Cayman Islands Fall Short on Anti-Money Laundering Regulations

Cayman Islands Fall Short on Anti-Money Laundering Regulations

A Global Financial Hub with a Reputation for Secrecy and Lax Regulation

The Cayman Islands, a major player in the global financial industry, has been found lacking when it comes to anti-money laundering (AML) regulations. According to its own risk assessment report, which was quietly released in May after two years of delays, the country faces significant external threats from money launderers and tax evaders.

Vulnerabilities Identified

The report highlights several vulnerabilities that make the Cayman Islands susceptible to money laundering:

Banks without a physical presence: A number of banks operate in the Cayman Islands without having a physical presence on the island, making it difficult for regulators to supervise them effectively.
Weaknesses in supervision and enforcement: The report notes that there are weaknesses in the oversight and enforcement mechanisms, which can lead to non-compliance with AML regulations.

The Securities Sector: A Major Concern

The securities sector is a major concern, as 85% of the world’s hedge funds are domiciled in the Cayman Islands. Many of these firms are exempt from licensing requirements, leaving them vulnerable to money laundering due to limited supervision.

Under-Resourced Financial Crimes Unit

The Financial Crimes Unit (FCU), responsible for investigating AML cases, has been woefully under-resourced. With a staff of 18 investigators, the unit is tasked with tackling a caseload equivalent to the size of the entire Russian economy.

Inadequate Sanctions for Non-Compliance

Sanctions for non-compliance with Cayman’s AML regulations have also been criticized as inadequate. Fines of up to $500,000 are seen as insufficient to deter dirty money.

Recommendations and Next Steps

The report recommends “decisive action” on all aspects of AML measures, including:

Regulations: Strengthening and clarifying regulations to prevent loopholes.
Supervision: Improving supervision and enforcement mechanisms.
Sanctions: Increasing the severity of sanctions for non-compliance.
Intelligence: Enhancing intelligence gathering and sharing.
Enforcement: Improving the effectiveness of enforcement actions.
International Cooperation: Strengthening international cooperation to combat money laundering.

As the Financial Action Task Force (FATF) prepares to assess Cayman’s progress at the end of this year, authorities have a few months to prove they are serious about tackling money laundering. Critics argue that setting up a central public register of beneficial ownership would be a significant step in increasing transparency and combating financial secrecy.