Review of the Caribbean Regional Compliance Association Conference held 10-11 November 2008 at the Hyatt Regency Port of Spain in Trinidad.

While it’s in some views a true Caribbean success story, an offshore darling that’s skyrocketed to a prominent position in global banking, the Cayman Islands still bears a weighty albatross on its shoulders.

It’s common to hear prominent members of Cayman’s offshore finance community bemoaning that despite all its best efforts, Cayman’s reputation is still suffering thanks in no small part to the combined forces of the media, the entertainment business, zealous US politicians and its offshore rivals – in equal measure.

To add further fuel to the fire, the Cayman Islands has been subject to the scrutiny of bodies like the Financial Action Task Force, an international policy making leader that, despite lacking official powers of enforcement, can essentially make or break a country’s reputation through its well-publicised and highly regarded country assessment reports.

In June 2000 the FATF listed Cayman as a non-cooperative jurisdiction in the international fight against money laundering, placing it on its so-called blacklist.

To add insult to injury, in July the United States Treasury Department issued a warning to banks and other financial institutions operating in the US of serious deficiencies in Cayman’s counter money-laundering systems.

It was only a year later that the FATF Review Group’s technical report acknowledged the Cayman Islands had taken concrete steps to implement legal reforms, and cited significant improvements in its anti-money laundering systems and confirmed the Cayman Islands was deemed compliant with the 25 criteria used for evaluation.

The FATF also announced its decision to withdraw the application of FATF Recommendation 21 to de-listed countries, under which FATF member countries were able to issue business advisories to their financial institutions.

Since then the FATF’s blacklist, based on 25 criteria, has been quietly phased out and replaced by another assessment method based on what are known as the 40 plus 9 Recommendations.

The 40 plus 9 reflect a risk based approach, where countries are now rated on their ability to comply or not comply with them. They reflect a broad and diverse range of sectors, ranging from policing, to precious metals, to terrorism.

FATF administrator Richard Berkhout, whose work focuses on assessing jurisdictions’ compliance with the FATF 40 plus 9 Recommendations and conducting outreach, was keynote speaker at the Caribbean Regional Compliance Association conference recently held in Port of Spain, Trinidad.

While his conference presentation outlined in broad strokes the international role of the FATF and recent policy developments, Mr. Berkhout took the time to share his thoughts on Cayman’s current situation and future prospects with the Cayman Financial Review.

He explained that first off, the FATF is, where possible, devolving responsibility for individual countries and territories to their regional FATF-related bodies, which in Cayman’s case is the Caribbean Financial Action Task Force.

The CFATF was established in 1992 and is an FATF-style regional organisation of 30 states in the Caribbean basin, which aims to achieve effective implementation amongst its membership of measures to combat money laundering and terrorist financing. The Cayman Islands has been a member from inception.

In March, the CFATF became an FATF Associate member, which gives it a greater decision-making role within the FATF.

A third-round CFATF evaluation of the Cayman Islands’ anti-money laundering and combating the financing of terrorism regimes, released 11 December, 2007, gave high marks to Cayman’s compliance regime.

The evaluation rated the Cayman Islands compliant or largely compliant with 38 out of the 40 Financial Action Task Force AML recommendations and the nine CFT special recommendations. This compares favourably with third-round evaluations to date of FATF countries.

“We have noticed that formerly blacklisted countries are now the best; the most compliant,” observed Mr. Berkhout.

“We stopped the blacklist because the recommendations changed, and also because we now trust the regional bodies like the CFTAF to assess the members too.” He noted that some kind of continuing assessment method needs to be in place as entities like banks, as well as the public, always want to know whether they, or the people they are dealing with, are in compliance.

“It’s important to note that with these new recommendations, jurisdictions are not always fully compliant, but mostly, they are,” he said.

He underscored the point that the banking community needs to step up and urge governments to enact legislation that will help not only their performance on the country reports but their international image.

“You can’t be in compliance in all of the aspects – if a country has issues, that is normal – and once you solve one problem another tends to come up,” he said.

“For instance, you can comply with Recommendation 6 if you are a common law jurisdiction, but you can’t comply with 34, which deals with transparency of trust.”

There is nothing that would stop governments from making a case for themselves, he continued.

“You need to sell yourself and we are there to gauge whether the things you are doing are bad or good.”

He pointed to the case of shell banks, which, while legitimate, may be covering up some less legitimate activities somewhere else that are almost impossible to trace. If those activities can’t be traced, that still doesn’t tell the FATF that they are unsullied.

“The possibility of meeting our recommendations or not should not stop places like the Cayman Islands to take action on their own to state their case both to us and to others, not just acting in reaction to what we say,” he said.

“But I would say that good assessment reports are the best promotion.”

He explained that the decision was made not to implement a white list, like the EU does, because banks prefer a risk-based approach.

“Really, your image is up to you,” he said.

There are two main issues for Cayman and the Caribbean to consider, he said.

One is that the FATF sets the global AML compliance standard, which is the 40 plus 9.

“There is one standard for all; in theory all AML systems should be compatible,” he said.

He observed that a regional body like the Caribbean Compliance Association could assist greatly with standardising AML systems across the region, both by working with businesses and by lobbying governments to pass relevant legislation.

“If countries have problems doing business with each other, they should address this.”

The second issue for Cayman to consider, he said, is that many Caribbean jurisdictions once followed a philosophy of “the less rules the better,” which ended up hurting the private sector in the countries that ended up black listed.

“The trouble is, if you want to be a financial centre you have to do it all, and you have to pay constant attention,” he said.

“And if you are a small country it’s that much harder to do everything.”

He noted law enforcement as one big problem area, as small countries just don’t have the capacity to deal with all kinds of crime at once.

“For the private sector, the key is communication. Make sure you communicate to your government,” he urged.

“Copy other jurisdictions even, ones that are doing some things right that you need to work on. These reports are available on the FATF website.”

The growing recognition of the increased role of the private sector in AML activity is reflected in such organisations as the Cayman Islands Financial Services Association.

CIFSA is stepping up its activities in an effort to advance Cayman’s image overseas, both in the United States as well as with the EU and the OECD.

Calvin Wilson, executive director of the CFATF made special mention of the Cayman Islands Real Estate Brokers Association, an organisation not traditionally associated with compliance activity.

“The case of CIREBA dealing with AML issues is a fantastic example of the role an organisation like this can play,” said Mr. Wilson.

He said he hopes Cayman will take up the mantle of regional advocate, as the region has the opportunity to make an impact at future FATF meetings on standards by bringing regional issues to bear.

Most recently, the Cayman Islands Government announced in early December that it will take an active role in HM Treasury’s independent review of UK Crown Dependencies and Overseas Territories, which will analyse the long-term opportunities and challenges facing them as international financial centres.

So while the Cayman Islands continues to build its reputation on the international stage, work still needs to be done.