The government of the Cayman Islands has said it is “astounded” at being named on a list of high-risk countries for financial crime by the UK Financial Conduct Authority. The Cayman Government has written to the FCA to say its inclusion is “wholly arbitrary”.
Financial Services Minister Wayne Panton is quoted on the Cayman 27 TV station website saying that the government “is considering all options available to us, including judicial review which will seek to reverse the FCA’s decision to include Cayman on the list.”
The Cayman Chamber of Commerce Council, meanwhile, has called the high-risk listing “insulting”.
Two of the main arguments against Cayman’s inclusion on the list seem to be:
a) We have all the necessary laws in place
b) The size of the financial sector doesn’t matter. For example, the CEO of Cayman Finance is quoted in Compass Cayman saying: “the size of the financial sector should not be used arbitrarily as a sign of high risk.”
A first answer to both a) and b) was provided by this sentence in a US State department report in March 2014:
“While the Cayman Islands increased both its regulatory and law enforcement staffing, the number of prosecutions and convictions is extremely low given the vast scale of the country’s financial sector; there has been only one conviction since 2006.”
The FCA’s response to the Cayman government was along the same lines: “we consider that the size of a country’s financial sector is correlated to risk as the larger the financial sector, the greater the risk that it will be used to facilitate money laundering.”
To put Cayman’s single conviction since 2006 in perspective: in 2011 the FCA visited 27 UK banking groups with significant international activity to look at their money-laundering risk management, and found “serious weaknesses common to many firms included in our review”.
It also found that “Around a third of banks, including the private banking arms of some major banking groups, appeared willing to accept very high levels of money-laundering risk if the immediate reputational and regulatory risk was acceptable.”
In fact, when the FCA fined Standard Chartered bank for anti-money laundering failings in January 2014, it reviewed just 48 customer files and found 15 high-risk cases, in the majority of which the level of due diligence was insufficient.
In comparison, the US State department report on money-laundering risks found that as of March 2013 the Cayman banking sector had USD 1.63 trillion in assets, and that “There were approximately 222 banks, 150 active trust licenses, 730 captive insurance companies, nine money service businesses, and more than 92,000 companies licensed or registered in the Cayman Islands.” Given that Cayman’s population is 57 thousand, practically all these are operating in the international offshore sector.
It is of course theoretically possible that despite the lack of effective enforcement the Cayman finance sector is self-regulating and applying all relevant laws to itself. One way of finding out would be if the Cayman authorities carried out a similar exercise as the FCA did in 2011, visiting a sample of banks to review the due diligence on some of their high-risk customers.
– Offshore team spirit update: the letter from the Cayman government to the FCA complains that BVI, Jersey and the Isle of Man have not been included on the high-risk list for money-laundering even though they feature more often than Cayman on one of the sources used to compile the list (the Treasury sanctions list).
– The link to the list of high-risk countries on the FCA website is currently inactive. As noted by the I hate money-laundering blog, the FCA did not list the US as a high-risk country. The US State department, on the other hand, did include the UK on the US list.