Cayman Islands and EU AML High Risk Third Country List – Government, Public Sector

On January 7, 2022, the European Commission adopted a draft Delegated Regulation (the “Draft Regulation) updating its list of ‘high-risk third countries’ (‘EU AML list’) identified as having strategic deficiencies in their anti-money laundering and counter-terrorist financing (‘AML/CFT’) regimes “)1.

The draft regulation proposes to add nine countries (including the Cayman Islands) and remove five countries from the EU AML list2. It will be submitted to the EU Council and Parliament for approval. If neither objects, it will be published in the Official Journal of the EU and will enter into force 20 days after its publication.

This update briefly analyzes the practical implications of the potential addition of the Cayman Islands to the EU AML list for customers using Cayman Islands vehicles.

Why the proposed addition?

The European Commission has pledged to better align with the Financial Action Task Force on Money Laundering (“FATF”) listing process and the proposed addition of the Cayman Islands to the anti-money laundering list of the EU is a direct result of the Cayman Islands being included on the list of jurisdictions subject to enhanced AML/CFT/CPF scrutiny (“FATF Watch List”) in February 2021, as stated in our previous customer update. However, it should be noted that the FATF and EU registration regimes are not currently aligned. The FATF maintains dual lists while the EU maintains a single list. The FATF Watch List (sometimes referred to as the “FATF Gray List”) includes jurisdictions that are actively working with the FATF to address strategic deficiencies in their AML/CFT regimes. This is separate from the FATF “Call to Action” / “Non-Cooperative Jurisdiction” list (sometimes referred to as the FATF “Black” list). The section below titled “Planned changes to EU anti-money laundering laws” examines EU reform proposals to move to this dual list model.

It is noted in the recitals of the draft regulations that the Cayman Islands’ work continues to address its strategic shortcomings identified by the FATF regarding (i) the establishment of effective sanctions when parties do not submit the required information on the beneficial ownership; and (ii) demonstrate that it effectively prosecutes money laundering cases in accordance with the jurisdiction’s risk profile.

In October 2021, the FATF positively recognized the Cayman Islands’ efforts to improve the AML/CFT regime with respect to these shortcomings, as discussed in more detail below.

Practical consequences

AML/CFT and enhanced customer due diligence

Any entity subject to EU AML/CFT laws is required to apply enhanced due diligence and ongoing monitoring processes for any of its clients/clients established or resident in an AML List jurisdiction of the EU. The measures to be applied will vary, but may entail:

a. a requirement to perform more comprehensive due diligence on the source of funds and source of wealth of the client/customer (for example, additional information may need to be provided to financial intermediaries such as correspondent banks); and or

b. increased internal controls over business acceptance and ongoing monitoring.

Securitizations

Amendments to EU Securitization Regulation (EU) 2017/2402 on April 9, 2021 affect the use of Special Purpose Vehicles (“SPV”) established in non-EU jurisdictions listed EU AML. Accordingly, specific advice should be taken by relevant EU entities in relation to securitisations (defined in the EU Securitization Regulation) that use Cayman Islands SPVs.

European investment and marketing funds

EU AML listing does not prevent Cayman Islands investment funds from being marketed in the EU under national private placement rules under Directive (EU) 2011/61 on Alternative Investment Fund Managers (“AIFMD”). However, in November 2021, the European Commission published proposals to modify the AIFMD. If the Cayman Islands is added to the EU’s AML list and remains there by the time the proposed AIFMD amendments come into effect, this could theoretically prevent investment funds domiciled in the Cayman Islands from trading in the EU. under national private placement schemes. However, the AIFMD proposals are not expected to enter into force until 2024 and may be affected by planned changes to European anti-money laundering legislation in the meantime, as discussed below.

EU public funding

EU-related development agencies may not be able to lend development funds to the Cayman Islands or to entities established in the Cayman Islands, subject to certain exceptions. However, we understand that this feature is not widely used in practice and therefore we do not expect it to have a significant impact.

Tax implications

EU AML listing should not affect existing representations or commitments made by tax authorities under agreements with the Cayman Islands in the area of ​​international mutual tax cooperation. Similarly, the listing is not a tax measure and would, for example, have no impact on transactions with Cayman Islands counterparties under the EU’s DAC6 tax reporting regime.

Planned changes to EU anti-money laundering laws

As part of a wider reform package of European AML/CFT legislation, the European Commission has recently published a new draft AML/CFT Regulation. Please refer to our customer update on this for more details. These reforms seek to move away from the current approach (in MLD4) of prescribing a single list of AML high-risk third countries. It is proposed that the EU regime be aligned with the FATF double list approach and distinguish between:

(i) third countries where significant strategic gaps in the AML/CFT legal and institutional framework of the third country have been identified; and

(ii) Third countries with compliance weaknesses.

The new EU AML/CFT regulatory framework (including the draft AML/CFT Regulation) is expected to be fully operational by 2024 and may have implications for other EU legislative reforms, including including the aforementioned AIFMD proposals.

FATF Plenary and Cayman Islands Government Response

During its October 2021 Plenary, the FATF positively acknowledged the Cayman Islands’ ongoing efforts to improve its AML/CFT regime.

The FATF has acknowledged that the Cayman Islands has applied and will maintain “effective, proportionate and dissuasive sanctions, including administrative sanctions and other enforcement measures against obliged entities to ensure that AML/CFT offenses are corrected.”

It is therefore understood that the FATF considers that the Cayman Islands is making positive progress in satisfying the outstanding final recommendations arising from the effectiveness evaluation and that the jurisdiction has already satisfied the vast majority of the evaluation heads. The Cayman Islands is also ‘Compliant’ or ‘Largely Compliant’ with all 40 FATF Technical Recommendations. Assuming this positive progress continues, it is reasonable to expect the Cayman Islands to be removed from the FATF watch list in the relatively short term.

On January 12, 2022, the Cayman Islands Government’s Department of Financial Services and Commerce issued a Notice to Industry acknowledging the publication of the proposed regulations. He notes that the department continues to hold direct discussions with EU officials with a view to making progress on improvements to the regime to facilitate the jurisdiction’s delisting.

Footnotes

1 Article 9 of the Fourth Money Laundering Directive (EU) 2015/849 (“MLD4”) empowers the European Commission to adopt delegated acts to identify high-risk third countries.

2 Proposed countries to add: Burkina Faso, Cayman Islands, Haiti, Jordan, Mali, Morocco, Philippines, Senegal and South Sudan. Countries proposed for deletion: Bahamas, Botswana, Ghana, Iraq and Mauritius.

The content of this article is intended to provide a general guide on the subject. Specialist advice should be sought regarding your particular situation.

Martin E. Berry