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Matt Mulry, Dillon Eustace

Cayman anti-money laundering regime under review

By Matt Mulry (pictured), Dillon Eustace – In the shadow of an impending review by the Financial Acting Task Force the Cayman Islands has undertaken an overhaul of its laws, regulations and guidance notes which govern its anti-money laundering and counter-terrorist financing regime. 

The revisions to the Cayman laws, regulations and guidance notes are extensive but the impact on the Cayman funds industry is generally to add clarity and to confirm that existing approaches to compliance through delegation to a regulated and approved administrator continue to be available. From our point of view and that of our clients its is the ease with which a fund can delegate its compliance obligations that is of key importance and as far as is possible the delegation process remains unchanged. In this blog I try to highlight the essential elements of the new regime as they apply to our funds clients and to give a broad overview of the steps that we are taking to ensure the compliance requirement are satisfied.

The key changes to the current regime as it applies to hedge and private equity funds are to extend its scope, to add a requirement for all funds to designate compliance and reporting officers, to incorporate the Cayman regulator’s established risk based approach and to clarify the application and implementation of simplified and enhanced due diligence approaches.

The scope of the Proceeds of Crime Law has been expanded to cover not only mutual funds (including registered and closely held funds) but also single investor funds and closed ended private equity funds. The guidance notes issued by the Cayman Islands Monetary Authority focuses its sector specific guidance on mutual funds without explicitly providing guidance for single investor funds or private equity funds but the specific guidance given for mutual funds can sensibly be applied across each of these fund types. Industry best practice in Cayman has long been to implement the full extent of the anti-money laundering regime as applicable to mutual funds when establishing all types of funds so the number of private equity and single investor funds that will need to address significant changes to their current practices will be limited. Those that do need to make these changes will have until 31 May 2018 to do so.

Under the new regime funds are required to designate an anti-money laundering compliance officer, money laundering reporting officer and a deputy money laundering reporting officer. The regime specifically permits the delegation of these obligations and in particular supports a delegation to a fund’s administrator. We would expect that the majority of administrators will accept that they are best placed to take on this responsibility. Administrators which are subject to and comply with the anti-money laundering regime of the Cayman Islands or of an approved jurisdiction will have their own compliance officer and anti-money laundering reporting officers who can act for the fund in those capacities.

The risk based approach broadly requires a fund to identify and assess the money laundering risks and terrorist financing risks applicable to their business and to determine the overall level of risk and the appropriate mitigation to be applied. A non-exclusive list of the risks and warning signs relevant to mutual funds is set out in the guidance notes and whilst the assessment and determination of risks can be delegated to a fund’s administrator the delegation to the administrator itself also needs to be assessed by the fund. This is the case particularly where the delegate is not subject to adequate anti-money laundering and counter terrorist financing law and measures or if it is not adequately supervised.

Following a risk assessment in relation to its investors a fund or its administrator is able to apply a lighter simplified approach to identification and verification where those investors are considered low risk. Low risk is generally categorised by reference to established categories of regulated or listed entities provided that the relevant regulator or stock exchange is approved by the Cayman Islands Monetary or the Cayman Islands Anti-Money Laundering Steering Group. An important change has been made to the ability of a fund to rely on the receipt of subscription funds from a bank account verified to be in the name of the investor at a bank regulated in an approved jurisdiction in that whilst this approach is still permitted the investor’s identity will need to be verified before any assets can be returned to them.

Enhanced due diligence procedures beyond the usual identification and verification requirements need to be applied where an investor is assessed to be high risk including where that investor is based in a high risk country or holds a position or familial relationship that make them a politically exposed person. The guidance notes set out a non-exclusive list of enhanced measures that should be considered in these circumstances including obtaining additional information and conducting enhanced monitoring.

Delegation of a fund’s anti-money laundering and counter terrorist financing procedures remains a feature of the Cayman regime and three approaches to delegation of these procedures are available. The most common approach is likely to remain a delegation by a fund which has no staff in the Cayman Islands to an administrator which is subject to and complies with the anti-money laundering regime of the Cayman Islands or of an approved jurisdiction. A fund might also choose to delegate part only of the required procedures to such a delegate. Lastly a fund may delegate all or any part of its obligation to maintain its compliance procedures to a suitable third party provided that such delegation is appropriately risk assessed by the fund. In each case the fund will need to ensure that appropriate records will be made available to the Cayman Islands Monetary Authority on request.

Where the third option for delegation is relied upon a full risk assessment of the delegate will be required to ensure an equivalency of the procedures adopted by them to those applicable under the new Cayman regime. This additional burden combined with the possibility that such a delegation may result in the fund needing to maintain a register of beneficial owners in the Cayman Islands is likely to lead to a reduced reliance on this third option.

Before this overhaul of its anti-money laundering regime the Cayman Islands already had regime which was recognised as being more effective in preventing financial crime than the regimes adopted in the largest jurisdictions with which it routinely conduct business. The new regime seeks to preserve the careful balance between the legitimate concerns which underpin anti-money laundering and counter terrorist financing and the efficient conduct of financial services business. We believe that the implementation of procedures to ensure compliance with the new regime should not be a difficult process and that in the majority of cases the established administrators will be pro-active in assisting their clients with updating their administration agreements to cover off these new requirements.

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