FATF's grey list ruling on the Cayman Islands

How long is this piece of string?

At its recent plenary, The FATF refused to remove the Cayman Islands from the grey list noting that the jurisdiction has made progress by advancing ML prosecutions into convictions and demonstrating progress on complex ML cases with a foreign predicate, but concluding that the Cayman Islands should demonstrate that it is ‘prosecuting all types of money laundering cases in line with the jurisdiction’s risk profile and that such prosecutions are resulting in the application of dissuasive, effective, and proportionate sanctions.’

For anyone new to this blacklisting episode, the Cayman Islands has moved from enhancing the regulatory framework to establishing a stronger legal framework, demonstrating technical compliance and in recent years, moving into the current phase of demonstrating implementation. Success in this final phase is increasingly being measured by the extent (and now it seems, detailed implications of) prosecutions.

The challenge Cayman faces is not that it doesn’t understand the need to enhance its regulatory framework to fight financial crimes. It has done so in arguably the most complete manner demonstrated by any country since the FATF and CFATF began the peer reviews decades ago.?The Cayman Islands government and previous administrations have always placed adhering to the FATF’s standards as a priority, and usually with the full support of the industry.?The pace of progress on the FATF issue over the past 2 years is clear evidence of that.

There are 2 significant areas to zoom in on; namely what level of sanctions/punishment arising from prosecutions should be deemed sufficient to be ‘in line’ with Cayman’s risk profile? And second, how does the proper functioning of our judicial system relate to our need to address this issue?

Risk based approach

Our discussions with the FATF have reached a point where clearly we need some clarity around what ‘in line’ means in this context.

As a jurisdiction we have been categorized whether rightly or wrongly, as having a higher risk exposure to money laundering and similar crimes. With some reluctance (because objectively it could easily be argued otherwise--just take a look at the USA and the UK for example) we accepted that assessment more than 2 decades ago and quickly moved to address the deficiencies pointed out in the various reviews.

The challenge Cayman faces is not that it doesn’t understand the need to enhance its regulatory framework to fight financial crimes. It has done so in arguably the most complete manner demonstrated by any country since the FATF and CFATF began the peer reviews decades ago.?

Based on our own risk assessment and risk based approach, the Cayman Islands has quite literally (and this can be read directly from the FATF’s own findings) put in place all the required laws, regulations and institutions that amount to a near perfect AML framework. And although there has been no formal study on this, the financial services industry has very likely invested hundreds of millions of dollars in compliance (systems, audits and personnel) over the past 2 decades.

It’s hard to understand why these actions are not viewed as being perfectly aligned with our risk profile (unless you are familiar with the 25 year old arguments re unfairness, politically and commercially motivated biases, etc, but let’s stick with the more technical approach right now).

Threading a very fine line..

The FATF is essentially saying now that we need to demonstrate our implementation with prosecutions. That implies successful prosecutions, convictions and sentencing. But how long is that piece of string? The Cayman Islands can demonstrate that its system is working by showing that those who breach the laws are not only caught but successfully prosecuted. Will the next stage involve questioning how many years of sentencing qualifies as being 'in line with our risk profile'? and is the judicial system not meant to operate independently??

You might be tempted to argue that 'at least we now know their expectations'. But if we examine the actions of the FATF over the past 2 decades we will see evidence that the goal post not only moves but the rules of the game are adjusted along the way as well.

The trouble for the Cayman Islands is we can't simply move on to playing a different game.?We are vested in a world class international financial services industry that we have built up over the past 70 years which is globally well respected and contributes directly or indirectly more than half of the country’s GDP. Our ‘game' is financial services and we have played it very well. The regulation of this sector and any objective reviews by external bodies, are meant to be transparent so in essence we should all know the rules that we are expected to play by.?If later we find that those rules are posing a threat to the way our judicial system is meant to function, we will be threading a fine line.