Cayman Islands bid farewell to the grey list during the Financial Action Task Force (FATF) plenary in Paris, concluding on 27 October 2023. This removal isn’t just a milestone for the jurisdiction’s financial services industry, showcasing its dedication to combating financial crime; it also carries promising implications for its financial landscape.
What is FATF grey list?
The Financial Action Task Force (FATF) is an intergovernmental organisation responsible for setting international standards and promoting effective measures to combat money laundering, terrorist financing, and related threats to the global financial system.
The FATF grey list outlines the countries or jurisdictions that the FATF deems as ‘jurisdictions under increased monitoring, and the Cayman Islands found itself on this list in February 2021, signalling the need for enhanced efforts to address strategic deficiencies.
Cayman’s road to compliance
Since 2019, the Cayman Islands has dedicated significant resources to achieve compliance. These efforts included establishing a dedicated bureau within the police service to lead complex cross-border money-laundering inquiries, implementing stringent rules and oversight for high-risk industries such as real estate and precious metal dealers, among other reforms.
In February 2021, the FATF added the Cayman Islands to the FATF grey list following a mutual evaluation. Although the jurisdiction had addressed 60 out of 63 recommended actions, three crucial tasks remained before removal:
- applying sanctions that are effective, proportionate, and dissuasive, and taking administrative penalties and enforcement actions against obliged entities to ensure that breaches are remediated effectively and in a timely manner.
- imposing adequate and effective sanctions in cases where relevant parties (including legal persons) do not file accurate, adequate, and up to date beneficial ownership information; and
- demonstrating that they are prosecuting all types of money laundering in line with the jurisdiction’s risk profile and that such prosecutions are resulting in the application of dissuasive, effective, and proportionate sanctions.
By June 2023, the Cayman Islands successfully fulfilled all recommended actions outlined by the FATF, and was officially removed on 27 October 2023.
Building a more favourable financial environment
Cayman Island has been one of the preferred jurisdictions by foreign investors, and about 400 foreign portfolio investors (FPIs) are domiciled from Cayman Island. Removal from the FATF grey list will further enhance Cayman Islands reputation, highlighting its robust and effective Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regime.
There is now an expectation that Cayman Islands’ strengthened reputation will soon lead to a delisting from European Commission’s “high-risk third countries.” This removal, in turn, will enhance the country’s access to EU financial markets. That is to say, the close alignment with the FATF’s process not only solidifies the jurisdiction’s global financial standing but also opens opportunities for the country to engage more freely in financial transactions, attracting foreign investments and fostering economic growth.
Opening gates to the CLO market
After the Cayman Islands found itself on the EU AML blacklist in March 2022 following the initial grey listing, but there’s now a positive outlook as the jurisdiction anticipates delisting in early 2024. This is a natural progression follows the successful removal of the Cayman Islands from the FATF grey list.
According to Article 4 of the EU Securitisation Regulation, the EU AML blacklist countries are unable to establish securitisation special purpose entities. This triggered a migration of CLO SPVs from Cayman Island to other jurisdictions, such as Bermuda and Jersey. Good news is the regulatory barrier will soon cease to exist. Now, European investors and managers have the green light to utilize Cayman Islands entities as issuers and actively invest in CLOs domiciled in the Cayman Islands.
Moreover, after the removal of the Cayman Islands from the EU AML blacklist, there’s an expectation that the perceived risk of local tax audits on investments in structures established in the Cayman Islands will decrease. Consequently, EU investors may be more inclined to choose the jurisdiction for LLC formations, anticipating a reduction in concerns related to potential audits.
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