Cayman Islands expected to be removed from anti-money laundering and anti-terrorist financing list

Cayman Islands expected to be removed from anti-money laundering and anti-terrorist financing list

The Financial Action Task Force (FATF) issued a black list and a grey list based on the latest global risk management of money laundering and terrorist financing in different jurisdictions in July. 

The black list means high-risk jurisdictions subject to a call for action, which includes North Korea and Iran. 

The grey list means jurisdictions under increased monitoring, which includes Albania, Barbados, Botswana, Burkina Faso, Cambodia, Cayman Islands, Gibraltar, Haiti, Jamaica, Jordan, Mali, Morocco, Myanmar, Nicaragua, Pakistan, Panama, Philippines, Senegal, South Sudan, Syrian Arab Republic, Turkey, Uganda, United Arab Emirates, and Yemen.

Compared with the list of February, 2022, the blacklist remains unchanged, with North Korea and Iran still on. Malta, on the other hand, has been removed from the grey list and is no longer a country that needs increased monitoring.

FATF keeps a close eye on tax haven

Barbados, Panama and the Cayman Island, the three offshore financial centers (normally called tax havens), remain on the grey list. 

Barbados has a double taxation avoidance agreement with China and an agreed dividend tax rate of 5%, which is in the lowest bracket of agreed dividend tax rates, the same with Singapore and Hong Kong. Because of this, Barbados companies are used by some cross-border investors as tax planning SPVs for investments in China.

Panama, another traditionally offshore financial center, has an advantage in international shipping and offshore trust business. However, the leaking of documents in previous years has made Panama a key target of surveillance by international organizations, including the FATF. As of today, Panama has no double taxation agreement with China.

The Cayman Islands is one of the most famous places for cross-border investors. Many people have heard of Cayman Exempt Companies and Cayman USD Funds.

Companies raising capital or listing outside of Chinese mainland always choose a Cayman company as the holding company or listing entity.

The Cayman Islands and China do not have a double taxation avoidance agreement, but they have signed a Memorandum of Understanding on Securities and Futures Regulatory Cooperation, which provides for regulatory cooperation and information exchange on the issuance, trading and administration of securities and futures, brokers and dealers, market conditions of investment products, clearing and settlement, compliance, insider trading of listed companies, options contracts, futures trading, etc.

In recent years, the Cayman Islands has implemented the Economic Substance Law and CRS, which allows information on the ultimate beneficiaries of Cayman companies to be exchanged back to China through official channels. Please pay attention on this if you or your clients have business in Barbados, Panama or the Cayman Islands.

Cayman Islands has a great progress in meeting FATF technical compliance

In February 2021, the Cayman Islands made a high-level commitment to work with the FATF to enhance the effectiveness of its anti-money laundering and anti-terrorist financing regime.

In November 2021, FAFT conducted a monitoring and assessment of the Cayman Islands' anti-money laundering and anti-terrorist financing, concluding that it had made significant progress in terms of technical compliance, but needed to work on strategic deficiencies.

At present, the Cayman Islands continues to work on implementing actions to address the strategic deficiencies, specifically in the following areas. 1) Apply adequate and effective sanctions where relevant parties (including legal persons) fail to submit accurate, adequate and up-to-date information on beneficial ownership as required. 2) Prosecute all types of money laundering cases in accordance with the risk profile of the relevant party in that jurisdiction and that such prosecutions should have a dissuasive, effective and sanctioning practical effect.

Based on the FATF's endorsement of the Cayman Islands, the European Commission's Directorate-General for Financial Services and Capital Markets Union has confirmed, by letter dated 17 May 2022, that the EU does not require the Cayman Islands to adopt any additional anti-money laundering and anti-terrorist financing measures beyond those included in the FATF actions above.

It means that once the FATF removes the Cayman Islands from its list of jurisdictions under increased monitoring, the EU will consider taking steps to remove the Cayman Islands from the EU anti-money laundering and anti-terrorism list. The FATF will publish its next list in October 2022. It remains to be seen whether the Cayman Islands will then be removed from the FATF and EU anti-money laundering and anti-terrorist financing lists.

Chinese mainland's risk management of the FATF black and grey list

If you or your clients have business with jurisdictions that are on the FATF black/grey list, what regulation may apply?

In Chinese mainland, for example, both banks and third party institutions are obliged to take appropriate risk management measures in accordance with the Circular on Further Strengthening Anti-Money Laundering and Anti-Terrorist Financing and other anti-money laundering laws and regulations.

If you or your clients have investments in high-risk jurisdictions, restrictions or monitoring may include, but are not limited to 1) Being subject to enhanced customer identification measures; 2) Being subject to enhanced transaction monitoring measures; 3) Prompt submission of suspicious transaction reports where suspicious circumstances are identified, which may result in denial of financial services or even termination of the business relationship. 4) Customer identification from blacklisted third parties will not be recognized. 5) Vulnerable to being classified as a high-risk rated customer.

If you or your clients only have investments in jurisdictions on the FATF's grey list, China will take this into account as a factor in its money laundering risk assessment, but will not take other stringent measures.

Sinobravo Insight

With the strengthening of international anti-money laundering and anti-terrorist financing efforts, as well as the introduction of CRS and economic substance laws, major banks and registered agents in both onshore countries and offshore jurisdictions have stepped up their efforts to vet the identity and eligibility of their customers.

When banks and registered agents identify possible "suspicious transactions", they will request "due diligence" from their clients. If the clients do not cooperate or fail to qualify, they may be classified as a "high risk customer", which may result in the freezing of their bank account.

To avoid having your offshore bank account frozen, please ensure that:

-- The account must not remain inactive and a moderate flow of funds must be maintained. Avoid large and rapid movements of funds in and out of your account.

-- Avoid transactions with FATF, EU black/grey list jurisdictions. If you do have such business, you need to inform them in advance, communicate with your bank account manager and confirm before proceeding.

-- Do not collect or settle foreign exchange for others, and never deal with money from underground money changers.

-- Fulfil CRS or due diligence requirements, cooperate with bank investigations, respond to bank investigation letters in a timely manner and maintain communication with banks and other financial institutions.