These paper commitments are generally worth little unless they are put into practice.
Take the Cayman Islands. In early May, the government quietly released an executive summary of its 2015 national money laundering risk assessment, almost two years after the final risk assessment workshop was held. While the document has so far flown largely under the radar, at Transparency International we believe it deserves a wider audience, as it shows serious risks of dirty money being laundered through the world’s sixth largest financial centre.
This matters because, far from being victimless crimes, corruption and tax evasion deprive citizens around the world of much-needed public services while at the same time undermining institutions and democracy. Developing countries alone lose an estimated US$1 trillion each year to illicit financial flows.
How do the Cayman Islands rate their own efforts?
Cayman’s self-assessment starts by recognising that the country faces major external threats, including its financial system being used to commit fraud and evade taxes.
Vulnerabilities identified include the fact the majority of banks operating in the Caymans don’t have a physical presence in the country. While the document attempts to strike a reassuring note by mentioning that the head offices of these banks are ‘mostly’ in countries with equivalent anti-money laundering requirements to Cayman’s, according to this source the list of equivalent countries includes known anti-money laundering laggards the British Virgin Islands and Panama.
85 per cent of the world’s hedge funds are domiciled in the Cayman Islands
The most vulnerable sector to money laundering within the Cayman financial industry is the securities sector, which includes hedge funds; around 85 per cent of the world’s hedge funds are domiciled in the Cayman Islands.
The law that applies to this sector is the Securities Investment Business Law (SIBL), and the report flags as a significant vulnerability that 2,275 persons are doing business in the sector while exempted from the SIBL licensing requirement. Per the Cayman’s self-assessment, these Excluded Persons, ‘particularly those providing services to high net worth individuals, are vulnerable to money laundering due to limited supervision’. For example, there are no direct inspections by authorities of Excluded Persons ‘to verify that proper due diligence and account monitoring are taking place’.
Referring to the over 11,000 mutual funds registered in Cayman, the report finds as a vulnerability that often ‘the main activity of the fund does not occur within the jurisdiction’ and that ‘in some cases the identity and locations of the ultimate beneficial owners [the real owners] are not necessarily known’. The document again shirks Cayman’s responsibility for due diligence, claiming that these risks are ‘somewhat mitigated by the fact that the majority of the Investment Managers are from Schedule 3 [equivalent legislation] countries’.
Considering the threat posed by international money laundering, Cayman’s Financial Crimes Unit (FCU) is woefully under-resourced. The unit had 13 staff at the time of the risk assessment, down from 17 in 2007. The report finds that ‘[c]utbacks in staffing levels, together with the departure of key personnel such as the Forensic Accountant (sic), have presented challenges to the FCU in the processing of increasing numbers of complex investigations’.
Although an update on personnel notes that in February 2017 five additional investigators have been appointed, this means that this key unit now has a total of 18 staff to investigate US$1.3 trillion in assets – an amount equivalent to the size of the entire Russian economy.
The Cayman’s Financial Crimes Unit has a staff of 18 to investigate US$1.3 trillion in assets
Until recently, sanctions for non-compliance with Cayman’s money laundering regulations were also inadequate at providing a credible deterrent. The sanctions have since been raised from US$5,000 to up to US$500,000, however the document provides no detail on whether these increased sanctions have yet been applied in practice.
‘Decisive action’ required
The report implicitly recognises the dire state of Cayman’s anti-money laundering system when it recommends ‘decisive action’ around practically the entire range of anti-money laundering measures: regulations, supervision, sanctions, intelligence, enforcement, and domestic and international co-operation.
While many other countries have weaknesses when it comes to stopping dirty money, from the United States to Singapore, that is no reason to let any particular country off the hook regarding its own issues, especially, as in the case of the Cayman Islands, one that actively promotes itself as a world leader for financial services.
As local media have also noted, at the end of this year the Cayman Islands will be assessed by the Financial Action Task Force, which will look not just at paper commitments but also at whether Cayman is taking effective action against dirty money in practice.
Cayman authorities have a few months to show they are ready to shape up: as we have recommended previously, one concrete measure they could take is to set up a central public register of beneficial ownership.
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