The 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 is not only a milestone for the jurisdiction in its efforts to combat financial crime but also holds promising implications for its financial service industry.
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
The Cayman Islands has dedicated significant resources to achieve compliance. These efforts included establishing the Cayman Islands Bureau of Financial Investigations (CIBFI) 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.
However, although the jurisdiction had addressed 60 out of 63 recommended actions by FAFT, thr Cayman islands is added to the FATF grey list in February 2021. The 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 investment environment
The Cayman Islands has long been a preferred jurisdiction for foreign investors and foreign portfolio investors (FPIs). Its recent removal from the FATF grey list, as highlighted by Premier Wayne Panton, further enhances this reputation by acknowledging the territory’s effective Anti-Money Laundering/Countering the Financing of Terrorism (AML/CFT) regime.
While it remained greylisted, some EU investors perceived an increased risk of local tax audits on Cayman-based investment structures. This led them to be less inclined to utilize Cayman LLCs as holding vehicles during that period. With the delisting, such concerns are expected to dissipate, potentially reviving interest in leveraging the jurisdiction for LLC formations and other investment vehicles.
Opening gates to the CLO market
After the Cayman islands found itself on the EU AML list in March 2022 following the initial grey listing, 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 (SSPE). This triggered a migration of collateralized loan obligations (CLO) special purpose vehicle (SPVs) from the Cayman Island to other jurisdictions. Good news is the regulatory barrier will soon cease to exist. Now, European investors and managers have the green light to utilize the Cayman Islands entities as issuers and actively invest in CLOs domiciled in the Cayman Islands.
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