The confrontation between the U.K. Financial Conduct Authority and the government of the Cayman Islands over an unfavorable risk assessment suggests a global need for more accessible regulatory guidance, according to a London-based expert on financial crime.
After complaints from the government and the financial services sector in the Cayman Islands, the FCA said this month that it had withdrawn a list of 95 countries considered to be at “high risk” of financial crime. The list, which included the Cayman Islands, had been intended for internal use by the FCA and had been obtained through a freedom of information request.
The issue, according to Zia Ullah, a partner in the London office of international law firm Eversheds, points to the gap between the FCA’s treatment of risk and its expectation that regulated firms should be able to assess their own risk.
A close examination of the components of risk, Ullah said, can produce an understanding that will actually mitigate that risk. Sophisticated scoring tools may not be available to smaller organizations, he said.
Being “offshore” does not necessarily make something high risk, he said. The Cayman Islands, Ullah said, offers an efficient tax regime.
The U.S. state of Delaware, he added, while not offshore, has a regulatory structure that attracts corporations. While certain jurisdictions may provide congenial domiciles for legitimate assets, Ullah said, some decisions on location may be made for reasons of illegality. This, he said, keeps alive perceptions of potential high risk in some territories.
“It becomes very difficult for a regulator to understand whether they’re approaching it in the right way,” Ullah said. “So it’s one of those difficult issues that firms are grappling with and that they would really appreciate some help with.”
Ullah believes the furor over the FCA’s list was caused by the desire from the Caymans to obtain maximum information on the process. “There was no strategic aim to publish that list,” he told Best’s News Service.
But Ullah does not expect regulators around the world to burst forth with insights into how they reach their conclusions. As affected entities seek guidance from the regulators, he said, they are not suddenly looking for a rules-based approach to regulation.
U.S. regulators, Ullah said, would be unlikely to change their methods in regard to other jurisdictions as a result of the Cayman complaints against the FCA. “It’s usually the other way around, that the rest of the world will follow the U.S.’s lead in the way they approach these things,” he said.
Paul Byles, chief executive officer of First Regents Bank & Trust (Cayman) Ltd., said the incident had raised questions about the diligence and methodology of the FCA
“It is difficult to assess whether this has had any long-term impact,” Byles said in an email. “But I suspect that the negative impact on the Cayman Islands will be short lived.”
Ullah believes the Cayman reaction would have been less angry if the FCA had explained its criteria. But apart from bringing political pressure, he does not see much the Cayman government can now do about the issue. “You can’t prevent another jurisdiction’s institutions from reaching a particular conclusion,” he said.
Byles said the FCA should explain the reason behind the listing to the Cayman authorities. “I believe that the issue has largely been resolved in terms of the public relations impact as a result of the FCA retracting the list,” he said.
Byles said reputational issues involving the Cayman Islands stem from “a now dated perception of the offshore world.”
Despite improving its regulatory framework and its participation in international initiatives, Byles said, “the Cayman Islands has not yet been properly recognized in some circles for its high regulatory standards.”
Johann Moxam, president of the Cayman Islands Chamber of Commerce, said the Cayman Islands “never should have been placed” on the FCA list. “This decision by the FCA to withdraw the list validates our position that the methodology used by the FCA was riddled with inaccuracies and flawed assumptions,” Moxam said in an email.
Ullah, who regards risk assessment as among the most difficult areas in the fight against financial crime, believes a broad-based regulatory approach would be a big step in the right direction. This, he said, would consider such factors as
customer and product types, and geography. The measurement of risk “has evolved as a process over many years,” he said, “but there’s no real objective standard against which you judge it. Different regulators approach it in different ways.”