Compliance Risks Loom Large in Cayman Islands Banking Sector
The Cayman Islands may appear to be a tranquil Caribbean haven with its picturesque beaches and laid-back atmosphere, but beneath the surface lies a complex web of financial transactions that poses significant compliance risks for banking institutions.
The Financial Landscape
According to a recent Mutual Evaluation by the Financial Action Task Force (FATF), the Cayman Islands boasts the 6th largest banking sector in the world, with a cross-border asset position valued at $1.365 trillion and the 5th largest financial jurisdiction by cross-border liabilities valued at $1.347 trillion.
Regulatory Environment
The territory’s relaxed regulatory environment and lack of taxation on corporate profits, capital gains, and personal income have made it an attractive hub for international businesses. However, this has also led to concerns about money-laundering and financial crimes, prompting FATF to place the Cayman Islands on its Grey List and the European Union to label it a high-risk third country.
Deficiencies in Anti-Money Laundering Regime
The Cayman Islands’ anti-money laundering regime has been identified as having several significant deficiencies, including:
- Insufficient focus on international financial crime risks
- Failure to impose sanctions on entities that do not provide accurate beneficial ownership information
- Inadequate assessment of risks in financial sectors not directly supervised within the territory
- Proportionate sanctioning and asset seizure measures that do not deter financial crimes
- Reactive approach to addressing financial crimes, rather than proactive prevention
Mitigating Risks
To mitigate these risks, financial institutions operating in or with exposure to the Cayman Islands can take several steps:
- Understand your exposure to the Cayman Islands, including hosting operations or having clients registered there
- Conduct more stringent Know Your Customer (KYC) actions on clients with ties to the Cayman Islands
- Identify and assess the nature of a client’s business and reasons for operating in the territory
- Determine a client’s source of wealth and revenue
Conclusion
Despite ongoing efforts to improve its anti-money laundering regime, financial institutions must remain vigilant when dealing with entities registered or operating in the Cayman Islands. By adopting robust mitigation measures, they can limit their risk exposure and protect their businesses from financial crime.
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