Black Immigrant Daily News
When it comes to Cayman’s compliance with anti-money laundering and anti-terrorist financing standards set by the Financial Action Task Force (FATF), the new government has taken positive steps ensure that Cayman continues to adhere to international requirements. This is also the case in relation to similar concerns raised by the European Union (EU). All of the work to date, however, may be in peril if the FATF and the EU continue to see new products in the virtual assets space as facilitating money laundering and terrorist financing rather than eliminating or mitigating the risks.
FATF Recommendation 15
The general concern for the risks surrounding these new products is found under FATF Recommendation 15. It says that “countries and financial institutions should identify and assess the money laundering or terrorist financing risks that may arise in relation to (a) the development of new products and new business practices, including new delivery mechanisms, and (b) the use of new or developing technologies for both new and pre-existing products. ” In practice, these risks must be assessed prior to the launch of new products.
In relation to the assessment of risks, FATF Recommendation 15 says that, to manage and mitigate the risks emerging from virtual assets, countries should ensure that virtual asset service providers are regulated for AML/CFT purposes and licensed or registered and subject to effective systems for monitoring and ensuring compliance with the relevant measures called for in the FATF Recommendations. To comply with the regulatory spirit of FATF Recommendation 15, Cayman has passed the Virtual Asset (Service Providers) Act, requiring persons who carry on, or purport to carry on, virtual asset service in or from within the Cayman Islands to register with the regulator.
Regarding the implementation of relevant measures to prevent the misuse of virtual assets for money laundering and terrorist financing, the Cayman authorities published notices that Part XA of the Anti-Money Laundering (Amendment) (No. 2) Regulations, 2020 (“AMLRs”), commenced on July 1, 2022, to address identification and record-keeping requirements relating to transfers of virtual assets. However, the onus is on virtual asset service providers to advise the Cayman regulator how such providers will comply with these requirements, including details of their compliance arrangements, relevant policies and procedures and the use of resources (including technological tools). If providers are compliant with the AMLRS and any other relevant Act and the regulator is satisfied as to such compliance, the exercise could result in the prevention of criminals or their associates from holding, or being the beneficial owner of, a significant or controlling interest, or holding a management function in, a virtual asset service provider.
Ongoing monitoring
The initial assessment of virtual asset service providers for compliance is not the end of the exercise, either. There must be ongoing regulation and supervision or monitoring to ensure that virtual asset service providers are effectively implementing the relevant FATF Recommendations (enshrined in a careful and responsible manner within relevant Cayman laws) to mitigate money laundering and terrorist financing risks emerging from virtual assets, including risks associated with to decentralized finance (DeFi), non-fungible tokens (NFTs), unhosted wallets, the potential misuse of virtual assets for sanctions evasion and the threat posed by ransomware actors who may misuse virtual assets to facilitate payments in connection with cybercrimes. In relation to DeFi, an FATF report dated June 2022 noted that DeFi is “increasingly used for money laundering, and the percentage of funds sent from illicit wallets to DeFi protocols compared to centralized exchanges is increasing; DeFi received 17% of all funds sent from illicit wallets in 2021 (15% in 2020).”
International cooperation
In addition to local assessment of emerging risks, where money laundering and terrorist financing concerns for a particular virtual asset service provider are communicated from another country to the Cayman regulator, the Cayman regulator will be expected, in the spirit if the FATF Recommendations and existing agreements, to exchange information promptly and constructively with its foreign counterparts. The response to such requests, gathering and sharing of relevant information may involve the consideration of complex matters, however, including data protection and privacy rules, which may slow down the sharing of information or present barriers to sharing information.
Consequences of compliance failures
The implication of all of the foregoing is that, while Cayman may soon come off FATF and EU lists of countries dubbed as having strategic deficiencies in relation to their anti-money laundering and anti-terrorism financing regimes, any misuse of virtual assets connected to a local virtual asset service provider to facilitate money laundering or terrorist financing or any failure to mitigate such risks (which is later detected in an FATF inspection or review) may put Cayman right back on the map as a candidate for future EU or FATF grey or black lists.
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