New rules shake up anti-money laundering services

Cayman’s fund industry is facing significant changes under new regulations to fight money laundering and the financing of terrorism.

Last year the latest Anti-Money Laundering Regulations, designed to bring Cayman’s regime in line with FATF recommendations and global practice, extended their application to all relevant financial businesses. These are entities that conduct a business of “investing, administering or managing funds or money on behalf of other persons” or “investment related insurance” in or from Cayman. As a result, the definition now includes certain previously unregulated, closed-ended investment funds and structured finance vehicles.

Appointment of AML officers

One of the most important changes is that the regulations now prescribe that both regulated and unregulated funds have until Sept. 30 to nominate three types of anti-money laundering (AML) officers. New funds were already expected to have appointed the designated AML officers since June 1.

Crucially, the money laundering reporting officer, the deputy money laundering reporting officer and the AML compliance officer must be natural persons, rather than a service provider entity.

The AML compliance officer is responsible for overall compliance with the regulation and will have anti-money laundering oversight of all activities of a fund, including investor-related due diligence and investment activities. The money laundering reporting officer, in turn, is the primary point of contact for suspicious activity reports and responsible for the submission of those reports.

In practice, it is expected that most funds will appoint one individual to fill both roles of AML compliance officer and money laundering reporting officer and another individual as deputy money laundering reporting officer.

Regulated funds must submit the names and prescribed details of their AML officers to the Cayman Islands Monetary Authority via the authority’s REEFS (Regulatory Enhanced Electronic Forms Submission) portal by Sept. 30. Non-regulated funds must keep the information on file for inspection by the regulator.

Until now most regulated funds delegated the AML functions to their administrator or another service provider, especially in cases where a fund did not have any employees.

In addition to appointing natural persons to these roles, funds must review their service provider delegation agreements to make sure that the delegation of the AML function is properly taken care of and update their documentation and internal anti-money laundering compliance policies and procedures.

LaNishka Farrington-McSweeney, a partner in EY’s Financial Services Organization, says many of the changes were already implicit in previous regulations but the update spells them out in black and white.

The new rules will streamline the market in terms of focus and who ultimately takes responsibility for anti-money laundering, she notes. Where previously fund administrators, registered agents and individuals in-house may all have been engaged in anti-money laundering, the new AML regulations concentrate the responsibilities in defined functions.

In addition, the rules now go deeper in terms of what is expected from the money laundering reporting officer.

Whether funds decide to take over AML functions in-house or delegate them to a service provider, the relevant officers must be independent and autonomous.  They must also be suitably qualified and have knowledge of Cayman Islands laws and regulations.

Suitable officers should be at least at managerial level and there must be clear reporting lines, and regular reporting to the AML officers, from all fund delegates including the investment manager.

Francis Donoghue, a consultant with compliance service provider KSG Risk Solutions, says “many funds and smaller financial services providers might see merit in appointing a third-party compliance professional with the required skills and experience, rather than employing a full-time employee or finding an existing employee to appoint to the role, thus leveraging off the consultants expertise and experience.”

Market shake-up

The regulations provide new opportunities for market participants and have already led to a shake-up with the emergence of new directors and new businesses, Farrington-McSweeney says.

In addition to new entrants, existing players, like law firms, who are adding new services, are disrupting the market.

The EY partner believes that technological capabilities around transaction monitoring will be key differentiators that become more important under the new rules. “Capacity is going to be more difficult to prove under the new law for smaller service providers,” Farrington-McSweeney says.

Although there is no cap on the number of AML officer appointments any one individual can take on, service providers need to be able to demonstrate to the regulator that they are discharging their fiduciary duty correctly.

Delegation

Likewise, if the AML functions are outsourced to a jurisdiction outside of the Cayman Islands, funds must be satisfied that the anti-money laundering regime that is applied there is at least on par with the AML regime of the Cayman Islands.

This means the fund or its service provider must carry out a gap analysis to demonstrate equivalency.

Donoghue notes this analysis should be based on outcomes – for example, in terms of customer due diligence and suspicious activity reporting, rather than a comparison of descriptive rules. “Previously, it was sufficient to rely on the fact that the third party was regulated in a ‘Schedule 3’ country” deemed equivalent in their regime, Donoghue says.

One of the key elements is that any suspicious activity reports are directed to the Financial Reporting Authority in Cayman, even if the AML functions are based outside of the jurisdiction.

This point and the right to carry out gap analyses should be covered by the delegation agreements.

Although the new rules will mean some added costs, Farrington-McSweeney says, clients are sophisticated enough to understand this regulation is going to be global.

“We are not doing anything that is different from other jurisdictions and if you participate in financial services globally, you are going to have to comply with [those] regulations.”

At the same time, the potential penalties for non-compliance have increased.

Cayman’s financial regulator can impose administrative fines of up to CI$1 million for breaches of AML requirements.

And auditors will pick up on any shortcomings.

“Under the Mutual Funds Law, we are required as auditors to report non-compliance to the regulator,” the EY partner says.

The advice to clients who struggle to make the required appointments in time is therefore to engage with the regulator and not to ignore the issue.
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