-residents and drug trafficking.

The Caribbean Financial Action Task Force (CFATF) published a Mutual Evaluation Report into Anti-Money Laundering (AML) and Counter-Terrorist Financing (CFT) measures in the Cayman Islands in March 2019.

It’s an analysis of the measures in place in the Cayman Islands from a sample period in 2017 as well as how the country stacks up against the Financial Action Task Force (FATF) 40 Recommendations of 1990.

They also measured the level of effectiveness of the Cayman Islands’ AML/CFT system and gave recommendations on how to strengthen the system. Those areas include transaction monitoring, sanctions screening and enhancing customer due diligence (CDD), among others.

The study found the Cayman Islands were fully compliant with only 12 of the 40 measures. On 15 recommendations, they were largely compliant, but they were only partially compliant with 13 recommendations.

Lack of enhanced due diligence

Of those, many were high-risk areas, such as a lack of overall assessing risks and applying a risk-based approach. There is also no specific obligation for financial institutions (FIs) to apply enhanced due diligence when dealing with high-risk countries, the study found.

Officials also found the Cayman Islands has a higher threshold for transaction reporting (15,000 KYD  – or about $18,300 US), a lack of controls for beneficial ownership information, holes in the regulation and supervision of financial institutions, a lack of independence for the Financial Reporting Authority (FRA) and a lack of safeguards and regulations for cash couriers.

It’s a large problem considering the amount of money that goes through its economy. According to the Bank of International Settlements, the banking sector of the Cayman Islands was the sixth largest in the world in 2014, with a cross-border asset position at $1.365 trillion US and fifth by cross-border liabilities of $1.347 trillion US.

The report said the Cayman Islands has a high level of commitment to “ensuring their AML/CFT framework is robust and capable of safeguarding the integrity of the jurisdiction’s financial sector.” But they say despite having a well-developed legal framework, there are a number of major problems.

Risks from domestic and foreign criminals

“As a major international financial centre, the Cayman Islands is confronted with inherent ML/TF risks, threats and associated vulnerabilities emanating from domestic and foreign criminal activities (e.g. tax evasion, fraud, drug trafficking),” said the report.

Domestically, the national risk assessment (NRA) identified theft, corruption and drug trafficking as the main generators of domestic proceeds of crime,” said the report. But the NRA warns that foreign generated proceeds of crime pose a more significant threat to the financial and nonfinancial sectors than domestically generated proceeds of crime. The foreign threats identified were fraud, evasion of foreign taxes by non-residents and drug trafficking.

The report also said the level of sanctions screening needs to be increased.

“There is a wide appreciation for the importance of sanctions amongst the private sector but the frequency of sanctions screening varied and could be enhanced,” said the report. “The understanding of what steps should be taken in the event targeted persons are identified is limited.”

The study also pointed out lawyers remain unsupervised for AML/CFT purposes. Further, a risk-based supervisory regime for dealers in precious metals or stones (DPMS), real estate agents and accountants has not been fully implemented.

Complex financial crimes not pursued

The study said the Cayman Islands has a structure to ensure financial crimes are investigated and prosecuted. However, they found “the investigations and prosecution of ML in the Cayman Islands are primarily domestic minor predicate offences.”

“Given the focus on investigation and prosecution of domestic based minor predicate offences, confiscations results are quite modest and may not be commensurate with the ML risks of the jurisdiction. There could also be greater use of civil forfeiture.”

The Royal Cayman Islands Police Service (RCIPS) and the Office of the Director of Public Prosecutions (ODPP) have dedicated resources to combat financial crime including ML/TF. But the study said large and complex financial investigations and prosecutions have not been identified, or pursued. They also found there is limited focus on stand-alone ML cases and foreign offences.

“Ultimately, this contributes to jurisdiction’s reactive approach to investigating financial crime based on the commission of, in most instances, relatively minor domestic predicate offences.”

For its part, the government promised to implement the report’s recommendations over the next year or so, including a number of legislative changes and strengthening its financial crimes unit with a focus on money-laundering and terrorist financing investigations.

“The history of financial services in the Cayman Islands shows that Government and the private sector are willing and able to meet changing global standards while maintaining our standing atop the international financial services market,” said Financial Services Minister Tara Rivers.

To find out how Alessa can help flag AML indicators, improve sanctions screening processes and other AML/CFT measures, please contact us.

 

 

About Andrew Simpson

Andrew Simpson (LinkedIn | Twitter) is Chief Operating Officer at CaseWare RCM and has more than 20 years of experience building businesses in the fields of information systems audit and security, data analytics, Anti-Money Laundering and forensics. He is a regular contributor to conferences and a recognized thought leader in financial crime management.