08/08/22

CAYMAN ISLANDS: Report says law firms present “medium-high” risk for money laundering.

As published on cayman.loopnews.com, Sunday 7 August, 2022.

Cayman’s national money laundering and terrorist financing risk assessment (dated March 2022) reported that the inherent money laundering and terrorist financing risk for firms of attorneys-at-law conducting relevant financial business in the Cayman Islands is considered to be medium-high.

The overall, medium-high risk rating was reached after assessing the nature, size, complexity, customer types, transactions, products, services and delivery channels of international and domestic law firms. 

As the national risk assessment highlights the legal sector as “a key component of the jurisdiction’s financial services product,” a “major export,” and as “critical to the economy,” it is important that the medium-high risk assessment for law firms and their activities is not taken lightly.

Regarding this, the national risk assessment said:

"The inherent vulnerabilities of the legal profession must be seen in the context of the jurisdictional vulnerabilities facing the Cayman Islands. These have been identified as being the risk that the Cayman Islands' financial system could be used as a conduit for the proceeds of financial crime generally, and fraud, bribery and corruption, tax evasion, and drug trafficking specifically. These threats are usually predicated upon the commission of crimes abroad and the decision to funnel those proceeds through structures, transactions and accounts in the Cayman Islands. The most significant danger for the legal community is the direct participation of firms in that movement of funds through their involvement in such transactions and or the usage of their accounts."

Since the national risk assessment also notes that a “relatively small number of these firms control much of the international legal activity as they are multi-jurisdictional and have great reach in bringing business to the Islands,” common sense dictates that the regulatory, anti-money laundering scope must not only focus on activities locally, but also on international activities connected to local firms. According to the national risk assessment, such activities include a “significant volume of complex cross-border transactions, involvement with unregulated products and entities.”

By taking this approach, the regulator will have a more complete understanding of the risks that global activities might present to the local anti-money laundering and anti-terrorist financing regime, including whether these risks are exacerbated by some persons advising on Cayman Islands law overseas without ever having being admitted to practice Cayman Islands law in the Cayman Islands and without ever having possessed Cayman Islands legal practice certificates.

Resolutions of money laundering and terrorist financing concerns might also be more straightforward too if the situation was not further complicated by existing cases in the courts of the Cayman Islands challenging the structure of the regulator, the Cayman Attorneys Regulation Authority (CARA), which was not established as a separate legal entity, but as a subcommittee of the board of directors of the Cayman Islands Legal Practitioners Association (CILPA), a private association.

Further exacerbating the issue are provisions of the Legal Services Act which, if brought into force by Cabinet “as is” and without amendments, will establish the Cayman Islands Legal Services Council comprising of the Attorney General, the Chief Justice and political appointees. Unfortunately, some members of the public view this structure as problematic due to the perceived issues of independence and potential conflicts of interest.

Regarding these perceptions, one member of the public said that "if you have the country’s head of judiciary and a person who leads the government’s prosecution office both sitting on the Council, then questions of separation of powers and ability to have a fair trial arise if a lawyer decides to challenge a decision of the Council in relation to the Council’s proposed functions to regulate the practice of law or to act as a supervisory authority for lawyers under Cayman’s anti-money laundering regime."

From an objective standpoint, it seems better for the jurisdiction to resolve issues of concern with the regulatory, anti-money laundering and anti-terrorist financing structure now, rather than the Cabinet taking a decision now to bring the Legal Services Act in force, unamended, with the concerns unresolved. Objectively speaking, the approach here must be a careful and considered one, as perceived actions or omissions in "doing the right thing" may also impact the confidence that the Financial Action Task Force, the European Union and others have in the local anti-money laundering and anti-terrorist financing regime.

Whatever the Cabinet decides to do though, it is likely that the Financial Action Task Force, the European Union and others will be paying close attention over the next few months to the concerns raised in the national risk assessment regarding cross-border international transactions, how they are related to local firms and what that means in terms of increasing or reducing money laundering and terrorist financing threats to the jurisdiction.