Cayman Islands: Money Laundering - Some Practical Considerations

Last Updated: 2 July 1999


Although money laundering is currently a popular topic with financial circles, misconceptions abound when people are asked to describe the problem. Many people still consider it to be drug money deposited as cash in offshore tax havens. In fact the definition is far broader and has been defined as "the disguise of the source of illicit funds" or "the transformation of illegally obtained funds to that which appears legitimate." The broader definition demonstrates why the problem is a world wide problem not solely a tax haven issue.


In attempts to ascertain the current levels of money being laundered world wide one encounters enormous variations ranging from billions to trillions of dollars on an annual basis. In a recent KPMG publication it stated that there are more than 1 million International Business Corporations world wide holding more than US$5 trillion in assets. Law enforcement agencies estimate that as much as 90% of all criminal proceeds are laundered through IBC’s.

There are huge unexplained variations in the estimates. It is obvious that we do not know all the methods being employed to launder funds. As in the drug industry itself the greater rewards from the illicit actions make it hard for the authorities to effectively contain the industry.

Part of the substantial variation may be due to the repeated counting of a single transaction. For example, if a million dollars generated from the drug industry in Colombia is placed (introduced) through Mexico into the banking system, then (layered - disguising its origins) sent by wire transfer to an account in the Turks and Caicos for onward investment to a company in Switzerland for final investment in a real estate company (integration - legitimate operations) in New York the transaction could be seen as either a sole million dollar transaction or four separate transactions of a million dollars each.

As techniques for layering, the process by which money is "cleaned", become more sophisticated the problem is exacerbated and larger estimates are made of the potential volumes.


Given the difficulty of accurately estimating the volumes of money laundering, why do the authorities invest so much of their scarce resources in attempting to quantify their understanding of the volumes?

The main rationale is that the authorities need to have a clearer understanding of the problem they are attempting to redress. Being able to state that over a trillion dollars a year is laundered focuses the attention of the budget makers and is a tremendously powerful political tool.

Although I do not seek to quantify the problem in this article I strongly believe that people involved in the financial services industry and certainly those in the offshore arena consider the problem as one of the most significant issues facing the financial services industry today.


In this article I discuss what is being done in the offshore jurisdictions, in particular, in the Cayman Islands. Money laundering is not an offshore problem; it is a world wide problem and whatever the volumes are one can see that there are sufficient sums of illegal proceeds to infiltrate virtually all areas of economic activity.

In my experience the offshore centres are far more aware of money laundering and therefore have taken greater steps to take action against such criminal activity than the larger nations. Admittedly most developed nations have introduced anti-money laundering legislation but to many people such activities are so far removed from their day to day work that they are barely aware of the laws.

On the other hand financial services professionals in the Cayman Islands and other offshore financial centres are frequently exposed to new enquiries and business relationships and are therefore more alert to the identification and prevention of money laundering.

In the offshore centres there is less overt regulation than onshore. By overt regulation I mean extensive compliance rules and substantial, complex and sometimes onerous financial reporting. The regulators objective is to ensure that only respectable and qualified service providers are operating from the jurisdiction. The regulators require quarterly reports containing mainstream financial information of considerably less detail than would be required to effectively manage a business. Recently some of the regulators have introduced onsite visits but, as yet, these visits are rare and not particularly detailed.

As a result the burden of day to day regulation is placed in the hands of the service providers. They are highly effective in the battle against money laundering. They are motivated by a number of measures:

1. Country Reputation

To an extent the service providers are the correct people to bear the burden since they benefit directly from the good name and effective business practices of the jurisdiction. All service providers are well aware of the number of offshore jurisdictions all competing for very mobile and transitory business. They know that any clear evidence of money laundering could lead to substantial outflows of assets from the jurisdiction.

2. Firm Reputation

Many practitioners work for substantial organisations who have built up their reputations over many years. Many of these firms have internal ethical guidelines which determine the business practices of the organisation. The experience of American Express in Mexico clearly demonstrates the costs incurred by a firm when illegal activities are discovered involving the participation of employees.

The argument that excessive inquiries of potential customers reduces an institutions competitiveness is no longer valid. Bona fide clients do not resent valid enquiries if their rationale is explained. Unusual resistance can be a good indication of problems to come.

3. Personal Liability

Many of the offshore centres have introduced legislation which render the service provider personally liable, on a criminal level, for servicing funds generated from criminal activities. Under the Proceeds of Criminal Conduct Law in the Cayman Islands the service provider needs to ensure that they have carried out sufficient due diligence on any prospective client to alert them to any suspicious activity.


It is all well and good for the authorities to legislate that the service providers should police the system but in reality how do they do it?

It is a complex area and the issues of client acceptance and ongoing monitoring should be carried out by experienced and knowledgeable personnel. There should be effective mechanisms to review and enhance the measures being employed. Effective knowledge sharing will continue to be a crucial tool in this area.

It is vital for any firm to have sound policies, clear practical instructions and, as importantly, to ensure they are being enforced. Preventive and detective systems of internal controls are required.

However, as a practical measure in my view the primary rule is that of professional scepticism. The professional should not accept everything they are told at face value. They should challenge the statements being made. They should enquire further into aspects of their clients’ business. If possible they should visit the physical premises. From the information available they should ensure that the size of the operation justifies the cash flows being generated. If they have inadequate information to form this view consideration should be given as to whether they need to complete additional procedures.


1. Avoid high risk jurisdictions - current examples are Nigeria, Russia, Eastern Europe. Certainly with Eastern Europe it is exceedingly difficult to obtain valid meaningful references. Amazingly offers of assisting a senior ranking Nigerian official remove millions of dollars from that country still appears to be doing the rounds.

2. Avoid rushed transactions. Where people are trying to complete a substantial transaction at very short notice they may be trying to get you to shortcut your usual due diligence procedures. Remember it is much harder to extricate yourself from a client relationship than anticipated.

3. Avoid transactions that appear to be unusually lucrative without economic risks to justify them. At risk of being banal if it seems too good to be true - it probably is. A few years ago we were approached to set up a company to receive a billion dollars of commission involving the movement of gold equivalent to the total annual gold traded on all the exchanges world wide. The size of the scheme was so ridiculous that it was easy to identify and turn down.

It is important to note that you do not always understand or need to understand the whole transaction but you do need to ensure that there are good indications that there is a valid commercial reason for the transaction. There are several cases of service providers not fully understanding a tax transaction that later turned out to be a fraud. As a service provider in today’s world I believe you need to satisfy yourself of the commercial rationale of the transaction you are assisting.

4. Bank references are useful to get but can say very little - a reference that states that an individual has maintained a bank balance at the institution for two years provides you with very little information about the client. Additional professional references backed up by common sense understanding of your clients business is essential.

5. Do some research into the firms providing professional references. If you have a sole practitioner law firm giving a glowing reference on a client, you need to ensure that there is not an unusual relationship between the two. For example, if the client gives the professional 95% of his business, they may have lost some independent perspective.

6. Avoid transactions that insist that no one else be informed of the transaction otherwise the transaction will become void.

7. Be very wary of accepting substantial gifts or lavish entertaining - these can obligate you or impair your judgement.

8. If you have reservations - turn it down - it is just not worth the risk.

9. If you feel there is some concern that the transaction may have crossed over the line between tax avoidance to evasion be exceedingly careful. This is a particularly thorny area at this time. The defence that it is not a crime in your jurisdiction may not be a valid defence for much longer.

10. Bear in mind that services to military or political figures are higher risk.

11. Be sceptical

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.

This article also appears in the 'International Offshore and Financial Centres Handbook 1999/2000'. For further information about this highly informative guide to offshore centres, or to order your copy, please phone +44 (0) 207 820 7733 or send an email to

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

Some comments from our readers…
“The articles are extremely timely and highly applicable”
“I often find critical information not available elsewhere”
“As in-house counsel, Mondaq’s service is of great value”

Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:
  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.
  • Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.
    If you do not want us to provide your name and email address you may opt out by clicking here
    If you do not wish to receive any future announcements of products and services offered by Mondaq you may opt out by clicking here

    Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

    Use of

    You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


    Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

    The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


    Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

    • To allow you to personalize the Mondaq websites you are visiting.
    • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
    • To produce demographic feedback for our information providers who provide information free for your use.

    Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

    Information Collection and Use

    We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

    We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

    Mondaq News Alerts

    In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


    A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

    Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

    Log Files

    We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


    This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

    Surveys & Contests

    From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


    If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


    From time to time Mondaq may send you emails promoting Mondaq services including new services. You may opt out of receiving such emails by clicking below.

    *** If you do not wish to receive any future announcements of services offered by Mondaq you may opt out by clicking here .


    This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

    Correcting/Updating Personal Information

    If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

    Notification of Changes

    If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

    How to contact Mondaq

    You can contact us with comments or queries at

    If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.

    By clicking Register you state you have read and agree to our Terms and Conditions