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He Hath Founded It Upon the Seas: Cayman Islands AML/CFT/CPF Regulation Changes in 2023

The phrase in the title of this update is the national motto of the Cayman Islands and appears on the national coat of arms, referring to the islands’ long history and ties to the sea.

Cayman may have been founded on the trading routes of the Caribbean Ocean and beyond, but through the 20th century it has developed into a major international finance centre.

The Cayman Islands Monetary Authority (CIMA), the regulatory authority in the Cayman Islands, is expected to issue updates in 2023 ensuring the Cayman Islands continues to evolve with international standards.

This year, all Cayman Islands domiciled funds must ensure the conduct of their business and their service providers comply with the Cayman Islands Anti Money Laundering Regulations (AMLRs).

The AMLRs require Cayman Funds to establish Anti-Money Laundering (AML), Countering Terrorist Financing (CFT), and Countering Proliferation Financing (CPF) policies, controls, and procedures (PCPs) which effectively detect and prevent a fund from being used for illicit purposes protecting the integrity of the global financial sector.

Following a period of private sector consultation within the Cayman Islands financial sector, CIMA will update the AMLRs and AML Guidance accordingly which will affect all the entities under its regulatory oversight, including Cayman Islands regulated mutual funds, and Cayman Islands private funds regulated under the Private Funds Act.

 

CIMA Board Governance Expectations

As per Section 2(B)(2) of the Guidance Notes on the Prevention and Detection of Money Laundering, Terrorist Financing and Proliferation Financing in the Cayman Islands (AML Guidance):

Senior management of a Financial Service Provider (FSP) is responsible for the effective management of its business. Therefore, it is the responsibility of the senior management to ensure that appropriate systems are in place to prevent and report ML/TF/PF and the FSP is in compliance with the applicable legislative and regulatory obligations.

In view of this, the onus to stay abreast of regulatory changes and CIMA’s expectations, ultimately rests with the fund and the fund’s Directors (collectively the ‘fund’).

 

AMLRs and AML Guidance Proposed Changes

To safeguard the corporate governance and internal controls of the operations of your fund, regular assurance testing should be completed to ensure the Fund’s corporate governance and internal controls evolve as and when the AMLRs and AML Guidance evolve.  The Cayman Islands Government is proposing amendments to the AMLRs as a result of reviews of the AMLRs, which were being driven by changes to international AML/CFT standards and the need to align the AMLRs and AML Guidance more closely with these standards and other best practices.  The Proposed change relate to:

  • updating the Proliferation Financing (PF) definition,
  • requirements assessing PF (i.e., tracks in most respect with assessing ML/TF),
  • record keeping procedures (remedy inconsistency), and
  • obligations of Designated Non-Financial Business and Professionals (DNFBP)

 

Governance Framework

A Cayman Islands fund should, via is governance framework, rely on its appointed AML Officers (AMLCO, MLRO, and DMLRO) to assist with the flow of AML/CFT/CPF information and how it impacts the fund.

Noting the importance of a Cayman Islands fund appointing AML Officers who have the authority and ability to oversee the effectiveness of the Fund’s PCPs with applicable AML/CFT/CPF legislation and guidance and the day-to-day operation of the AML/CFT/CPF reliance the fund has placed on its service providers.

 

AMLRs Duties and Value-add

Fund boards should expect their AML Officers to advise them of any AML/CFT/CPF regulatory or control changes/expectations that need to be brought to their attention and how they will impact the fund’s governance framework. The flow of AML/CFT/CPF information is a critical component to the effectiveness of a fund’s corporate governance framework.

For a Cayman Islands fund to satisfy its AML/CFT/CPF obligations, the fund should continually test its corporate governance framework, and identify any weak spots it may have, for example, AML risk assessments procedures and controls such as customer due diligence or sanctions screening. To achieve this, a fund must effectively monitor its compliance via its Directors and Senior Management (e.g., AML Officers), under adopted governance standards which proactively allow the Fund’s compliance programme to evolve with the everchanging AML/CFT/CPF landscape.

Proper AML/CFT/CPF governance standards, include, but are not limited to the following:

  • Annual (at minimum) review of the AMLRs and the Fund’s and its service providers AML/CFT/CPF PCPs;
  • Annual AML/CFT/CPF training for all staff including Directors and Senior Management; and
  • Annual AML/CFT/CPF Business Risk Assessments and Audits.

The lack of appropriately skilled and experienced AML personnel and understanding of their roles entail could expose a fund to non-compliance.

 

CIMA Regulatory Supervision

CIMA remains committed to supervising the Cayman Islands’ financial sector business activities and their implementation of an effective and efficient corporate governance framework. This includes the structure and governance of the governing body, its collective legal and regulatory obligations, and the obligations of the individual directors, which include the understanding and oversight of the appointed and delegated AML/CFT/CPF functions.

Not having an effective corporate governance framework in place, will expose the fund and directors to avoidable risks/breaches and potential fines.

 

CIMA Inspections

CIMA has the power to conduct AML/CFT/CPF themed inspections which will continue to be a key focus of theirs in 2023.

These AML/CFT/CPF themed inspections allow CIMA to:

  • understand the business activities and operating environment of its Regulated Entities;
  • detect problems of compliance (i.e., any non-compliance) with relevant law and regulations; and
  • gather information on any matters that may require policy consideration or enhancements.

These AML/CFT/CPF themed inspections may form the basis for future regulatory or enforcement actions where breaches are identified. Under Cayman Islands legislation, CIMA has the authority to impose administrative fines for non-compliance. If a fund, were deemed to be in breach of their AML/CFT/CPF obligations, the fund could face the following CIMA imposed fines:

 

Breach Fines Limitation Period
Minor ‘Initial’ fixed fine of US$6,098

The supervisory authority also has a discretion to impose one or more additional fines of US$6,098 each, up to a cumulative cap of US$24,390 for a single minor breach

6 Months
Serious A single fine up to a maximum of US$60,976 for individuals or US$121,951 for corporate bodies 2 years
Very Serious A single fine up to a maximum of US$121,951 for individuals or US$1,219,512 for corporate bodies 2 Years

Having AML Officers who are suitably qualified and have sufficient skills and experience in the area of compliance, particularly in the areas of AML/CFT/CPF ensure a fund complies with its AML/CFT/CPF obligations.

 

JTC AML Officer Service

JTC has qualified and experienced professionals who have extensive knowledge and understanding of Cayman Islands AMLRs and are here to help. JTC has a dedicated and experienced AML services team to deliver a robust Anti-Money Laundering Officer service which will both satisfy the AML Officer appointment obligations and provides an independent AML oversight function that reviews a Cayman Islands fund’s current corporate governance framework vs. the regulatory requirements/expectations and identifies deficiencies or areas that could be enhanced. JTC would be happy to discuss the practical solutions and controls our AML Officer Service would entail and how they would benefit a Cayman Islands fund.

 

To find out more about AML services, contact Clay Dupuy directly.

 

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