Title: Money Laundering Risks in the Cayman Islands’ Financial Sector: A National Risk Assessment

Introduction

The Cayman Islands, a renowned global financial hub, has been identified as having serious risks of money laundering in a recent national risk assessment report. Hosting 85% of the world’s hedge funds, this British Overseas Territory is under the spotlight.

Vulnerabilities in the Cayman Financial Industry

According to the report, the country’s financial sector has significant vulnerabilities, particularly in the securities sector. The Cayman Islands financial system is susceptible to fraud and tax evasion, with major concerns regarding the lack of physical presence for most banks operating within the jurisdiction.

Off-shore Head Offices

The report states that although most banks have offices in countries adhering to anti-money laundering (AML) requirements, there are notable exceptions such as the British Virgin Islands and Panama.

Concerns Surrounding Mutual Funds

With more than 11,000 mutual funds registered, a significant issue is identified that in many cases, the main activity of the fund does not occur within the jurisdiction, and the identity and locations of the ultimate beneficial owners are often not known.

Lack of Supervision for Excluded Persons

Another concern is that the majority of investment managers are from countries with equivalent legislation, but the lack of supervision for Excluded Persons, who are providing services to high net worth individuals, leaves these individuals vulnerable to money laundering.

Critically Under-Resourced Financial Crimes Unit

The Cayman Islands’ Financial Crimes Unit (FCU), which is responsible for investigating money laundering and related offenses, has been critically under-resourced. In 2015, the FCU had only 13 staff members, a significant decrease from the 17 investigators present in 2007.

Staff Turnover

Over time, the unit has faced challenges due to staffing cuts and the departure of key personnel such as the Forensic Accountant. Recent updates indicate that five additional investigators were appointed in February 2017, bringing the unit’s total staffing to 18.

Inefficient Penalties for Non-compliance

Previously, penalties for non-compliance with the Cayman Islands’ AML regulations were inadequate as a deterrent, but fines were raised from US$5,000 to a maximum of US$500,000 in unspecified circumstances.

Recommendations for Improvements

The report suggests numerous improvements to the Cayman Islands’ AML system, including regulations, supervision, as well as intelligence gathering and international cooperation.

Proposed Measures

One crucial measure the authorities could take is to establish and maintain a central public register of beneficial ownership to increase transparency and accountability within the financial sector.

Assessment by the Financial Action Task Force

With an assessment by the Financial Action Task Force (FATF) set for the end of 2023, there is little time for the authorities to take decisive action and demonstrate their commitment to combating money laundering.

Conclusion

In the face of growing public attention and calls for greater transparency and stricter regulations, it is crucial for financial hubs like the Cayman Islands to address their vulnerabilities to money laundering and strengthen their AML defenses.