Cayman Islands: National Risk Assessment - Under The Microscope

The Cayman Islands is currently undergoing its first National Money Laundering/Terrorist Financing ("ML/TF") Risk Assessment. The objective of a risk assessment is to identify the threats or potential threats to the Anti- Money Laundering (AML) regime that the jurisdiction has in place.


The requirement to perform a National Risk Assessment stems from the Financial Action Task Force's (FATF) 40 Recommendations on International Standards on Combating Money Laundering and the Financing of Terrorism and Proliferation issued in 2012. The FATF is an intergovernmental body established in 1989, and its mandate is to set standards and to promote effective implementation of legal, regulatory and operational measures for combatting money laundering, terrorist financing and the financing of proliferation, as well as other related threats to the integrity of the international financial system. This is achieved by member countries, of which there are 34, adopting these standards and adhering to the recommendations that have been issued. Although the Cayman Islands are not a member of the FATF, they are a member of its regional standard setter associate member, the Caribbean Financial Action Task Force ("CFATF"), which was established in 1996. The CFATF is an organisation of 27 states and territories in the Caribbean basin which have agreed to implement common countermeasures against ML/TF through endorsing the 40 recommendations produced by the FATF.

The National Risk Assessment comes about as a result of the revisions to the FATF Recommendations in 2012. The first recommendation in this list is that countries should identify, assess and understand the money laundering and terrorist financing risks that exist in their countries and should take action to coordinate efforts to assess these risks. As this is a completely new global process, introducing a brand new methodology for assessments, it is being undertaken for the first time at a national level by many countries that adhere to these international standards. Norway and Spain have been the first two countries to be assessed with the new methodology last October by the FATF. Assessments are done via mutual evaluations that are conducted with the country and representatives of the FATF or regional standard setter.

Why is it Being Done?

Any jurisdiction that expects to be at the forefront of international financial services should ensure that risks are identified, assessed and action taken to mitigate issues regarding money laundering and terrorist financing. The National Risk Assessment is to ensure that the Cayman Islands have appropriate ML/TF policies and procedures in place, that these policies and procedures are being followed and that all the identified 'risk' areas can be addressed. The successful passing of this assessment will ensure Cayman retains its high international reputation. This means that there must be policies, controls and procedures in place, not only at a national level but also within the various industries and sectors that enable the management and effective mitigation of risks that have been identified. Additionally, systems need to be installed to monitor the implementation of those controls and to enhance them, if necessary. It is useful if the process is as inclusive and co-operative as possible.

The objective and the whole basis of a National Risk Assessment is to ensure that measures in place to prevent or mitigate money laundering and terrorist financing are proportionate with the risks that have been identified. A risk-based approach, through a risk assessment, is an essential foundation in allocating AML/ Combating the Financing of Terrorism (CFT) resources efficiently to the perceived threats. Importantly, there should be sufficient breadth and depth devoted to potential threats and vulnerabilities, as well as their consequences. It is worth noting that ML/TF risks are inherently difficult to describe or to measure in quantifiable or numerical terms, therefore a risk assessment will involve making judgements about these perceived issues. The National Risk Assessment is the forum for which jurisdictions will demonstrate that these issues have been considered and therefore ensure that exposure to these elements are limited. Jurisdictions should consider the capacity and AML/CFT-relevant experience of particular sectors and industries, because in order to properly assess the risks, it is important to identify certain key components where such vulnerabilities may exist. Risk is not static but is a constantly changing metric. More significant areas of vulnerability can be found where it has been determined that certain customers, countries or geographic areas, products, services or transactions may pose a higher threat to the financial system for ML or TF.

It is important to point out that the risk approach for money laundering and terrorist financing, while intrinsically linked, can actually vary significantly as the mechanisms for detecting them are quite different. While the focus on TF aims to prevent future such acts of terrorism from taking place, authorities looking to combat money laundering are usually dealing with criminal activity that has already happened. Essentially, private sector involvement can be extremely valuable to this process, in order to help build up a complete picture of the national ML/TF risks. Islands financial services sector was reported as having a 'Strong Compliance Culture.' That evaluation rated Cayman as 'compliant' or 'largely compliant' with 38 out of 40 of the then FATF recommendations and nine special recommendations (as it then was). The ratings are Compliant, Largely Compliant, Partially Compliant and Non-Compliant. This compared very favourably with third round evaluations to date of other FATF countries. When Will it Take Place? The fourth round of evaluations for the Cayman Islands will take place in the first quarter of 2017. Preparations can take place as early as a country would like. The process itself starts roughly six months before the onsite visit by the assessors and lasts roughly six months after the visit with follow up meetings and the presentation of the final assessment and findings at the Plenary, held bi-annually. The onsite inspection includes not only interviews with government officials but also with various financial industry and association members.

Who Will it Impact?

The National Risk Assessment will impact any entity conducting relevant financial business including, and not only, regulated entities such as banks, corporate service providers, insurance companies investment and securities services, but also 'Designated Non-Financial Businesses and Professionals' (DNFBPs), such as money remittance service providers, jewellery stores and real estate agents, basically anyone where such risks are inherent to their businesses. While traditionally seen as only relevant to the financial industry and parties regulated by CIMA, AML/CFT transcends that notion and is at the heart of any financial transaction. Anywhere where there is movement of money there is a perceived threat and the aim is to prevent criminals from using the financial system to move their ill-gotten gains.

Have There Been Any Previous Types of National Reviews?

Since the implementation of the FATF recommendations in 1989, there have been three rounds of mutual evaluations internationally, this now being the fourth round with new and revised recommendations. All countries adhering to the FATF standards will have to implement this new recommendation before their mutual evaluations are conducted. In the past the focus has been more on ensuring that legislation and systems are in place by countries to detect ML/TF. This mutual evaluation, however, is different as the focus now is on the effectiveness of the regime in place. Hence this risk assessment is very important as it will determine how effective the systems put in place really are. In previous reviews, blacklists had been implemented as a deterrent for financial business in certain listed jurisdictions.

The last CFATF review of the Cayman Islands took place in June 2007, and the Cayman Islands financial services sector was reported as having a 'Strong Compliance Culture.' That evaluation rated Cayman as 'compliant' or 'largely compliant' with 38 out of 40 of the then FATF recommendations and nine special recommendations (as it then was). The ratings are Compliant, Largely Compliant, Partially Compliant and Non-Compliant. This compared very favourably with third round evaluations to date of other FATF countries.

When Will it Take Place?

The fourth round of evaluations for the Cayman Islands will take place in the first quarter of 2017. Preparations can take place as early as a country would like. The process itself starts roughly six months before the onsite visit by the assessors and lasts roughly six months after the visit with follow up meetings and the presentation of the final assessment and findings at the Plenary, held bi-annually. The onsite inspection includes not only interviews with government officials but also with various financial industry and association members.

About the Author

Sandra Edun-Watler is the Head of Compliance (Americas) for Walkers with responsibility for the firm's Cayman and BVI offices. She is an attorneyat- law with expertise in all aspects of regulatory law and is the current President of the Cayman Islands Compliance Association.

Originally published in Cayman Finance Magazine, 2015-2016, Issue 2

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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