European Union: Update On The EU AML List Limited Impact For The Cayman Islands

Summary

In January we published an advisory which provided an update on the European Commission's delegated regulation proposing to update the existing EU AML List to add the Cayman Islands, along with a number of other jurisdictions. We noted in this advisory that this proposal would impact a small subset of securitisation vehicles but otherwise has no direct consequences for investors or clients using Cayman Islands structures. This update confirms this limited impact and provides an update on timing.

Timing

The delegated regulation was subject to a one month review period and in this time the European Parliament and the Council of the EU did not raise any objections or request further time for scrutiny. It is expected that the delegated regulation will be published in the Official Journal of the European Union on 21 February and the updated AML list will enter into force on 13 March 2022.

Progress Towards Removal from the AML List

In June 2021, the FATF agreed that the Cayman Islands had made positive progress having already addressed one of three action points, with the remaining two items being actively addressed. Meanwhile, the FATF's Enhanced Follow-Up Report issued in November 2021 confirmed that the Cayman Islands is FATF rated as Largely Compliant or Compliant with all of the FATF's 40 Recommendations. The earliest opportunity to be removed from the FATF's Monitoring List will be in late 2022, which is expected to result in its removal from the EU AML List.

Impact

The inclusion of the Cayman Islands on the EU AML List would require EU financial institutions to apply enhanced due diligence measures, to the extend they do not already, to relationships or transactions involving the Cayman Islands. A number of EU financial institutions already do this in practice.

The inclusion of the Cayman Islands on the EU AML List would also prevent EU financial institutions from establishing new tranched securitisation vehicles in the Cayman Islands. This is because Article 4 of the EU Securitisation Regulation states that securitisation special purpose entities (SSPEs) "shall not be established" in a non-EU jurisdiction which is on the EU AML List by an EU financial institution.

EU investors will also be precluded from investing in securitisation deals with Cayman Islands issuers which will affect EU Risk Retention compliant transactions (particularly in the CLO space) and those deals with EU based equity investors. The Securitisation Regulation does not expand further and does not impose restrictions on EU investors who have invested in already existing SSPEs and transactions which have closed prior to the 13 March 2022 date.

It has no impact on the vast majority of Cayman Islands securitisation vehicles without an EU nexus. The EU Securitisation Regulation diverges from UK Securitisation Regulation, which references the FATF list of "high risk jurisdictions", which does not include the Cayman Islands.

There is no immediate or direct impact to private equity or hedge funds formed in the Cayman Islands as a result of the Cayman Islands being added to the EU AML list and it does not otherwise than as stated above have consequences for investors or clients using Cayman Islands structures. No penalties or sanctions for Cayman Islands entities would arise from the Cayman Islands' placement on the EU AML list. Further, the EU AML List is unrelated to the EU's tax blacklist.

Next Steps

Walkers has prepared for every outcome and should there be a need to use an alternative jurisdiction to the Cayman Islands, can provide the same level and scope of service in each of its Bermuda or Jersey offices with additional options for Guernsey and Ireland. The choice of alternative will obviously be driven by client preference taking into account time-zones, jurisdictional familiarity through other products and rating agency comfort. We have migrated Cayman Islands entities to and incorporated new entities in each of Bermuda and Jersey as a response to this issue so are well-versed in the process and able to seamlessly guide our clients through the steps required as well as the ongoing maintenance of the entities.

The Cayman Islands Ministry of Financial Services will continue discussions with EU officials. We are continuing to monitor the situation and will advise further in the event of any developments or updates.

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.