Q&A: Offshore AML regulation and enforcement

February 2023  |  SPECIAL REPORT: CORPORATE FRAUD & CORRUPTION

Financier Worldwide Magazine

February 2023 Issue

FW discusses offshore AML regulation and enforcement with Miriam Smyth at Appleby.

FW: To what extent are financial crimes, including money laundering, growing in frequency and complexity? How would you summarise recent trends in this area?

Smyth: The threat posed to the international financial system as a result of financial crime, including money laundering, is a global problem requiring effective financial crime risk management. As a founding member of the Caribbean Financial Action Task Force, the Cayman Islands has a longstanding commitment to anti-money laundering (AML) and countering the financing of terrorism (CFT) and a deeply rooted compliance culture. The Cayman Islands has made noteworthy progress in financial crime risk management building on years of good work by local government investigating and prosecuting cross-border money laundering cases. The financial crime investigation unit which is part of the Royal Cayman Islands Police Service works with other Cayman Islands entities, including the Financial Reporting Authority (FRA) and the Cayman Islands Monetary Authority (CIMA), to protect the Cayman Islands from financial crime.

FW: ​In your experience, what are the main types of financial crime that organisations are encountering in the Cayman Islands?

Smyth: Financial crime prevention is an important issue for the Cayman Islands government, which has implemented mitigating measures through the following regimes: AML/CFT compliance, economic substance, beneficial ownership and tax reporting compliance via the Foreign Account Tax Compliance Act (FATCA) and the Common Reporting Standard (CRS). Each of these regimes has helped to minimise the threat of financial crimes within the Cayman Islands.

FW: How would you describe recent regulatory and enforcement trends in the fight against money laundering? What efforts are being made to strengthen offshore frameworks?

Smyth: CIMA applies a risk-based approach to its AML/CFT supervisory framework. CIMA’s risk-based approach reflects the 2021 Cayman Islands national risk assessment of its money laundering, terrorist financing and proliferation financing risks, which is designed to draw from its experience of its first national risk assessment conducted in 2015 and to assist financial institutions, designated non-financial businesses and virtual asset service providers with assessing their own risks. As part of its supervisory activities, CIMA carries out AML/CFT inspections. Enforcement action to strengthen CIMA’s regulatory framework has resulted in fines being imposed against financial service providers (FSPs) from across the financial services industry for contravening AML regulations. To date, CIMA has imposed nine fines against FSPs for breaches of the AML regulations. In November 2022, the Grand Court of the Cayman Islands imposed an order on a mutual fund administrator licence holder to pay CIMA $5.1m for breaches of AML regulations.

“The imposition by CIMA of fines under its administrative fines regimes demonstrates CIMA’s willingness to pursue enforcement actions and impose sanctions where FSPs fail in their AML/CFT compliance.”
— Miriam Smyth

FW: ​What common themes have you observed from specific enforcement actions and related penalties issued by authorities? What key lessons can we learn from their outcome?

Smyth: One common theme observed is that for all clients, AML/CFT compliance cannot be a ‘box-ticking’ exercise. CIMA expects firms to have a robust and effective AML/CFT compliance framework in place. AML/CFT compliance is, and will remain, a key priority for CIMA. The imposition by CIMA of fines under its administrative fines regimes demonstrates CIMA’s willingness to pursue enforcement actions and impose sanctions where FSPs fail in their AML/CFT compliance.

FW: ​To what extent are you seeing an increase in information sharing between regulatory authorities in different jurisdictions? What are the pros and cons of this development?

Smyth: As part of its supervisory powers, CIMA is empowered to enter into a memorandum of understanding (MoU) with overseas regulatory authorities in order to assist with cross-border supervision. The pros of such supervisory cooperation between CIMA and foreign regulators helps formalise information exchange and promote the integrity, stability and efficiency of FSPs and the financial system generally. Additionally, beneficial ownership information relating to Cayman Islands established entities can be shared with various international regulatory authorities in accordance with the relevant agreements or MoUs in place. The pros of this development means that relevant authorities can access information not otherwise publicly available. The cons of this development means that it can have implications for the privacy rights of beneficial owners.

FW: What steps should companies take to ensure adequate processes, programmes and policies are in place for anti-money laundering (AML) purposes? In what ways can companies utilise technology to help manage AML regulatory compliance?

Smyth: An in-scope company subject to the AML/CFT regime needs to ensure that it has effective processes in place to prevent and detect money laundering and terrorist financing activities. Such processes should include having their own documented business risk assessment to take account of their obligations under relevant financial sanctions regulations, in particular given the heightened regulatory attention given to financial sanctions as a result of Russia’s invasion of Ukraine. An in-scope company should also adopt internal policies, controls and procedures in relation to its business, to prevent and detect risks and have a clearly defined process in place for the formal review at least annually of such policies and procedures at board level. An in-scope company should further ensure that AML/CFT training is provided to its staff, including training on its internal reporting procedure as well as details on reporting a suspicious activity report to the FRA. As regards utilising technology to help manage AML/CFT compliance, the use of technology continues to be increasingly adopted in the Cayman Islands, in particular for small to medium-sized in-scope companies. Its use is expected to significantly develop even further in future years given the increasing number of service providers offering technological solutions focused on AML/CFT compliance.

FW: How do you expect offshore AML regulation and enforcement to evolve in the months and years ahead?

​Smyth: Between 2021 and 2022, CIMA published a number of notices and press releases arising from AML/CFT supervisory engagements with FSPs in various areas of compliance. These include due diligence, AML/CFT policies and procedures, corporate governance and outsourced AML/CFT activities. A September 2022 published circular set out CIMA’s findings from on-site inspections conducted on persons registered under the Securities Investment Business Act. Along with the specific expectations stated in that circular, CIMA also stressed that, where FSPs fail to demonstrate compliance, it will determine the appropriate action to undertake, within the full range of its regulatory tools, including, where necessary, utilising its enforcement powers. During 2023, we expect CIMA to impose more administrative fines with greater monetary penalties. The publication of supervisory circulars setting out the findings and expectations of CIMA supervisory inspections may be indicative of a pre-warning to certain FSPs of CIMA’s 2023 enforcement priorities.

 

Miriam Smyth is a senior associate based in Appleby’s Cayman Islands office. She provides regulatory risk management and compliance advice to a wide range of regulated financial service providers including banks, insurers, reinsurers, investment firms, fund service providers and FinTech firms. In addition to her private practice experience, she has also worked as in-house legal counsel at a large global bank and in the enforcement division at the Central Bank of Ireland. She can be contacted on +1 (345) 525 2975 or by email: msmyth@applebyglobal.com.

© Financier Worldwide

THE RESPONDENT

Miriam Smyth

Appleby

©2001-2024 Financier Worldwide Ltd. All rights reserved. Any statements expressed on this website are understood to be general opinions and should not be relied upon as legal, financial or any other form of professional advice. Opinions expressed do not necessarily represent the views of the authors’ current or previous employers, or clients. The publisher, authors and authors' firms are not responsible for any loss third parties may suffer in connection with information or materials presented on this website, or use of any such information or materials by any third parties.