New AML regulations come into force

The Cayman Islands government recently adopted updated Anti-Money Laundering Regulations (the AML Regulations) which came into force on 2 October 2017. The AML Regulations demonstrate Cayman’s ongoing commitment to complying with the highest international standards on combatting money laundering and terrorist financing and aim to ensure consistency with the Financial Action Task Force (FATF) 2012 recommendations, in accordance with its position as a leading international finance centre. The adoption of the AML Regulations is part of the update of the Cayman Islands anti-money laundering (AML) regime following on from the updated Proceeds of Crime Law (the PCL) which took effect earlier this year.

This alert sets out key changes under the AML Regulations.

What’s new under the AML Regulations?

The AML Regulations make the following changes to Cayman’s AML regime for anyone carrying out relevant financial business (RFB) in or from the Cayman Islands:

  • Risk based approach : the AML Regulations include  comprehensive procedural updates for assessing and applying a risk based approach to money laundering and terrorist financing risks and compliance. This includes the requirement to conduct a business risk assessment of products, practices, delivery mechanisms (data) and new or developing technology risks in accordance with the FATF recommendations.  The practical application of the risk rating methodology will be expanded upon in updated guidance notes [1] which are expected to be issued by the end of the year and which are also expected to include further details of enhanced due diligence requirements for servicing new technologies, including cryptocurrencies.
  • Beneficial owners : the AML Regulations contain specific requirements to identify beneficial owners for legal persons and legal arrangements and to apply a risk based approach in conducting client due diligence on existing relationships. New beneficial owner definitions have been added, which closely follow the definitions in the FATF recommendations, FATCA [2] and CRS[3] .
  • Penalties : there is a substantial increase in the penalties that apply for breach of the AML Regulations. This is in line with other recent changes and proposed changes to increase penalties for breaches of various Cayman regulatory laws.
  • RFB list expanded : the list of activities which are classed as RFB is now contained in the PCL instead of the AML Regulations. The PCL revised the RFB list to include an entity that is “otherwise investing, administering or managing funds or money on behalf of other persons”, bringing the classification in line with the FATCA and CRS definitions of an investment entity. In essence this means that regulated and unregulated Cayman investment entities will now be subject to compliance with the Cayman Islands AML regime. Previously under earlier versions of the PCL and AML Regulations, investment funds which are regulated under the Mutual Funds Law were classed as conducting RFB and so required to comply with AML legislation, but non-regulated funds were not expressly covered by the definition of RFB.  The RFB list also now includes “underwriting and placement of life insurance and other investment related insurance”.  The updated Guidance Notes are expected to include sector specific guidance which will help those whose activities are now classed as RFB.
  • New competent authority for unregulated entities and possible transitional period : as the revised RFB list means that various unregulated entities will now be carrying out RFB, it is likely that a new competent authority will be established to supervise their AML compliance. There may also be a transitional period to allow those entities time to put in place appropriate procedures to comply with their new AML obligations. We will issue further updates once more details are available.
  • Countries with equivalent legislation : the list of countries which are deemed by the Cayman Islands to have equivalent AML legislation (previously referred to as Schedule 3 countries) is now approved by the Government’s Anti-Money Laundering Steering Group, which forms part of the Attorney General’s office. This change was brought in to allow the list to be amended without having to pass formal legislation. The list[4] is the same as the previous Schedule 3 list, except that Mexico, Panama and Turkey are no longer included.
  • Other revisions : more prescriptive definitions (previously contained in the Guidance Notes) have been added in respect of politically exposed persons, which includes their family members and close associates. New procedural requirements have also been added to conduct sanction checks. The Cayman Islands has implemented the UN Security Council Resolutions and the European Union and United Kingdom sanctions measures, which are applied against countries, regimes or persons designated to be in violation of international laws.

 
Are other changes expected?

Revised draft updated Guidance Notes are expected to be circulated by the Government for consultation in the next few weeks, and then finalised and adopted later this year. We will issue further client updates once the revised Guidance Notes are in effect.

Caribbean Financial Action Task Force (CFATF) evaluation

In accordance with FATF recommendations, financial institutions are expected to identify, assess and understand the AML and counter-terrorist financing (AML/CFT) risks to which they are exposed and take AML/CFT measures appropriate to those risks in order to mitigate them effectively.  

The CFATF team is scheduled to make a mutual evaluation of the Cayman Islands regulatory framework during an onsite visit in December.  As an integral element of its preparation, the Cayman Islands Monetary Authority (CIMA) is conducting a formal assessment of the AML/CFT risks present in various sectors of the financial services industry.

Those licensees affected [5] are currently being asked to complete a self-assessment relating to their specific business risks and AML/CFT controls to allow CIMA to obtain a complete and comprehensive view of each sectorial risk.  The self-assessment form is available to the relevant licensees on the REEFS portal.

Please contact your usual Harneys contact if you have any questions or would like further advice on your AML obligations.
 

 
[1] Guidance Notes on the Prevention and Detection of Money Laundering and Terrorist Financing in the Cayman Islands (Guidance Notes)
[2] the US Foreign Account Tax Compliance Act, the intergovernmental agreement between the United States and the Cayman Islands and the Cayman Islands Tax Information Authority (International Compliance) (United States) Regulations (as revised)
[3] the OECD sponsored Multilateral Competent Authority Agreement and certain bilateral agreements or tax treaties regarding the common reporting standard on automatic exchange of information the Tax Information Authority (International Tax Compliance) (Common Reporting Standard) Regulations (as revised)
[4] Argentina, Australia, Austria, Bahamas, Bahrain, Barbados, Belgium, Bermuda, Brazil, British Virgin Islands, Canada, Cyprus, Denmark, Finland, France, Germany, Gibraltar, Greece, Guernsey, Hong Kong, Iceland, India, Ireland, Isle of Man, Israel, Italy, Japan, Jersey, Liechtenstein, Luxembourg, Malta, Netherlands, New Zealand, Norway, People’s Republic of China, Portugal, Singapore, Spain, Sweden, Switzerland, United Arab Emirates, United Kingdom, United States of America.
[5] Category A banks, Category B banks, Class A insurance companies, Class B insurance companies that carry out long-term business, mutual fund administrators, Securities Investment Business licensees, Money Services businesses, building societies and credit unions, licensed company managers and corporate services providers and licensed trust companies, restricted trust companies and registered controlled subsidiaries.